Boston Medical Center · Boston Medical Center Balance Sheets September 30, 2013 and 2012 The...

Boston Medical CenterFinancial StatementsSeptember 30, 2013 and 2012

Boston Medical CenterIndexSeptember 30, 2013 and 2012

Page(s)

Independent Auditor’s Report.......................................................................................................... 1–2

Financial Statements

Balance Sheets ......................................................................................................................................3

Statements of Operations .......................................................................................................................4

Statements of Changes in Net Assets.....................................................................................................5

Statements of Cash Flows ......................................................................................................................6

Notes to Financial Statements .......................................................................................................... 7–41

PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us

Independent Auditor’s Report

To the Board of Trustees of

Boston Medical Center

We have audited the accompanying financial statements of Boston Medical Center (the “Medical Center”),

which comprise the balance sheets as of September 30, 2013 and September 30, 2012, and the related

statements of operations and changes in unrestricted net assets, and of cash flows for the years then

ended.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in

accordance with accounting principles generally accepted in the United States of America; this includes

the design, implementation, and maintenance of internal control relevant to the preparation and fair

presentation of financial statements that are free from material misstatement, whether due to fraud or

error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in

the financial statements. The procedures selected depend on our judgment, including the assessment of

the risks of material misstatement of the financial statements, whether due to fraud or error. In making

those risk assessments, we consider internal control relevant to the Medical Center’s preparation and fair

presentation of the 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 Medical

Center’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 financial statements. We

believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our

audit opinion.

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the

financial position of Boston Medical Center at September 30, 2013 and September 30, 2012, and the

results of its operations and its cash flows for the years then ended in accordance with accounting

principles generally accepted in the United States of America.

Other Matter

Faculty Practice Foundation, Inc. and Affiliates (the “Foundation”) and Boston Medical Center Health Plan,

Inc. (“BMCHP”) are affiliates of the Medical Center. As described in Note 18, due to the significance of

the transactions between the Medical Center, Foundation, and BMCHP, the results of operations for the

Medical Center may not be indicative of the results which would have been attained if the Foundation and

BMCHP were not affiliates of the Medical Center.

Boston, Massachusetts

February 5, 2014

Boston Medical CenterBalance SheetsSeptember 30, 2013 and 2012

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

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(in thousands) 2013 2012

Assets

Current assets

Cash and cash equivalents 139,834$ 114,229$

Patient accounts receivable, less allowance of $22,604 and $19,221

in 2013 and 2012 67,210 74,712

Other accounts receivable, less allowance of $5,722 and $5,186

in 2013 and 2012 39,038 55,948

Current portion of grants receivable, less allowance of $3,796 and

$3,362 in 2013 and 2012 25,812 25,343

Current portion of estimated receivable for final settlements with

third-party payors 17,284 8,744

Current portion of due from related parties 100,774 56,935

Inventories 5,490 4,584

Prepaid expenses and other current assets 7,147 6,068

Insurance recoveries receivable 35,282 38,676

Current portion of funds held by Trustees 21,720 32,250

Total current assets 459,591 417,489

Assets limited as to use

Board-designated investments 359,240 340,482

Funds held by trustees 49,474 54,732

Donor-restricted investments 306,483 274,475

Total assets limited as to use 715,197 669,689

Property, plant and equipment, net 456,347 425,320

Long-term portion of due from related parties 30,570 30,570

Grants receivable, less current portion 18,098 27,851

Other noncurrent assets 182,650 201,879

Total assets 1,862,453$ 1,772,798$

Liabilities and Net Assets

Current liabilities

Accounts payable and accrued expenses 127,955$ 135,701$

Deferred revenue 18,348 18,334

Current portion of long-term debt and capital leases 17,616 17,398

Professional liability claims 35,282 38,676

Current portion of due to related parties 51,174 43,482

Total current liabilities 250,375 253,591

Long-term liabilities

Estimated final settlements with third-party payors 62,444 28,889

Obligations under capital leases 18,687 28,770

Long-term debt 363,360 371,220

Other long-term liabilities 59,870 87,249

Total liabilities 754,736 769,719

Commitments and contingencies

Net assets

Unrestricted 771,252 687,623

Temporarily restricted 320,112 299,103

Permanently restricted 16,353 16,353

Total net assets 1,107,717 1,003,079

Total liabilities and net assets 1,862,453$ 1,772,798$

Boston Medical CenterStatements of OperationsYears Ended September 30, 2013 and 2012


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Operating revenue

Net patient service revenue, net of provision for bad debt($41,542 in 2013 and $40,472 in 2012) 893,584$ 855,756$

Grants and contract revenue 82,185 84,296Other revenue 12,412 10,785

Net assets released from restrictions for operations 23,890 24,632

Total operating revenue 1,012,071 975,469

Operating expenses

Salaries and wages and fringe benefits 482,941 465,374Supplies and expenses 243,181 234,969

Institutional support (Note 18) 110,772 96,514Depreciation and amortization 59,232 60,305

Interest expense 13,716 18,626Research, sponsored programs and community health services 95,257 97,126

Total operating expenses 1,005,099 972,914

Income from operations 6,972 2,555

Nonoperating gains (losses), netInvestment income (including other-than-temporary impairment

losses of $1,316 and $1,007 in 2013 and 2012, respectively) 16,641 9,098Fundraising costs and other (3,570) (2,810)

Total nonoperating gains 13,071 6,288

Excess of revenue over expenses 20,043 8,843

Other changes in unrestricted net assetsChange in unrealized appreciation on investments 7,588 23,988

Net assets transfer from BMCHP 23,000 50,000Revised classification of net assets (Note 2) - 5,129

Contributed capital asset 3,846 -Net assets released from restrictions for property, plantand equipment 3,351 2,470

Pension related changes other than net periodic pension costs 25,801 (2,982)

Change in unrestricted net assets 83,629 87,448

Unrestricted net assets

Beginning of year 687,623 600,175

End of year 771,252$ 687,623$

Boston Medical CenterStatements of Changes in Net AssetsYears Ended September 30, 2013 and 2012


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Temporarily Permanently

(in thousands) Unrestricted Restricted Restricted Total

Net assets at September 30, 2011 600,175$ 301,969$ 16,353$ 918,497$

Increases (decreases) in net assets

Excess of revenues over expenses 8,843 - - 8,843

Investment income - 24,444 - 24,444

Change in unrealized appreciation

on investments 23,988 12,695 - 36,683

Contribution revenue - 10,286 - 10,286

Net assets released from restrictions for

operations - (24,632) - (24,632)

Net asset transfer from BMCHP 50,000 - - 50,000

Revised classification of net assets 5,129 (5,129) - -

Net assets released from restriction for

property, plant and equipment 2,470 (2,470) - -

Pension related changes other than net periodic

pension costs (2,982) - - (2,982)

Change in assistance with the City of Boston ("COB") - (18,060) - (18,060)

Total increase (decrease) in net assets 87,448 (2,866) - 84,582

Net assets at September 30, 2012 687,623 299,103 16,353 1,003,079

Increases (decreases) in net assets

Excess of revenues over expenses 20,043 - - 20,043


Change in unrealized appreciation

on investments 7,588 26,296 - 33,884

Contribution revenue - 10,078 - 10,078

Net assets released from restrictions for

operations - (23,890) - (23,890)

Net asset transfer from BMCHP 23,000 - - 23,000

Contributed capital asset 3,846 - - 3,846

Net assets released from restriction for -

property, plant and equipment 3,351 (3,351) - -

Pension related changes other than net periodic

pension costs 25,801 - - 25,801

Total increase in net assets 83,629 21,009 - 104,638

Net assets at September 30, 2013 771,252$ 320,112$ 16,353$ 1,107,717$

Boston Medical CenterStatements of Cash FlowsYears Ended September 30, 2013 and 2012


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Operating activities

Change in net assets 104,638$ 84,582$

Adjustments to reconcile change in net assets to net cash provided by

operating activities

Accretion of discount on long-term grants (1,403) (2,116)

Depreciation and amortization 59,232 60,305

Restricted contributions (3,933) (4,351)

Donated securities received (386) (74)

Amortization of bond discount 126 119

Loss on disposal of fixed assets - 8,887

Bond premium - 7,557

Amortization of bond premium (445) (111)

City of Boston lease refinancing (9,347) (12,058)

Discount and allowance for contributions receivable 3,929 4,234

Net realized gains and change in unrealized appreciation

on investments (42,027) (53,902)

Equity in net losses of joint ventures 799 971

Contributed capital asset (3,846) -

Increase in asset retirement obligation 956 996

Provision for bad debts 41,542 30,499

Pension related changes other than net periodic pension costs (25,801) 2,982

Changes in operating assets and liabilities

Grants receivable 10,687 26,364

Patient accounts receivable (34,040) (38,682)

Other current assets and liabilities 11,010 (8,535)

Other noncurrent assets and liabilities 7,916 11,102

Due to/from related parties (36,147) 18,361


Accounts payable and accrued expenses (9,203) 10,469

Net cash provided by operating activities 99,272 167,108

Investing activities

Investment in forgiveness loan (1,000) -

Investment in subsidiaries (4,657) (2,913)

Purchases of investments (114,933) (481,971)

Proceeds from sale of investments 121,982 407,615

Purchase of property, plant and equipment (71,319) (37,429)

Proceeds from sales of donated securities 386 74

Net cash used in investing activities (69,541) (114,624)

Financing activities

Repayment of long-term debt and capital leases (8,059) (128,328)

Proceeds from restricted contributions 3,933 4,351

Proceeds from borrowings - 108,950

Net cash used in financing activities (4,126) (15,027)

Increase in cash and cash equivalents 25,605 37,457

Cash and cash equivalents


End of year 139,834$ 114,229$

Supplemental disclosure of cash flow information

Cash paid for interest 18,944$ 21,943$

Property, plant, and equipment included in accounts payable 5,312 3,886

Conditional asset retirement obligations 621 662

Net fixed assets recognized related to conditional asset retirement obligations (335) (334)

Contributed securities 386 74

Boston Medical CenterNotes to Financial StatementsSeptember 30, 2013 and 2012

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1. Organization

Boston Medical Center (the “Medical Center” or “BMC”) was incorporated on July 1, 1996 when allof the assets and liabilities of University Hospital, Inc. (a.k.a. Boston University Medical CenterHospital or “BUMCH”) and its subsidiaries were merged with and into the Medical Center. Inaddition, specific assets and liabilities of Boston City Hospital (“BCH”), Boston Specialty andRehabilitation Hospital (“BSRH”) and Trustees of Health and Hospitals, Inc. (“THH”), as indicated inthe Consolidation Agreement, were transferred by the City of Boston (the “City” or “COB”) to theMedical Center. The merger of BUMCH into the Medical Center was accounted for as a pooling ofinterests, and the consolidation of certain assets and liabilities of BCH, BSRH and THH into theMedical Center was accounted for as a contribution of net assets. Accordingly, the balance sheetincludes all the assets, liabilities and net assets of the former BUMCH and only certain assets,liabilities and net assets of the former BCH, BSRH and THH. The contribution of net assets by theCity of $58,700,000 included cash, accounts receivable, inventory and moveable equipment lesscertain trade accounts payable.

BMC’s sole corporate member is BMC Health System, Inc., (the “System”) a non-profit corporationthat oversees the operation of BMC, Boston Medical Center Health Plan, Inc. (“BMCHP”), andvarious affiliates and associated services. The System was organized effective July 1, 2013, and isthe sole corporate member of both BMC and BMCHP.

Univer Development Foundation, Inc. (“UDF”) is a Massachusetts Corporation involved in realestate development activities. UDF is wholly owned by the Medical Center.

East Concord Medical Foundation, Inc. (“ECMF”) is a Massachusetts Corporation involved in realestate development activities. ECMF is a joint venture between the Medical Center and theTrustees of Boston University, and each appoints one-half of ECMF’s directors. ECMF has beenfully consolidated with the Medical Center as the Medical Center guarantees 100% of the debt ofECMF.

BMC Integrated Care Services, Inc. (formerly BMC Management Services, Inc.) arranges deliveryof health care services to enrollees or beneficiaries of preferred provider health insurancearrangements, health maintenance organizations, corporate employee benefit plans, prepaid healthplans, and other alternative delivery system contracts with medical service providers. BMCIntegrated Care Services, Inc. promotes the development of an integrated delivery system to moreefficiently and effectively meet the healthcare needs of the community. This delivery system willbenefit the community by attracting a continuum of patients with diverse medical problems that willcontribute to research, education, clinical care and teaching activities. BMC Integrated CareServices, Inc. contracts on behalf of the Medical Center, its physicians, and some communityhealth centers. The Faculty Practice Foundation is BMC Integrated Care Services, Inc.’s solecorporate member. The Medical Center is a corporate member of Integrated Care Services, lnc.’ssole corporate member; the president of Integrated Care Services and a majority of its directors areMedical Center representatives.


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These financial statements do not include the combined accounts of Faculty Practice Foundation,Inc. (“Faculty”) and its 21 affiliated faculty practice plans (the “Plans,” collectively known as the“Foundation”), the Boston Medical Center Health Plan, Inc. (“BMCHP”), Boston Medical CenterInsurance Company, Ltd. (“BMCIC”), Boston Medical Center Insurance Company, Ltd. of Vermont(“BMCIC of Vermont”), Boston University Affiliated Physicians, Inc. (“BUAP”), Gryant, Inc. or BMCNAB Business Trust.

The Foundation became affiliated with the Medical Center during the year ended September 30,2001 and has a fiscal year-end of June 30. The Foundation had total net assets of $115,010,000and $95,540,000 as of June 30, 2013 and 2012, respectively, and total assets of $206,052,000 and$190,774,000 as of June 30, 2013 and 2012, respectively. The Foundation had total operatingrevenue of $321,084,000 and $316,891,000 for the years ended June 30, 2013 and 2012,respectively, before any eliminations, and an increase in unrestricted net assets of $19,470,000and $5,967,000 for the years ended June 30, 2013 and 2012, respectively.

BMCHP was established as an independent 501(c)(3) organization on July 1, 1997. BMCHP wasestablished to administer the BMC Health Plan, which is a capitated provider-sponsored programof The Commonwealth of Massachusetts’ Division of Medical Assistance (“DMA”) designed toprovide medical coverage to people who are covered by Medicaid. On March 16, 2012, BMCHPbecame licensed as a Health Maintenance Organization (“HMO”) insurer by the New HampshireInsurance Department. In April of 2012, the New Hampshire Department of Health and HumanServices (“DHHS”) selected BMCHP as one of three insurers to serve individuals qualifying for theNew Hampshire Medicaid program. The DHHS Managed Care Program has been approved by thefederal Centers for Medicare and Medicaid Services (“CMS”). Members became effective duringDecember 2013. BMCHP will operate under the name Well Sense Health Plan in the state of NewHampshire. BMCHP is an affiliate of BMC, effective July 1, 2013 BMC Health System Inc.replaced BMC as BMCHP’s sole corporate member. BMCHP had total net assets of $222,397,000and $229,723,000 as of September 30, 2013 and 2012, respectively, and total assets of$356,083,000 and $382,094,000 as of September 30, 2013 and 2012, respectively. BMCHP hadtotal operating revenue of $1,368,277,000 and $1,194,409,000, before eliminations, and adecrease in unrestricted net assets of ($7,326,000) and ($51,455,000) for the years endedSeptember 30, 2013 and 2012, respectively.

Effective July 1, 2002, the Medical Center and the Foundation established BMCIC for purposes ofproviding professional and general liability insurance to each entity, its physicians and employees.BMCIC was incorporated under the laws of the Cayman Islands and has a Cayman IslandsUnrestricted Class B insurer’s license. BMCIC is owned 70% by the Medical Center and 30% bythe Foundation. BMCIC had a net income of $0 for the years ending September 30, 2013 and2012. BMCIC had a total shareholder’s equity of $120,000 and $120,000 and total assets of$107,158,000 and $99,531,000 as of September 30, 2013 and 2012, respectively.

BMCIC of Vermont was incorporated on October 7, 2004 as a single parent captive insurancecompany licensed by the State of Vermont. BMCIC of Vermont provided insurance coverage fromDecember 31, 2004 until December 31, 2005. BMCIC of Vermont provided coverage for theMedical Center for property and for certain liability exposures arising from acts of terrorism underthe Terrorism Risk Insurance Act of 2002 (“TRIA”). All coverages provided by BMCIC of Vermontwere on a claims-made basis. BMCIC of Vermont ceased to provide coverage, effectiveDecember 31, 2005, because TRIA expired on December 31, 2005 and was not extended by thefederal government. BMCIC of Vermont is owned 100% by the Medical Center. BMCIC ofVermont had total shareholder’s equity of $345,000 and $250,000 and total assets of $353,000 and$290,000 as of September 30, 2013 and 2012, respectively.


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BUAP is a tax exempt, nonprofit corporation that employs nine physicians in Boston, Foxboro andNorwood, Massachusetts, to provide health care services, perform medical and clinical research,and provide health and medical education programs. The Medical Center is BUAP’s sole corporatemember.

Gryant, Inc. is a Massachusetts Corporation organized under Chapter 156D of the General Laws ofMassachusetts for real estate development activities. Gryant, Inc. is wholly owned by theMedical Center.

BMC NAB Business Trust was organized, in May 2008, as a Massachusetts business trust underChapter 182 of the General Laws of Massachusetts. The Medical Center is a 90% shareholder ofthe trust, as well as trustee, and Steward Research and Specialty Projects Corporation, an affiliateof Steward Medical Holdings Subsidiary Five, Inc., is a 10% shareholder.

2. Summary of Significant Accounting Policies

Principles of ConsolidationThe financial statements include the accounts of the Medical Center, ECMF, BMC Integrated CareServices, Inc. and UDF. All significant intercompany accounts and transactions have beeneliminated. The accompanying financial statements have been prepared on the accrual basis ofaccounting in accordance with accounting principles generally accepted in the United States ofAmerica.

Cash and Cash EquivalentsCash equivalents include certain investments in highly liquid debt instruments with originalmaturities of three months or less at date of purchase. The Medical Center maintainsapproximately $132,142,000 and $117,477,000 at September 30, 2013 and 2012, respectively, ofits cash and cash equivalents accounts with a single institution. The Medical Center has notexperienced any losses associated with deposits at this institution.

InvestmentsInvestments in equity securities with readily determinable fair values and all investments in debtsecurities (marketable investments) are measured at fair value in the balance sheet primarily basedon quoted market prices. Investment income or loss (including realized gains and losses oninvestments, interest and dividends) is included in the excess of revenues over expenses unlessthe income or loss is restricted by donor or law. The change in unrealized appreciation oninvestments is recorded in the statement of operations as changes in unrestricted net assets,unless their use is restricted by explicit donor-imposed stipulations or law, in which case they arereported in the appropriate restricted class of net assets.

The fair value of the Medical Center’s investments in bonds, notes, and common stock is based onquoted market prices in an active market. At September 30, 2013 and 2012, the Medical Centerheld interests in private investment funds. Interests in private investment funds are generallyrecorded at fair market value based on the Medical Center’s ownership share and rights of theinvestment, unless certain criteria require the investment to be recorded as equity methodinvestments or at cost. Securities for which no such quotations or valuations are readily availableare carried at fair value as estimated by management using values provided by external investmentmanagers. The Medical Center believes that these valuations are a reasonable estimate of fairvalue as of September 30, 2013 and 2012, but are subject to uncertainty and, therefore, may differfrom the value that would have been used had a ready market for the investment existed. The


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Medical Center has the ability to liquidate its investments periodically in accordance with theprovisions of the respective fund agreements.

Assets Limited as to UseAssets limited as to use primarily include assets held by trustees under bond indenture agreementsand designated assets set aside by the Board of Trustees for future capital improvements overwhich the Board retains control and may, at its discretion, subsequently use for other purposes.Also included are donor-restricted investments representing permanently and temporarily restrictednet assets.

Property, Plant and EquipmentProperty and equipment acquisitions are recorded at cost. Donated items are recorded at fairmarket value at the date of contribution. Depreciation, which includes the amortization of assetsrecorded under capital leases, is provided using the straight-line method over the estimated usefullives of the respective assets in accordance with guidance published by the American HospitalAssociation. Maintenance and repairs are charged to expense as incurred; major renewals andbetterments are capitalized. Costs and the related allowance for depreciation are eliminated fromthe accounts when items are sold, retired or abandoned and any related gain or loss is recognizedas a non-operating gain or loss in the statement of operations. The carrying value of property andequipment is reviewed if the facts and circumstances indicate that it may be impaired.

Assessment of Long-Lived AssetsThe Medical Center periodically reviews the carrying value of its long-lived assets (primarilyproperty, plant and equipment) to assess the recoverability of these assets; any impairments wouldbe recognized in operating results, if the reduction in value is considered to beother-than-temporary.

InventoriesInventories are stated at the lower of cost (first-in, first-out method) or market.

Third-Party Liabilities for Patient ServicesUnder the terms of contractual agreements, certain elements of third-party reimbursement aresubject to negotiation, audit and/or final determination by third-party payors. The accompanyingfinancial statements include certain estimates of final settlements. Variances between estimatedand final settlements are included in the statement of operations in the year in which the settlementor change in estimate occurs.

The Medical Center has classified a portion of the accrual for settlements with third-party payors asshort-term receivables because such amounts are expected to be received or paid in the nexttwelve months. The Medical Center has also classified a portion of the accrual for settlements withthird-party payors as long-term liabilities because such amounts, by their nature, or by virtue ofregulation or legislation, will not be received or paid within one year.


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Deferred RevenueDeferred revenue consists of amounts received in advance of the contract period. Certainadvances are received from the Commonwealth of Massachusetts (the “Commonwealth”) relatedto grants. Advances received related to grants were $17,798,000 and $17,639,000 as ofSeptember 30, 2013 and 2012, respectively. Also included in deferred revenue is a rebatereceived in advance. The Medical Center recorded deferred revenue related to the rebate of$550,000 and $695,000 for the years ended September 30, 2013 and 2012, respectively.

Net AssetsPermanently restricted net assets include only the historical dollar amount of gifts, which arerequired by donors to be held in perpetuity. Temporarily restricted net assets include gifts, grants,investment income, including realized gains and losses, and the change in unrealized appreciationon investments, which can be expended but for which restrictions have not yet been met. Suchrestrictions include purpose restrictions, time restrictions and restrictions imposed by law on theuse of capital appreciation on donor restricted funds. At September 30, 2012, temporarilyrestricted net assets include a reduction due to the refinancing of the City of Boston (“COB”) leaseobligation.

Realized gains and losses are classified as unrestricted net assets unless they are restricted by thedonor or the law. Unless permanently restricted by the donor, realized and unrealized net gains onpermanently restricted gifts are classified as temporarily restricted until appropriated for spendingby the Medical Center in accordance with policies established by the Medical Center and theUniform Prudent Management of Institutional Funds Act (“UPMIFA”) enacted by theCommonwealth in July 2009. Unrestricted net assets include all the remaining net assets of theMedical Center. See Note 11 for further information on the composition of restricted net assets.

Gifts and GrantsGifts of long-lived assets with explicit restrictions that specify the use of assets and gifts of cash orother assets that must be used to acquire long-lived assets are reported as additions to temporarilyrestricted net assets. Gifts of long-lived assets and gifts specified for the acquisition or constructionof long-lived assets are reported as additions to unrestricted net assets when the assets are placedin service and are excluded from the excess of revenues over expenses.

Unconditional promises to give cash and other assets to the Medical Center are reported at fairvalue on the date the promise is received. The contributions are reported as temporarily restrictedsupport if they are received with donor stipulations that limit the use of the donated assets or asunrestricted contributions if no such conditions exist. When a donor restriction expires, that is,when a stipulated time restriction ends or purpose restriction is accomplished, temporarilyrestricted net assets are reclassified to unrestricted net assets and reported in the statements ofoperations as net assets released from restrictions.

Grants and contracts are recognized as unrestricted revenues as the related expenditures areincurred. The Medical Center recognizes indirect cost recoveries at provisional rates, which aresubject to audit, for U.S. Government grants and contracts and negotiated rates for other grantsand contracts.

Self-Insurance ReservesThe Medical Center is self-insured for certain employee health care benefits, workers’compensation and certain other employee benefits. These costs are accounted for on an accrualbasis to include estimates of future payments on claims incurred as of the balance sheet date.


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Professional Liability InsuranceThe Medical Center maintains medical malpractice insurance on a modified claims-made basis forresidents, interns and physicians, the Medical Center and its employees, significantly all of whichare provided by BMCIC. The deposit liability represents the provision on hand to cover liabilitiesthat may arise under the primary professional liability, commercial general liability and excessprofessional liability policies issued by the company. Premiums are allocated to the deposit liabilityaccount as well as losses, investment income, operating expenses and unrealized holdinggains/losses on investments. The reserve for losses and loss adjustment expenses andcorresponding reinsurance recoverable represent management’s best estimate, at a 70%confidence level discounted at 4%, of the BMCIC’s liability under the excess loss coverage basedon an actuarial projection of losses. The Medical Center has provided for the estimated cost ofincurred but not reported malpractice claims and an estimate for amounts payable on thedeductibles.

