University of Kansas Hospital Authority

University of Kansas Hospital Authority

Accountants’ Report and Financial Statements

June 30, 2011 and 2010

University of Kansas Hospital Authority June 30, 2011 and 2010

Contents

Independent Accountants’ Report ...................................................................................... 1

Management’s Discussion and Analysis ............................................................................ 2

Financial Statements

Balance Sheets .................................................................................................................................. 10

Statements of Revenues, Expenses and Changes in Net Assets ....................................................... 11

Statements of Cash Flows ................................................................................................................ 12

Notes to Financial Statements .......................................................................................................... 14

Independent Accountants’ Report

The Board of Directors

University of Kansas Hospital Authority

Kansas City, Kansas

We have audited the accompanying balance sheets of the University of Kansas Hospital Authority (the

Authority), a component unit of the State of Kansas, as of June 30, 2011 and 2010, and the related

statements of revenues, expenses and changes in net assets and cash flows for the years then ended.

These financial statements are the responsibility of the Authority’s management. Our responsibility is to

express an opinion on these 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 of material misstatement. An audit includes examining,

on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also

includes assessing the accounting principles used and significant estimates made by management, and

evaluating the overall financial statement presentation. We believe that our audits provide a reasonable

basis for our opinion.

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

financial position of the University of Kansas Hospital Authority as of June 30, 2011 and 2010, and the

changes in its financial position and its cash flows for the years then ended in conformity with accounting

principles generally accepted in the United States of America.

The accompanying management’s discussion and analysis as listed in the table of contents is not a

required part of the financial statements but is supplementary information required by the Governmental

Accounting Standards Board. We have applied certain limited procedures, which consisted principally of

inquiries of management regarding the methods of measurement and presentation of the supplementary

information. However, we did not audit the information and express no opinion on it.

September 28, 2011

University of Kansas Hospital Authority Management’s Discussion and Analysis

June 30, 2011 and 2010

2

The University of Kansas Hospital Authority (the Authority) prepares its financial statements in accordance

with the provisions of the Governmental Accounting Standards Board’s (GASB’s) Statement No. 34, Basic

Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments.

This section of the Authority’s annual financial report presents management’s analysis of the Authority’s

financial performance during the fiscal years that ended on June 30, 2011 and 2010. Please read it in

conjunction with the financial statements, which follow this section.

Overview of the Financial Statements

This annual report consists of two parts: ―Management’s Discussion and Analysis‖ and ―Financial

Statements.‖ The financial statements also include notes that explain in more detail some of the information

in the financial statements. The Authority is a self-supporting entity and follows enterprise fund reporting;

accordingly, the financial statements are presented using the economic resources measurement focus and the

accrual basis of accounting.

Required Financial Statements

The required statements are the balance sheets, the statements of revenues, expenses and changes in net

assets and the statements of cash flows. These statements offer short and long-term financial information

about Authority activities.

The balance sheets include all of the Authority’s assets and liabilities and provide information about the

nature and amounts of investments in resources (assets) and the obligations to Authority creditors

(liabilities). The assets and liabilities are presented in a classified format, which distinguishes between

current and long-term assets and liabilities. It also provides the basis for computing rate of return,

evaluating the capital structure of the Authority and assessing the liquidity and financial flexibility of the

Authority. The statements of revenues, expenses and changes in net assets measure the success of the

Authority’s operations over the past two years. The final required financial statements are the statements

of cash flows. The primary purpose of these statements is to provide information about the Authority’s

cash receipts and cash disbursements during the reporting periods. The statements of cash flows report

cash receipts, cash disbursements and net changes in cash resulting from operating, investing and

financing activities.

Financial Analysis of the Authority

The Authority’s net assets are defined as the difference between assets and liabilities. Over time, the

increase or decrease in the Authority’s net assets is one indicator of whether its financial health is

improving or deteriorating. Other indicators include, but are not limited to, changes in unrestricted cash

and investments and long-term debt to net assets ratios. However, other nonfinancial factors must be

considered, such as changes in economic conditions, population growth, regulations, and government

legislation affecting the health care industry.


June 30, 2011 and 2010

3

Significant Transactions

During fiscal year 2011, and in order to fulfill its statutory mission, the Authority substantially increased

its outpatient cancer operations with the acquisition of the Kansas City area business assets and operations

of US Oncology (USON), the manager of Kansas City Cancer Centers, a 27 physician medical oncology

and radiation oncology group (KCCC). The Authority also purchased certain assets from KCCC. The

KCCC physicians became employees of two separate tax-exempt faculty practice foundations and they

also became members of the faculty of the University of Kansas School of Medicine (KUSOM). Through

these arrangements, which were completed on June 20, 2011, the Authority, KUSOM and the tax-exempt

faculty practice foundations all combine as the University of Kansas Cancer Center, and now represent

the Kansas City area's premier cancer care organization.

The University of Kansas Cancer Center now has 51 medical and radiation oncologists, working in 12

locations throughout the Kansas City area. The land and buildings for 4 of the 12 locations were

purchased by the Authority.

A major component of the Affiliation Agreement (See Note 1 for a description of the Affiliation

Agreement) included a commitment by the Authority to develop and construct an $85 million medical

office building (MOB) for lease by the University of Kansas (University) on behalf of Kansas University

Physicians, Inc. (UKP). The Authority, the University and UKP finalized an agreement whereby the

University, on behalf of UKP, will lease 89% of the building for 30 years. These lease payments,

beginning at $3.125 million per year, are split between core rent and operating components each with

their own inflator. The lease commenced on July 18, 2011 when UKP took occupancy. The Authority

assigned the rights to these lease payments in order to secure approximately $55.2 million of financing

through the Kansas Development Finance Authority (KDFA). The University is the sole source of

funding for this financing. The $55.2 million consisted of $49.4 million of project funds, $5.1 million of

capitalized interest funds (in order to pay the interest costs due before the lease commences) and $0.7

million of issuance costs. A long term liability related to these funds was recognized as MOB Lease

Revenue Bonds. The liability will deplete as the assigned lease payments are made by the University,

which correlates to the Authority earning the funds by providing UKP with space in the MOB as well as

certain operating services. This MOB consolidates 9 physician specialty divisions in a 214,000 square

foot, state of the art facility and is supported by a new 600 space parking garage financed and constructed

by the University.