Statements of OperationsAll activities of the Medical Center deemed by management to be ongoing or central to theprovision of health care services, training and research activities are reported as operatingrevenues and expenses. Peripheral or incidental transactions are reported as nonoperating gainsand losses.

The statement of operations includes the excess of revenue over expenses. Changes inunrestricted net assets which, consistent with industry practice, are excluded from the excess ofrevenue over expenses, include the change in unrealized appreciation on investments,contributions of long-lived assets (including assets acquired using contributions which, by donorrestriction, were to be used for the purpose of acquiring such assets), pension related changesother than net periodic pension costs, and net asset transfers from BMCHP to the Medical Center.Other changes in unrestricted net assets includes a contributed capital asset related to the FGHbuilding transfer in fiscal year 2013, and a revised classification of net assets in fiscal year 2012.

During fiscal year 2013, the Medical Center received favorable settlements from Medicaid,Medicare and the Health Safety Net fund (“HSN”) related to prior years. Changes include MedicaidPay for Performance payments for $1,000,000, Medicare prior period cost report settlements for$5,500,000 and the Medical Center settled with the HSN for outpatient rate corrections, EMSambulance free care payments and physician free care payments for $20,200,000.

Favorable changes in prior year estimates from third-party payors recorded in the years endedSeptember 30, 2013 and 2012 amounted to approximately $26,766,000 and $17,228,000,respectively.

Net Patient Service RevenueNet patient service revenue is reported at the estimated net realizable amounts, excluding chargesrelated to charity accounts, from patients and third-party payors. It includes estimates ofanticipated retroactive adjustments under reimbursement agreements with certain third-partypayors, including Medicare and Medicaid. Such adjustments are accrued in the period the relatedservices are provided and adjusted in subsequent periods, as final settlements are determined.


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Other RevenueOther revenue consists primarily of services rendered to other organizations under contractualagreements which include community health centers and area hospitals. Additionally included inother revenues are meaningful use payments received for meeting stage one of the CMSrequirements. Also included in other revenue are miscellaneous fees related to the sale of medicalproducts.

Charity CareThe Medical Center provides care without charge to patients who meet certain criteria under itscharity care policy. Since the Medical Center does not pursue collection of amounts determined toqualify as charity care, they are not reported as net patient service revenue. The Medical Centermaintains records to identify and monitor the level of free care it provides.

The Medical Center provided free care of $87,707,000 and $97,031,000 in 2013 and 2012,respectively. Such costs have been estimated based on the ratio of expenses (excluding bad debtexpense) to establish patient service charges. Under healthcare reform all documentedMassachusetts citizens who were once eligible for charity care are now required to be enrolled inone of the subsidized Commonwealth Care insurance products. Those patients who are over300% of the federal poverty guidelines are now required to buy into an affordable insuranceproduct either offered by their employer or the Commonwealth Care Connector or face financialpenalties. Many of the Medical Center’s patients that were previously uninsured are now enrolledin various health insurance plans in an effort to comply with the Commonwealth’s healthcare reformmandate.

Through the Commonwealth’s Health Safety Net Office (“HSNO”), the Medical Center receivesreimbursement for a significant portion of the charity care it provides. The amounts received were$63,091,000 and $58,908,000 for the years ended September 30, 2013 and 2012, respectively.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally acceptedin the United States of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Significant estimates are made in the area of patientaccounts receivable, accruals for settlements with third-party payors, accrued professional liabilityinsurance, accrued compensation and benefits and conditional asset retirement obligations. Actualresults could differ from those estimates.

Fair Value of Financial InstrumentsThe fair value of the Medical Center’s financial instruments approximates the carrying amountreported in the balance sheet for cash and cash equivalents, investments, receivables andpayables.

Income TaxesThe Medical Center, ECMF, and UDF are nonprofit corporations and have been recognized as taxexempt pursuant to Section 501(c)(3) of the Internal Revenue Code. BMC Integrated CareServices, Inc. is a taxable entity.


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RevisionIn 2012 the revised classification between unrestricted and temporarily restricted net assets of$5,129,000 reflects the correction of an error of previously reported investment gains. These gainswere related to earnings on funds invested in the Medical Center’s pooled endowment fund whichwere previously reported as temporarily restricted net assets, but should be reported asunrestricted net assets. These amounts were corrected in fiscal year 2012 and management didnot consider this adjustment to be material to the financial statements.

Adoption of New Accounting GuidanceIn July 2011, the FASB issued Health Care Entities: Presentation and Disclosure of Patient ServiceRevenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for certain health careentities. Under the new guidance, bad debts relating to patient service revenue will be separatelydisclosed in the statement of operations and reported as a component of net patient servicerevenue. Bad debts associated with activities other than patient service revenue will continue to bereported as an operating expense. The standard is effective for fiscal years after December 15,2012. The Medical Center adopted the provisions of ASU 2011-7 during the year endedSeptember 30, 2013.

In August 2010, the Financial Accounting Standards Board (FASB) issued Accounting StandardsUpdate 2010-24 (ASU 2010-24), Presentation of Insurance Claims and Related InsuranceRecoveries, as an amendment to ASC Topic 954. ASU 2010-24 requires that medical malpracticeclaims, which include costs associated with litigating or settling claims, be accrued when theincidents that give rise to the claims occur and that companies should not net insurance recoveriesagainst the related claim liability. Medical Center adopted ASU 2010-24 as of October 2011.Adoption of ASU 2010-24 had no impact on excess of revenues over expenses. Refer to Note 22Professional Liability Insurance, for more information.

In August 2010, the FASB issued (ASU 2010-23) Health Care Entities: Measuring Charity Care forDisclosure, which clarified the disclosure of charity care provided by healthcare organizations,providing that such disclosure should be measured using cost and that related reimbursementsrecorded should also be separately disclosed. The Medical Center adopted the provisions of ASU2010-23 during the year ended September 30, 2012.


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3. Assets Limited as to Use

Assets limited as to use consist of the following at September 30:

At Fair At Fair

(in thousands) Value Cost Value Cost

Cash and cash equivalents 2,367$ 2,367$ 3,177$ 3,177$

Bonds and U.S. Treasury Notes 133,263 125,884 129,272 119,934

Private investment funds 235,519 204,980 187,709 171,975

Mutual funds 121,080 106,209 102,418 89,324

Marketable equity securities 116,984 83,927 94,471 80,533

Money market mutual funds 2,923 2,923 47,916 47,916

612,136 526,290 564,963 512,859

Funds held by trustee 71,194 71,364 86,982 87,294

683,330$ 597,654$ 651,945$ 600,153$

2013 2012

At September 30, 2013 and 2012, respectively, the Medical Center recorded certain privateinvestment funds of $53,587,000 and $49,994,000 using the cost method. For the privateinvestment funds reflected in the balance sheet at cost, the difference (unrecorded net unrealizedappreciation) between the value reported by the investment managers and the cost for theseinvestments was $11,078,000 and $2,498,000 as of September 30, 2013 and 2012, respectively.Included in private investment funds as described in the American Institute of Certified PublicAccountants document, A Practice Aid for Auditors Alternative Investments - Audit Considerationsare alternative investment vehicles including commingled funds with an estimated fair value ofapproximately $235,519,000 and $187,709,000 at September 30, 2013 and 2012, respectively.

Total return on the Medical Center’s investment portfolio, which includes investment income, netrealized gains (losses) and the change in the unrealized appreciation on investments, includes thefollowing for the years ended September 30:


Unrestricted

Dividends and interest 14,102$ 10,850$

Net realized gains (losses) on investments 2,539 (1,752)

Change in unrealized appreciation on investments 7,588 23,988

24,229 33,086

Temporarily restricted

Dividends and interest 6,272 5,473

Net realized gains on investments 5,604 18,971

Change in unrealized appreciation on investments 26,296 12,695

38,172 37,139

62,401$ 70,225$


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Investments, in general, are exposed to various risks, such as interest rate, credit, and overallmarket volatility. As such, it is reasonably possible that changes in the fair value of investments willoccur in the near term and that such changes could materially affect the amounts reported in thebalance sheets and statements of operations.

4. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability(an exit price) in the principal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. In determining fair value, theuse of various valuation approaches, including market, income and cost approaches, is permitted.

A fair value hierarchy has been established based on whether the inputs to valuation techniquesare observable or unobservable. Observable inputs reflect market data obtained from sourcesindependent of the reporting entity. Unobservable inputs reflect the entities’ own assumptionsabout how market participants would value an asset or liability based on the best informationavailable. Valuation techniques used to measure fair value must maximize the use of observableinputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchybased on three levels of inputs, of which the first two are considered observable and the lastunobservable, that may be used to measure fair value.

The following describes the hierarchy of inputs used to measure fair value and the primaryvaluation methodologies used by the Medical Center for financial instruments measured at fairvalue on a recurring basis. The three levels of inputs are as follows:

Level 1 Observable inputs such as quoted prices in active markets;

Level 2 Inputs, other than the quoted prices in active markets, that are observable eitherdirectly or indirectly; and

Level 3 Unobservable inputs in which there is little or no market data, which require thereporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following threevaluation techniques:

Market ApproachPrices and other relevant information generated by market transactions involving identical orcomparable assets or liabilities;

Cost ApproachAmount that would be required to replace the service capacity of an asset (i.e., replacement cost);and

Income ApproachTechniques to convert future amounts to a single present amount based on market expectations(including present value techniques).


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Investments (except for private partnerships, which are reported on either the equity method orcost method of accounting) and funds held by trustee are classified within Level 1 or Level 2 of thefair value hierarchy as they are valued using quoted market prices, broker or dealer quotations, orother observable pricing sources.

The following table summarizes fair value measurements at September 30, 2013 for financialassets measured at fair value on a recurring basis.

(in thousands) Level 1 Level 2 Level 3 Total

Investments

Cash and cash equivalents 2,367$ -$ -$ 2,367$

Bonds and U.S. Treasury Notes - 133,263 - 133,263

Marketable equity securities 116,984 - - 116,984

Private investment funds - 235,519 - 235,519

Money market mutual funds 2,923 - - 2,923

Mutual funds 121,080 - - 121,080

243,354$ 368,782$ -$ 612,136$

Funds held by trustee

U.S. government securities 35,228$ -$ -$ 35,228$


71,194$ -$ -$ 71,194$



Investments


Bonds and U.S. Treasury Notes - 129,272 - 129,272



Money market mutual funds 47,916 - - 47,916Mutual funds 102,418 - - 102,418

247,982$ 316,981$ -$ 564,963$

Funds held by trusteeU.S. government securities 34,949$ -$ -$ 34,949$


86,982$ -$ -$ 86,982$

The Medical Center had no transfers from Level 2 to Level 1 in fiscal year 2013 and 2012.


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The following is a description of the Medical Center’s valuation methodologies for assets andliabilities measured at fair value. Fair value for Level 1 is based upon quoted prices in activemarkets that the Medical Center has the ability to access for identical assets and liabilities. Marketprice data is generally obtained from exchange or dealer markets. The Medical Center does notadjust the price for such assets and liabilities.

Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quotedprices for identical or similar instruments in markets that are not active and model-based valuationtechniques for which all significant assumptions are observable in the market or can becorroborated by observable market data for substantially the full term of the assets. Inputs areobtained from various sources including market participants, dealers, and brokers.

Fair value for Level 3 is based on valuation techniques that use significant inputs that areunobservable as they trade infrequently or not at all.

The Medical Center’s investments in bonds and U.S. Treasury notes and private investment fundsare fair valued based on most current net asset value (“NAV”).

The following table presents liquidity information for the financial instruments carried at net assetvalue at September 30, 2013.

(in thousands)Investment Type Net Asset Value Redemption Frequency Notice Period

Bonds and U.S. Treasury Notes 133,263$ Daily–Monthly 2–30 Days

Private investment funds 235,519 Bi-Monthly–Monthly 3–45 Days

368,782$

Investments Asset Value at September 30, 2013


(in thousands)Investment Type Net Asset Value Redemption Frequency Notice Period

Bonds and U.S. Treasury Notes 129,272$ Daily–Monthly 2–30 Days

Private investment funds 187,709 Bi-Monthly–Monthly 3–45 Days

316,981$

Investments Asset Value at September 30, 2012

There were no unfunded commitments as of September 30, 2013.

Externally managed marketable investments with fair value below cost are considered to beother-than-temporarily impaired and accordingly, the unrealized depreciation is recognized asrealized losses through a write-down in the cost basis of these investments. All other investmentsare periodically reviewed for impairment to determine if such declines are other-than-temporary.Management’s review is based upon the percentage and period of time that the investment isbelow cost as well as other qualitative considerations. A similar write down is recorded when theimpairment on these investments has been judged to be other-than-temporary. During 2013 and2012, the Medical Center reported recognized losses of approximately $1,316,000 and $1,007,000,respectively, relating to declines in fair value of investments that were determined by managementto be other-than-temporary.


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5. Contributions Receivable

Contributions receivable are recorded as part of other accounts receivable and other noncurrentassets on the balance sheet. Contributions receivable, net, are summarized as follows as ofSeptember 30:

Unconditional promises expected to be collected in:


Less than one year 4,438$ 6,505$

One year to five years 7,504 4,661

More than five years 2,000 4,000

13,942 15,166

Less: Discounts and allowance for uncollectible accounts (3,929) (4,234)

Net contributions receivable 10,013$ 10,932$

Included in total gross contributions receivable is a single donor in the amount of $10,000,000. Theoriginal contribution from the donor in 2008 was $15,000,000, of which $5,000,000 was paid.Discount rates used to calculate the present value of contributions receivable ranged from2.40%-6.00%, depending upon the anticipated pledge fulfillment date.

6. Property, Plant and Equipment

The property, plant and equipment of the Medical Center consists of the following at September 30:

(in thousands) Useful Life 2013 2012

Land 11,292$ 11,292$

Land improvements 5–40 years 775 1,532

Buildings 15–45 years 186,393 168,553

Building and leasehold improvements 5–40 years 369,558 355,105

Fixed equipment 5–25 years 43,605 58,581

Major movable equipment 3–20 years 322,242 337,766

Leased buildings and equipment 15–20 years 118,408 125,548

Construction in progress 70,761 50,575

1,123,034 1,108,952

Accumulated depreciation and amortization (666,687) (683,632)

Property, plant and equipment, net 456,347$ 425,320$

Depreciation expense amounted to $47,874,000 and $50,379,000 for the years endedSeptember 30, 2013 and 2012, respectively. Amortization expense amounted to $11,358,000 and$9,926,000 for the years ended September 30, 2013 and 2012, respectively.

As of September 30, 2013 and 2012, assets under capital lease agreements amounted toapproximately $118,408,000 and $125,548,000, respectively, with accumulated amortization of$86,177,000 and $81,971,000, respectively. Amortization expense is included with depreciationand amortization expense in the statement of operations.


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Fully depreciated property, plant and equipment with an original cost of $76,177,000 was disposedof during the year ended September 30, 2013.

The Master Trust Indenture places certain restrictions on property, plant and equipment in terms ofthe creation of liens and transfers of assets.

The Medical Center has capitalized interest in the amount of $47,823,000 and $41,463,000 for theyears ended September 30, 2013 and 2012, respectively.

7. Other Noncurrent Assets

Other noncurrent assets consist of the Medical Center’s investments in Medical Research RealtyTrust, the 650 Albany Street Trust, Biosquare Realty Trust, NEIDL (Note 23), BCD Building LLC(“BCD”), FGH Building LLC (“FGH”), notes receivable and unamortized bond issuance expenses.The investments in Medical Research Realty Trust, 650 Albany Street Trust, Biosquare RealtyTrust, NEIDL, BCD and FGH are recorded utilizing the equity method of accounting. Unamortizedbond issuance expenses are amortized over the life of the related bonds.

The Medical Center has financed the cost of renovating two existing structures and for newconstruction of a third building on its campus using the New Markets Tax Credit (“NMTC”) program.NMTC is a program of the Community Development Financial Institutions Fund (“CDFI Fund”), abureau of the United States Treasury. The NMTC program awards tax incentives to private sectorinvestors who provide investment capital to entities that create economic growth and jobs indistressed neighborhoods. Investors receive a tax credit against federal income taxes over aseven-year period.

In 2005, the Medical Center was the beneficiary of an allocation of NMTC that was awarded toAffirmative Investments, Inc. These NMTC and federal historic tax credits were used as part of afinancing package to reduce the cash required by the Medical Center to rehabilitate theBCD Building. The financing required the Medical Center to loan approximately $5,800,000 and$6,100,000 to a third party relating to project costs of $16,000,000 to perform buildingimprovements on the BCD building. The $5,800,000 is recorded as a note receivable atSeptember 30, 2013 and 2012 but it is considered permanent financing and will be forgiven oncethe Medical Center takes ownership, which is expected at the end of the seven-year period whenthe tax incentives for the investor have been exhausted. The $6,100,000 was repaid to the MedicalCenter by a third party; however the interest is still outstanding. The loans have an interest rate of5.12% and have accrued interest of $1,768,000 and $2,071,000 as of September 30, 2013 and2012, respectively. On May 1, 2012, the Medical Center purchased Gryant, Inc.’s interest in theBCD building for $300,000. On June 21, 2013, Gryant, Inc. transferred $297,000 ($300,000 lessbank fees) to the Medical Center and the Medical Center reduced its interest in BCD. As ofSeptember 30, 2013 and 2012, the Medical Center recorded $1,303,000 and $1,600,000 as aninvestment in BCD.


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The Medical Center has entered into four put and call option agreements in connection with theredevelopment of BCD. If the put options or the call options are not executed, two of theagreements terminate on December 22, 2014, and the other two terminate on June 5, 2016. Thepurpose of the put and call option agreements is to ensure that the Medical Center regains controlof the rehabilitated building at the end of the NMTC period. This is accomplished by acquiring theinterests of all investment members for $1,472,000.

On October 1, 2012 the Medical Center executed the put for BCD to Sovereign. The MedicalCenter paid Sovereign $1,455,000 for Sovereign’s 99% interest in Affirmative NMTC Fund I LLC(the “Fund”). Affirmative LLC has the other 1% interest in the Fund. Affirmative LLC has a putoption to sell its 1% interest in the Fund to the Medical Center; however, as of September 30, 2013,the Medical Center has not executed the put for BCD to Affirmative LLC. In connection with thistransaction, a long term asset of $1,056,000 remains on the balance sheet.

During 2006, the Medical Center loaned approximately $11,600,000 and $9,000,000 to a third partyrelating to project costs of $21,000,000 to perform building improvements on the Medical Center’sFGH Building. These loans are part of a second financing package that utilizes new market taxcredits to reduce the cash required by the Medical Center to rehabilitate the facility. The$11,654,000 loan was recorded as other noncurrent assets at September 30, 2012 and it wasconsidered permanent financing and was forgiven when the Medical Center took ownership in2013. The loan had an interest rate of 3.5% and was recorded as notes receivable with accruedinterest of $116,000 as of September 30, 2012. At September 30, 2013, this loan was forgiven.The $9,000,000 was repaid to the Medical Center by a third party in fiscal year 2010.

The Medical Center entered into four put and call option agreements in connection with theredevelopment of the FGH Building. All of the agreements terminate on December 20, 2015 if theput options or the call options are not executed. The purpose of the put and call option agreementsis to ensure that the Medical Center regains control of the rehabilitated building at the end of theNMTC period. This is accomplished by acquiring interests of all investment members for$1,654,000. The Medical Center has calculated that the net present value of acquiring the interestof all investors totals $1,125,000, which the Medical Center recorded as long-term assets andliabilities for the years ended September 30, 2012.

On July 24, 2012, the Medical Center purchased Gryant Inc.’s interest in the FGH Building for$150,000. On March 1, 2013, the Medical Center executed the puts for FGH to Sovereign andAffirmative, LLC. The Medical Center paid a total of $1,652,000 to Sovereign and Affirmative, LLCfor their combined 100% interest in the Affirmative NMTC Fund II, LLC (“the Fund”). After the putswere exercised, the Medical Center had 100% interest and control over the FGH Building. TheFGH Building and all other assets and liabilities were transferred from Gryant, Inc. to the MedicalCenter. The FGH building was recorded on the Medical Center’s books at its net book value of$17,849,000. The lease between the Medical Center and Affirmative LLC was terminated as aresult of the transaction. The Medical Center forgave its note and interest receivable and wrotedown its investment in FGH, lease payable and all assets and liabilities transferred from Gryant,Inc., excluding the building, to zero. The entire transaction resulted in a contribution of a capitalasset of $3,846,000, from Sovereign to the Medical Center, which is recorded as a change in netassets.


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During 2008, the Medical Center loaned $53,667,000 to a third party relating to project costs of$190,110,000 for the demolition of 91 East Concord Street and for the design, construction, andequipping of the Shapiro Ambulatory Care Center. The loan is part of a financing package thatutilizes $70,000,000 of new markets tax credits to reduce cash required by the Medical Center toconstruct this new facility. The loan is recorded as other noncurrent assets as of September 30,2013 and 2012 and will be reclassified to property, plant and equipment once the Medical Centertakes ownership at the end of the lease period. The loan has an interest rate of 3.85%, and hasbeen recorded as notes receivable as of September 30, 2013 and 2012, with accrued interest of$9,570,000 and $7,719,000, respectively. The loan from the Medical Center was combined with athird party capital contribution in the amount of $16,333,000 in an investment fund totaling$70,000,000. The total amount in the investment fund was used to make a “qualified equityinvestment” into community development entities (“CDEs”). The CDEs, in turn, are required tomake a series of loans totaling $68,900,000 to the BMC NAB Business Trust for the construction ofthe facility.

Included in the capital contribution is a low interest loan in the amount of $2,917,000, which mustbe repaid by the BMC NAB Business Trust at the end of the loan period.

As part of this financing transaction, there is a provision for an assignment of all loans to theMedical Center on the seventh anniversary of the transaction. As a financial incentive to trigger theassignment of all the loans, the loans will have a $5,000,000 principal payment due at the end ofthe seven years.

At September 30, 2009, the outstanding loans, except the low interest loan in the amount of$2,917,000 which will be paid in full by the BMC NAB Business Trust, were assigned to andrecorded as a liability to the Medical Center. The Medical Center thus became the sole lender tothe BMC NAB Business Trust. The Medical Center will have the option to terminate the businesstrust lease at that time and terminate the loans, eliminating the ownership structures created for theNMTC transaction.

In November and December 2008, the Medical Center closed on a second and third round ofNMTC financing for the construction of the Shapiro Ambulatory Care Center. The Medical Centerwas the beneficiary of an allocation of federal new market tax credits in the amounts of$46,697,000 and $24,000,000, respectively. In these two financing transactions, the MedicalCenter provided loans of $33,582,000 and $19,517,000 with the capital contribution of $14,715,000and $4,483,000 provided by a third party. These loans of $33,582,000 and $19,517,000 have aninterest rate of 3.0% and have accrued interest of $3,622,000 and $2,055,000, respectively, as ofSeptember 30, 2013. In the second round of NMTC financing, the Medical Center also entered intoan additional loan in the amount of $472,000 with an interest rate of 3.00%. Accrued interest of$51,000 and $60,000 related to this loan has been recorded as of September 30, 2013 and 2012,respectively. All loans are recorded as notes receivable as of September 30, 2013 and 2012.These funds also became equity investments into CDEs. The CDEs, in turn, are required to makea series of loans to the BMC NAB Business Trust totaling $46,234,000 and $24,000,000 for theconstruction of the facility.


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As part of these financing transactions, the Medical Center has entered into two put and callagreements in connection with the construction of the Shapiro Ambulatory Care Center. Thepurpose of these agreements is to ensure that the Medical Center retains control of the newbuilding at the end of the NMTC period. If the put options are not exercised by the investors, thenthe call option may be exercised by the Medical Center during a four-month period following the putoption period. If the call option is executed, then the Medical Center must pay the fair market valueof the investors’ interest.

8. Long-Term Debt

Long-term debt consists of the following at September 30:

(in thousands) Interest Rate 2013 2012

Massachusetts Development Finance Agency

Revenue Bonds Series C 3.00%–5.25% 103,870$ 108,950$

Revenue Bonds Series B 4.00%–5.75% 244,040 244,585

ECMF Series A Bonds 6.45% 8,600 9,600

Series O - Tax Exempt (Garage) varies 10,741 11,224

Series O - Taxable (Garage) varies 3,364 3,515

370,615 377,874

Less: Current portion of long-term debt (7,533) (7,251)

Revenue Bonds Series B discount (6,723) (6,849)

Revenue Bonds Series C premium 7,001 7,446

363,360$ 371,220$

On October 1, 2010 (the “Effective Date”) pursuant to certain provisions of Chapter 240 of the Actsof 2010 of the Massachusetts Legislature, signed into law by the Massachusetts Governor onAugust 5, 2010 (the “Legislation”) the Massachusetts Health and Educational Facilities Authority(the “Authority”) was merged into the Massachusetts Development Finance Agency(“MassDevelopment”). Under the Legislation, among other matters in connection with the merger,(i) on the Effective Date, the Authority is dissolved, and (ii) on and after the Effective Date, theAuthority’s rights, powers and duties, and properties shall be exercised, performed, owned andheld by MassDevelopment, and any and all obligations and liabilities of the Authority shall becomeobligations and liabilities of MassDevelopment.

In July 2012, the Medical Center refunded the MassDevelopment Revenue Bonds, Boston MedicalCenter Issue, Series A (1998) Bonds (“Series A Bonds”) through the sale of $108,950,000MassDevelopment, Series C Revenue 2012 Bonds (“Series C Revenue Bonds”). The principalamount outstanding of the Series A Bonds was $119,970,000. The interest rate on the Series CRevenue Bonds ranges from 3.00% to 5.25% based on the bonds’ maturities. Principal andsinking fund payments will be made annually between 2013 and 2029 and range from $5,080,000to $8,060,000.


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In July 2008, the Medical Center issued through the Authority $245,175,000 Series B RevenueBonds. The bonds were issued to finance the cost of demolition of 91 East Concord Street, thedesign, construction and equipping of the Shapiro Ambulatory Care Center, the design andconstruction of a 2-story addition to the Menino Pavilion, and routine capital expenditures. Theinterest rate on the Series B Revenue Bonds ranges from 4.00% to 5.75% based on the bonds’maturities. Principal and sinking fund payments will be made annually between 2013 and 2038and range from $545,000 to $26,430,000.

The Medical Center has granted a mortgage on the Newton Pavilion and Health Services buildingand a negative pledge on the restricted property of the Menino Pavilion and the YawkeyAmbulatory Care Center pursuant to the Amended and Restated Master Trust Indenture. TheAmended and Restated Master Trust maintains the financial covenant requiring the Medical Centerto maintain an annual debt service coverage ratio of at least 1.10 to 1.

These financial statements represent the Obligated Group and three financially immaterial affiliatesthat are not members of the Obligated Group (UDF, ECMF, and the BMC Integrated CareServices, Inc.).

The Amended and Restated Master Trust Indenture covers the obligations of Series B RevenueBonds, Series C Revenue Bonds and Series O Pool Loans.

ECMF issued $17,200,000 of bonds (the “ECMF Series A Bonds”) through the Authority onMarch 7, 2000. The bonds were issued in two separate issuances with $5,900,000 of the bondsmatured in 2010 (the “2010 Bonds”) and $11,300,000 of the bonds maturing in 2020 (the “2020Bonds”). Principal payments are made on an annual basis through 2020 and range from$1,000,000 to $1,500,000. The interest rate on the 2020 bonds is 6.45%. The bonds areredeemable at any time at the option of ECMF at their principal amounts plus accrued interest.The bonds are collateralized by a grant of a mortgage on the project, a pledge of all revenues to bereceived by ECMF and the Medical Center’s guaranty of payment of total debt service on thebonds.

In October 2012, the Medical Center entered into a Line of Credit for short-term borrowings with abank under which up to $25 million may be borrowed on such terms as outlined by the Amendedand Restated Line of Credit Agreement. This Agreement will be renewed annually but can bewithdrawn at the bank’s option. The Medical Center has pledged certain board designatedaccounts to secure the line of credit. The assets of these accounts will collateralize borrowingsagainst the line of credit. The Medical Center has not borrowed against the line of credit as ofSeptember 30, 2013.

Included in the Medical Center’s debt is approximately $14,105,000 of the Authority’s variable ratedemand bonds (“VRDBs”), Capital Asset Program Issue 2009 Series O-1 and O-2 (a refinancing ofthe Authority’s Series M loans issued in 2005). The Medical Center has entered into irrevocableletters of credit (“LOCs”) with a financial institution to secure bond repayment and interestobligations associated with its VRDBs. RBS Citizens, N.A. provides LOCs totaling $14,981,000.There are no drawings under the LOCs as of September 30, 2013. The LOC supporting theSeries O-1 and O-2 will expire on December 31, 2014. RBS Citizens provided a Federal HomeLoan Bank wrap (AAA rated) for the two Letters of Credit. The term and payment schedule for theloans did not change. The interest rates at September 30, 2013 were 0.09% and 0.16% for the taxexempt and taxable loans, respectively.


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If the VRDBs are unable to be remarketed, the trustee for the VRDB will request purchase underthe LOC scheduled repayment terms. Based on the existing repayment and maturity terms of theunderlying LOCs, the scheduled payments under the VRDB related LOCs will be determined whenand if the VRDBs are unable to be remarketed.

The Medical Center has a liquidity covenant which requires minimum liquidity of $50,000,000 bemaintained in certain board designated accounts as security for the LOCs.

The Medical Center has escrowed the following funds with bond trustees under the Series BRevenue Bonds, the Series C Revenue Bonds, the ECMF Series A Bonds and Series O Poolloans. In addition, these amounts include funds for the self-insured workers’ compensationprogram and funds designated by management for pension and other employee benefit purposes.These funds are included in assets limited as to use in the financial statements.


Construction fund 21,809$ 38,770$

Debt service fund 6,724 6,764

Debt service reserve funds 35,385 35,276

Accrued interest receivable 469 285

Workers compensation reserve funds 6,470 5,550

Other held funds 337 337

71,194$ 86,982$

September 30,

The assets of the funds held by the trustees are invested principally in government securities andmoney market funds.

Maturities of long-term debt are as follows:

(in thousands)

Years Ending September 30,

2014 7,533$

2015 8,258

2016 8,601

2017 9,225

2018 9,933

Thereafter 327,065

370,615$

The fair value of long-term debt was approximately $375,270,000 and $409,931,000 atSeptember 30, 2013 and 2012, respectively.


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9. Obligations Under Capital Leases

Obligations under capital leases consist of the following at September 30:


City of Boston (forgivable) 27,851$ 37,198$

City of Boston 919 1,501

Other - 218

Less: Current portion (forgivable) (9,753) (9,347)

Less: Current portion (330) (800)

18,687$ 28,770$

Effective with the merger on July 1, 1996, the Medical Center entered into a 50-year capital leasewith the Public Health Commission (“PHC”), a division of the City of Boston, for all the real propertypreviously owned by BCH. The lease payments for the first 25 years are equal to the debt servicepayments required on the City of Boston Revenue Refunding Bonds, Boston City Hospital(FHA insured mortgage) Series B (the “1993 Bonds”). The lease payments for the second25 years will be determined at that time based upon several factors. In conjunction with the leaseexecution, the City of Boston agreed to provide the Medical Center with Base Assistance Grantpayments (Note 14) which are expected to equal the Medical Center’s payments on the first25 years of the lease. The lease payments during the first 25 years are only required if theMedical Center receives the Base Assistance Grant payments from the City of Boston. Theinterest rate on the lease was 6.2%.

On May 1, 2012, the City of Boston refinanced its 2002 Bonds through the issuance of GeneralObligation Bonds, 2012 Series C (the “2012 Bonds”). In conjunction with the refinancing, theMedical Center and PHC amended the lease agreement to reflect a reduction in monthly paymentsso that the Medical Center’s obligation was equal to the debt service payment for the City ofBoston’s General Obligation debt. As the Medical Center continues to occupy the space and paysrent that is less than fair market value, the execution of this amendment resulted in a forgivablecapital leased asset between the City of Boston and the Medical Center. The execution of theforgivable capital leased asset resulted in a reduction of the existing asset of $8,887,000 and areduction in the obligation of $18,060,000. A gain of $9,211,000 was recorded on the amendmentof the agreement due to a difference in amortization methods. The capital asset, the forgivableobligation and the gain will be amortized over the remainder of the lease term (through June 2016).The amended agreement also terminates the Medical Center’s Base Assistance Grant receivablepayments from the City of Boston.

Once the 2002 Bonds are retired, the rent payments will reflect fair market value, taking intoaccount, among other factors, restrictions in the lease agreement and any investments the MedicalCenter has made.


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Future minimum payments of the Medical Center’s obligations under capital leases are as follows:

(in thousands)


2014 371$

2015 347

2016 273

2017 -

2018 -

Thereafter -

Total minimum lease payments 991

Less: Amount representing interest (72)

Present value of minimum lease payments 919

Less: Current portion (330)

589$

10. Operating Lease Commitments

The Medical Center estimated future minimum lease obligations are as follows:

Lease

(in thousands) Obligations


2014 7,787$

2015 7,162

2016 7,032

2017 6,503

2018 6,276

Thereafter 16,776

51,536$

The Medical Center records rent expense on a straight-line basis over the life of the lease andrecords accrued rent as the difference between rent expense and actual payments made. As ofSeptember 30, 2013 and 2012, the accumulated difference between rent expense and amountspaid amounted to $2,080,000, and is included in accounts payable and accrued expenses andother long-term liabilities on the balance sheet.


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11. Restricted Net Assets

Restricted net assets, which are recorded in assets limited to use, grants receivable and otheraccounts receivable on the balance sheet, are composed of the following at September 30:



Accumulated realized and unrealized gains 219,597$ 187,697$

City of Boston Grants (Note 14) 27,851 37,198

Funds for the purchase of equipment and

capital improvements 31,802 31,825

Other restricted purposes 40,862 42,383

320,112$ 299,103$

Permanently restricted

Investments to be held in perpetuity 16,353$ 16,353$

12. Endowments

The Medical Center’s endowment consists of approximately 167 donor–restricted funds establishedfor a variety of purposes. As required by generally accepted accounting principles, net assetsassociated with endowment funds are classified and reported as restricted or unrestricted based onthe existence or absence of donor–imposed restrictions.

The Medical Center has interpreted the UPMIFA as requiring the preservation of the original gift asof the gift date of the donor–restricted endowment funds absent explicit donor stipulations to thecontrary. As a result of this interpretation, the Medical Center classifies as permanently restrictednet assets, the original value of gifts donated to the permanent endowment. The remaining portionof the donor–restricted endowment fund that is not classified in permanently restricted net assets isclassified as temporarily restricted net assets until those amounts are appropriated for expenditureby the Medical Center in a manner consistent with the standard of prudence prescribed byUPMIFA. In accordance with UPMIFA, the Medical Center considers certain factors in making adetermination to appropriate or accumulate endowment funds. These factors include the durationand preservation of the fund; the purpose of the organization and the donor–restricted endowmentfund; general economic conditions; the possible effect of inflation and deflation; the expected totalreturn from income and the appreciation of investments; other resources of the organization; andthe investment policies of the organization.

As of September 30, 2013, the Medical Center did not have board-designated funds included in theendowment. The endowment net asset composition by type of fund consisted of the following:



Donor-restricted

endowment funds -$ 183,302$ 16,353$ 199,655$

-$ 183,302$ 16,353$ 199,655$


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Changes in endowment net assets for the year ended September 30, 2013, consisted of thefollowing:



Endowment net assets at

September 30, 2012 -$ 162,727$ 16,353$ 179,080$

Investment return


Net unrealized appreciation - 19,284 - 19,284

Total investment return - 28,343 - 28,343

Appropriation of endowment

assets for expenditures - (7,768) - (7,768)

- (7,768) - (7,768)

Endowment net assets atSeptember 30, 2013 -$ 183,302$ 16,353$ 199,655$

As of September 30, 2012, the endowment net asset composition by type of fund consisted of thefollowing:



Donor-restricted

endowment funds -$ 162,727$ 16,353$ 179,080$

-$ 162,727$ 16,353$ 179,080$





September 30, 2011 -$ 140,398$ 16,353$ 156,751$

Investment return






- (7,143) - (7,143)



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13. Third-Party Reimbursement

The Medical Center maintains agreements with Blue Cross of Massachusetts, Inc., the SocialSecurity Administration under the Medicare Program, the Commonwealth under the MedicaidProgram and certain managed care entities that govern payment to the Medical Center for servicesrendered to patients covered by these programs.

MedicareReimbursement for services provided to inpatients and outpatients covered by the federalgovernment’s Medicare program who have elected not to enter a Medicare health maintenanceorganization for services varies according to patient classification systems that are based onclinical, diagnostic, and other factors.

MedicaidThe Commonwealth’s MassHealth (Office of Medicaid) utilizes a prospective payment system foracute hospital services provided to Medicaid beneficiaries. The Office of Medicaid pays theMedical Center a fixed amount per discharge for inpatient services, prospectively determined flatrates based on diagnoses and procedures performed for most outpatient services, and fixed feesfor certain other outpatient services.

Uncompensated CareThe Medical Center is partially reimbursed for uncompensated care services, defined as charitycare and bad debt associated with emergency services, through the statewide HSNO, administeredby the Commonwealth. Following the merger of BUMCH and BCH on July 1, 1996, the MedicalCenter has continued the historical mission and commitment of BCH to the public health needs ofall residents of the City of Boston to provide accessible health care services to all in need of care,regardless of status or ability to pay. As a result, the Medical Center receives a significant amountof its reimbursement from the HSNO. Changes in the level of funding of the Health Safety Net or inthe regulations governing its administration may have an adverse impact on the Medical Center.

14. Grant Payments

In connection with the establishment of the Medical Center, the City of Boston agreed to provideBase Assistance Grant payments to capitalize the Medical Center and promote the development ofan urban healthcare system in the City of Boston. Funding was subject to annual appropriation bythe City each fiscal year after July 1, 1996 for as long as the FHA mortgage is outstanding. TheBase Assistance Grant payments were approximately $0 and $7,167,000 for the years endingSeptember 30, 2013 and 2012, respectively. The accretion of the discount of these grants ofapproximately $0 and $1,704,000 for the years ended September 30, 2013 and 2012, respectively,is included in contribution revenue of temporarily restricted net assets in the statement of changesin net assets. The receipt of these payments from the City each year is recorded as temporarilyrestricted net assets that are released from restrictions for operations.

On May 1, 2012 the City of Boston refinanced its 2002 Bonds through the issuance of GeneralObligation Bonds, 2012 Series C. In conjunction with the refinancing, the City of Boston terminatedthe agreement to provide the Base Assistance Grant to the Medical Center, as the FHA mortgageis no longer outstanding. As the Medical Center continues to occupy the space and pays rent thatis less than fair market value, the execution of this amendment resulted in an “in-kind” rentreceivable between the City of Boston and the Medical Center.


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The net present value of the “in-kind” rent receivable is $27,851,000 and $37,198,000 is included inthe grants receivable and temporarily restricted net assets on the balance sheet at September 30,2013 and 2012, respectively. The “in-kind” rent receivable has been discounted using a rate of4.26%. The accretion of the discount on the “in-kind” receivable is approximately $1,403,000 and$412,000 for the years ended September 30, 2013 and 2012, respectively, and is included incontribution revenue of temporarily restricted net assets in the statement of changes in net assets.

15. Benefit Plans Available to Employees

The Medical Center has a Tax Sheltered Annuity Plan (the “TSA Plan”) which is a deferredcompensation plan. Participation in the TSA Plan is voluntary. The Medical Center also has acontributory 403(b) plan. The Medical Center’s contributions under this plan amounted to$16,390,000 and $16,009,000 for the years ended September 30, 2013 and 2012, respectively.

Certain retired Medical Center employees have postretirement medical and life insurance benefitscovered under the Welfare Benefits Plan (“the Plan”). The Plan was frozen effective with themerger on July 1, 1996. Current employees and employees retiring after July 1, 1996 are notcovered by the Plan. The accrued benefit cost amounted to $155,000 and $171,000 as ofSeptember 30, 2013 and 2012, respectively. The net periodic benefit cost recorded on the Planamounted to ($31,000) and ($38,000) for the years ended September 30, 2013 and 2012,respectively.


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The Medical Center maintains a defined benefit pension plan (the “Pension Plan”), effective July 1,1996, for certain former employees of BCH with a measurement date of September 30. Thecovered group consists of employees who either had a nonforfeitable right to a retirement benefitunder the former BCH defined benefit pension plan or would have earned one with service throughSeptember 30, 1997. The Pension Plan provides benefits based on an employee’s averagecompensation and years of service reduced by a percentage of their Social Security benefit. ThePension Plan’s provisions have been set based on a collective bargaining agreement effectiveJuly 1, 1996, and a formal document was signed on June 30, 1997. Contributions to the Plan aremade in amounts sufficient to meet the minimum funding requirements set forth in the EmployeeRetirement Income Security Act of 1974. The City is responsible for the past service cost of formerBCH employees.


Accumulated benefit obligation 117,939$ 124,165$

Change in projected benefit obligation

Projected benefit obligation at beginning of year 139,747$ 117,603$

Service cost 5,970 5,461

Interest cost 5,191 5,243

Actuarial (gain) loss (18,781) 13,138

Benefits paid (2,095) (1,698)

Projected benefit obligation at end of year 130,032$ 139,747$

Change in plan assets

Fair value of plan assets at beginning of year 86,939$ 70,467$

Actual return on plan assets 9,431 11,770

Employer contributions 6,800 6,400

Benefits paid (2,095) (1,698)

Fair value of plan assets at end of year 101,075$ 86,939$

Reconciliation of funded status

Projected benefit obligation 130,032$ 139,747$

Fair value of plan assets 101,075 86,939

Funded status (28,957) (52,808)

Amounts recognized in the balance sheetincluded within other long-term liabilities (28,957)$ (52,808)$


33

The components of net periodic benefit cost for the years ended September 30, 2013 and 2012 areas follows:


Service cost 5,970$ 5,461$Interest cost 5,191 5,243Expected return on plan assets (6,272) (5,120)

Amortization of prior service cost 1 1Amortization of net loss 3,906 3,581

Net periodic benefit cost 8,796$ 9,166$

Weighted average assumptions used to determine thenet periodic cost for the period just ended

Discount rate 3.75 % 4.50 %

Long-term rate of return 7.00 % 7.00 %Rate of compensation increase 3.00 % 3.50 %

Weighted average assumptions used to determinethe benefit obligations


Rate of compensation increase 4.00 % 3.00 %

Other changes in plan assets and benefitobligations recognized in unrestricted net assets

New net actuarial (gain) loss (21,939)$ 6,488$Amortization of prior service cost (1) (1)

Amortization of net loss (3,906) (3,581)

(25,846)$ 2,906$

Amounts recognized in unrestricted net assets

Net prior service cost 1$ 3$Net actuarial loss 15,317 41,163

15,318$ 41,166$

The amounts expected to be recognized as amortization of prior net service cost and amortizationof net loss, respectively, and as components of net periodic cost in the upcoming year are $1,275and $359,880.


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Pension Plan AssetsThe Pension Plan weighted average asset allocation as of the measurement dates September 30,2013 and 2012, respectively, is as follows:

Target Allocation

Fiscal Year Ending

September 30, 2013 2013 2012

Asset category

Equity securities 63 % 64 % 53 %

Debt securities 20 20 39

Other 17 16 8

100 % 100 % 100 %

Percentage of Plan Assets at

September 30,

The fair value of pension plan assets as of September 30, 2013 is disclosed in the table below:


Investments


Fixed income 5,942 13,840 - 19,782

Equities 9,906 54,592 - 64,498

Commodities 13,857 - - 13,857

32,643$ 68,432$ -$ 101,075$

The fair value of pension plan assets as of September 30, 2012 is discussed in the table below.


Investments

Cash and cash equivalents 1,693$ -$ -$ 1,693$Fixed income 9,303 24,820 - 34,123

Equities 9,049 36,821 - 45,870Commodities 5,253 - - 5,253

25,298$ 61,641$ -$ 86,939$

The Medical Center contracts with a consulting firm for financial consulting services for the PensionPlan. The consultants provide the Medical Center’s Investment Committee and management withfinancial analysis and recommendations on target allocations and investment managers. TheMedical Center’s investment objective is to achieve the highest reasonable total return afterconsidering (i) plan liabilities, (ii) funding status and projected cash flows, (iii) projected marketreturns, valuations and correlations for various asset classes, and (iv) the Medical Center’s abilityand willingness to incur market risk. The Medical Center’s Investment Committee activelymanages the pension plan assets by selecting investments and investment managers to maximizethe investment returns.


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The expected long-term rate of return assumption represents the expected average rate ofearnings on the funds invested or to be invested to provide for the benefits included in the benefitobligations. The long-term rate of return assumption is determined based on a number of factors,including historical market index, returns, the anticipated long-term asset allocation of the plans,historical plan return data, plan expenses, and the potential to outperform market index returns.

Cash FlowsInformation about the expected cash flows for the Pension Plan is as follows:

Expected contributions for fiscal year ending September 30, 2014

Expected employer contributions 6,800,000$

Estimated future benefit payments reflecting expected future

service for the fiscal year(s) ending September 30

2014 3,549,000$

2015 4,111,000

2016 4,612,000

2017 5,473,000

2018 6,286,000

2019–2022 44,673,000

The Medical Center contributed $6,800,000 and $6,400,000 to the Pension Plan for the yearsended September 30, 2013 and 2012, respectively. The Medical Center plans to make anynecessary contributions during the upcoming fiscal year 2014 to ensure the Pension Plancontinues to be adequately funded during the current market conditions.

16. Concentration of Credit Risk

The Medical Center provides health care services to residents within its geographic location. TheMedical Center grants credit without collateral to its patients, most of whom are local residents andare either insured under third-party payor agreements or covered by the Health Safety Net CarePool.

The mix of receivables from patients and third-party payors at September 30, 2013 and 2012 wasas follows:

2013 2012

Medicare 18 % 18 %

Medicaid 22 25

HMOs 32 30

Commercial 7 9

Blue Cross 6 6

Commonwealth Care 5 5

Other 2 1

Self-Pay 8 6

100 % 100 %


36

The Medical Center records an allowance for doubtful accounts (credit losses) for the followingother accounts receivable balances at September 30, 2013:

Allowance forReceivable Doubtful

(in thousands) Balance Accounts

FICA reimbursement for resident payments 886$ -$

Other hospitals and health centers 5,942 2,404New market tax credits 17,309 -Outside contracts 13,290 1,545

Contributions receivable 4,344 1,570Other 2,989 203

44,760$ 5,722$

The Medical Center records an allowance for doubtful accounts (credit losses) for the followingother accounts receivable balances at September 30, 2012:

Allowance forReceivable Doubtful


FICA reimbursement for resident payments 22,146$ -$


Contributions receivable 6,338 1,591Other 823 200

61,134$ 5,186$

These receivables represent current amounts from the other accounts receivable balance.Management regularly assesses the adequacy of the allowance for doubtful accounts byperforming ongoing evaluation of the balances, including such factors as the economicenvironment, risks associated with each receivable, the financial condition of specific borrowersand, where applicable, the existence of any guarantees or indemnifications.

Factors also considered by management when performing its assessment, in addition to generaleconomic conditions and the other factors described above, include, but were not limited to, adetailed review of the aging of receivables and review of cash receipts in current year comparedagainst prior year allowance for doubtful accounts. The level of the allowance is adjusted basedupon the results of management’s analysis.


37

Changes in the allowance for doubtful accounts for the year ended September 30, 2013 and 2012were as follows:


Beginning balance at October 1 5,186$ 5,253$

Recoveries (21) (432)Net charge-offs 557 365

Ending balance at September 30 5,722$ 5,186$

17. Net Patient Service Revenue and Allowance for Doubtful Accounts

Net patient service revenue before the provision for bad debts for the year ended September 30,2013 and 2012 is summarized as follows:


Patient 63,808$ 62,681$

Third-party payers 871,318 833,547

Less: Provision for Bad Debt (41,542) (40,472)

Net patient service revenue 893,584$ 855,756$

Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating thecollectability of accounts receivable, the Medical Center analyzes past collection history andidentifies trends to estimate the appropriate allowance for doubtful accounts and provision for baddebts. Management regularly reviews the data and models in evaluating the sufficiency of theallowance for doubtful accounts. Throughout the year, the Medical Center, after all reasonablecollection efforts have been exhausted, will write off the difference between the standard rates (ordiscounted rates if negotiated) and the amounts actually collected against the allowance fordoubtful accounts. In addition management monitors the write-offs against established allowancesas of a point in time to determine the appropriateness of the underlying assumptions used inestimating the allowance for doubtful accounts.

Accounts receivable, prior to adjustments for doubtful accounts, is summarized as follows atSeptember 30, 2013 and 2012:


Patient 17,039$ 13,855$


Total 329,554 330,315

Reserve for Contractual Allowance (239,740) (236,382)

Reserve for Doubtful Accounts (22,604) (19,221)

Patient Accounts Receivable, Net 67,210$ 74,712$


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18. Related Party Transactions

The Foundation and the Medical Center have significant transactions with each other for operatingpurposes. During the years ended September 30, 2013 and 2012, the Medical Center providedfunding of approximately $107,655,000 and $95,252,000, respectively, to the Foundation forprofessional and support services. The Foundation is comprised of physician groups which provideteaching and other services to the Medical Center. In addition, the Medical Center and theFoundation have certain board members in common. The Medical Center has various notesreceivable and other receivables from the Foundation which totaled approximately $35,818,000and $32,495,000 at September 30, 2013 and 2012, respectively. In addition, the Medical Centerowed the Foundation $38,689,000 and $32,796,000 at September 30, 2013 and 2012,respectively, and the amounts due are included in the current portion of due to related parties.

BMCHP and the Medical Center have significant transactions with each other for operatingpurposes. Total revenue earned by the Medical Center from BMCHP related to medical servicesprovided by the Medical Center to BMCHP members was $118,714,000 and $92,597,000 for theyears ended September 30, 2013 and 2012, respectively, and is included in net patient servicerevenue. At September 30, 2013 and 2012, BMCHP owed the Medical Center $23,043,000 and$248,000, respectively. In addition, BMCHP owed the Medical Center $12,540,000 and$12,276,000 at September 30, 2013 and 2012, respectively, and the amounts due are included inpatient accounts receivable. BMCHP approved a net asset transfer of $23,000,000 and$50,000,000 to the Medical Center for the years ending September 30, 2013 and 2012,respectively.