June 30, 2011 and 2010

4

Balance Sheets

A summary of the Authority’s condensed balance sheets is presented in Table A-1.

Table A-1 Condensed Balance Sheets

(in millions of dollars) 2011 2010

June 30 Dollar Dollar

2011 2010 2009 Change Change

Cash and noncurrent investments $ 319.5 $ 300.6 $ 236.6 $ 18.9 $ 64.0

Assets limited as to use by trustee 1.3 36.3 — (35.0) 36.3

Patient accounts receivable, net 103.5 85.1 83.4 18.4 1.7

Capital assets, net 531.2 410.8 387.8 120.4 23.0

Restricted assets 28.1 26.9 24.2 1.2 2.7

Other assets 55.5 25.5 19.9 30.0 5.6

Total assets $ 1,039.1 $ 885.2 $ 751.9 $ 153.9 $ 133.3

Current liabilities $ 122.0 $ 93.1 $ 78.4 $ 28.9 $ 14.7

Short-term debt outstanding 9.1 4.7 4.5 4.4 0.2

MOB lease revenue bonds 55.1 55.1 — — 55.1

Long-term debt outstanding 301.0 237.7 245.2 63.3 (7.5)

Total liabilities 487.2 390.6 328.1 96.6 62.5

Minority interest 1.9 1.4 1.4 0.5 —

Net assets

Invested in capital assets, net of

related debt 212.1 164.2 139.6 47.9 24.6

Restricted 29.4 63.2 24.2 (33.8) 39.0

Unrestricted 308.5 265.8 258.6 42.7 7.2

Total net assets 550.0 493.2 422.4 56.8 70.8

Total liabilities and net assets $ 1,039.1 $ 885.2 $ 751.9 $ 153.9 $ 133.3

As can be seen from the table above, total assets increased $153.9 million to $1,039.1 million at June 30,

2011, from $885.2 million at June 30, 2010. Cash and non-current investments increased $18.9 million

during the period. Assets limited as to use by trustee decreased $35.0 million due to the spending of the

project funds on the MOB construction. Patient accounts receivable, net increased $18.4 million or

21.6%; however, the Authority’s days in net receivables only increased from 40.0 days at June 30, 2010

to 45.0 days at June 30, 2011. Capital assets, net increased $120.4 million driven by net additions of

$144.1 million, less $23.6 million of additional accumulated depreciation. See Note 3 for further details.

Total liabilities in fiscal year 2011 increased $96.6 million to $487.2 million from activity related to the

cancer services acquisition, as well as an increase in current liabilities from significant construction projects.


June 30, 2011 and 2010

5

For fiscal year 2010, total assets increased $133.3 million to $885.2 million, from $751.9 million at

June 30, 2009. Cash and investments increased $64.0 million during the same period. Assets limited as

to use by trustee increased to $36.3 million at June 30, 2010 and consisted of trustee held funds related to

the MOB Lease Revenue Bonds. See Note 5 for further details. Patient accounts receivable, net

increased $1.7 million or 2.0%; however, the Authority’s days in net receivables decreased from 42.2

days at June 30, 2009 to 40.0 days at June 30, 2010. Capital assets, net increased $23.0 million at

June 30, 2010 from June 30, 2009, driven by net additions of $45.9 million, less $22.9 million of

additional accumulated depreciation. See Note 3 for further details.

Total liabilities in fiscal year 2010 increased $62.5 million to $390.6 million primarily from activity

related to the financing transaction related to the MOB. Other current liabilities also increased

significantly, primarily due to MOB construction activity.

Statements of Revenues, Expenses and Changes in Net Assets

While the condensed balance sheets show the change in financial position of net assets, the following

condensed statements of revenues, expenses and changes in net assets provide information regarding the

nature and source of these changes, as summarized in Table A-2 below.

Table A-2 Condensed Statements of Revenues, Expenses

and Changes in Net Assets (in millions of dollars)

2011 2010

June 30 Dollar Dollar

2011 2010 2009 Change Change

Total operating revenues $ 869.2 $ 805.0 $ 750.5 $ 64.2 $ 54.5

Total operating expenses 828.2 753.2 692.9 75.0 60.3

Operating income 41.0 51.8 57.6 (10.8) (5.8)

Investment earnings 19.6 19.4 (4.6) 0.2 24.0

Interest expense (9.6) (9.9) (10.2) 0.3 0.3

Other nonoperating gain (loss), net 2.5 5.8 (0.5) (3.3) 6.3

Excess of revenues over expenses

before contributions 53.5 67.1 42.3 (13.6) 24.8

Capital contributions 3.3 3.7 20.4 (0.4) (16.7)

Changes in net assets 56.8 70.8 62.7 (14.0) 8.1

Net assets, beginning 493.2 422.4 359.7 70.8 62.7

Net assets, ending $ 550.0 $ 493.2 $ 422.4 $ 56.8 $ 70.8

During fiscal year 2011, total operating revenues increased $64.2 million, or 8.0%. Consistent with the

prior year, this revenue growth was primarily due to volume as well as increased intensity of services for

both inpatient and outpatient services. Discharges increased 3.1%, outpatient encounters increased 5.2%

and Case Mix Index (CMI) increased 3.5%. Management attributes this positive trend to the Authority’s

high quality care and patient satisfaction.


June 30, 2011 and 2010

6

Total operating expenses increased $75.0 million or 10% and is attributed to volume increases, inflation,

acquisition activities, physician support, as well as increases in support to the University.

During fiscal year 2010, total operating revenues increased $54.5 million, or 7.3%. This revenue growth

was primarily due to volume as well as increased intensity of services for both inpatient and outpatient

services. Discharges increased 8.1%, outpatient encounters increased 7.2% and Case Mix Index (CMI)

increased 2.2%. This volume increase occurred despite significant declines in hospital volumes in the

overall market, as well as the sale of the outpatient renal dialysis unit as of March 1, 2010.

Nonoperating activity in fiscal year 2011 was slightly less favorable than 2010. Annual investment

performance showed a gain of $19.6 million, representing a 6.3% return, which was $0.2 million more

than the prior year. Interest expense was $0.3 million less in fiscal year 2011 than in year 2010. During

2011 there was a $1.2 million gain recognized due to the partial sale of the Authority’s interest in the

NRA-UKMC, Kansas, LLC from 38.2% to a 25% ownership interest. See Note 1, Nature of Operations,

for further details.