The Medical Center and BMCIC have significant transactions with each other for the purpose ofproviding professional and general liability insurance. Total expenses incurred by the MedicalCenter related to the insurance provided by BMCIC were $4,100,000 and $4,182,000 for the yearsending September 30, 2013 and 2012, respectively. The Medical Center has $31,311,000 and$15,283,000 of prepaid premiums and retrospective premium credits that were prepaid by theMedical Center to BMCIC at September 30, 2013 and 2012, respectively. The Medical Centerrecorded an insurance recovery receivable and a professional liability claims payable of$35,282,000 and $38,676,000 for the years ended September 30, 2013 and 2012, respectively.

The Medical Center and BMCIC of Vermont have transactions with each other for the purpose ofproviding insurance coverage for property and for certain liability exposures arising from acts ofterrorism under TRIA. All insurance written and claims paid originate with the Medical Center.There were no expenses incurred by the Medical Center related to the insurance provided byBMCIC of Vermont for the years ending September 30, 2013 and 2012, respectively. AtSeptember 30, 2013 and 2012, respectively, there were no premiums owed to BMCIC of Vermontas all premiums written were paid prior to year-end.

BUAP and the Medical Center have transactions with each other for operating purposes. Duringthe year ended September 30, 2013 and 2012 the Medical Center provided funding ofapproximately $3,117,000 and $1,262,000, respectively, to BUAP for professional and supportservices. The Medical Center has various accounts receivable from BUAP which totaledapproximately $4,411,000 and $4,070,000 at September 30, 2013 and 2012, respectively.


39

The Medical Center and the BMC NAB Business Trust have significant transactions with eachother relating to the construction of the Shapiro Ambulatory Care Center. Pursuant to the note andloan agreement, dated May 1, 2008, the Medical Center loaned the BMC NAB Business Trust $0 in2013 and $3,172,000 in 2012 for the construction of the facility.

The Medical Center is affiliated with several community health centers. At September 30, 2013and 2012, the Medical Center had loaned a total of $6,000,000 and $5,820,000, respectively, to thecommunity health centers. The loans are interest bearing and are forgiven as long as no event ofdefault as defined in the loan documents has occurred.

19. Functional Expenses

The total operating expenses of the Medical Center by function are as follows for the year endedSeptember 30:


Patient care 704,657$ 673,623$Medical education 67,092 62,832Research, sponsored programs and community health services 95,257 97,126

General and administrative 138,093 139,333

1,005,099$ 972,914$

20. Governmental Subsidies

On December 20, 2011, Centers for Medicare and Medicaid Services (“CMS”) approved a threeyear Massachusetts Medicaid Waiver extension for the period of July 1, 2011 through June 30,2014 that included Delivery System Transformation Initiative (“DSTI”) potential funding of$103,553,000 annually for the Medical Center. These initiatives are designed as incentivepayments to support investments in health care delivery systems that will support payment reform,and transition away from fee-for-service payments toward alternative payment arrangements thatreward high-quality, efficient, and integrated systems of care. CMS has identified four categoriesfor which funding authority is available. Participating hospitals must select a minimum number ofprojects from each category as outlined in the Master DSTI Plan. The four categories are: (1)development of a fully integrated delivery system; (2) improved health outcomes and quality; (3)ability to respond to statewide transformation to value-based purchasing and to accept alternativesto fee-for-service payments; and (4) population-focused improvements. The Medical Center hassubmitted a DSTI Plan with detailed projects to be implemented consistent with the categoriesoutlined. CMS finalized the approval of the Medical Center’s DSTI plan on June 20, 2012. TheMedical Center has recorded $103,553,000 in fiscal year 2013 and 2012, respectively.

Other Safety Net Care Pool Supplemental PaymentsThe Medical Center receives additional supplemental payments from the State under the SpecialTerms and Conditions of the MassHealth Medicaid Section 1115 Demonstration, the Corporationmeets the criteria for qualification for Public Service Hospital Safety Net Care Payments. TheMedical Center has recorded $52,000,000 for years ending September 30, 2013 and 2012.


40

21. Commitments and Contingencies

The Medical Center is subject to complaints, claims and litigation which have arisen in the normalcourse of business. In addition, the Medical Center is subject to compliance with laws andregulations of various governmental agencies. Recently, governmental review of compliance withthese laws and regulations has increased in the healthcare industry, resulting in fines and penaltiesfor noncompliance by individual health care providers.

In September 2009, allegations of wage and hour violations were made in complaints filed inMassachusetts Superior Court and the United States District Court for the District ofMassachusetts. In sum, the plaintiffs allege that the Medical Center and other defendants failed topay a class of hourly employees for missed and interrupted meal breaks, preliminary andpostliminary hours worked, and mandatory training time. In February and March, 2011, all claimsin both the federal and state cases were dismissed. In August 2013, the United States Court ofAppeals for the First Circuit in part vacated the dismissal decision and sent the case back to theDistrict Court for further proceedings. The parties have agreed to settle the case, pending approvalby the District Court. Management has accrued for the settlement and it is included in the balancesheet as accounts payable and accrued expenses.

In July 2012, allegations of patent infringement were made in a complaint filed in the United StatesDistrict Court for the District of Massachusetts against the Medical Center, Boston UniversityAffiliated Physicians, Inc., Boston University Medical Center Radiologists, Inc., and Trustees ofBoston University. The plaintiffs (Neurografix, Neurography Institute Medical Associates, Inc., andImage-Based Surgicenter Corporation) allege infringement of their patents through the purchaseand use of MRIs and other equipment manufactured by Philips, General Electric, and BrainLab.This action, which has been consolidated with other similar suits, is currently stayed (suspended)pending resolution of plaintiff’s claims against the equipment manufacturers. A Motion to Dismissthe consolidated claims is also pending. It is not possible at this time to express any opinion as tothe merit of the action or the likelihood that the claimants will prevail.

22. Self-Insurance

Professional and General LiabilityEstimated professional and general liability costs, as calculated by BMCIC’s consulting actuaries,consist of specific reserves to cover the estimated liability resulting from medical or general liabilityincidents or potential claims which have been reported, as well as a provision for claims incurredbut not reported. Estimated professional and general liabilities are based on claims reported,historical experience, and industry trends. These liabilities include estimates of future trends inloss severity and frequency and other factors that could vary as the claims are ultimately resolved.Although it is not possible to measure the degree of variability inherent in such estimates,management believes the reserves for claims are adequate. These estimates are periodicallyreviewed, and necessary adjustments are reflected in the consolidated statement of operations inthe year the need for such adjustments becomes known. Management is unaware of any claimsthat would cause the final expense for professional and general liability risks to vary materially fromthe amounts provided.


41

Excess Liability CoverageThe Medical Center has excess liability coverage of $30,000,000 for professional and generalliability losses per individual claim, and for annual aggregate professional and general liabilitylosses on a claims-made basis. The existence of this reinsurance coverage does not relieve theMedical Center of its primary obligation with respect to losses incurred. The Medical Center wouldbe liable for claims ceded to reinsurers in the event such reinsurers are unable to meet theirobligations.

23. National Emerging Infectious Diseases Laboratory (“NEIDL”)

In September 2003, Boston University received an award from the National Institutes of Health(“NIH”) for the construction of a biocontainment facility to be located on Boston University’s MedicalCampus. This laboratory will be used by Boston University and the Medical Center, as well asother organizations, to support the federal government’s bio-defense efforts. As part of this award,NIH will provide $140,990,000 of the construction costs of the facility. Boston University andBoston Medical Center each provided $27,927,000 toward construction, and received a 50% equityinterest in the venture. As such, both parties will share equally in the future operating activities ofthe laboratory. The NIH reimbursement was recorded as an increase to temporarily restricted netassets. On May 1, 2010, Boston Medical Center issued a letter notifying Boston University that theMedical Center elected to withdraw from further participation in the NEIDL at Boston UniversityMedical Center effective as of May 1, 2011. As a result of the withdrawal, the Medical Centerreversed the investment and temporarily restricted net assets recorded in previous periods.

In 2011, Boston Medical Center and Boston University agreed to contribution repayment termswhereas Boston University owes Boston Medical Center the total principal of $29,064,000.Boston University will make five annual payments of $5,813,000 plus 2% interest on theoutstanding balance due. The remaining balance owed to the Medical Center is $17,584,000 and$23,445,000 as of September 30, 2013 and 2012, respectively, and is included in other accountsreceivable and other noncurrent assets on the balance sheet.

24. Subsequent Events

The Medical Center has assessed the impact of subsequent events through February 5, 2014, thedate the audited financial statements were available for issuance, and has concluded that otherthan the note below, there were no such events that require adjustment to the audited financialstatements or disclosure in the notes to the audited financial statements.

On October 24, 2013, Gryant, Inc. was dissolved.

BMC Health System, Inc.Consolidated Financial Statements withSupplemental Consolidating InformationSeptember 30, 2013 and 2012

BMC Health System, Inc.IndexSeptember 30, 2013 and 2012

Page(s)

Independent Auditor’s Report.......................................................................................................... 1–2

Consolidated Financial Statements

Balance Sheets ......................................................................................................................................3

Statements of Operations .......................................................................................................................4

Statements of Changes in Net Assets.....................................................................................................5

Statements of Cash Flows ......................................................................................................................6

Notes to Financial Statements .......................................................................................................... 7–45

Supplemental Consolidating Information

Balance Sheets .............................................................................................................................. 46–47

Statements of Operations ............................................................................................................... 48–49

Independent Auditor’s Report

To the Board of Trustees

of Boston Medical Center

We have audited the accompanying consolidated financial statements of BMC Health System, Inc.

(the “System”), which comprise the consolidated balance sheets as of September 30, 2013 and 2012, and

the related consolidated statements of operations and changes in net assets, and of cash flows for the

years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial

statements in accordance with accounting principles generally accepted in the United States of America;

this includes the design, implementation, and maintenance of internal control relevant to the preparation

and fair presentation of consolidated financial statements that are free from material misstatement,

whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of

America. Those standards require that we plan and perform the audit to obtain reasonable assurance

about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in

the consolidated financial statements. The procedures selected depend on our judgment, including the

assessment of the risks of material misstatement of the consolidated financial statements, whether due to

fraud or error. In making those risk assessments, we consider internal control relevant to the System’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 System’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.

PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us

2

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material

respects, the financial position of the System at September 30, 2013 and 2012, and the results of their

operations and their cash flows for the years then ended in accordance with accounting principles

generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements

taken as a whole. The consolidating information is the responsibility of management and was derived

from and relates directly to the underlying accounting and other records used to prepare the consolidated

financial statements. The consolidating information has been subjected to the auditing procedures

applied in the audit of the financial statements and certain additional procedures, including comparing and

reconciling such information directly to the underlying accounting and other records used to prepare the

financial statements or to the financial statements themselves and other additional procedures, in

accordance with auditing standards generally accepted in the United States of America. In our opinion,

the consolidating information is fairly stated, in all material respects, in relation to the consolidated

financial statements taken as a whole. The consolidating information is presented for purposes of

additional analysis of the consolidated financial statements rather than to present the financial position,

results of operations and cash flows of the individual entities and is not a required part of the consolidated

financial statements. Accordingly, we do not express an opinion on the financial position, results of

operations and cash flows of the individual entities.

Boston, Massachusetts

February 5, 2014

BMC Health System, Inc.Consolidated Balance SheetsSeptember 30, 2013 and 2012

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

3


Assets

Current assets

Cash and cash equivalents 255,124$ 206,335$

Short-term investments 39,791 42,070

Patients accounts receivable, less allowance of $27,076 and $25,488 in

2013 and 2012, respectively 69,209 75,850

Other accounts receivable, less allowance of $6,751 and $6,005 in


Current portion of grants receivable, less allowance of $3,796 and $3,362 in


Current portion of estimated receivable for final settlements with third-party payors 17,284 8,744

Inventories 5,490 4,584

Prepaid expenses and other current assets 7,747 9,214

Current portion of funds held by Trustees 21,720 32,250

Total current assets 547,462 507,866


Board-designated investments 359,240 340,482

Funds held by Trustees 49,474 54,732

Donor-restricted investments 306,483 274,475

Reserve funds 119,492 110,451

Total assets limited as to use 834,689 780,140

Other assets

Long-term investments 233,164 267,785

Property, plant and equipment, net 637,834 631,848

Grants receivable, less current portion 18,098 27,851

Other noncurrent assets 176,755 194,052

Total assets 2,448,002$ 2,409,542$


Current liabilities

Accounts payable and accrued expenses 170,261$ 179,047$

Claims payable 70,606 81,238

Deferred revenue 18,348 18,334

Current portion of long-term debt and capital leases 17,666 17,467

Other current liabilities 11,022 26,544

Total current liabilities 287,903 322,630

Long-term liabilities


Obligations under capital leases 18,735 28,810

Long-term debt 513,995 541,854

Other long-term liabilities 135,949 170,930

Total liabilities 1,019,026 1,093,113


Net assets

Unrestricted 1,092,511 1,000,973

Temporarily restricted 320,112 299,103

Permanently restricted 16,353 16,353

Total net assets 1,428,976 1,316,429

Total liabilities and net assets 2,448,002$ 2,409,542$

BMC Health System, Inc.Consolidated Statements of OperationsYears Ended September 30, 2013 and 2012


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Operating revenueNet patient service revenue, net of provision for bad debt($54,717 in 2013 and $45,247 in 2012) 895,593$ 883,074$

Capitation revenue 1,362,040 1,191,612Grants and contract revenue 70,414 72,856

Other revenue 77,933 72,611Net assets released from restrictions for operations 23,890 24,632

Total operating revenue 2,429,870 2,244,785

Operating expensesSalaries and wages and fringe benefits 785,969 766,918Supplies and expenses 1,466,886 1,343,163

Depreciation and amortization 69,801 71,724Interest expense 18,169 23,424

Research, sponsored programs and community health services 71,062 66,986

Total operating expenses 2,411,887 2,272,215

Income (loss) from operations 17,983 (27,430)

Nonoperating gains (losses), netInvestment income (including other-than-temporary impairment

losses of $1,316 and $1,007 in 2013 and 2012, respectively) 31,835 22,879Fundraising costs and other (3,147) (2,438)

Total nonoperating gains, net 28,688 20,441

Excess (deficiency) of revenue over expenses 46,671 (6,989)

Other changes in unrestricted net assets

Change in unrealized appreciation on investments 8,309 36,114Revised classification of net assets (Note 2) - 5,129

Other adjustments - (1,765)Contributed capital asset 7,406 -

Net assets released from restrictions for property, plant and equipment 3,351 2,470Pension related changes other than net periodic pension costs 25,801 (2,982)

Change in unrestricted net assets 91,538 31,977

Unrestricted net assetsBeginning of year 1,000,973 968,996

End of year 1,092,511$ 1,000,973$

BMC Health System, Inc.Consolidated Statements of Changes in Net AssetsYears Ended September 30, 2013 and 2012


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Net assets at September 30, 2011 968,996$ 301,969$ 16,353$ 1,287,318$

Increases (decreases) in net assetsDeficiency of revenues over expenses (6,989) - - (6,989)

Investment income - 24,444 - 24,444Change in net unrealized appreciation

on investments 36,114 12,695 - 48,809Contribution revenue - 10,286 - 10,286

Net assets released from restrictions foroperations - (24,632) - (24,632)

Net assets released from restrictions forproperty, plant and equipment 2,470 (2,470) - -

Other adjustments (1,765) - - (1,765)Change in assistance with the

City of Boston ("COB") - (18,060) - (18,060)Revised classification of net assets 5,129 (5,129) - -

Pension related changes other than net periodicpension costs (2,982) - - (2,982)

Total increase (decrease) in net assets 31,977 (2,866) - 29,111

Net assets at September 30, 2012 1,000,973 299,103 16,353 1,316,429

Increases (decreases) in net assetsExcess of revenues over expenses 46,671 - - 46,671

Investment income - 11,876 - 11,876Change in net unrealized appreciation

on investments 8,309 26,296 - 34,605Contribution revenue - 10,078 - 10,078

Net assets released from restrictions foroperations - (23,890) - (23,890)

Net assets released from restrictions forproperty, plant and equipment 3,351 (3,351) - -

Contributed capital asset 7,406 - - 7,406

Pension related changes other than net periodicpension costs 25,801 - - 25,801

Total increase in net assets 91,538 21,009 - 112,547

Net assets at September 30, 2013 1,092,511$ 320,112$ 16,353$ 1,428,976$

BMC Health System, Inc.Consolidated Statements of Cash FlowsYears Ended September 30, 2013 and 2012


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Operating activities

Change in net assets 112,547$ 29,111$

Adjustments to reconcile change in net assets to net cash provided by

operating activities

Accretion of discount on long-term grants (1,403) (2,116)

Depreciation and amortization 69,801 71,724

Restricted contributions (3,933) (4,351)

Donated securities received (386) (74)

Equity in net losses of joint ventures 799 971

Contributed capital asset (7,406) -

Amortization of bond discount 126 119

Loss on disposal of fixed assets - 8,887

BUAP acquisition - (166)

Bond premium - 7,557

Amortization of bond premium (445) (111)

City of Boston lease refinancing (9,347) (12,058)

Discount and allowance for contributions receivable 3,929 4,234

Net realized gains and change in unrealized appreciation

on investments (43,273) (66,615)

Increase in asset retirement obligation 956 996

Provision for bad debts 54,717 45,353

Pension related changes other than net periodic pension costs (25,801) 2,982

Changes in operating assets and liabilities

Grants receivable 10,687 26,364

Patient accounts receivable (48,076) (50,398)

Other current assets and liabilities (20,678) (4,808)

Other noncurrent assets and liabilities (10,498) 2,930


Claims payable (10,632) (7,331)

Accounts payable and accrued expenses (10,134) 22,399

Net cash provided by operating activities 86,565 95,108

Investing activities

Proceeds from sale of investments 349,920 643,234

Investment in forgiveness loan (1,000) -

Investment in subsidiaries (4,657) (2,913)

Purchases of investments (303,586) (761,245)

Purchase of property, plant and equipment (74,669) (46,112)

Proceeds from sale of donated securities 386 74

Net cash used in investing activities (33,606) (166,962)

Financing activities

Proceeds from borrowings 42 108,950

Proceeds from restricted contributions 3,933 4,351

Repayment of long-term debt and capital leases (8,145) (128,403)

Net cash used in financing activities (4,170) (15,102)

Increase (decrease) in cash and cash equivalents 48,789 (86,956)

Cash and cash equivalents


End of year 255,124$ 206,335$

Supplemental disclosure of cash flow activities

Cash paid for interest 21,967$ 25,196$

Property, plant and equipment included in accounts payable 5,312 3,886

Conditional asset retirement obligations 621 662

Net fixed assets recognized related to conditional asset retirement obligations (335) (334)

Contributed securities 386 74

Gift in kind 500 500

New capital leases 27 -

BMC Health System, Inc.Notes to Consolidated Financial StatementsSeptember 30, 2013 and 2012

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1. Organization

Boston Medical Center Corporation (the “Medical Center” or “BMC”) was incorporated on July 1,1996 when all of the assets and liabilities of University Hospital, Inc. (a.k.a. Boston UniversityMedical Center Hospital or “BUMCH”) and its subsidiaries were merged with and into the MedicalCenter. In addition, specific assets and liabilities of Boston City Hospital (“BCH”), Boston Specialtyand Rehabilitation Hospital (“BSRH”) and Trustees of Health and Hospitals, Inc. (“THH”), asindicated in the Consolidation Agreement, were transferred by the City of Boston (the “City”) to theMedical Center. The merger of BUMCH into the Medical Center was accounted for as a pooling ofinterests, and the consolidation of certain assets and liabilities of BCH, BSRH and THH into theMedical Center was accounted for as a contribution of net assets. Accordingly, the balance sheetincludes all the assets, liabilities and net assets of the former BUMCH and only certain assets,liabilities and net assets of the former BCH, BSRH and THH. The contribution of net assets bythe City of $58,700,000 included cash, accounts receivable, inventory and moveable equipmentless certain trade accounts payable.

BMC’s sole corporate member is BMC Health System, Inc. (the “System”), a non-profit corporationthat oversees the operation of BMC, Boston Medical Center Health Plan, Inc. (“BMCHP”), andvarious affiliates and associated services. The System was organized effective July 1, 2013, and isthe sole corporate member of both BMC and BMCHP.

The consolidated financial statements of the System (formerly Boston Medical Center andAffiliates) include the Medical Center, the combined accounts of Faculty Practice Foundation, Inc.(“Faculty”) and its 21 affiliated faculty practice plans (the “Plans,” collectively known as the“Foundation”), BMCHP, Univer Development Foundation, Inc. (“UDF”), East Concord MedicalFoundation (“ECMF”), Boston Medical Center Insurance Company, Ltd. (“BMCIC”), Boston MedicalCenter Insurance Company of Vermont (“BMCIC of Vermont”), Boston University AffiliatedPhysicians Inc. (“BUAP”), BMC Integrated Care Services, Inc, Gryant, Inc. and BMC NAB BusinessTrust (collectively known as the “System”). The Medical Center and each of its memberorganizations have fiscal years ending September 30, except the Foundation, ECMF and BMCIntegrated Care Services, Inc. which have a fiscal year ending June 30.

Faculty was incorporated on October 18, 1994 under the provisions of General Laws, Chapter 180,of The Commonwealth of Massachusetts as a nonprofit organization operated exclusively forclinical, charitable, scientific and educational purposes. The Plans were established asnot-for-profit faculty practice plan corporations operating exclusively for the benefit of BMC andBoston University School of Medicine (“BUSM”) (collectively, the “Institutions”). Faculty is grantedthe power to approve the Plans’ annual operating budgets, physician compensation plans, andmanaged care contracts. The Plans’ purpose is to provide, coordinate and facilitate the delivery ofpatient care services and to promote the development of an integrated system of delivery to moreefficiently and effectively meet the health care needs of the communities served by the Institutions.In 2000, the Foundation changed its affiliation with BMC and is now controlled by BMC.Accordingly, the Foundation’s financial statements are consolidated into the System.

BMCHP was established as an independent 501(c)(3) organization on July 1, 1997. BMCHP wasestablished to administer the BMC Health Plan, which is a capitated provider-sponsored programof the Commonwealth of Massachusetts’ Division of Medical Assistance (“DMA”) designed toprovide medical coverage to people who are covered by Medicaid.


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On March 16, 2012, BMCHP became licensed as a Health Maintenance Organization (“HMO”)insurer by the New Hampshire Insurance Department. In April of 2012, the New HampshireDepartment of Health and Human Services (“DHHS”) selected BMCHP as one of three insurers toserve individuals qualifying for the New Hampshire Medicaid program. The DHHS Managed CareProgram has been approved by the federal Centers for Medicare and Medicaid Services (“CMS”).Members became effective during December 2013. BMCHP will operate under the name WellSense Health Plan in the state of New Hampshire.

Univer Development Foundation, Inc. (“UDF”) is a Massachusetts corporation involved in realestate development activities. UDF is wholly owned by the Medical Center.

East Concord Medical Foundation, Inc. (“ECMF”) is a Massachusetts corporation involved in realestate development activities. ECMF is a joint venture between the Medical Center and theTrustees of Boston University, and each appoints one-half of ECMF’s directors. ECMF has beenfully consolidated with the Medical Center as the Medical Center guarantees 100% of the debt ofECMF.

Gryant, Inc. is a Massachusetts corporation organized under Chapter 156D of the General Laws ofMassachusetts for real estate development activities. Gryant, Inc. is wholly owned by the MedicalCenter.

BMCIC of Vermont was incorporated on October 7, 2004 as a single parent captive insurancecompany licensed by the State of Vermont. BMCIC of Vermont provided insurance coverage fromDecember 31, 2004 until December 31, 2005. BMCIC of Vermont provided coverage for theMedical Center for property and for certain liability exposures arising from acts of terrorism underthe Terrorism Risk Insurance Act of 2002 (“TRIA”). All coverages provided by BMCIC of Vermontwere on a claims-made basis. BMCIC of Vermont ceased to provide coverage, effectiveDecember 31, 2005, because TRIA expired on December 31, 2005 and was not extended by thefederal government. BMCIC of Vermont is owned 100% by the Medical Center.

BUAP is a tax exempt, nonprofit corporation that employs nine physicians in Boston, Foxboro andNorwood, Massachusetts, to provide health care services, perform medical and clinical research,and provide health and medical education programs. The Medical Center is BUAP’s sole corporatemember.

BMC Integrated Care Services, Inc. (formerly BMC Management Services, Inc.) arranges deliveryof health care services to enrollees or beneficiaries of preferred provider health insurancearrangements, health maintenance organizations, corporate employee benefit plans, prepaid healthplans, and other alternative delivery system contracts with medical service providers. BMCIntegrated Care Services, Inc. promotes the development of an integrated delivery system to moreefficiently and effectively meet the healthcare needs of the community. This delivery system willbenefit the community by attracting a continuum of patients with diverse medical problems that willcontribute to research, education, clinical care and teaching activities. BMC IntegratedServices, Inc. contracts on behalf of the Medical Center, its physicians, and some communityhealth centers. The Faculty Practice Foundation is BMC Integrated Care Services, Inc.’s solecorporate member. The Medical Center is a corporate member of BMC Integrated Care Services,Inc.’s sole corporate member; the president of BMC Integrated Care Services, Inc. and a majorityof its directors are Medical Center representatives.