Nonoperating activity in fiscal year 2010 was substantially more favorable than fiscal year 2009. Annual

investment performance showed a gain of $19.4 million, representing a 7.2% return, which was an

improvement of $24.0 million compared to 2009. Interest expense was $0.3 million less in fiscal year

2010 than in year 2009. The sale of the outpatient renal dialysis unit during 2010 resulted in recognition

of a gain of approximately $6 million.

Net assets, ending increased $56.8 million, or 11.5%, to $550.0 million at June 30, 2011. This resulted

from a $53.5 million excess of revenues over expenses before contributions and $3.3 million in capital

contributions attributed to the Authority’s fund-raising program.

Net assets, ending increased $70.8 million, or 16.8%, to $493.2 million at June 30, 2010. This resulted

from a $67.1 million excess of revenues over expenses before contributions and $3.7 million in capital

contributions attributed to the Authority’s fund-raising program.

Table A-3 presents total operating revenue and major expense categories as a percentage of total

operating revenues before bad debts as they would be shown by a nongovernmental hospital for fiscal

years 2011, 2010 and 2009. This pro forma presentation also shows interest as an operating expense,

while governmental entities reflect it as a nonoperating expense.


June 30, 2011 and 2010

7

Table A-3 Combined Expense Ratio Comparison

(Pro Forma – Nongovernmental)

(in millions of dollars)

2011 2010 2009

Total operating revenue, before bad debts

of $54.4, $47.7 and $33.0 in 2011, 2010

and 2009, respectively $ 923.6 $ 852.7 $ 783.5

Expenses as a percent of total operating revenue

Compensation (salary/benefits/contract labor) 41.9% 41.6% 42.4%

Supplies 20.9 21.2 21.5

Other operating expense 22.6 20.9 19.7

Bad debt expense 5.9 5.6 4.2

Depreciation and interest 5.4 5.8 6.2

Total operating expenses 96.7% 95.1% 94.0%

Pro forma operating margin 3.3% 4.9% 6.0%

The compensation ratio continues to be a strong point. This is attributed to economies of scale while

experiencing significant revenue growth. The supply ratio improved during 2011 after having also

improved during 2010. The increase in other operating expenses related partly to increased costs

resulting from the physician services agreements and support for the School of Medicine. In addition, the

Authority’s intergovernmental transfers to the State Medicaid program increased significantly. See

Note 1, Net Patient Service Revenue, for further details. The combined uncompensated care (bad debt

and charity care) costs were relatively stable in both years representing 4.9% of gross revenue in 2010 and

5.0% in 2011. Depreciation and interest both decreased slightly over the prior year due to the increase in

operating revenue.

Table A-4 depicts sources of gross patient revenue by payor category for fiscal years 2011, 2010 and

2009.

Table A-4 Payor Mix

(based on billed charges)

2011 2010 2009

Medicare 31.3% 30.9% 31.9%

Medicaid 10.1 10.6 10.2

Indemnity 5.4 5.4 5.3

Managed care 18.8 18.7 19.7

Private pay 3.6 3.8 3.9

Other 2.4 2.5 2.2

Blue Cross 20.6 20.8 20.4

Medicare/Medicaid HMO 7.8 7.3 6.4

100.0% 100.0% 100.0%


June 30, 2011 and 2010

8

Payor mix has been fairly consistent with the prior years, demonstrating that fiscal years 2010 and 2011

volume growth was spread fairly evenly throughout the payor classifications. There were slight increases

in Medicare and Medicare/Medicaid Managed Care during 2011 from 2010.

Capital Assets

Table A-5 summarizes the capital assets, by asset category, and the related accumulated depreciation.

Table A-5 Capital Assets


2011 2010 2009

Land and land improvements $ 23.7 $ 20.2 $ 20.2

Buildings and fixed equipment 467.2 416.3 400.6

Movable equipment 179.7 157.2 152.4

Gross capital assets in service 670.6 593.7 573.2

Less accumulated depreciation 253.1 229.5 206.6

Net capital assets in service 417.5 364.2 366.6

Construction-in-progress 113.7 46.6 21.2

Net capital assets $ 531.2 $ 410.8 $ 387.8

During 2011, capital assets, net increased $120.4 million driven by net additions of $144.0 million less

$23.6 million of additional accumulated depreciation. This was in large part due to the purchase of four

cancer center sites and equipment related to the KCCC transaction as well as $54.1 million added to CIP

related to continued progress on the MOB and related equipment. Approximately $12.0 million was

spent on the heart center project (see Note 3) and $10.3 million on the electronic medical records project.

During 2010, capital assets, net increased $23.0 million, driven by net additions of $45.9 million less

$22.9 million of additional accumulated depreciation. Major net additions included $5.4 million in nurse

unit renovations, $9.8 million spent on the electronic medical records project and $18.6 million towards

the MOB.


June 30, 2011 and 2010

9

Debt

Table A-6 summarizes outstanding debt at June 30, 2011, 2010 and 2009.

Table A-6 Outstanding Debt at Year-End


June 30

2011 2010 2009

Series 2004 Revenue Bonds $ 56.1 $ 56.9 $ 57.7

Series 2006 Revenue Bonds (net of

premium and refinancing costs) 181.0 184.6 187.9

Long-term financed obligations 0.5 0.9 1.3

Promissory note 22.5 — —

Revolving loan commitment 50.0 — 2.8

Total $ 310.1 $ 242.4 $ 249.7

Over the two-year period, total debt outstanding increased $60.4 million due to new debt of $72.5 million

and decreases of $12.1 million due to principal payments. A $22.5 million promissory note and a $50.0

million draw on the revolving loan commitment were incurred in the fourth quarter. It is anticipated that

the revolving loan commitment will be repaid in FY 2012. See also the discussion of the MOB Lease

Revenue Bonds issued during fiscal year 2010 in Note 5. The Authority’s Standard & Poor’s rating of

A+ was received in September 2011, and a rating of A+ from Fitch IBCA, was received in August 2011.

For further information, refer to Note 4 to the financial statements.