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BMC NAB Business Trust was organized in May 2008 as a Massachusetts business trust underChapter 182 of the General Laws of Massachusetts. The Medical Center is a 90% shareholder ofthe trust, as well as trustee, and Steward Research and Specialty Projects Corporation, an affiliateof Steward Medical Holdings Subsidiary Five, Inc., is a 10% shareholder.

Effective July 1, 2002, the Medical Center and the Faculty established BMCIC for purposes ofproviding professional and general liability insurance to each entity, its physicians and employees.BMCIC was incorporated under the laws of the Cayman Islands and has a Cayman IslandsUnrestricted Class B insurer’s license. BMCIC is owned 70% by the Medical Center and 30% bythe Faculty.

2. Summary of Significant Accounting Policies

Basis of Accounting and Principles of ConsolidationThe consolidated financial statements are prepared on the accrual basis of accounting inaccordance with accounting principles generally accepted in the United States of America. Theconsolidated financial statements of the System include the accounts of the Medical Center, theFoundation, BMCHP, ECMF, UDF, Gryant, Inc., BMC NAB Business Trust, BMCIC, BMCIC ofVermont, BUAP and BMC Integrated Care Services, Inc. All significant intercompany accounts andtransactions have been eliminated.

Cash and Cash EquivalentsCash equivalents include certain investments in highly liquid debt instruments with originalmaturities of three months or less at date of purchase. The System maintains the majority of itscash and cash equivalents accounts at two institutions, $246,948,000 and $209,114,000 atSeptember 30, 2013 and 2012, respectively. The System has not experienced any lossesassociated with deposits at these institutions.

Short-Term InvestmentsShort-term investments include certain investments in private investment funds and money marketmutual funds, which the System intends on using for operations within a year.

InvestmentsInvestments in equity securities with readily determinable fair values and all investments in debtsecurities (marketable investments) are measured at fair value in the balance sheet primarily basedon quoted market prices. Investment income or loss (including realized gains and losses oninvestments, interest and dividends) is included in the excess (deficiency) of revenues overexpenses unless the income or loss is restricted by donor or law. The change in unrealizedappreciation on investments is recorded in the statement of operations as changes in unrestrictednet assets, unless their use is restricted by explicit donor-imposed stipulations or law, in which casethey are reported in the appropriate restricted class of net assets.

The fair value of the System’s investments in bonds, notes, and common stock is based on quotedmarket prices in an active market. At September 30, 2013 and 2012, the System held interests inprivate investment funds. Interests in private investment funds are generally recorded at fairmarket value based on the System’s ownership share and rights of the investment, unless certaincriteria require the investment to be recorded as equity method investments or at cost. Securitiesfor which no such quotations or valuations are readily available, are carried at fair value asestimated by management using values provided by external investment managers. The Systembelieves that these valuations are a reasonable estimate of fair value as of September 30, 2013and 2012, but are subject to uncertainty and, therefore, may differ from the value that would have


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been used had a ready market for the investment existed. The System has the ability to liquidatetheir investments periodically in accordance with the provisions of the respective fund agreements.

Assets Limited as to UseAssets limited as to use primarily include assets held by trustees under bond indentureagreements, BMCHP reserve funds required to be maintained by its contract with MassHealth, anddesignated assets set aside by the Board of Trustees for future capital improvements over whichthe Board retains control and may, at its discretion, subsequently use for other purposes. Alsoincluded are donor-restricted investments representing permanently and temporarily restricted netassets.

Property, Plant and EquipmentProperty, plant and equipment acquisitions are recorded at cost. Donated items are recorded atfair market value at the date of contribution. Depreciation, which includes the amortization ofassets recorded under capital leases, is provided using the straight-line method over the estimateduseful lives of the respective assets in accordance with guidance published by the AmericanHospital Association. Maintenance and repairs are charged to expense as incurred; majorrenewals and betterments are capitalized. Costs and the related allowance for depreciation areeliminated from the accounts when items are sold, retired or abandoned and any related gain orloss is recognized as a nonoperating gain or loss in the statement of operations. The carryingvalue of property, plant and equipment is reviewed if the facts and circumstances indicate that itmay be impaired.

Assessment of Long-Lived AssetsThe System periodically reviews the carrying value of its long-lived assets (primarily property, plantand equipment) to assess the recoverability of these assets; any impairments would be recognizedin operating results, if the reduction in value is considered to be other-than-temporary.

InventoriesInventories are stated at the lower of cost (first-in, first-out method) or market.

Third-Party Liabilities for Patient ServicesUnder the terms of contractual agreements, certain elements of third-party reimbursement aresubject to negotiation, audit and/or final determination by third-party payors. The accompanyingfinancial statements include certain estimates of final settlements. Variances between estimatedand final settlements are included in the statement of operations in the year in which the settlementor change in estimate occurs.

The Medical Center has classified a portion of the accrual for settlements with third-party payors asshort-term receivables because such amounts are expected to be received or paid in the nexttwelve months. The Medical Center has also classified a portion of the accrual for settlements withthird-party payors as long-term liabilities because such amounts, by their nature, or by virtue ofregulation or legislation, will not be received or paid within one year.

Deferred RevenueDeferred revenue consists of amounts received in advance of the contract period. Certainadvances are received from the Commonwealth of Massachusetts (the “Commonwealth”) relatedto grants. Advances received related to grants were $17,798,000 and $17,639,000 as ofSeptember 30, 2013 and 2012, respectively. Also included in deferred revenue is a rebatereceived in advance. The System recorded deferred revenue related to the rebate of $550,000 and$695,000 for the years ended September 30, 2013 and 2012, respectively.


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Health Care Cost RecognitionThe delivery network for BMCHP consists of BMC and other acute care hospitals, physicianpractices and community health centers throughout the Commonwealth. BMCHP places emphasison the Primary Care Provider (“PCP”) as the primary care manager. BMCHP compensates theseproviders on fee for service basis and it supports several alternative payment models.

The cost of contracted health care services is accrued in the period in which services are providedto a member based in part on estimates. The estimated liability for medical and hospital claimspayable is actuarially determined based on an analysis of historical claims experience, modified forchanges in enrollment, inflation and benefit coverage. The liability for accrued claims expenserepresents the anticipated cost of claims incurred but unpaid at the balance sheet date. Theestimates for accrued claims expense may be more or less than the amounts ultimately paid whenclaims are settled. Such changes in estimates are reflected in the current period statement ofoperations and changes in unrestricted net assets. The estimated liability for medical and hospitalclaims payable also includes an accrual for loss adjustment expenses which relate to the estimatedcosts to process claims which have been incurred but not reported.

Since August 1, 2001, BMCHP self-insures for a significant portion of its claims.

Premium DeficiencyBMCHP recognizes a premium deficiency based upon expected premium revenue, medical andadministrative expense levels, and remaining contractual obligations under BMCHP’s historicalexperience. As of September 30, 2013 and 2012, the premium deficiency reserve totalsapproximately $8,280,000 and $23,000,000, respectively.

Net AssetsPermanently restricted net assets include only the historical dollar amount of gifts, which arerequired by donors to be held in perpetuity. Temporarily restricted net assets include gifts, grants,investment income, including realized gains and losses, and the change in unrealized appreciation(depreciation) on investments, which can be expended but for which restrictions have not yet beenmet. Such restrictions include purpose restrictions, time restrictions and restrictions imposed bylaw on the use of capital appreciation on donor restricted funds. At September 30, 2012,temporarily restricted net assets include a reduction due to the refinancing of the City of Boston(“COB”) lease obligation.

Realized gains and losses are classified as unrestricted net assets unless they are restricted by thedonor or the law. Unless permanently restricted by the donor, realized and unrealized net gains onpermanently restricted gifts are classified as temporarily restricted until appropriated for spendingby the System in accordance with policies established by the System and the Uniform PrudentManagement of Institutional Funds Act (“UPMIFA”) enacted by the Commonwealth in July 2009.Unrestricted net assets include all the remaining net assets of the System. See Note 11 for furtherinformation on the composition of restricted net assets.

Gifts and GrantsGifts of long-lived assets with explicit restrictions that specify the use of assets and gifts of cash orother assets that must be used to acquire long-lived assets are reported as additions to temporarilyrestricted net assets. Gifts of long-lived assets and gifts specified for the acquisition or constructionof long-lived assets are reported as additions to unrestricted net assets when the assets are placedin service and are excluded from the excess (deficiency) of revenues over expenses.


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Unconditional promises to give cash and other assets to the System are reported at fair value onthe date the promise is received. The contributions are reported as temporarily restricted support ifthey are received with donor stipulations that limit the use of the donated assets or as unrestrictedcontributions if no such conditions exist. When a donor restriction expires, that is, when astipulated time restriction ends or purpose restriction is accomplished, temporarily restricted netassets are reclassified to unrestricted net assets and reported in the statements of operations asnet assets released from restrictions.

Grants and contracts are recognized as unrestricted revenues as the related expenditures areincurred. The System recognizes indirect cost recoveries at provisional rates, which are subject toaudit, for U.S. Government grants and contracts and negotiated rates for other grants andcontracts.

Self-Insurance ReservesThe System is self-insured for certain employee health care benefits, workers’ compensation andcertain other employee benefits. These costs are accounted for on an accrual basis to includeestimates of future payments on claims incurred as of the balance sheet date.

Professional Liability InsuranceThe Medical Center and Foundation maintain medical malpractice insurance on a modified claims-made basis for residents, interns and physicians, the Medical Center, the Foundation and theiremployees, significantly all of which are provided by BMCIC. The deposit liability represents theprovision on hand to cover liabilities that may arise under the primary professional liability,commercial general liability and excess professional liability policies issued by the company.Premiums are allocated to the deposit liability account as well as losses, investment income,operating expenses and unrealized holding gains/losses on investments. The reserve for lossesand loss adjustment expenses and corresponding reinsurance recoverables representmanagement’s best estimate, at a 70% confidence level discounted at 4%, of BMCIC’s liabilityunder the excess loss coverage based on an actuarial projection of losses. The Medical Centerand Foundation have provided for the estimated cost of incurred but not reported malpracticeclaims and an estimate for amounts payable on the deductibles.

Statements of OperationsAll activities of the System deemed by management to be ongoing or central to the provision ofhealth care services, training and research activities are reported as operating revenues andexpenses. Peripheral or incidental transactions are reported as nonoperating gains and losses.

The statement of operations includes the excess (deficiency) of revenues over expenses.Changes in unrestricted net assets which, consistent with industry practice are excluded from theexcess (deficiency) of revenues over expenses, include the change in unrealized appreciation oninvestments, contributions of long-lived assets (including assets acquired using contributions whichby donor restriction were to be used for the purposes of acquiring such assets), pension-relatedchanges other than net periodic pension costs, and net asset transfers from BMCHP to the MedicalCenter. Other changes in unrestricted net assets includes a contributed capital asset related to theFGH building transfer in fiscal year 2013, and a revised classification of net assets in fiscal year2012.


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During fiscal year 2013, the Medical Center received favorable settlements from Medicaid,Medicare and the Health Safety Net fund (“HSN”) related to prior years. Changes include MedicaidPay for Performance payments for $1,000,000, Medicare prior period cost report settlements for$5,500,000 and settlements with the HSN for outpatient rate corrections, EMS ambulance free carepayments and physician free care payments for $20,200,000.

Favorable changes in prior year estimates from third-party payors recorded in the years endedSeptember 30, 2013 and 2012 amounted to approximately $26,766,000 and $17,228,000,respectively.

Net Patient Service RevenueNet patient service revenue is reported at the estimated net realizable amounts, excluding chargesrelated to charity accounts, from patients and third-party payors. It includes estimates ofanticipated retroactive adjustments under reimbursement agreements with certain third-partypayors, including Medicare and Medicaid. Such adjustments are accrued in the period the relatedservices are provided and adjusted in subsequent periods, as final settlements are determined.

The Plans have agreements with third-party payors that provide for payments to the Plans atamounts different from their established rates. Payment arrangements include discountedcharges, capitation arrangements, or fee schedules. Net patient service revenue for the Plans isreported at the estimated net realizable amounts from patients, third-party payors, and others forservices rendered.

The Plans have agreements and participate in hospital affiliated network agreements with varioushealth maintenance organizations (“HMOs”), through a master contract established byBMC Integrated Care Services, Inc. to provide medical services to subscribing participants. TheFoundation is the sole corporate member of BMC Integrated Services, Inc. Under certainagreements, the Plans earn capitation revenue based on the number of each HMO’s participants,regardless of services actually performed by the Plans. In addition, the Medical Center and thePlans are responsible for deficits beyond withheld amounts and are entitled to surpluses overwithheld amounts.

The Plans are required to fund their share (from risk contracts) of any deficits in excess of theamounts withheld under this master contract. Surplus amounts in excess of amounts withheldhave been recorded and retained by BMC Integrated Care Services, Inc. A surplus of $236,000and $0 was earned for years ended June 30, 2013 and 2012, respectively. The Foundation’sinterest in BMC Integrated Care Services, Inc. is recorded on the equity method of accounting.

Capitation RevenueMembership capitation payments are generally for a period of one month, are due monthly andreported as earned during the period of coverage. Capitation payments received prior to thecoverage period are recorded as deferred revenue. MassHealth remits monthly membershippayments based on estimated enrollments. Such estimates are subsequently adjusted on aperiodic basis based on actual membership. Gross capitation receivables from MassHealthamounted to approximately $26,102,000 and $31,198,000 at September 30, 2013 and 2012,respectively.


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Other RevenueOther revenue consists primarily of services rendered to other organizations under contractualagreements which include community health centers and area hospitals. Additionally included inother revenues are meaningful use payments received for meeting stage one of the CMSrequirements. Also included in other revenue are miscellaneous fees related to the sale of medicalproducts.

Charity CareThe System provides care without charge to patients who meet certain criteria under its charitycare policy. Since the System does not pursue collection of amounts determined to qualify ascharity care, they are not reported as net patient service revenue. The System maintains recordsto identify and monitor the level of free care it provides.

The System provided free care of $109,420,000 and $122,618,000 in 2013 and 2012, respectively.Such costs have been estimated based on the ratio of expenses (excluding bad debts) to establishpatient service charges. Under healthcare reform all documented Massachusetts citizens whowere once eligible for charity care are now required to be enrolled in one of the subsidizedCommonwealth Care insurance products. Those patients who are over 300% of the federalpoverty guidelines are now required to buy into an affordable insurance product either offered bytheir employer or the Commonwealth Care Connector or face financial penalties. Many of theSystem’s patients that were previously uninsured are now enrolled in various health insuranceplans in an effort to comply with the Commonwealth’s healthcare reform mandate.

Through the Commonwealth’s Health Safety Net Office (“HSNO”), the Medical Center receivesreimbursement for a significant portion of the charity care it provides. The amounts received were$63,091,000 and $58,908,000 for the years ended September 30, 2013 and 2012, respectively.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally acceptedin the United States of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Significant estimates are made in the area of patientaccounts receivable, accruals for settlements with third-party payors, accrued professional liabilityinsurance incurred but not reported claims, accrued compensation and benefits, and conditionalasset retirement obligations. Actual results could differ from those estimates.

Fair Value of Financial InstrumentsThe fair value of the System’s financial instruments approximates the carrying amount reported inthe balance sheet for cash and cash equivalents, investments, receivables and payables.

Income TaxesThe System, the Medical Center, BMCHP, UDF, ECMF, BUAP and NAB Trust are nonprofitcorporations and have been recognized as tax exempt pursuant to Section 501(c)(3) of the InternalRevenue Code. Faculty has been determined to be a tax-exempt organization underSections 501(c)(3) and 170(c)(2) of the Internal Revenue Code as evidenced by a determinationletter dated May 29, 1997 as part of a group filing with the Plans and Faculty. Accordingly, noprovision for income taxes has been made in the accompanying financial statements. BMCIC ofVermont is a nonprofit captive insurance company licensed by the State of Vermont. BMCIntegrated Care Services, Inc. and Gryant, Inc. are taxable entities.


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No income, capital or premium taxes are levied in the Cayman Islands and BMCIC has beengranted an exemption until September 16, 2022 for any such taxes that might be introduced.BMCIC intends to conduct its affairs so as not to be liable for taxes in any other jurisdiction.Accordingly, no provision for income taxes has been made in the accompanying financialstatements.

RevisionIn 2012, the revised classification between unrestricted and temporarily restricted net assets of$5,129,000 reflects the correction of an error of previously reported investment gains. These gainswere related to earnings on funds invested in the Medical Center’s pooled endowment fund whichwere previously reported as temporarily restricted net assets, but should be reported asunrestricted net assets. These amounts were corrected in fiscal year 2012 and management doesnot consider this adjustment to be material to the financial statements.

Adoption of New Accounting GuidanceIn July 2011, the FASB issued Health Care Entities: Presentation and Disclosure of Patient ServiceRevenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for certain health careentities. Under the new guidance, bad debts relating to patient service revenue will be separatelydisclosed in the statement of operations and reported as a component of net patient servicerevenue. Bad debts associated with activities other than patient service revenue will continue to bereported as an operating expense. The standard is effective for fiscal years after December 15,2012. The System adopted the provisions of ASU 2011-7 during the year ended September 30,2013.

In August 2010, the Financial Accounting Standards Board (FASB) issued Accounting StandardsUpdate 2010-24 (ASU 2010-24), Presentation of Insurance Claims and Related InsuranceRecoveries, as an amendment to ASC Topic 954. ASU 2010-24 requires that medical malpracticeclaims, which include costs associated with litigating or settling claims, be accrued when theincidents that give rise to the claims occur and that companies should not net insurance recoveriesagainst the related claim liability. The System adopted ASU 2010-24 as of October 2011.Adoption of ASU 2010-24 had no impact on excess (deficiency) of revenues over expenses. Referto Note 23 Self Insurance, for more information.

In August 2010, the FASB issued (ASU 2010-23) Health Care Entities: Measuring Charity Care forDisclosure, which clarified the disclosure of charity care provided by healthcare organizations,providing that such disclosure should be measured using cost and that related reimbursementsrecorded should also be separately disclosed. The System adopted the provisions of ASU 2010-23during the year ended September 30, 2012.

ReclassificationCertain amounts from the 2012 financial statements have been reclassified to conform with the2013 presentation.


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3. Investments and Assets Limited as to Use

Short-term and long-term investments and assets limited as to use, consist of the following atSeptember 30:

At Fair At Fair

(in thousands) Value Cost Value Cost

Cash and cash equivalents 5,241$ 5,246$ 5,082$ 5,084$

Bonds and U.S. Treasury Notes 172,123 165,244 168,982 158,322Private investment funds 335,229 292,759 315,652 292,680Mutual funds 221,125 184,098 192,414 167,310

Marketable equity securities 140,837 104,785 116,222 100,509Money market mutual funds 120,526 120,512 175,279 172,161Asset-backed securities 9,502 9,573 11,638 11,446

1,004,583 882,217 985,269 907,512

Funds held by trustees 71,194 71,364 86,982 87,294

1,075,777$ 953,581$ 1,072,251$ 994,806$

2013 2012

At September 30, 2013 and 2012, the System recorded certain private investment funds of$53,587,000 and $49,994,000 using the cost method. For the private investment funds reflected inthe balance sheet at cost, the difference (unrecorded net unrealized appreciation) between thevalue reported by the investment managers and the cost for these investments was $11,078,000and $2,498,000 as of September 30, 2013 and 2012, respectively. Included in private investmentfunds (as described in the American Institute of Certified Public Accountants document, A PracticeAid for Auditors Alternative Investments - Audit Considerations) are alternative investment vehiclesincluding commingled funds with an estimated fair value of approximately $335,229,000 and$315,652,000 at September 30, 2013 and 2012, respectively.

BMCHP is required by its contract with MassHealth to maintain a combination of financialinsolvency reserve and reinsurance reserve funds in an amount based on monthly enrollment. Thereserve funds of BMCHP amounted to $12,994,000 and $12,852,000 at September 30, 2013 and2012, respectively.

In connection with its recent licensure with the Massachusetts Division of Insurance, BMCHP hasplaced on deposit with the Commonwealth a $1,000,000 U.S. Treasury note with an amortized costof $1,000,000. In addition, for licensure in New Hampshire BMCHP has purchased and placed ondeposit a $500,000 U.S. Treasury note with an amortized cost of $500,000. Both security depositsare also included in assets limited as to use.


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Total return on the System’s investment portfolio, which includes investment income, net realizedgains (losses) and the change in the unrealized appreciation (depreciation) on investments,includes the following for the years ended September 30:


Unrestricted

Dividends and interest 28,771$ 24,044$Net realized gains (losses) on investments 3,064 (1,165)

Change in net unrealized appreciation on investments 8,309 36,114

40,144 58,993

Temporarily restrictedDividends and interest 6,272 5,473

Net realized gains on investments 5,604 18,971Change in net unrealized appreciation on investments 26,296 12,695

38,172 37,139

78,316$ 96,132$

Unrealized gains related to BMCIC of $10,146,000 and $11,399,000 as of September 30, 2013 and2012, respectively, were used to offset the deposit liability for net unrealized holdings (gains)Iosses on available for sale securities.

Investments, in general, are exposed to various risks, such as interest rate, credit, and overallmarket volatility. As such, it is reasonably possible that changes in the fair value of investments willoccur in the near term and that such changes could materially affect the amounts reported in theconsolidated balance sheets and statements of operations.

4. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability(an exit price) in the principal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. In determining fair value, theuse of various valuation approaches, including market, income and cost approaches, is permitted.

A fair value hierarchy has been established based on whether the inputs to valuation techniquesare observable or unobservable. Observable inputs reflect market data obtained from sourcesindependent of the reporting entity and unobservable inputs reflect the entities’ own assumptionsabout how market participants would value an asset or liability based on the best informationavailable. Valuation techniques used to measure fair value must maximize the use of observableinputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchybased on three levels of inputs, of which the first two are considered observable and the lastunobservable, that may be used to measure fair value.

The following describes the hierarchy of inputs used to measure fair value and the primaryvaluation methodologies used by the System for financial instruments measured at fair value on arecurring basis. The three levels of inputs are as follows:

Level 1 Observable inputs such as quoted prices in active markets;


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Level 2 Inputs, other than the quoted prices in active markets, that are observable either directlyor indirectly; and

Level 3 Unobservable inputs in which there is little or no market data, which require the reportingentity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following threevaluation techniques:

Market ApproachPrices and other relevant information generated by market transactions involving identical orcomparable assets or liabilities;

Cost ApproachAmount that would be required to replace the service capacity of an asset (i.e., replacement cost);and

Income ApproachTechniques to convert future amounts to a single present amount based on market expectations(including present value techniques).

Investments (except for private partnerships, which are reported on either the equity method orcost method of accounting) and funds held by trustee are classified within Level 1 or Level 2 of thefair value hierarchy as they are valued using quoted market prices, broker or dealer quotations, orother observable pricing sources.



Investments

Cash and cash equivalents 5,241$ -$ -$ 5,241$Bonds and U.S. Treasury Notes 1,500 170,623 - 172,123

Private investment funds - 335,229 - 335,229Mutual funds 121,080 100,045 - 221,125Marketable equity securities 140,837 - - 140,837

Money market mutual funds 120,526 - - 120,526Asset-backed securities - 9,502 - 9,502

389,184$ 615,399$ -$ 1,004,583$

Funds held by trustee

U.S. government securities 35,228$ -$ -$ 35,228$Money market mutual funds 35,966 - - 35,966

71,194$ -$ -$ 71,194$


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Investments


Bonds and U.S. Treasury Notes 1,500 167,482 - 168,982


Mutual funds 102,418 89,996 - 192,414



Asset-backed securities - 11,638 - 11,638

400,501$ 584,768$ -$ 985,269$

Funds held by trusteeU.S. government securities 34,949$ -$ -$ 34,949$


86,982$ -$ -$ 86,982$

The System had no transfers from Level 2 to Level 1 in fiscal year 2013 and 2012, respectively.

The following is a description of the System’s valuation methodologies for assets and liabilitiesmeasured at fair value. Fair value for Level 1 is based upon quoted prices in active markets thatthe System has the ability to access for identical assets and liabilities. Market price data isgenerally obtained from exchange or dealer markets. The System does not adjust the price forsuch assets and liabilities.

Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quotedprices for identical or similar instruments in markets that are not active and model-based valuationtechniques for which all significant assumptions are observable in the market or can becorroborated by observable market data for substantially the full term of the assets. Inputs areobtained from various sources including market participants, dealers, and brokers.

Fair value for Level 3 is based on valuation techniques that use significant inputs that areunobservable as they trade infrequently or not at all.

The System’s investments in bonds and U.S.Treasury notes and private equity funds are fair valuebased on most current net asset value (“NAV”).


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Net Asset Redemption Notice

(in thousands) Value Frequency Period

Investment Type

Private investment funds 335,229$ Bi-Monthly-Monthly 3 - 45 daysBonds and U.S. Treasury Notes 170,623 Daily-Monthly 2 - 30 daysMutual funds 100,045 Daily-Monthly 2 - 6 days

Asset-backed securities 9,502 Daily-Monthly 4 - 30 days

615,399$

Investments Asset Value


Net Asset Redemption Notice

(in thousands) Value Frequency Period

Investment Type

Private investment funds 315,652$ Bi-Monthly-Monthly 3 - 45 days

Bonds and U.S. Treasury Notes 167,482 Daily-Monthly 2 - 30 days

Mutual funds 89,996 Daily-Monthly 2 - 6 days

Asset-backed securities 11,638 Daily-Monthly 4 - 30 days

584,768$

Investments Asset Value

There were no unfunded commitments as of September 30, 2013.

Externally managed marketable investments with fair value below cost are considered to beother-than-temporarily impaired and accordingly, the unrealized depreciation is recognized asrealized losses through a write-down in the cost basis of these investments. All other investmentsare periodically reviewed for impairment to determine if such declines are other-than-temporary.Management’s review is based upon the percentage and period of time that the investment isbelow cost as well as other qualitative considerations. A similar write down is recorded when theimpairment on these investments has been judged to be other-than-temporary. During 2013 and2012, the Medical Center reported recognized losses of approximately $1,316,000 and $1,007,000,respectively, relating to declines in fair value of investments that were determined by managementto be other-than-temporary.


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5. Contributions Receivable

Contributions receivable are recorded as part of other accounts receivable on the balance sheet.Contributions receivable, net, are summarized as follows as of September 30:

Unconditional promises expected to be collected in:


Less than one year 4,438$ 6,505$

One year to five years 7,504 4,661More than five years 2,000 4,000

13,942 15,166

Less: Discounts and allowance for uncollectible accounts (3,929) (4,234)

Net contributions receivable 10,013$ 10,932$

Included in total gross contributions receivable is a single donor in the amount of $10,000,000. Theoriginal contribution from the donor in 2008 was $15,000,000, of which $5,000,000 was paid.Discount rates used to calculate the present value of contributions receivable ranged from2.40%-6.00%, depending upon the anticipated pledge fulfillment date.

6. Property, Plant and Equipment

The property, plant and equipment of the System consists of the following at September 30:

(in thousands) Useful Life 2013 2012

Land 11,292$ 11,292$

Land improvements 5 - 40 years 775 1,532Buildings 15 - 45 years 190,914 173,074Building and leasehold improvements 5 - 40 years 553,842 560,408

Fixed equipment 5 - 25 years 44,871 59,763Major movable equipment 3 - 20 years 372,284 385,101Leased buildings and equipment 15 - 20 years 119,300 126,413

Construction in progress 70,761 50,575

1,364,039 1,368,158

Accumulated depreciation and amortization (726,205) (736,310)

Property, plant and equipment, net 637,834$ 631,848$

Depreciation expense amounted to $58,443,000 and $61,798,000 for the years endedSeptember 30, 2013 and 2012, respectively. Amortization expense amounted to $11,358,000 and$9,926,000 for the years ended September 30, 2013 and 2012, respectively.

Fully depreciated property, plant and equipment with an original cost of $76,315,000 was disposedof during the year ended September 30, 2013.

The Master Trust Indenture places certain restrictions on property, plant and equipment in terms ofthe creation of liens and transfers of assets.


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As of September 30, 2013 and 2012, assets under capital lease agreements amounted toapproximately $119,300,000 and $126,413,000, respectively, with accumulated amortization of$86,962,000 and $82,698,000, respectively. Amortization expense is included with depreciationand amortization expense in the statement of operations.

The System has capitalized interest in the amount of $51,122,000 and $44,762,000 for the yearsended September 30, 2013 and 2012, respectively.

7. Other Noncurrent Assets

Other noncurrent assets consist of the Medical Center’s investments in Medical Research RealtyTrust, the 650 Albany Street Trust, Biosquare Realty Trust, NEIDL (Note 24), BCD Building LLC(“BCD”), FGH Building LLC (“FGH”), notes receivable and unamortized bond issuance expenses.The investments in Medical Research Realty Trust, 650 Albany Street Trust, Biosquare RealtyTrust, NEIDL, BCD and FGH are recorded utilizing the equity method of accounting. TheMedical Center’s investment in BCD and the Medical Center’s paid-in capital were eliminated uponconsolidation of Gryant, Inc. Unamortized bond issuance expenses are amortized over the life ofthe related bonds.

The Medical Center has financed the cost of renovating two existing structures and for newconstruction of a third building on its campus using the New Markets Tax Credit (“NMTC”) program.NMTC is a program of the Community Development Financial Institutions Fund (“CDFI Fund”), abureau of the United States Treasury. The NMTC program awards tax incentives to private sectorinvestors who provide investment capital to entities that create economic growth and jobs indistressed neighborhoods. Investors receive a tax credit against federal income taxes over aseven-year period.

In 2005, the Medical Center was the beneficiary of an allocation of NMTC that was awarded toAffirmative Investments, Inc. These NMTC and federal historic tax credits were used as part of afinancing package to reduce the cash required by the Medical Center to rehabilitate theBCD Building. The financing required the Medical Center to loan approximately $5,800,000 and$6,100,000 to a third party relating to project costs of $16,000,000 to perform buildingimprovements on the BCD building. The $5,800,000 is recorded as a note receivable atSeptember 30, 2013 and 2012 but it is considered permanent financing and will be forgiven oncethe Medical Center takes ownership, which is expected at the end of the seven-year period whenthe tax incentives for the investor have been exhausted. The $6,100,000 was repaid to the MedicalCenter by a third party; however the interest is still outstanding. The loans have an interest rate of5.12% and have accrued interest of $1,768,000 and $2,071,000 as of September 30, 2013 and2012, respectively. On May 1, 2012, the Medical Center purchased Gryant, Inc.’s interest in theBCD building for $300,000. On June 21, 2013, Gryant transferred $297,000 ($300,000 less bankfees) to the Medical Center and the Medical Center reduced its interest in the BCD Building. As ofSeptember 30, 2013 and 2012, the Medical Center recorded $1,303,000 and $1,600,000 as aninvestment in BCD.

The Medical Center has entered into four put and call Option Agreements in connection with theredevelopment of the BCD Building. If the put options or the call options are not executed, two ofthe agreements terminate on December 22, 2014, and the other two terminate on June 5, 2016.The purpose of the put and call option agreements is to ensure that the Medical Center regainscontrol of the rehabilitated building at the end of the NMTC period. This is accomplished byacquiring the interests of all investment members for $1,472,000.


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On October 1, 2012 the Medical Center executed the put for BCD to Sovereign. The MedicalCenter paid Sovereign $1,455,000 for Sovereign’s 99% interest in Affirmative NMTC Fund I LLC(the “Fund”). Affirmative LLC has the other 1% interest in the Fund. Affirmative LLC has a putoption to sell its 1% interest in the Fund to the Medical Center; however, as of September 30, 2013,the Medical Center has not executed the put for BCD to Affirmative LLC. In connection with thistransaction, a long term asset of $1,056,000 remains on the balance sheet.

During 2006, the Medical Center loaned approximately $11,600,000 and $9,000,000 to a third partyrelating to project costs of $21,000,000 to perform building improvements on the Medical Center’sFGH Building. These loans are part of a second financing package that utilizes new market taxcredits to reduce the cash required by the Medical Center to rehabilitate the facility. The$11,654,000 loan was recorded as other noncurrent assets at September 30, 2012 and it wasconsidered permanent financing and was forgiven when the Medical Center took ownership in2013. The loan had an interest rate of 3.5% and was recorded as notes receivable with accruedinterest of $116,000 as of September 30, 2012. The $9,000,000 was repaid to the Medical Centerby a third party in fiscal year 2010.

The Medical Center entered into four put and call option agreements in connection with theredevelopment of the FGH Building. All of the agreements terminate on December 20, 2015 if theput options or the call options are not executed. The purpose of the put and call option agreementsis to ensure that the Medical Center regains control of the rehabilitated building at the end of theNMTC period. This is accomplished by acquiring interests of all investment members for$1,654,000. The Medical Center has calculated that the net present value of acquiring the interestof all investors totals $1,125,000, which the Medical Center recorded as long-term assets andliabilities for the year ended September 30, 2012.

On July 24, 2012, the Medical Center purchased Gryant, Inc.’s interest in the FGH building for$150,000. On March 1, 2013, the Medical Center executed the puts for FGH to Sovereign andAffirmative, LLC. The Medical Center paid a total of $1,652,000 to Sovereign and Affirmative, LLCfor their combined 100% interest in the Affirmative NMTC Fund II, LLC (“the Fund”). After the putswere exercised, the Medical Center had 100% interest and control over the FGH Building. TheFGH Building and all other assets and liabilities were transferred from Gryant, Inc. to the MedicalCenter. The FGH building was recorded on the Medical Center’s books at its net book value of$17,849,000. The lease between the Medical Center and Affirmative LLC was terminated as aresult of the transaction. The Medical Center forgave its note and interest receivable and wrotedown its investment in FGH, lease payable and all assets and liabilities transferred fromGryant, Inc., excluding the building, to zero. The entire transaction resulted in a contribution of acapital asset of $7,406,000, from Sovereign to the System which is recorded as a change in netassets.

During 2008, the Medical Center loaned $53,667,000 to a third party relating to project costs of$190,110,000 for the demolition of 91 East Concord Street and for the design, construction, andequipping of the Shapiro Ambulatory Care Center. The loan is part of a financing package thatutilizes $70,000,000 of new markets tax credits to reduce cash required by the Medical Center toconstruct this new facility. The loan is recorded as other noncurrent assets as of September 30,2013 and 2012 and will be reclassified to property, plant and equipment once the Medical Centertakes ownership at the end of the lease period. The loan has an interest rate of 3.85%, and hasbeen recorded as notes receivable as of September 30, 2013 and 2012 with accrued interest of$9,570,000 and $7,719,000, respectively. The loan from the Medical Center was combined with athird-party capital contribution in the amount of $16,333,000 in an investment fund totaling$70,000,000. The total amount in the investment fund was used to make a “qualified equityinvestment” into community development entities (“CDEs”). The CDEs, in turn, are required to


24

make a series of loans totaling $68,900,000 to the BMC NAB Business Trust for the construction ofthe facility.

Included in the capital contribution was a low interest loan in the amount of $2,917,000 which mustbe repaid by the BMC NAB Business Trust at the end of this loan period.

As part of this financing transaction, there is a provision for an assignment of all loans to theMedical Center on the seventh anniversary of the transaction. As a financial incentive to trigger theassignment of all the loans, the loans will have a $5,000,000 principal payment due at the end ofthe seven years.

At September 30, 2009, the outstanding loans, except the low interest loan in the amount of$2,917,000 which will be paid in full by the BMC NAB Business Trust, were assigned to andrecorded as a liability to the Medical Center. The Medical Center thus became the sole lender tothe BMC NAB Business Trust. The Medical Center will have the option to terminate the businesstrust lease and the loans, eliminating the ownership structures created for the NMTC transaction.

In November and December 2008, the Medical Center closed on a second and third round ofNMTC financing for the construction of the Shapiro Ambulatory Care Center. The Medical Centerwas the beneficiary of an allocation of federal new market tax credits in the amounts of$46,697,000 and $24,000,000, respectively. In these two financing transactions, the MedicalCenter provided loans of $33,582,000 and $19,517,000 with the capital contribution of $14,715,000and $4,483,000 provided by a third party. These loans of $33,582,000 and $19,517,000 have aninterest rate of 3.00% and have accrued interest of $3,622,000 and $2,055,000, respectively, as ofSeptember 30, 2013. In the second round of NMTC financing, the Medical Center also entered intoan additional loan in the amount of $472,000 with an interest rate of 3.00%. Accrued interest of$51,000 and $60,000 related to this loan has been recorded as of September 30, 2013 and 2012,respectively. All loans are recorded as notes receivable as of September 30, 2013 and 2012.These funds also became equity investments into CDEs. The CDEs, in turn, are required to makea series of loans to the BMC NAB Business Trust totaling $46,234,000 and $24,000,000 for theconstruction of the facility.

As part of these financing transactions, the Medical Center has entered into two put and callagreements in connection with the construction of the Shapiro Ambulatory Care Center. Thepurpose of these agreements is to ensure that the Medical Center retains control of the newbuilding at the end of the NMTC period. If the put options are not exercised by the investors, thenthe call option may be exercised by the Medical Center during a four-month period following the putoption period. If the call option is executed, then the Medical Center must pay the fair market valueof the investors’ interest.


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8. Long-Term Debt

Long-term debt consists of the following at September 30:

(in thousands) Interest Rate 2013 2012

Revenue Bonds Series C 103,870$ 108,950$

Revenue Bonds Series B 244,040 244,585ECMF Series A Bonds 8,600 9,600Series O - Tax Exempt (Garage) Varies 10,741 11,224

Series O - Taxable (Garage) Varies 3,364 3,515CDE Loans 150,635 170,634

521,250 548,508

Less: Current portion of long-term debt (7,533) (7,251)

Revenue Bonds Series B discount (6,723) (6,849)Revenue Bonds Series C premium 7,001 7,446

513,995$ 541,854$

3.00 % - 5.25 %

4.00 % - 5.75 %6.45 %

0.82 % - 4.60 %

On October 1, 2010 (the “Effective Date”) pursuant to certain provisions of Chapter 240 of the Actsof 2010 of the Massachusetts Legislature, signed into law by the Massachusetts Governor onAugust 5, 2010 (the “Legislation”) the Massachusetts Health and Educational Facilities Authority(the “Authority”) was merged into the Massachusetts Development Finance Agency(“MassDevelopment”). Under the Legislation, among other matters in connection with the merger,(i) on the Effective Date, the Authority is dissolved, and (ii) on and after the Effective Date, theAuthority’s rights, powers and duties, and properties shall be exercised, performed, owned andheld by MassDevelopment, and any and all obligations and liabilities of the Authority shall becomeobligations and liabilities of MassDevelopment.

In July 2012, the Medical Center refunded the MassDevelopment Revenue Bonds, Boston MedicalCenter Issue, Series A (1998) Bonds (“Series A Bonds”) through the sale of $108,950,000MassDevelopment, Series C Revenue 2012 Bonds (“Series C Revenue Bonds”). The principalamount outstanding of the Series A Bonds was $119,970,000. The interest rate on the Series CRevenue Bonds ranges from 3.00% to 5.25% based on the bonds’ maturities. Principal andsinking fund payments will be made annually between 2013 and 2029 and range from $5,080,000and $8,060,000.

In July 2008, the Medical Center issued through the Authority $245,175,000 Series B RevenueBonds. The bonds were issued to finance the cost of demolition of 91 East Concord Street, thedesign, construction and equipping of the Shapiro Ambulatory Care Center, the design andconstruction of a two-story addition to the Menino Pavilion, and routine capital expenditures. Theinterest rate on the Series B Revenue Bonds varies from 4.00% to 5.75% based on the bonds’maturities. Principal and sinking fund payments will be made annually between 2013 and 2038and range from $545,000 to $26,430,000.

The Medical Center has granted a mortgage on the Newton Pavilion and Health Services buildingand a negative pledge on the restricted property of the Menino Pavilion and the YawkeyAmbulatory Care Center pursuant to the Amended and Restated Master Trust Indenture. TheAmended and Restated Master Trust maintains the financial covenant requiring the Medical Centerto maintain an annual debt service coverage ratio of at least 1.10 to 1.


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The Medical Center is currently the sole member of the Obligated Group. These financialstatements include the Medical Center’s Affiliates who are not members of the Obligated Group.The column entitled “Medical Center” in the supplemental consolidating information of theconsolidated financial statements represent the Obligated Group and three financially immaterialaffiliates that are not members of the Obligated Group (UDF, ECMF and BMC Integrated CareServices, Inc.).

The Amended and Restated Master Trust Indenture covers the obligations of Series B RevenueBonds, Series C Revenue Bonds and Series O Pool loans.

ECMF issued $17,200,000 of bonds (the “ECMF Series A Bonds”) through the Authority onMarch 7, 2000. The bonds were issued in two separate issuances with $5,900,000 of thebonds matured in 2010 (the “2010 Bonds”) and $11,300,000 of the bonds maturing in 2020(the “2020 Bonds”). Principal payments are made on an annual basis through 2020 and rangefrom $1,000,000 to $1,500,000. The interest rate on the 2020 bonds is 6.45%. The bonds areredeemable at any time at the option of ECMF at their principal amounts plus accrued interest.The bonds are collateralized by a grant of a mortgage on the project, a pledge of all revenues to bereceived by ECMF and the Medical Center’s guaranty of payment of total debt service on thebonds.

In October 2012, the Medical Center entered into a Line of Credit for short-term borrowings with abank under which up to $25 million may be borrowed on such terms as outlined by the Amendedand Restated Line of Credit Agreement. This Agreement will be renewed annually but can bewithdrawn at the bank’s option. The Medical Center has pledged certain board designatedaccounts to secure the line of credit. The assets of these accounts will collateralize borrowingsagainst the line of credit. The Medical Center has not borrowed against the line of credit as ofSeptember 30, 2013.

Included in the Medical Center’s debt is approximately $14,105,000 of the Authority’s variable ratedemand bonds (“VRDBs”), Capital Asset Program Issue 2009 Series O-1 and O-2 (a refinancing ofthe Authority’s Series M loans issued in 2005). The Medical Center has entered into irrevocableletters of credit (“LOCs”) with a financial institution to secure bond repayment and interestobligations associated with its VRDBs. RBS Citizens, N.A. provides LOCs totaling $14,981,000.There are no drawings under the LOCs as of September 30, 2013. The LOC supporting the SeriesO-1 and O-2 will expire on December 31, 2014. RBS Citizens provided a Federal Home LoanBank wrap (AAA rated) for the two Letters of Credit. The term and payment schedule for the loansdid not change. The interest rates at September 30, 2013 were 0.09% and 0.16% for thetax-exempt and taxable loans, respectively.

If the VRDBs are unable to be remarketed, the trustee for the VRDB will request purchase underthe LOC scheduled repayment terms. Based on the existing repayment and maturity terms of theunderlying LOCs, the scheduled payments under the VRDB related LOCs will be determined whenand if the VRDBs are unable to be remarketed.

BMC NAB Business Trust has $139,135,000 in CDE loans as of September 30, 2013 and 2012related to financing for the construction of the Shapiro Ambulatory Care Center. The interest rateson the CDE loans range from 0.82% to 2.0%. Currently, interest-only payments are being madeannually on the CDE loans. One CDE loan with a principal balance of $2,917,000 must be repaidin May 2015. Beginning in November 2015, principal and interest are due for all other CDE loansrelated to the first round of new market tax credit (“NMTC”) financing. In May 2019, principal and


27

interest payments are due for CDE loans related to the second and third rounds of NMTCfinancing.

Gryant, Inc. has $11,500,000 in loans as of September 30, 2013 and 2012 related to financing forthe rehabilitation of the BCD Building. The interest rate on the BCD loan is 4.6%. Currently,interest-only payments are being made annually on the loan. The loan will be forgiven when theMedical Center takes ownership of the BCD building; therefore, no principal payments have beenmade.

The Medical Center has a liquidity covenant which requires minimum liquidity of $50,000,000 bemaintained in certain board designated accounts as security for the LOCs.

The Medical Center has escrowed the following funds with bond trustees under the Series BRevenue Bonds, the Series C Revenue Bonds, the ECMF Series A Bonds, and Series O Poolloans. In addition, these amounts include funds for the self-insured workers’ compensationprogram and funds designated by management for pension and other employee benefit purposes.These funds are included in assets limited as to use in the financial statements.


Construction fund 21,809$ 38,770$

Debt service fund 6,724 6,764

Debt service reserve funds 35,385 35,276

Accrued interest receivable 469 285

Workers' compensation reserve fund 6,470 5,550

Other held funds 337 337

71,194$ 86,982$

September 30,

The assets of the funds held by the trustees are invested principally in government securities andmoney market funds.

Maturities of long-term debt are as follows:

(in thousands)


2014 7,533$

2015 11,412

2016 10,716

2017 11,303

2018 12,033

Thereafter 468,253

521,250$

The fair value of long-term debt was approximately $528,518,000 and $583,400,000 atSeptember 30, 2013 and 2012, respectively.


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9. Obligations Under Capital Leases

Obligations under capital leases consist of the following at September 30:


City of Boston (forgivable) 27,851$ 37,198$City of Boston 919 1,501Other 98 327

Less: Current portion (forgivable) (9,753) (9,347)Less: Current portion (380) (869)

18,735$ 28,810$

Effective with the merger on July 1, 1996, the Medical Center entered into a 50-year capital leasewith the Public Health Commission (“PHC”), a division of the City of Boston, for all the real propertypreviously owned by BCH. The lease payments for the first 25 years are equal to the debt servicepayments required on the City of Boston Revenue Refunding Bonds, Boston City Hospital(FHA insured mortgage) Series B (the “1993 Bonds”). The lease payments for the second25 years will be determined at that time based upon several factors. In conjunction with the leaseexecution, the City of Boston agreed to provide the Medical Center with Base Assistance Grantpayments (Note 14) which are expected to equal the Medical Center’s payments on the first25 years of the lease. The lease payments during the first 25 years are only required if the MedicalCenter receives the Base Assistance Grant payments from the City of Boston. The interest rate onthe lease was 6.2%.

On May 1, 2012, the City of Boston refinanced its 2002 Bonds through the issuance of GeneralObligation Bonds, 2012 Series C (the “2012 Bonds”). In conjunction with the refinancing, theMedical Center and PHC amended the lease agreement to reflect a reduction in monthly paymentsso that the Medical Center’s obligation was equal to the debt service payment for the City ofBoston’s General Obligation debt. As the Medical Center continues to occupy the space and paysrent that is less than fair market value, the execution of this amendment resulted in a forgivablecapital leased asset between the City of Boston and the Medical Center. The execution of theforgivable capital leased asset resulted in a reduction of the existing asset of $8,887,000 and areduction in the obligation of $18,060,000. A gain of $9,211,000 was recorded on the amendmentof the agreement due to a difference in amortization methods. The capital asset, the forgivableobligation and the gain will be amortized over the remainder of the lease term (through June 2016).The amended agreement also terminates the Medical Center’s Base Assistance Grant receivablepayments from the City of Boston.

Once the 2002 Bonds are retired, the rent payments will reflect fair market value, taking intoaccount, among other factors, restrictions in the lease agreement and any investments the MedicalCenter has made.


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Future minimum payments of the System’s obligations under capital leases are as follows:

(in thousands)


2014 422$2015 3962016 272

2017 -2018 -Thereafter -

Total minimum lease payments 1,090

Less: Amount representing interest (73)

Present value of minimum lease payments 1,017

Less: Current portion (380)

637$

10. Operating Lease Commitments

The System amortizes deferred rent on a straight-line basis over the term of the lease. AtSeptember 30, 2013 and 2012 approximately $485,000 and $704,000, respectively, of amortizationhad been recorded as an offset to rent expense and at September 30, 2013 approximately$485,000 and $3,091,000 remains deferred as a current and noncurrent liability, respectively.

The System’s estimated future minimum lease obligations are as follows:

Lease

(in thousands) Obligations


2014 13,508$

2015 12,582

2016 12,367

2017 8,635

2018 6,983

Thereafter 16,776

70,851$

The System records rent expense on a straight-line basis over the life of the lease and recordsaccrued rent as the difference between rent expense and actual payments made. As ofSeptember 30, 2013 and 2012, the accumulated difference between rent expense and amountspaid amounted to $3,370,000 and $3,666,000, respectively, and is included in accounts payableand accrued expenses and long-term liabilities on the balance sheet.


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11. Restricted Net Assets

Restricted net assets, which are recorded in assets limited to use, grants receivable and otheraccounts receivable on the balance sheet, are composed of the following at September 30:



Accumulated realized and unrealized gains 219,597$ 187,697$City of Boston Grants (Note 14) 27,851 37,198

Funds for the purchase of equipment andcapital improvements 31,802 31,825

Other restricted purposes 40,862 42,383

320,112$ 299,103$

Permanently restricted

Investments to be held in perpetuity 16,353$ 16,353$

12. Endowments

The Medical Center’s endowment consists of approximately 167 donor-restricted funds establishedfor a variety of purposes. As required by generally accepted accounting principles, net assetsassociated with endowment funds, are classified and reported as restricted or unrestricted basedon the existence or absence of donor-imposed restrictions.

The Medical Center has interpreted the UPMIFA as requiring the preservation of the original gift asof the gift date of the donor-restricted endowment funds absent explicit donor stipulations to thecontrary. As a result of this interpretation, the Medical Center classifies as permanently restrictednet assets, the original value of gifts donated to the permanent endowment. The remaining portionof the donor-restricted endowment fund that is not classified in permanently restricted net assets isclassified as temporarily restricted net assets until those amounts are appropriated for expenditureby the Medical Center in a manner consistent with the standard of prudence prescribed byUPMIFA. In accordance with UPMIFA, the Medical Center considers certain factors in making adetermination to appropriate or accumulate endowment funds. The factors include the durationand preservation of the fund; the purpose of the organization and the donor-restricted endowmentfund; general economic conditions; the possible effect of inflation and deflation; the expected totalreturn from income and the appreciation of investments; other resources of the organization; andthe investment policies of the organization.