Health Care Reform

During March 2010, President Obama signed into law the Patient Protection and Affordable Care Act

and the Health Care and Education Tax Credits Reconciliation Act of 2010. Together, these two acts will

reform the health care system and will impact payments received by hospitals. Any reductions in hospital

payments may be offset by reductions in hospital bad debts and charity care, as the number of uninsured

Americans is reduced. However, the overall impact of health care reform on the Authority is not

presently determinable.

Contacting the Authority’s Financial Management

If you have questions about this report or need additional financial information, contact the Authority’s

Executive Office at University of Kansas Hospital Authority, 3901 Rainbow Boulevard, Kansas City,

Kansas 66160.

University of Kansas Hospital Authority Balance Sheets

June 30, 2011 and 2010

(In Thousands)

See Notes to Financial Statements

Assets

2011 2010

Current Assets

Cash and cash equivalents $ 72,174 $ 84,188

Assets limited or restricted as to use, current — 5,658

Patient accounts receivable, net of allowance;

2011 - $51,519, 2010 - $44,581 103,489 85,066

Other receivables 1,470 1,025

Inventories 14,779 12,041

Prepaid expenses 6,491 6,070

Total current assets 198,403 194,048

Noncurrent Investments 247,353 216,403

Assets Limited or Restricted as to Use

Held by trustee 1,281 36,213

By donors 60 74

1,341 36,287

Less amount required to meet current obligations — 5,658

Total assets limited or restricted as to use 1,341 30,629

Capital Assets, Net 531,245 410,817

Other Assets

Interest in restricted net assets of endowment association 28,088 26,889

Goodwill and intangibles, net of accumulated amortization;

2011 - $30, 2010 - $0 25,557 —

Long-term investments 5,008 4,225

KDFA lease revenue bond issuance costs 686 679

Deferred financing and bond issue costs,

less accumulated amortization of $338 and $257

in 2011 and 2010, respectively 1,412 1,470

Total other assets 60,751 33,263

Total assets $ 1,039,093 $ 885,160

10

Liabilities and Net Assets

2011 2010

Current Liabilities

Current portion of long-term debt $ 9,125 $ 4,687

Accounts payable 62,310 40,295

Accrued salaries, wages and benefits 44,371 41,305

Estimated amounts due to third-party payors 9,212 5,932

Other 6,097 5,607

Total current liabilities 131,115 97,826

MOB Lease Revenue Bonds 55,082 55,130 —

Long-term Debt

Bonds payable 232,680 237,212

Promissory note 18,287 —

Revolving loan commitment 50,000 —

Long-term financed obligations — 457

Total long-term debt, net of current portion 300,967 237,669

Total liabilities 487,164 390,625

Minority Interest 1,894 1,374

Net Assets

Invested in capital assets, net of related debt 212,058 164,273

Restricted-expendable for

Capital acquisitions and other 29,429 63,176

Unrestricted 308,548 265,712

Total net assets 550,035 493,161

Total liabilities and net assets $ 1,039,093 $ 885,160

University of Kansas Hospital Authority Statements of Revenues, Expenses and Changes in Net Assets

Years Ended June 30, 2011 and 2010

(In Thousands)

See Notes to Financial Statements 11

2011 2010

Operating Revenues

Net patient service revenue, net of provision for uncollectible

accounts; 2011 - $54,406, 2010 - $47,723 $ 839,361 $ 775,266

Other operating revenue 29,845 29,783

Total operating revenues 869,206 805,049

Operating Expenses

Salaries and wages 302,124 279,452

Employee benefits 73,523 66,129

Contract labor 11,204 9,522

Purchased services 111,881 94,052

Supplies 192,211 180,159

Depreciation and amortization 40,520 39,553

Other expenses 96,724 84,372

Total operating expenses 828,187 753,239

Operating Income 41,019 51,810

Nonoperating Gains (Losses)

Investment earnings 19,677 19,417

Interest expense (9,627) (9,938)

Other gains, net 4,144 7,301

Minority interest (1,652) (1,447)

Total nonoperating gains 12,542 15,333

Excess of Revenues Over Expenses

Before Capital Contributions 53,561 67,143

Capital Contributions 3,313 3,669

Increase in Net Assets 56,874 70,812

Net Assets, Beginning of Year 493,161 422,349

Net Assets, End of Year $ 550,035 $ 493,161

University of Kansas Hospital Authority Statements of Cash Flows


(In Thousands)


2011 2010

Operating Activities

Receipts from and on behalf of patients and third-party payors $ 824,218 $ 772,566

Other receipts, net 29,400 30,524

Payments to employees (372,898) (342,095)

Payments to suppliers and contractors (391,005) (363,009)

Net cash provided by operating activities 89,715 97,986

Noncapital Financing Activities

Noncapital grants and contributions 1,207 1,747

Net cash provided by noncapital financing activities 1,207 1,747

Capital and Related Financing Activities

Acquisition and construction of assets (141,171) (57,538)

Capital grants and contributions 2,310 237

Proceeds from sale of capital assets 83 313

Proceeds from sale of outpatient dialysis 1,627 6,327

Proceeds from MOB Lease Revenue Bonds — 54,466

Advances on revolving loan commitment 50,000 —

Principal paid on long-term debt and other obligations (4,687) (7,279)

Interest paid (9,712) (10,036)

Net cash used in capital and related financing activities (101,550) (13,510)

Investing Activities

Purchase of investments (41,081) (81,296)

Proceeds from sale of investments 45,586 18,290

Decrease in minority interest (1,132) (1,473)

Investment earnings 12,713 7,868

Other investment earnings 1,128 —

Cash paid for business combination (18,600) —

Net cash used in investing activities (1,386) (56,611)

Increase (Decrease) in Cash and Cash Equivalents (12,014) 29,612

Cash and Cash Equivalents, Beginning of Year 84,188 54,576

Cash and Cash Equivalents, End of Year $ 72,174 $ 84,188

University of Kansas Hospital Authority Statements of Cash Flows (Continued)


(In Thousands)


2011 2010

Reconciliation of Net Operating Revenues (Expenses) to

Net Cash Provided by Operating Activities

Operating income $ 41,019 $ 51,810

Depreciation and amortization 40,520 39,553

Loss on sale of assets 72 —

Provision for bad debts 54,406 47,723

Changes in operating assets and liabilities

Patient accounts receivable (72,829) (49,433)

Other receivables (445) 741

Inventories (1,817) (162)

Prepaid expenses (90) (1,397)

Accounts payable 22,824 5,425

Accrued salaries, wages and benefits 2,749 3,486

Estimated third-party payor settlements 3,280 (990)

Other assets and liabilities 26 1,230

Net cash provided by operating activities $ 89,715

$ 97,986

Noncash Capital and Related Financing Activities

Capital asset acquisitions included in accounts payable $ 10,507 $ 5,658

Promissory note 22,500 —

Other liability held in escrow 500 —

Noncash Investing Activity

Change in unrealized investment gains $ 6,964 $ 11,771

University of Kansas Hospital Authority Notes to Financial Statements

June 30, 2011 and 2010

14

Note 1: Nature of Operations and Summary of Significant Accounting Policies

The University of Kansas Hospital Authority (the Authority), a public body politic, a corporate and

independent instrumentality, and a component unit of the State of Kansas, was established by the

University of Kansas Hospital Authority Act. The University of Kansas Hospital ceased to

function as an operating division of the University of Kansas (the University), and the Authority

assumed its operation on October 1, 1998. It is the Authority’s mission to deliver world-class

patient care to the people served, and to ensure the excellence of future patient care through

exceptional learning, teaching and research. The University of Kansas Medical Center (KUMC) is

a campus of the University and offers educational programs through its Schools of Medicine,

Nursing and Allied Health. The campus consists of academic units operating alongside the

Authority, which provides opportunities for clinical experience and residency positions. These

financial statements represent transactions and balances of the Authority as of and for the years

ended June 30, 2011 and 2010.

Effective October 1, 1998, the Authority and the University, concurrently, entered into an

Affiliation Agreement, which provides that each will support the mission of the other. The

University and the Authority will cooperate in the provision of graduate medical education, clinical

support, administrative support and medical care of indigent patients. The agreement was renewed

under identical terms in 2003. A new affiliation agreement was signed effective January 1, 2008,

among the Authority, the University and Kansas University Physicians, Inc. (UKP). The agreement

provides that the Authority continue as KUMC’s primary teaching hospital and provides UKP greater

flexibility to respond to patient needs by supporting the faculty practice plan to encourage improved

quality and service.

Nature of Operations

The Authority’s principal activity is the operation of a licensed 620-bed teaching and treatment

facility located on the campus of KUMC in Kansas City, Kansas. As one of the region’s largest

acute care facilities providing tertiary and quaternary care, the Authority offers extensive

specialized service programs, including multidisciplinary service lines of organ transplantation,

cardiology, neurosciences and oncology. Other services include rehabilitation medicine,

emergency services, a burn center, senior care, trauma, diagnostic imaging, and a neonatal

intensive care unit. The Authority’s primary market is comprised of Wyandotte, Leavenworth and

Johnson counties in Kansas and Jackson, Platte and Clay counties in Missouri. In addition, more

than 30% of the Authority’s admissions come from outside the primary service area and originate

from nearly every county in Kansas and many counties in Missouri.

These financial statements include the accounts of the Authority, Jayhawk Primary Care, Inc.

(Jayhawk) and the KU MedWest Ambulatory Surgical Center LLC (the ASC). The Authority

owns 100% of Jayhawk, a blended component unit under Governmental Accounting Standards

Board (GASB) Statement No. 14, The Financial Reporting Entity. Jayhawk owns 100% of Mid-

America Cardiology Associates, Inc. (MAC) and this consolidated group operates under the name

of Medical Administrative Services of KUMed (MASKU). MASKU provides administrative and

billing agency services to the Authority in connection with certain activities of the Authority,


June 30, 2011 and 2010

15

including, but not limited to, managing primary care services in nine clinic locations throughout the

metropolitan area and managing the inpatient and outpatient cardiovascular services in 15 clinic

locations. MASKU represents approximately 0.2% of total assets of the Authority.

The ASC is a joint venture between certain physicians and the Authority. The Authority holds a 51%

ownership in the ASC. The ASC is also included as a blended component unit. The ASC leases and

operates the free-standing ambulatory surgery center previously operated by the Authority. The

accounts of the ASC are consolidated with those of the Authority and MASKU, and the physicians’

portion is shown as minority interest. The ASC represents 1.0% of total revenue and 0.4% of total

assets of the Authority.

On March 1, 2010, the Authority sold certain assets related to outpatient dialysis to RAI Care Centers

of Kansas City, LLC. Upon closing the asset sale, the Authority purchased a 49% interest in RAI Care

Centers of Westwood KS, LLC and a 38.2% interest in NRA-UKMC, Kansas, LLC. Subsequently the

Authority sold certain shares of the NRA-UKMC, Kansas, LLC bringing its ownership percentage to

25.0%. The gain of nearly $1.2 million on the sale was recognized in Other gains, net for the year

ended June 30, 2011. Both LLC’s are outpatient renal dialysis clinics, and are recorded as long term

investments.

All significant intercompany activity of MASKU has been eliminated in consolidation as well as

intercompany activity of the Authority, MASKU and the ASC. Substantially all of the Authority,

MASKU and the ASC’s expenses relate to providing health care services; therefore, the Authority

does not present expense information by functional classification.

UKP is a nonprofit, tax-exempt organization operated to coordinate the provision of professional

medical services by the faculty of the School of Medicine through separate nonprofit, tax-exempt

foundations that employ the physicians who provide the services. While Authority-employed

physicians also have admitting privileges to the Authority, UKP constitutes the vast majority of the

Authority’s medical staff. UKP clinics share a common campus with the Authority, including

several clinics located within Authority space. Certain of the clinics began moving to the newly

constructed Medical Office Building (MOB) and commencing operations there as of July 18, 2011.

See Note 10, Related Party Transactions, for further discussion of UKP and the University.

Principles of Presentation

The Authority follows the principles of fund accounting, in that each entity’s assets, liabilities and

net assets are accounted for with a separate set of self-balancing accounts and follow enterprise

fund reporting; accordingly, the accompanying financial statements are presented using the

economic resources measurement focus and the accrual basis of accounting, wherein revenues are

recognized when earned and expenses recorded when incurred. These principles require the

classification of net assets into three components: invested in capital assets, net of related debt;

restricted; and unrestricted. These classifications are defined as follows:

Invested in capital assets, net of related debt This component of net assets consists of

capital assets, including restricted capital assets, net of accumulated depreciation and reduced

by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are

attributable to the acquisition, construction, or improvement of those assets. If there are


June 30, 2011 and 2010

16

significant unspent related debt proceeds at year-end, the portion of the debt attributable to

the unspent proceeds is not included in the calculation of invested in capital assets, net of

related debt.