As of September 30, 2013, the Medical Center did not have board-designated funds included in theendowment. The endowment net asset composition by type of fund consisted of the following:



Donor-restrictedendowment funds -$ 183,302$ 16,353$ 199,655$

-$ 183,302$ 16,353$ 199,655$


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Temporarily Permanently(in thousands) Unrestricted Restricted Restricted Total


September 30, 2012 -$ 162,727$ 16,353$ 179,080$

Investment returnInvestment income - 9,059 - 9,059





- (7,768) - (7,768)


As of September 30, 2012, the endowment net asset composition by type of fund consisted of thefollowing:



Donor-restricted

endowment funds -$ 162,727$ 16,353$ 179,080$

-$ 162,727$ 16,353$ 179,080$


Temporarily Permanently(in thousands) Unrestricted Restricted Restricted Total


Investment return




Appropriation of endowmentassets for expenditures - (7,143) - (7,143)

- (7,143) - (7,143)



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13. Third-Party Reimbursement

The System maintains agreements with Blue Cross of Massachusetts, Inc., the Social SecurityAdministration under the Medicare Program, the Commonwealth under the Medicaid Program andcertain managed care entities that govern payment to the System for services rendered to patientscovered by these programs.

MedicareReimbursement for services provided to inpatients and outpatients covered by the federalgovernment’s Medicare program who have elected not to enter a Medicare health maintenanceorganization for services varies according to patient classification systems that are based onclinical, diagnostic, and other factors.

MedicaidThe Commonwealth’s MassHealth (Office of Medicaid) utilizes a prospective payment system foracute hospital services provided to Medicaid beneficiaries. The Office of Medicaid pays theSystem a fixed amount per discharge for inpatient services, prospectively determined flat ratesbased on diagnoses and procedures performed for most outpatient services, and fixed fees forcertain other outpatient services.

Uncompensated CareThe System is partially reimbursed for uncompensated care services, defined as charity care andbad debt associated with emergency services, through the statewide HSNO, administered by theCommonwealth. Following the merger of BUMCH and BCH on July 1, 1996, the System hascontinued the historical mission and commitment of BCH to the public health needs of all residentsof the City of Boston to provide accessible health care services to all in need of care, regardless ofstatus or ability to pay. As a result, the System receives a significant amount of reimbursementfrom the Health Safety Net. Changes in the level of funding of the HSNO or in the regulationsgoverning its administration may have an adverse impact on the System.

14. Grant Payments

In connection with the establishment of the Medical Center, the City of Boston agreed to provideBase Assistance Grant payments to capitalize the Medical Center and promote the development ofan urban healthcare system in the City of Boston. Funding was subject to annual appropriation bythe City each fiscal year after July 1, 1996 for as long as the FHA mortgage is outstanding. TheBase Assistance Grant payments were approximately $0 and $7,167,000 for the years endingSeptember 30, 2013 and 2012, respectively. The accretion of the discount of these grants ofapproximately $0 and $1,704,000 for the years ended September 30, 2013 and 2012, respectively,is included in contribution revenue of temporarily restricted net assets in the statement of changesin net assets. The receipt of these payments from the City each year is recorded as temporarilyrestricted net assets that are released from restrictions for operations.

On May 1, 2012 the City of Boston refinanced its 2002 Bonds through the issuance of GeneralObligation Bonds, 2012 Series C. In conjunction with the refinancing, the City of Boston terminatedthe agreement to provide the Base Assistance Grant to the Medical Center, as the FHA mortgageis no longer outstanding. As the Medical Center continues to occupy the space and pays rent thatis less than fair market value, the execution of this amendment resulted in an “in-kind” rentreceivable between the City of Boston and the Medical Center.


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The net present value of the “in-kind” rent receivable is $27,851,000 and $37,198,000 and isincluded in the grants receivable and temporarily restricted net assets on the balance sheet atSeptember 30, 2013 and 2012, respectively. The “in-kind” rent receivable has been discountedusing a rate of 4.26%. The accretion of the discount on the “in-kind” receivable is approximately$1,403,000 and $412,000 for the years ended September 30, 2013 and 2012, respectively, and isincluded in contribution revenue of temporarily restricted net assets in the statement of changes innet assets.

15. Benefit Plans Available to Employees

The Medical Center has a Tax Sheltered Annuity Plan (the “TSA Plan”) which is a deferredcompensation plan. Participation in the TSA Plan is voluntary. The Medical Center also has acontributory 403(b) plan. The Medical Center’s contributions under these plans amounted to$16,390,000 and $16,009,000 for the years ended September 30, 2013 and 2012, respectively.

Certain retired Medical Center employees have postretirement medical and life insurance benefitscovered under the Welfare Benefits Plan (“the Plan”). The Plan was frozen effective with themerger on July 1, 1996. Current employees and employees retiring after July 1, 1996 are notcovered by the Plan. The accrued benefit cost amounted to $155,000 and $171,000 as ofSeptember 30, 2013 and 2012, respectively. The net periodic benefit cost recorded on the Planamounted to $(31,000) and $(38,000) for the years ended September 30, 2013 and 2012,respectively.

BMCHP has a defined contribution retirement plan (“DC Plan”) under Section 401(k) of the InternalRevenue Code established effective August 1, 2001. The DC Plan covers all eligible employees atBMCHP who choose to participate, and requires BMCHP to match employees’ contributions up tospecified limitations. Participants are 100% vested in their deferred contributions, and rollovercontribution accounts immediately plus actual earnings thereon. The matching employercontribution is based on a discretionary formula and vests over a four year period. BMCHPcontributions under this DC Plan were $1,443,000 and $1,136,000 in 2013 and 2012, respectively.


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The Medical Center maintains a defined benefit pension plan (the “Pension Plan”), effective July 1,1996, for certain former employees of BCH with a measurement date of September 30. Thecovered group consists of employees who either had a nonforfeitable right to a retirement benefitunder the former BCH defined benefit pension plan or would have earned one with service throughSeptember 30, 1997. The Pension Plan provides benefits based on an employee’s averagecompensation and years of service reduced by a percentage of their Social Security benefit. ThePension Plan’s provisions have been set based on a collective bargaining agreement effectiveJuly 1, 1996, and a formal document was signed on June 30, 1997. Contributions to the Plan aremade in amounts sufficient to meet the minimum funding requirements set forth in the EmployeeRetirement Income Security Act of 1974. The City is responsible for the past service cost of formerBCH employees.


Accumulated benefit obligation 117,939$ 124,165$

Change in projected benefit obligation

Projected benefit obligation at beginning of year 139,747$ 117,603$Service cost 5,970 5,461

Interest cost 5,191 5,243Actuarial (gain) loss (18,781) 13,138Benefits paid (2,095) (1,698)

Projected benefit obligation at end of year 130,032$ 139,747$

Change in plan assets

Fair value of plan assets at beginning of year 86,939$ 70,467$

Actual return on plan assets 9,431 11,770Employer contributions 6,800 6,400Benefits paid (2,095) (1,698)

Fair value of plan assets at end of year 101,075$ 86,939$

Reconciliation of funded status

Projected benefit obligation 130,032$ 139,747$

Fair value of plan assets 101,075 86,939

Funded status (28,957) (52,808)

Amounts recognized in the balance sheetincluded within other long-term liabilities (28,957)$ (52,808)$


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The components of net periodic benefit cost for the years ended September 30, 2013 and 2012 areas follows:


Service cost 5,970$ 5,461$

Interest cost 5,191 5,243

Expected return on plan assets (6,272) (5,120)

Amortization of prior service cost 1 1

Amortization of net loss 3,906 3,581

Net periodic benefit cost 8,796$ 9,166$

Weighted average assumptions used to determine the net

periodic cost for the period just ended


Long-term rate of return 7.00 % 7.00 %


Weighted average assumptions used to determine the benefit

obligationsDiscount rate 4.75 % 3.75 %


Other changes in plan assets and benefit obligations recognized

in unrestricted net assets

New net actuarial (gain) loss (21,939)$ 6,488$

Amortization of prior service cost (1) (1)

Amortization of net loss (3,906) (3,581)

(25,846)$ 2,906$

Amounts recognized in unrestricted net assets

Net prior service cost 1$ 3$

Net actuarial loss 15,317 41,163

15,318$ 41,166$

The amounts expected to be recognized as amortization of prior net service cost and amortizationof net loss, respectively, and as components of net periodic cost in the upcoming year are $1,275and $359,880.

Pension Plan AssetsThe Pension Plan weighted average asset allocation as of the measurement dates September 30,2013 and 2012, respectively, is as follows:

Target Allocation

Fiscal Year Ending

September 30, 2013 2013 2012

Asset categoryEquity securities 63 % 64 % 53 %

Debt securities 20 20 39

Other 17 16 8

100 % 100 % 100 %

Percentage of Plan Assets at

September 30,


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The fair value of pension plan assets as of September 30, 2013 is disclosed in the table below.


Investments



32,643$ 68,432$ -$ 101,075$

The fair value of pension plan assets as of September 30, 2012 is disclosed in the table below.


Investments



25,298$ 61,641$ -$ 86,939$

The Medical Center contracts with a consulting firm for financial consulting services for the PensionPlan. The consultants provide the Medical Center’s Investment Committee and management withfinancial analysis and recommendations on target allocations and investment managers. TheMedical Center’s investment objective is to achieve the highest reasonable total return afterconsidering (i) plan liabilities, (ii) funding status and projected cash flows, (iii) projected marketreturns, valuations and correlations for various asset classes, and (iv) the Medical Center’s abilityand willingness to incur market risk. The Medical Center’s Investment Committee activelymanages the pension plan assets by selecting investments and investment managers to maximizethe investment returns.

The expected long-term rate of return assumption represents the expected average rate ofearnings on the funds invested or to be invested to provide for the benefits included in the benefitobligations. The long-term rate of return assumption is determined based on a number of factors,including historical market index, returns, the anticipated long-term asset allocation of the plans,historical plan return data, plan expenses, and the potential to outperform market index returns.

Cash FlowsInformation about the expected cash flows for the Pension Plan is as follows:

Expected contributions for fiscal year ending September 30, 2014

Expected employer contributions 6,800,000$


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Estimated future benefit payments reflecting expected future service

for the fiscal year(s) ending September 30,

2014 3,549,000$

2015 4,111,000

2016 4,612,000

2017 5,473,000

2018 6,286,000

2019 - 2022 44,673,000

The Medical Center contributed $6,800,000 and $6,400,000 to the Pension Plan for the yearsended September 30, 2013 and 2012, respectively. The Medical Center plans to make anynecessary contributions during the upcoming fiscal year 2014 to ensure the Pension Plancontinues to be adequately funded during the current market conditions.

16. Concentration of Credit Risk

The System provides health care services to residents within its geographic location. The Systemgrants credit without collateral to its patients, most of whom are local residents and are eitherinsured under third-party payor agreements or covered by the Health Safety Net Care Pool.

The mix of receivables from patients and third-party payors at September 30, 2013 and 2012 wasas follows:

2013 2012

Medicare 17 % 19 %

Medicaid 26 27

HMOs 26 24

Self-Pay 8 7

Commercial 5 11

Blue Cross 7 4

Commonwealth Care 5 4

Other 6 4

100 % 100 %

All of BMCHP’s capitation revenue is generated from enrollment in the prepaid health plansestablished by MassHealth and the Commonwealth Health Insurance Connector.


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The System records allowances for doubtful accounts (credit losses) for the following otheraccounts receivable balances at September 30, 2013:

AllowanceReceivable for Doubtful


FICA reimbursement for resident payments 886$ -$


Contributions receivable 4,344 1,570Capitation receivable 26,102 -

Reinsurance receivable 4,286 -Other 36,683 205

112,036$ 6,751$

The System records an allowance for doubtful accounts (credit losses) for the following otheraccounts receivable balances at September 30, 2012:

AllowanceReceivable for Doubtful


FICA reimbursement for resident payments 22,146$ -$


Contributions receivable 6,338 1,591Capitation receivable 31,198 -

Reinsurance receivable 6,148 -Other 8,430 200

109,481$ 6,005$

These receivables represent current amounts from the other accounts receivable balance.Management regularly assesses the adequacy of the allowance for doubtful accounts byperforming ongoing evaluation of the balances, including such factors as the economicenvironment, risks associated with each receivable, the financial condition of specific borrowersand, where applicable, the existence of any guarantees or indemnifications.

Factors also considered by management when performing its assessment, in addition to generaleconomic conditions and the other factors described above, include, but were not limited to, adetailed review of the aging of receivables and review of cash receipts in current year comparedagainst prior year allowance for doubtful accounts. The level of the allowance is adjusted basedupon the results of management’s analysis.


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Changes in the allowance for doubtful accounts for the years ended September 30, 2013 and 2012were as follows:


Beginning balances at October 1 6,005$ 5,253$

Recoveries (95) (461)

Net charge-offs 522 351New reserves 319 862

Ending balances at September 30 6,751$ 6,005$

17. Net Patient Service Revenue and Allowance for Doubtful Accounts

Net patient service revenue before the provision for bad debts for the year ended September 30,2013 and 2012 is summarized as follows:

(in thousands)2013 2012

Patient 287,428$ 321,158$Third-party payers 874,910 836,390

Less: Contractual allowance and provision for bad debts (266,745) (274,474)

Net patient service revenue 895,593$ 883,074$

Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating thecollectability of accounts receivable, the System analyzes past collection history and identifiestrends to estimate the appropriate allowance for doubtful accounts and provision for bad debts.Management regularly reviews the data and models in evaluating the sufficiency of the allowancefor doubtful accounts. Throughout the year, the System, after all reasonable collection efforts havebeen exhausted, will write off the difference between the standard rates (or discounted rates ifnegotiated) and the amounts actually collected against the allowance for doubtful accounts. Inaddition, management monitors the write-offs against established allowances as of a point in timeto determine the appropriateness of the underlying assumptions used in estimating the allowancefor doubtful accounts.

Accounts receivable, prior to adjustments for doubtful accounts, is summarized as follows atSeptember 30, 2013 and 2012:

(in thousands)

2013 2012

Patient 5,225$ 2,993$


Total 336,025 337,720

Reserve for contractual allowance (239,740) (236,382)

Reserve for doubtful accounts (27,076) (25,488)

Patient accounts receivable, net 69,209$ 75,850$


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18. Related Party Transactions

The Foundation and the Medical Center have significant transactions with each other for operatingpurposes. During the years ended September 30, 2013 and 2012, the Medical Center providedfunding of approximately $107,655,000 and $95,252,000, respectively, to the Foundation forprofessional and support services. The Foundation is comprised of physician groups which provideteaching and other services to the Medical Center. In addition, the Medical Center and theFoundation have certain board members in common. The Medical Center has various notesreceivable and other receivables from the Foundation which totaled approximately $35,818,000and $32,495,000 at September 30, 2013 and 2012, respectively. In addition, the Medical Centerowed the Foundation $38,689,000 and $32,796,000 at September 30, 2013 and 2012,respectively, and the amounts due are included in the current portion of due to related parties.

BMCHP and the Medical Center have significant transactions with each other for operatingpurposes. Total revenue earned by the Medical Center from BMCHP related to medical servicesprovided by the Medical Center to BMCHP members was $118,714,000 and $92,597,000 for theyears ended September 30, 2013 and 2012, respectively, and is included in net patient servicerevenue. At September 30, 2013 and 2012, BMCHP owed the Medical Center $23,043,000 and$248,000, respectively. In addition, BMCHP owed the Medical Center $12,540,000 and$12,276,000 at September 30, 2013 and 2012, respectively, and the amounts due are included inpatient accounts receivable. During the years ended September 30, 2013 and 2012, BMCHPapproved a net asset transfer of $23,000,000 and $50,000,000 to BMC, which was eliminated uponconsolidation.

The Medical Center and BMCIC have significant transactions with each other for the purpose ofproviding professional and general liability insurance. Total expenses incurred by theMedical Center related to the insurance provided by BMCIC were $4,100,000 and $4,182,000 forthe years ending September 30, 2013 and 2012, respectively. The Medical Center has$31,311,000 and $15,283,000 of prepaid premiums and retrospective premium credits that wereprepaid by the Medical Center to BMCIC at September 30, 2013 and 2012, respectively. In fiscalyear 2012 the Medical Center and the Foundation adopted ASU 2010-24, requiring the gross up ofanticipated claims liabilities and insurance recoveries. The Medical Center and the Foundationrecorded an insurance recovery receivable and a professional liability claims payable of$75,068,000 and $82,289,000 for the year ended September 30, 2013 and 2012, respectively.The receivable and payable for the Medical Center and Foundation eliminate upon consolidation.

The Medical Center and BMCIC of Vermont have transactions with each other for the purpose ofproviding insurance coverage for property and for certain liability exposures arising from acts ofterrorism under TRIA. All insurance written and claims paid originate with the Medical Center.There were no expenses incurred by the Medical Center related to the insurance provided byBMCIC of Vermont for the years ending September 30, 2013 and 2012, respectively. AtSeptember 30, 2013 and 2012, respectively, there were no premiums owed to BMCIC of Vermontas all premiums written were paid prior to year-end.

BUAP and the Medical Center have transactions with each other for operating purposes. Duringthe years ended September 30, 2013 and 2012, respectively, the Medical Center provided fundingof approximately $3,117,000 and $1,262,000, respectively, to BUAP for professional and supportservices. The Medical Center has various accounts receivable from BUAP which totaledapproximately $4,411,000 and $4,070,000 at September 30, 2013 and 2012, respectively.


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The Medical Center is affiliated with several community health centers. At September 30, 2013and 2012, the Medical Center had loaned a total of $6,000,000 and $5,820,000, respectively, to thecommunity health centers. The loans are interest bearing and are forgiven as long as no event ofdefault as defined in the loan documents shall have occurred.

BMCHP and the Foundation have transactions with each other for operating purposes. The totalrevenue earned by the Foundation from BMCHP related to medical services provided by theFoundation to BMCHP members was $13,888,000 and $10,813,000 for the year endedSeptember 30, 2013 and 2012, respectively, and is included in net patient service revenue. Alsoas of September 30, 2013 and 2012, BMCHP owed the Foundation $727,000 and $643,000,respectively.

The Medical Center and the BMC NAB Business Trust have significant transactions with eachother relating to the construction of the Shapiro Ambulatory Care Center. Pursuant to the note andloan agreement dated May 1, 2008, the Medical Center loaned the BMC NAB Business Trust $0and $3,172,000 in 2013 and 2012, respectively, for the construction of the facility.

Shared Services AgreementThe Plans each entered into a common paymaster agreement with the Medical Center and theTrustees of Boston University (“BU”). Under the terms of the physician practice agreements,faculty physicians and practitioners (“Faculty Members”) are employed by the individual Plans. TheFaculty serves the benefit of the Medical Center (by providing clinical services) and BUSM (byserving as faculty members of BUSM). Each Plan, with respect to each Faculty Member that thePlan employs, pays BU 27.8% of each Faculty Member’s salary up to a $255,000 base, forreimbursement of fringe benefits and related paymaster fees. If a particular Faculty Member’ssalary exceeds the base amount of $255,000, the Plans further pay BU 8.0% on such excess, up toan amount equal to the FICA limit for that particular year, and then 1.8% on any amount in excessof the applicable FICA limit. Additionally, the Plans pay the Medical Center for medical malpracticeinsurance premiums for each Faculty Member. BMC insures the Faculty members underagreement with BMCIC. The Plans also pay for a portion of administrative salaries and fringebenefits for nonphysician employees of BMC, who provide services to them. These expenses areincluded in salaries and wages and fringe benefits in the statements of operations.

The Medical Center and BUSM pay a portion of salaries of several physicians of the Foundation,and the Foundation is not responsible for reimbursing either institution. The Foundation alsoreceives from BMC reimbursement for a portion of free care services provided by the Foundation,as well as for teaching and other administrative duties. The Foundation received a total of$34,425,000 and $36,670,000 for institutional support from BUSM all of which was recorded inreimbursement of operating expenses for the years ended June 30, 2013 and 2012, respectively.The Foundation received a total of $101,622,000 and $91,430,000 for institutional support fromBMC for the years ended June 30, 2013 and 2012, respectively. The Foundation also received$29,458,000 and $30,140,000 from BMC which was recorded as reimbursement of operatingexpenses for the years ended June 30, 2013 and 2012, respectively. The Foundation received$70,000 and $1,734,000 in research support from the Medical Center for the years ended June 30,2013 and 2012, respectively.

The Plans use space in buildings owned by BUSM at no charge. Rent expense of $500,000,based upon estimated market rates, has been recorded as an in-kind donation for each of theyears ended June 30, 2013 and 2012, respectively.


42

Retirement PlanBUSM sponsors a defined contribution retirement plan, which covers all Faculty paid under theabove described common paymaster agreements. Costs related to Faculty are included in thefringe benefit rates described above. This retirement plan is available to Faculty who havecompleted two years of service for a Plan, who work at least 50% of full-time schedules and whohave appointments or expected assignment durations of at least nine months. BUSM contributesbetween 5% and 14% of salary to this retirement plan, depending on age, base salary, and anintegration level amount adjusted each year by BUSM.

The Medical Center sponsors a defined contribution’ retirement plan which covers all employees,including administrative employees of the Foundation. This retirement plan is available to regularemployees who have completed 1,000 hours of service within one-year period. BMC contributesbetween 3% and 8% of salary to this retirement plan, depending on years of service.

19. Claims Payable

BMCHP establishes a claims payable account for insured events which include estimates of futurepayments of loss and related loss adjustment expenses. The table below shows the changes inthe claims payable account for the years ended September 30, 2013 and 2012:


Accrued at beginning of year 94,157$ 96,566$

Incurred servicesCurrent year 1,291,092 1,116,773

Prior years (5,089) (9,877)

Total incurred 1,286,003 1,106,896

Paid claimsCurrent year 1,229,438 1,048,264

Prior years 66,849 61,041

Total paid 1,296,287 1,109,305

Accrued at end of year 83,873$ 94,157$

The estimated cost of losses and loss adjustment expenses attributable to insured events of theprior year decreased by approximately $5,089,000 and $9,877,000 during 2013 and 2012,respectively. Increases or decreases occur as a result of claim settlements during the year andreceipt of additional information regarding individual claims. Recent loss development trends arealso considered in evaluating the adequacy of the claims payable account.


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20. Functional Expenses

The total operating expenses of the System by function are as follows for the years endedSeptember 30, 2013 and 2012:


Patient care 1,986,740$ 1,855,508$

Medical education 67,092 62,832

Research, sponsored programs and community health services 71,062 66,986

General and administrative 286,993 286,889

2,411,887$ 2,272,215$

21. Governmental Subsidies

On December 20, 2011, CMS approved a three year Massachusetts Medicaid Waiver extension forthe period of July 1, 2011 through June 30, 2014 that included Delivery System TransformationInitiative (“DSTI”) potential funding of $103,553,000 annually for BMC. These initiatives aredesigned as incentive payments to support investments in health care delivery systems that willsupport payment reform, and transition away from fee-for-service payments toward alternativepayment arrangements that reward high-quality, efficient, and integrated systems of care. CMShas identified four categories for which funding authority is available. Participating hospitals mustselect a minimum number of projects from each category as outlined in the Master DSTI Plan. Thefour categories are: (1) development of a fully integrated delivery system; (2) improved healthoutcomes and quality; (3) ability to respond to statewide transformation to value-based purchasingand to accept alternatives to fee-for-service payments; and (4) population-focused improvements.The Medical Center has submitted a DSTI Plan with detailed projects to be implemented consistentwith the categories outlined. CMS finalized the approval of the Medical Center’s DSTI plan onJune 20, 2012. The Medical Center has recorded $103,553,000 in the fiscal year 2013 and 2012,respectively.

Other Safety Net Care Pool Supplemental PaymentsThe Medical Center receives additional supplemental payments from the State under the SpecialTerms and Conditions of the MassHealth Medicaid Section 1115 Demonstration, the Corporationmeets the criteria for qualification for Public Service Hospital Safety Net Care Payments. TheMedical Center has recorded $52,000,000 for years ending September 30, 2013 and 2012.

22. Commitments and Contingencies

The System is subject to complaints, claims and litigation which have arisen in the normal courseof business. In addition, the System is subject to compliance with laws and regulations of variousgovernmental agencies. Recently, governmental review of compliance with these laws andregulations has increased in the healthcare industry, resulting in fines and penalties fornoncompliance by individual health care providers.

In September 2009, allegations of wage and hour violations were made in complaints filed inMassachusetts Superior Court and the United States District Court for the District ofMassachusetts. In sum, the plaintiffs allege that the Medical Center and other defendants failed topay a class of hourly employees for missed and interrupted meal breaks, preliminary andpostliminary hours worked, and mandatory training time. In February and March, 2011, all claims


44

in both the federal and state cases were dismissed. In August 2013, the United States Court ofAppeals for the First Circuit in part vacated the dismissal decision and sent the case back to theDistrict Court for further proceedings. The parties have agreed to settle the case, pending approvalby the District Court. Management has accrued for the settlement and it is included in the balancesheet as accounts payable and accrued expenses.