Restricted This component of net assets consists of constraints placed on net assets use

through external constraints imposed by contracts, grantors, or contributors.

Unrestricted This component of net assets consists of those funds that do not meet the

definition of restricted or invested in capital assets, net of related debt.

The application of GASB Statement No. 34 also requires the presentation of bad debts as a

reduction from net patient service revenue, interest expense shown as a nonoperating item, and the

presentation of the statements of cash flows utilizing the direct method.

Pursuant to GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds

and Other Governmental Entities That Use Proprietary Fund Accounting, the Authority has elected

to apply the provisions of all relevant pronouncements of the Financial Accounting Standards

Board (the FASB) that do not contradict or conflict with GASB pronouncements, including those

issued after November 30, 1989.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting

principles in the United States requires management to make estimates and assumptions that affect

the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at

the date of the financial statements. Estimates also affect the reported amounts of revenues and

expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Authority considers all highly liquid investments with a maturity of three months or less when

purchased to be cash and cash equivalents. Cash and cash equivalents include money market

mutual funds, which are carried at fair value. Income related to cash equivalents is recorded as

nonoperating revenue.

Noncurrent Investments

Investments in debt and equity securities with readily determinable fair values are measured at fair

value using quoted market prices. Investments in limited partnerships that invest in marketable

securities are reported using the equity method of accounting based on information provided by the

respective partnership. Certain of the partnerships may hold some securities without readily

determinable fair values, and consequently, the partnerships may estimate the fair value for such

securities. These estimates may differ from the values that would have been used had a ready

market existed and may differ from the values at which such investments may be sold. Investment

income or loss (including realized gains and losses, interest, dividends, changes in equity of limited

partnerships, and unrealized gains and losses) is included in investment earnings. Funds are

invested in accordance with certain Board-approved policies, which, among other matters, require


June 30, 2011 and 2010

17

diversification of the investment portfolio, establish credit risk parameters and limit the amount of

investment in any single organization. Substantially all investment transactions are managed by

professional investment managers and are held in custody by financial institutions.

Inventories

Inventories consist primarily of drugs and medical supplies and are stated at cost (determined on

the first-in, first-out method), which is not in excess of market prices.


Assets limited or restricted as to use include investments held by trustee and investments restricted

by donors.

Donor-Restricted Gifts

From time to time, the Authority receives contributions from individuals and private organizations.

Contributions can be restricted for either specific operating or capital purposes. Amounts that are

unrestricted or that are restricted to a specific operating purpose are reported as nonoperating revenue.

Amounts restricted to capital acquisitions are reported after the performance indicator (excess of

revenues over expenses before contributions).

The University of Kansas Endowment Association (KUEA) collects donor-restricted gifts on

behalf of the Authority. These gifts are held at KUEA until the restriction is met, and the funds are

invested in accordance with KUEA policy. The Authority recognizes the increase or decrease in

the amount of assets held with KUEA in the statements of revenues, expenses and changes in net

assets in the same manner as other donated assets. All the funds held by KUEA are classified in

the balance sheets as interest in restricted net assets of endowment association.

When an expense is incurred for which unrestricted and restricted funds are available, it is the

Authority’s policy to apply the restricted funds first, then the unrestricted. Donated funds with

restrictions are available for the following purposes (in thousands):

2011 2010

Buildings and equipment $ 10,675 $ 16,683

Education 1,286 1,212

Health care services 15,038 7,924

General 1,149 1,144

Total $ 28,148 $ 26,963


June 30, 2011 and 2010

18

Capital Assets

Capital assets are stated at cost or, if donated, at fair value at the date of donation. The Authority

capitalizes equipment when the unit acquisition cost is $500 or greater and the estimated useful life

is three years or more. Depreciation on capital assets, excluding construction-in-progress, is

computed over the estimated useful lives of the assets based on the straight-line method.

The general range of estimated useful lives of the assets is 10 to 40 years for buildings and fixed

equipment and three to 20 years for movable equipment. Outlays for construction-in-progress are

capitalized as incurred.

The Authority capitalizes interest on projects financed with a restricted tax-exempt borrowing or

with an estimated cost of more than $10 million and an estimated construction period of more than

one year to complete. Depreciation and amortization expense includes the appropriate amount of

depreciation related to fixed assets that were obtained through capital lease arrangements.

Asset Impairment

The Authority considers whether indicators of impairment are present and performs the necessary

tests to determine if the carrying value of an asset is appropriate. Impairment write-downs, except

for those related to investments, are recognized in operating income at the time the impairment is

identified.

Goodwill and Intangible Assets

Goodwill is amortized on the straight-line basis over the estimated life of 25 years. Intangible

assets are amortized on the straight-line basis over three years. The assets are periodically

evaluated as to the recoverability of their carrying values.

Long-term Investments

The Authority records it investments in RAI Care Centers of Westwood KS, LLC and NRA-

UMKC, Kansas, LLC on the equity method of accounting based on information provided by the

respective entities.

Deferred Financing and Bond Issue Costs

The Authority defers financing expenses incurred in connection with the issuance of its long-term

debt. Such deferrals are amortized over the term of the related indebtedness on a straight-line

basis.


June 30, 2011 and 2010

19

Accrued Salaries, Wages and Benefits

The Authority records a liability for all earned paid time off not taken and related taxes expected to

be paid. Such amounts, as well as salaries, wages, and related benefits for any payroll periods or

portion thereof that are earned but not paid as of the balance sheets date, are included in accrued

salaries, wages and benefits.

Financial Instruments

Financial instruments consist of cash and cash equivalents, patient accounts receivable, noncurrent

investments, current liabilities and long-term debt obligations. The carrying amounts reported in

the balance sheets for cash and cash equivalents, assets whose use is limited, patient accounts

receivable and current liabilities approximate fair value. Management’s estimates of the fair value

of noncurrent investments and assets whose use is limited are included in Note 2 and long-term

debt obligations are described in Note 4.

Net Patient Service Revenue, Net of Provision for Uncollectible Accounts

Net patient service revenue, net of provision for uncollectible accounts, is reported at the estimated

net realizable amounts from patients, third-party payors and others for services rendered and

includes estimated retroactive revenue adjustments due to future audits and reviews as well as a

provision for uncollectible accounts.

Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the

period the related services are rendered, and such amounts are adjusted in future periods as

adjustments become known.

Net patient service revenue is presented net of Medicare, Medicaid, managed care and other third-

party contractual adjustments of $1.7 billion and $1.6 billion for the years ended June 30, 2011 and

2010, respectively.

The table below shows the percent of gross revenue and the percent of receivables from significant

third party payors:

Revenues Receivables

Year Ended June 30 As of June 30

2011 2010 2011 2010

Medicare 31.3% 30.9% 9.8% 9.9%

Medicaid 10.1 10.6 10.8 11.2

Blue Cross 20.6 20.8 13.9 14.2

Medicare: Medicare acute care services are reimbursed based on severity adjusted Diagnosis

Related Group prospective payments. In addition, Medicare pays for Direct Graduate Medical

Education, Indirect Medical Education, Disproportionate Share Hospital payments and Bad Debt

for unpaid Medicare beneficiary coinsurance and deductibles. Medicare outpatient services are


June 30, 2011 and 2010

20

primarily paid based on Ambulatory Payment Classification and Laboratory Fee schedule

prospective payments.

Medicaid: The Kansas Medicaid Program is administered by The Kansas Department of Health

and Environment (KDHE). Kansas Medicaid inpatient acute care services are reimbursed on a

percentage of billed covered charges as stated in the Kansas Medicaid program’s State Plan.

Kansas Medicaid outpatient services are reimbursed based on a fee schedule, with additional

quarterly supplemental payments based on reasonable cost reimbursement. The reimbursement for

inpatient and outpatient services is capped by certain limits established by the Centers for Medicare

and Medicaid Services (CMS) called Upper Payment Limits (UPLs). This UPL is the amount that

Medicare would have paid for those services. The Authority estimated its 2011 and 2010 Medicaid

inpatient UPL based on its internal data, as Kansas Medicaid final information for fiscal 2011 and

2010 is not available at year-end. Although the Kansas Medicaid State Plan provides for an

additional payment to hospitals servicing a disproportionately high indigent patient population, it

limits these payments to no more than .25% of the Federal Disproportionate Share Hospital

allotment for the State of Kansas. Therefore, the Kansas Medicaid Disproportional Share Hospital

payments to the Authority are considered immaterial.

Changes in Estimates / Risks: Laws and regulations governing the Medicare and Medicaid

programs are extremely complex and subject to interpretation. Noncompliance with Medicare and

Medicaid laws and regulations could make the Authority subject to significant regulatory action,

including substantial fines and penalties, as well as exclusion from the Medicare and Medicaid

programs. Although management believes that appropriate provisions have been made for all

known Medicare and Medicaid issues, there is at least a reasonable possibility that recorded

estimates will change by a material amount in the near term and that the Authority may be required

to pay back disallowed payments or may receive additional unrecorded payments. In fiscal 2011,

the Authority’s net patient service revenue increased by approximately $9.8 million, including

amounts totaling $7.6 million for Medicaid and $2.2 million for Medicare and other changes in

estimates related to prior years. The $7.6 million Medicaid net change primarily resulted from

KDHE’s final 2010 UPL calculations. In fiscal 2010, the Authority’s net patient service revenue

increased by approximately $3.5 million, including amounts totaling $2.0 million for Medicaid and

$1.5 million for Medicare and other changes in estimates related to prior years. The $2.0 million

Medicaid net change primarily resulted from KDHE’s final 2009 UPL calculations.

Uncompensated Care: The Authority provides care to patients who meet certain criteria under its

charity care policy without charge or at amounts less than its established rates. Because the

Authority does not pursue collection of amounts determined to qualify as charity care, such

services are not reported as revenue or accounts receivable. The costs and expenses incurred in

providing these services are included in operating expenses. Patients whose accounts were written

off to charity care status had charges, measured at established rates, written off to charity care for

the years ended June 30, 2011 and 2010, of approximately $81.7 million and $73.1 million,

respectively. In addition, the Authority provides a significant amount of uncompensated care to

uninsured and underinsured patients, which is included in the provision for uncollectible

receivables and includes amounts for patients who may have otherwise qualified for charity care

but did not complete applications or were not otherwise identified under the Authority’s charity

policy.


June 30, 2011 and 2010

21

Provision for Doubtful Accounts: The Authority records a provision for uncollectible accounts

as a deduction from net patient service revenue during the period in which collection is considered

doubtful. The provision for uncollectible accounts totaled $54.4 million and $47.7 million for the

years ended June 30, 2011 and 2010, respectively. The provision for uncollectible receivables is

based upon management’s assessment of historical and expected net collections considering

business and economic conditions, trends in health care coverage and other collection indicators.

Periodically throughout the year, management assesses the adequacy of the allowance for

uncollectible receivables based upon historical write-off experience by payor category. The results

of these reviews are then used to make any modifications to the provision for uncollectible

receivables to establish an appropriate allowance for uncollectible receivables. The Authority

follows established guidelines for placing certain past-due patient balances with collection

agencies.

Intergovernmental Transfers to the State of Kansas: The Medicaid program is a shared federal-

state program that is largely operated by the states under federal statutory and regulatory

guidelines. The financing of Medicaid payments is shared between individual states and the

federal government based on the Federal Medical Assistance Percentage, which is set by the United

States Congress. CMS has regulations in place explicitly allowing states to use local sources other

than state general revenues as a source of Medicaid financing.

In 2004, the CMS Secretary confirmed that the Authority is a unit of Kansas state government. As

a unit of state government, the Authority is an example of the local sources that may be used as a

source of Medicaid funding. This funding is commonly in the form of Intergovernmental Agency

Transfers (IGTs).

The Authority’s funding of hospital IGT payments was $9.5 million in 2011 ($7.6 million for hospital

inpatient and $1.9 million for hospital outpatient) and $7.9 million in 2010 ($6.1 million for hospital

inpatient and $1.8 million for hospital outpatient) and such amounts are included in other expenses in

the statements of revenues, expenses and changes in net assets. The Authority also funded an

additional prior year hospital inpatient IGT payment of $2.1 million in FY 2011. In addition, the

Authority received a prior year UPL payment of $6.3 million in FY 2011.