In July 2012, allegations of patent infringement were made in a complaint filed in the United StatesDistrict Court for the District of Massachusetts against the Medical Center, Boston UniversityAffiliated Physicians, Inc., Boston University Medical Center Radiologists, Inc., and Trustees ofBoston University. The plaintiffs (Neurografix, Neurography Institute Medical Associates, Inc., andImage-Based Surgicenter Corporation) allege infringement of their patents through the purchaseand use of MRIs and other equipment manufactured by Philips, General Electric, and BrainLab.This action, which has been consolidated with other similar suits, is currently stayed (suspended)pending resolution of plaintiff’s claims against the equipment manufacturers. A Motion to Dismissthe consolidated claims is also pending. It is not possible at this time to express any opinion as tothe merit of the action or the likelihood that the claimants will prevail.

23. Self Insurance

Professional and General LiabilityEstimated professional and general liability costs, as calculated by BMCIC’s consulting actuaries,consist of specific reserves to cover the estimated liability resulting from medical or general liabilityincidents or potential claims which have been reported, as well as a provision for claims incurredbut not reported. Estimated professional and general liabilities are based on claims reported,historical experience, and industry trends. These liabilities include estimates of future trends inloss severity and frequency and other factors that could vary as the claims are ultimately resolved.Although it is not possible to measure the degree of variability inherent in such estimates,management believes the reserves for claims are adequate. These estimates are periodicallyreviewed, and necessary adjustments are reflected in the consolidated statement of operations inthe year the need for such adjustments becomes known. Management is unaware of any claimsthat would cause the final expense for professional and general liability risks to vary materially fromthe amounts provided.

The System estimates that the expected claims liabilities at September 30, 2013 and 2012, on anundiscounted basis, are approximately $77,858,000 and $83,397,000, respectively.

Excess Liability CoverageThe System has excess liability coverage of $30,000,000 for professional and general liabilitylosses per individual claim, and for annual aggregate professional and general liability losses on aclaims-made basis. The existence of this reinsurance coverage does not relieve the System oftheir primary obligation with respect to losses incurred. The System would be liable for claimsceded to reinsurers in the event such reinsurers are unable to meet their obligations.

24. National Emerging Infectious Diseases Laboratory (“NEIDL”)

In September 2003, Boston University received an award from the National Institutes of Health(“NIH”) for the construction of a biocontainment facility to be located on Boston University’s MedicalCampus. This laboratory will be used by Boston University and the Medical Center, as well asother organizations, to support the federal government’s bio-defense efforts. As part of this award,NIH will provide $140,990,000 of the construction costs of the facility. Boston University andBoston Medical Center each provided $27,927,000 toward construction, and received a 50% equity


45

interest in the venture. As such, both parties will share equally in the future operating activities ofthe laboratory. The NIH reimbursement was recorded as an increase to temporarily restricted netassets. On May 1, 2010, Boston Medical Center issued a letter notifying Boston University that theMedical Center elected to withdraw from further participation in the NEIDL at Boston UniversityMedical Center effective as of May 1, 2011. As a result of the withdrawal, the Medical Centerreversed the investment and temporarily restricted net assets recorded in previous periods.

In 2011, Boston Medical Center and Boston University agreed to contribution repayment termswhereas Boston University owes Boston Medical Center the total principal of $29,064,000. BostonUniversity will make five annual payments of $5,813,000 plus 2% interest on the outstandingbalance due. The remaining balance owed to the Medical Center is $17,584,000 and $23,445,000as of September 30, 2013 and 2012, respectively, and is included in other accounts receivable andother noncurrent assets on the balance sheet.

25. Subsequent Events

The System has assessed the impact of subsequent events through February 5, 2014, the date theaudited financial statements were available for issuance, and have concluded that other than thenote below, there were no such events that require adjustment to the audited financial statementsor disclosure in the notes to the consolidated financial statements.

On October 24, 2013, Gryant Inc. was dissolved.

Supplemental Consolidating Information

BMC Health System, Inc.Consolidating Balance SheetSeptember 30, 2013

46

Consolidated

BMC Health Medical BMCIC and BMC Health

(in thousands) System, Inc. Center BMCHP Foundation BMCIC of Vermont NAB Gryant BUAP Eliminations System, Inc.

Assets

Current assets

Cash and cash equivalents -$ 139,834$ 35,032$ 77,978$ 367$ 71$ 108$ 1,734$ -$ 255,124$

Short-term investments - - 39,791 - - - - - - 39,791

Patients accounts receivable, less allowance of $27,076 in 2013 - 67,210 - 14,780 - - - 486 (13,267) 69,209

Other accounts receivable, less allowance of $6,751 in 2013 - 39,038 49,578 2,694 4,286 509 457 364 8,359 105,285

Current portion of grants receivable, less allowance of $3,796 in 2013 - 25,812 - - - - - - - 25,812

Current portion of estimated receivable for final settlements

with third-party payors - 17,284 - - - - - - - 17,284

Current portion due from related parties - 100,774 - 38,477 520 11,966 - - (151,737) -

Inventories - 5,490 - - - - - - - 5,490

Prepaid expenses and other current assets - 7,147 278 250 639 - - 49 (616) 7,747

Insurance recoveries receivable - 35,282 - 39,786 - - - - (75,068) -

Current portion of funds held by Trustees - 21,720 - - - - - - - 21,720

Total current assets - 459,591 124,679 173,965 5,812 12,546 565 2,633 (232,329) 547,462


Board-designated investments - 359,240 - - - - - - - 359,240

Funds held by Trustee - 49,474 - - - - - - - 49,474

Donor-restricted investments - 306,483 - - - - - - - 306,483

Reserve funds - - 17,793 - 101,699 - - - - 119,492

Total assets limited as to use - 715,197 17,793 - 101,699 - - - - 834,689

Other assets

Long-term investments - - 206,437 26,727 - - - - - 233,164

Property, plant and equipment, net - 456,347 7,174 5,014 - 151,016 17,530 753 - 637,834

Grants receivable, less current portion - 18,098 - - - - - - - 18,098

Due from related parties - 30,570 - - - - - - (30,570) -

Other noncurrent assets - 182,650 - 346 - - - - (6,241) 176,755

Total assets -$ 1,862,453$ 356,083$ 206,052$ 107,511$ 163,562$ 18,095$ 3,386$ (269,140)$ 2,448,002$


Current liabilities

Accounts payable and accrued expenses -$ 127,955$ 14,737$ 16,818$ 50$ 1,113$ 1,544$ 460$ 7,584$ 170,261$

Claims payable - - 83,873 - - - - - (13,267) 70,606

Deferred revenue - 18,348 - - 616 - - - (616) 18,348

Current portion of due to related parties - 51,174 23,043 34,340 - 6,191 - 4,902 (119,650) -

Current portion of long-term debt and capital leases - 17,616 - 50 - - - - - 17,666

Professional liability claims - 35,282 - 39,786 - - - - (75,068) -

Other current liabilities - - 11,022 - - - - - - 11,022

Total current liabilities - 250,375 132,675 90,994 666 7,304 1,544 5,362 (201,017) 287,903

Other liabilities

Estimated final settlements with third-party payors - 62,444 - - - - - - - 62,444

Obligations under capital leases - 18,687 - 48 - - - - - 18,735

Due to related parties - - - - 31,312 30,570 - - (61,882) -

Long-term debt - 363,360 - - - 139,135 11,500 - - 513,995

Other long-term liabilities - 59,870 1,011 - 75,068 - - - - 135,949

Total liabilities - 754,736 133,686 91,042 107,046 177,009 13,044 5,362 (262,899) 1,019,026


Net assets

Unrestricted - 771,252 222,397 115,010 465 (13,447) 5,051 (1,976) (6,241) 1,092,511

Temporarily restricted - 320,112 - - - - - - 320,112

Permanently restricted - 16,353 - - - - - - 16,353

Total net assets - 1,107,717 222,397 115,010 465 (13,447) 5,051 (1,976) (6,241) 1,428,976

Total liabilities and net assets -$ 1,862,453$ 356,083$ 206,052$ 107,511$ 163,562$ 18,095$ 3,386$ (269,140)$ 2,448,002$

BMC Health System, Inc.Consolidating Balance SheetSeptember 30, 2012

47

Consolidated

BMC Health BMCIC and BMC Health

(in thousands) System, Inc. Medical Center BMCHP Foundation BMCIC of Vermont NAB Gryant BUAP Eliminations System, Inc.

Assets

Current assets

Cash and cash equivalents -$ 114,229$ 36,355$ 53,131$ 353$ 371$ 904$ 992$ -$ 206,335$

Short-term investments - - 42,070 - - - - - - 42,070

Patients accounts receivable, less allowance of $25,488 in 2012 - 74,712 - 13,650 - - - 407 (12,919) 75,850

Other accounts receivable, less allowance of $6,005 in 2012 - 55,948 31,198 8,425 6,148 509 562 85 601 103,476

Current portion of grants receivable, less allowance of $3,362 in 2012 - 25,343 - - - - - - - 25,343

Current portion of estimated receivable for final settlements

with third-party payors - 8,744 - - - - - - - 8,744

Current portion due from related parties - 56,935 - 42,645 - 9,356 1,330 - (110,266) -

Inventories - 4,584 - - - - - - - 4,584

Prepaid expenses and other current assets - 6,068 2,836 262 642 - - 41 (635) 9,214

Insurance recoveries receivable - 38,676 - 43,613 - - - - (82,289) -

Current portion of funds held by Trustees - 32,250 - - - - - - - 32,250

Total current assets - 417,489 112,459 161,726 7,143 10,236 2,796 1,525 (205,508) 507,866


Board-designated investments - 340,482 - - - - - - - 340,482

Funds held by Trustee - 54,732 - - - - - - - 54,732

Donor-restricted investments - 274,475 - - - - - - - 274,475

Reserve funds - - 17,773 - 92,678 - - - - 110,451

Total assets limited as to use - 669,689 17,773 - 92,678 - - - - 780,140

Other assets

Long-term investments - - 244,129 23,656 - - - - - 267,785

Property, plant and equipment, net - 425,320 7,733 5,191 - 156,584 36,108 912 - 631,848

Grants receivable, less current portion - 27,851 - - - - - - - 27,851

Due from related parties - 30,570 - - - - - - (30,570) -

Other noncurrent assets - 201,879 - 201 - - - - (8,028) 194,052

Total assets -$ 1,772,798$ 382,094$ 190,774$ 99,821$ 166,820$ 38,904$ 2,437$ (244,106)$ 2,409,542$


Current liabilities

Accounts payable and accrued expenses -$ 135,701$ 30,056$ 14,365$ 191$ 1,114$ 1,722$ 301$ (4,403)$ 179,047$

Claims payable - - 94,157 - - - - - (12,919) 81,238

Deferred revenue - 18,334 - - 635 - - - (635) 18,334

Current portion of due to related parties - 43,482 248 37,147 1,053 3,874 - 4,070 (89,874) -

Current portion of long-term debt and capital leases - 17,398 - 69 - - - - - 17,467

Professional liability claims - 38,676 - 43,613 - - - - (82,289) -

Other current liabilities - - 26,413 - - - 89 42 - 26,544

Total current liabilities - 253,591 150,874 95,194 1,879 4,988 1,811 4,413 (190,120) 322,630

Other liabilities

Estimated final settlements with third-party payors - 28,889 - - - - - - - 28,889

Obligations under capital leases - 28,770 - 40 - - - - - 28,810

Due to related parties - - - - 15,283 30,570 - - (45,853) -

Long-term debt - 371,220 - - - 139,134 31,500 - - 541,854

Other long-term liabilities - 87,249 1,497 - 82,289 - - - (105) 170,930

Total liabilities - 769,719 152,371 95,234 99,451 174,692 33,311 4,413 (236,078) 1,093,113


Net assets

Unrestricted - 687,623 229,723 95,540 370 (7,872) 5,593 (1,976) (8,028) 1,000,973

Temporarily restricted - 299,103 - - - - - - - 299,103

Permanently restricted - 16,353 - - - - - - - 16,353

Total net assets - 1,003,079 229,723 95,540 370 (7,872) 5,593 (1,976) (8,028) 1,316,429

Total liabilities and net assets -$ 1,772,798$ 382,094$ 190,774$ 99,821$ 166,820$ 38,904$ 2,437$ (244,106)$ 2,409,542$

BMC Health System, Inc.Consolidating Statement of OperationsYear Ended September 30, 2013

48

Consolidated



Operating revenue

Net patient service revenue, net of provision for bad debt ($54,717 in 2013) -$ 893,584$ -$ 130,947$ -$ -$ -$ 3,664$ (132,602)$ 895,593$

Capitation revenue - - 1,362,040 - - - - - - 1,362,040

Grants and contract revenue - 82,185 - - - - - - (11,771) 70,414

Institutional support - - - 101,622 - - - 3,117 (104,739) -

Other revenue - 12,412 6,237 88,515 - 3,609 822 856 (34,518) 77,933

Net assets released from restrictions for operations - 23,890 - - - - - - - 23,890

Total operating revenue - 1,012,071 1,368,277 321,084 - 3,609 822 7,637 (283,630) 2,429,870

Operating expenses

Salaries and wages and fringe benefits - 482,941 47,057 250,534 (130) - - 5,567 - 785,969

Supplies and expenses - 243,181 1,312,902 52,489 11 107 997 2,253 (145,054) 1,466,886

Institutional support - 110,772 - - - - - - (110,772) -

Depreciation and amortization - 59,232 2,859 1,224 - 5,568 728 190 - 69,801

Interest expense - 13,716 - 5 - 3,509 939 - - 18,169

Research, sponsored programs and community health services - 95,257 - - - - - - (24,195) 71,062

Total operating expenses - 1,005,099 1,362,818 304,252 (119) 9,184 2,664 8,010 (280,021) 2,411,887

Income (loss) from operations - 6,972 5,459 16,832 119 (5,575) (1,842) (373) (3,609) 17,983

Nonoperating gains (losses), net

Income from investments (including other-than-temporary impairment

losses of $1,316 in 2013) - 16,641 10,709 1,000 (129) - - 5 3,609 31,835

Fundraising costs and other - (3,570) - 423 - - - - - (3,147)

Total nonoperating gains (losses), net - 13,071 10,709 1,423 (129) - - 5 3,609 28,688

Excess (deficiency) of revenue over expenses - 20,043 16,168 18,255 (10) (5,575) (1,842) (368) - 46,671


Change in unrealized appreciation (depreciation) on investments - 7,588 (494) 1,215 - - - - - 8,309

Net asset transfer to affiliate - 23,000 (23,000) - - - - - - -

Contributed capital asset - 3,846 - - - - 1,300 - 2,260 7,406

Net assets released from restrictions for property, plant and equipment - 3,351 - - - - - - - 3,351

Pension-related changes other than net periodic pension costs - 25,801 - - - - - - - 25,801

Change in unrestricted net assets -$ 83,629$ (7,326)$ 19,470$ (10)$ (5,575)$ (542)$ (368)$ 2,260$ 91,538$

BMC Health System, Inc.Consolidating Statement of OperationsYear Ended September 30, 2012

49

Consolidated



Operating revenue

Net patient service revenue, net of provision for bad debt ($45,247 in 2012) -$ 855,756$ -$ 127,772$ -$ -$ -$ 2,956$ (103,410)$ 883,074$

Capitation revenue - - 1,191,612 - - - - - - 1,191,612

Grants and contract revenue - 84,296 - - - - - - (11,440) 72,856

Institutional support - - - 91,430 - - - 1,262 (92,692) -

Other revenue - 10,785 2,797 97,689 - 3,554 1,160 350 (43,724) 72,611

Net assets released from restrictions for operations - 24,632 - - - - - - - 24,632

Total operating revenue - 975,469 1,194,409 316,891 - 3,554 1,160 4,568 (251,266) 2,244,785

Operating expenses

Salaries and wages and fringe benefits - 465,374 41,982 255,076 - - - 4,486 - 766,918

Supplies and expenses - 234,969 1,172,217 54,878 707 113 18 1,328 (121,067) 1,343,163

Institutional support - 96,514 - - - - - - (96,514) -

Depreciation and amortization - 60,305 3,042 1,608 - 5,543 1,126 100 - 71,724

Interest expense - 18,626 - 9 - 3,454 1,335 - - 23,424

Research, sponsored programs and community health services - 97,126 - - - - - - (30,140) 66,986

Total operating expenses - 972,914 1,217,241 311,571 707 9,110 2,479 5,914 (247,721) 2,272,215

Income (loss) from operations - 2,555 (22,832) 5,320 (707) (5,556) (1,319) (1,346) (3,545) (27,430)

Nonoperating gains (losses), net

Income from investments (including other-than-temporary impairment

losses of $1,007 in 2012) - 9,098 8,573 953 698 9 - 3 3,545 22,879

Fundraising costs and other - (2,810) - 372 - - - - - (2,438)

Total nonoperating gains (losses), net - 6,288 8,573 1,325 698 9 - 3 3,545 20,441

Excess (deficiency) of revenue over expenses - 8,843 (14,259) 6,645 (9) (5,547) (1,319) (1,343) - (6,989)


Change in unrealized appreciation (depreciation) on investments - 23,988 12,804 (678) - - - - - 36,114

Net asset transfer to affiliate - 50,000 (50,000) - - - - - - -

Revised classification of net assets - 5,129 - - - - - - - 5,129

Other adjustments - - - - - - - (1,765) - (1,765)

Net assets released from restrictions for property, plant and equipment - 2,470 - - - - - - - 2,470

Pension-related changes other than net periodic pension costs - (2,982) - - - - - - - (2,982)

Change in unrestricted net assets -$ 87,448$ (51,455)$ 5,967$ (9)$ (5,547)$ (1,319)$ (3,108)$ -$ 31,977$

(000's)

Maximum

MADS

Total operating revenue 996,816$

Operating expenses:

Salaries, wages, and benefits 482,426

Supplies and other expenses 240,671

Institutional Support 110,738

Depreciation and amortization 47,423

Interest expense 11,624

Research, sponsored programs -

and community health services 95,257

Total operating expenses 988,139

Excess of operating revenue over expenses 8,677

Non-operating gains 13,059

Excess revenue over expenses 21,736$

Income Available for Debt Service

Excess revenue over expenses 21,736

Depreciation 47,423

Amortization and interest 11,624

Income Available for Debt Service 80,783$

Maximum Annual Debt Service

Total Debt Service 27,821$

Debt Service Coverage Ratio 2.90

Boston Medial Center

Debt Service Coverage Ratio

as of September 30, 2013

(000's)

Annual

ANNUAL

Total operating revenue 996,816$

Operating expenses:








Total operating expenses 988,139






Depreciation 47,423




FY13 Debt Service 24,513$



Debt Service Coverage Ratio


(000's)

Operating Revenue:

Total Net Patient Revenue 910,978$

Research & Grants Revenue 86,016 Other Operating Revenue 18,057

Total operating revenue 1,015,051$

Operating expenses:






Research, sponsored programs and community health services 68,509

Total operating expenses 1,014,540

Operating Income / Loss 511


Net Income/(Loss) 11,520$


FY14 Hospital Operating Budget

Board Approved

(000's)

Maximum Projected

MADS

Total operating revenue 1,004,301$

Operating expenses:








Total operating expenses 1,002,616






Depreciation 49,417




Total Debt Service 27,821$



Debt Service Coverage Ratio Projected


Utilization of BMC

Sept YTD

2005 2006 2007 2008 2009 2010 2011 2012 2013

Inpatient

Discharges

Medicine/Surgery 19,875 20,001 21,089 21,508 22,553 22,882 21,447 18,841 18,605

OB/GYN 3,257 3,500 3,605 3,461 3,296 3,147 3,430 3,357 3,406

Pediatrics 1,558 1,856 1,987 1,869 1,938 1,801 1,677 1,513 1,542

Newborns 2,175 2,458 2,498 2,311 2,245 2,171 2,283 2,282 2,428

Rehabilitation 197 220 292 208 218 214 162 124 -

Transitional Care Unit 554 0 0 0 - - - - -

Total discharges 27,616 28,035 29,471 29,357 30,250 30,215 28,999 26,117 25,981

Patient Days

Medicine/Surgery 111,331 115,325 110,995 116,740 112,327 108,294 98,161 89,198 92,140

OB/GYN 10,401 10,434 11,538 11,216 10,439 10,535 10,967 11,241 11,297

Pediatrics 6,211 6,603 7,003 8,090 8,041 7,063 7,327 7,395 6,942

Newborns 10,328 11,372 12,288 10,391 9,620 9,870 10,185 10,708 11,323

Rehabilitation 4,645 5,332 5,091 3,893 3,432 3,599 3,502 2,041 -

Transitional Care Unit 5,827 0 0 0 - - - - -

Total patient days 148,743 149,066 146,915 150,330 143,859 139,361 130,142 120,583 121,702

Average Length of Stay

Medicine/Surgery 5.6 5.8 5.3 5.4 5.0 4.7 4.6 4.7 5.0

OB/GYN 3.2 3 3.2 3.2 3.2 3.3 3.2 3.3 3.3

Pediatrics 4 3.6 3.5 4.3 4.1 3.9 4.4 4.9 4.5

Newborns 4.7 4.6 4.9 4.5 4.3 4.5 4.5 4.7 4.7

Rehabilitation 23.6 24.2 17.4 18.7 15.7 16.8 21.6 16.5 #DIV/0!

Transitional Care Unit 10.5 0 0 0 - - - - -

Total average length of stay 5.4 5.3 5.0 5.1 4.8 4.6 4.5 4.6 4.7

Outpatient

Clinic Visits 451,008 468,678 474,289 532,011 568,632 612,083 634,995 662,083 682,219

Ambulatory Surgery Cases 20,832 22,485 22,404 24,449 24,970 24,807 25,962 28,382 27,840

Emergency Room Visits 124,447 128,005 126,039 129,562 131,288 132,348 128,231 129,714 132,038

Observation 5,128 5,570 5,411 6,742 6,483 7,016 7,308 8,126 7,839

Sept YTD

2005 2006 2007 2008 2009 2010 2011 2012 2013

Surgery (cases)

Inpatient 6,780 6,887 7,025 6,992 7,571 7,647 7,007 6,498 6,920

Outpatient 9,033 9,551 9,712 10,220 11,037 11,754 12,184 12,924 13,224

Total Surgery 15,813 16,438 16,737 17,212 18,608 19,401 19,191 19,422 20,144

Licensed Beds 563 575 582 582 626 639 639 635 611

Case Mix 1.44 1.43 1.37 1.4 1.37 1.32 1.34 1.43 1.47

Average Daily Census 412.32 430.47 420.9 410.7 394.1 381.8 356.6 329.5 333.4

Source: BMC records.

ended September 30,

Fiscal Year

Fiscal Year

ended September 30,

Boston Medical CenterPayer Mix

As of SeptYTD YTD YTD YTD YTD2009 2010 2011 2012 2013

Blue Cross 6.24% 6.22% 5.68% 5.08% 4.44%Commerical 3.54% 3.04% 2.91% 2.95% 2.93%Managed Care 15.13% 15.23% 14.70% 15.01% 13.97%Medicaid 21.79% 23.21% 22.07% 22.90% 22.33%Medicaid Managed 9.53% 9.54% 10.93% 10.81% 12.35%Medicare 24.52% 25.09% 25.55% 24.75% 23.56%Medicare Managed 4.86% 4.61% 4.87% 5.07% 5.46%Commonwealth Care 4.89% 3.91% 3.78% 3.50% 6.07%Free Care / HSN 6.26% 6.85% 7.52% 7.83% 6.95%Industrial Accident 0.71% 0.65% 0.77% 0.75% 0.74%Self Pay 2.52% 1.63% 1.21% 1.35% 1.22%

100.00% 100.00% 100.00% 100.00% 100.00%

Cash and Investments and Days Cash On Hand

Obligated Group Only

FY2012 FY2013 FY2013 FY2013 FY2013

(In Thousands) September 30 December 31 March 31 June 30 September 30

Actual Actual Actual Actual Actual

Available unrestricted funds:

Current assets:

Cash and cash equivalents 108,282$ 136,008$ 108,326$ 114,611$ 135,283$

Other Current Assets 302,238 316,343 308,734 304,227 317,323

Total 410,520$ 452,351$ 417,060$ 418,838$ 452,606$

Long-term Investments - - -

Assets limited or restricted as

to use:

Board -designated investments 340,482$ 344,746$ 352,847$ 348,810$ 359,240$

Held by trustees under debt

and other arrangements 53,938 60,155 49,640 51,967 48,730

Held for specific purposes

and endowments 274,475 276,776 288,586 293,693 306,483

Total limited or restricted funds 668,895 681,677 691,073 694,470 714,453

Total 1,079,415$ 1,134,028$ 1,108,133$ 1,113,308$ 1,167,059$

Unrestricted days of cash on hand1

173.9 191.5 182.2 182.7 191.6

Source: BMC Records1Calculated as available unrestricted funds and Board-designated investments (excludes unrestricted funds held by trustees)

divided by the quotient of (x) operating expenses less depreciation, amortization and other nonrecurring expenses,

divided by (y) the number of calendar days in the period.

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