The Authority also provides funding for Medicaid’s Supplemental Medical Education program.

This funding was $4.5 million in 2011 and $2.9 million in 2010. These IGT payments are provided

to qualified licensed professionals employed by or affiliated with the Authority in recognition of

the cost of providing teaching services.

Investment Income

Investment income and changes in the fair value of investments are classified as nonoperating

gains (losses).


June 30, 2011 and 2010

22

Operating Indicator

The Authority’s operating indicator (operating income) includes all unrestricted revenue, gains and

other support, and expenses directly related to the recurring and ongoing health care operations

from the reporting period. The operating indicator excludes investment earnings, interest expense,

contributions, gains (losses) on minority interest and earnings (losses) on Authority activities

deemed by management not to be directly related to providing healthcare services.

Performance Indicator

The Authority’s performance indicator (excess of revenues over expenses before capital

contributions) includes all changes in net assets other than capital contributions.

Reclassifications

Certain balances have been made to the 2010 financial statements to conform to the 2011 financial

statement presentation. These reclassifications had no effect on net earnings.

Note 2: Deposits and Investments

Deposits and investments are classified on the Authority’s balance sheets as cash and cash equivalents,

noncurrent investments and assets limited or restricted as to use. GASB Statement No. 3, Deposits

With Financial Institutions, Investments (Including Repurchase Agreements), and Reverse Repurchase

Agreements, and GASB Statement No. 40, Deposit and Investment Risk Disclosures, govern the

accounting and disclosures related to deposits and investments. GASB Statement No. 40 requires

disclosures related to certain types of risk. The following summarizes the Authority’s policies

regarding those items:

Credit Risk – In accordance with the Authority’s investment policy, the weighted-average quality

of the aggregate fixed income portfolio will be A or better, and 80% of the aggregate fixed income

portfolio will be BBB or better, with a minimum quality of B.

All of the Authority’s money market mutual funds carry AAAm ratings.

Concentration of Credit Risk – The Authority’s investment policy states that, with the exception

of obligations issued or guaranteed as to principal and interest by the U.S. government or its

agencies or instrumentalities, no commitment to a single issuer will exceed 2% of the market value

of the portfolio, and no position in the portfolio will exceed 2% of the issue outstanding.

Custodial Credit Risk – The Authority does not have a policy related to custodial credit risk for

deposits and is not exposed to custodial credit risk in relation to its investments.

Interest Rate Risk – In accordance with the Authority’s investment policy, the weighted-average

maturity of the aggregate fixed income portfolio may not be less than three years nor exceed ten

years.


June 30, 2011 and 2010

23

Foreign Currency Risk – The Authority’s investment policy states that no non-U.S. dollar

denominated funds are permitted. American Depository Receipts of non-U.S. companies may be

permitted by written consent only from the Investment Committee. Canadian securities are

permitted.

In accordance with policies and guidelines adopted by its Board of Directors, the Authority can

invest assets in liquid securities, including short-term cash equivalents, intermediate-term fixed

income securities, and equity securities. As prescribed in the Authority’s outstanding bond

documents, the assets limited or restricted as to use held by trustee may be invested in cash

(insured or otherwise collateralized), direct obligations of federal agencies or those guaranteed by

the United States, senior debt obligations, U.S. dollar denominated deposit accounts, commercial

paper, money market funds, prerefunded municipal obligations and investment agreements and

other forms of investments approved in writing by the bond insurer. Certain of these instruments

are subject to rating requirements and other requirements.

Cash and Cash Equivalents

At June 30, 2011 and 2010, the recorded cash balance of deposits with financial institutions totaled

$30.8 million and $29.0 million, respectively, and the bank balance totaled $32.3 million and $30.2

million, respectively. Of the bank balance, $1.2 million and $2.3 million at June 30, 2011 and

2010, respectively, were insured by federal depository insurance and $31.1 million and $27.9

million, respectively, were uninsured and uncollateralized.

The carrying value of these deposits and investments approximates fair value and was as follows

(in thousands):

June 30

2011 2010

Deposits with financial institutions $ 30,818 $ 29,023

Money market mutual funds 41,356 55,165

Total cash and cash equivalents $ 72,174 $ 84,188


June 30, 2011 and 2010

24

Noncurrent Investments

No position in a single issuer in the portfolio exceeds 2% of the market value of the portfolio, nor

does it exceed 2% of the issue outstanding; therefore, as indicated above, the Authority does not

have a concentration of credit risk. Furthermore, the Authority is not exposed to foreign currency

risk. The composition of the fixed income portfolio and the associated interest rate and credit risk

are summarized by year as follows (dollars in thousands):

Value

Weighted- Average Maturity

Credit Quality

June 30, 2011

Wells Fargo Advantage Adj. Rate Mortgage

Fund $ 12,514 4.71 AAA

Loomis Sayles Investment Grade Bond

Fund 11,268 9.17 BBB

Templeton Global Bond Fund 5,636 3.80 A

Merganser Short Term Bond Fund, LLC 26,524 1.90 AA+

PIMCO Low Duration Fund 13,350 2.70 AA

PIMCO Real Return Fund 10,075 9.20 AA+

PIMCO Total Return Fund 29,805 6.10 AA

Western Asset Intermediate Bond Fund 16,992 2.48 A

Western Asset Limited Duration Bond

Fund 8,466 5.31 BBB

Neuberger Berman High Income Bond

Fund 5,042 6.80 B

Highland Commingled Loan Fund, L.P. 10,433 4.35 CCC+

US Bank Short-term Investment 34,539 1.58 AAA

$ 184,644 4.17

The average credit quality of the Highland Commingled Loan Fund, L.P. was consistently a B-

from July 1, 2010 through May 31, 2011, at which time it fell to a credit quality of CCC+.


June 30, 2011 and 2010

25

Value

Weighted- Average Maturity

Credit Quality

June 30, 2010

Wells Fargo Advantage Adj. Rate Mortgage

Fund $ 12,173 5.37 AAA

Loomis Sayles Investment Grade Bond

Fund 10,128 9.76 A

Templeton Global Bond Fund 4,946 5.20 A

Merganser Short Term Bond Fund, LLC 25,810 1.91 AA+

PIMCO Low Duration Fund 12,693 2.93 AA

PIMCO Real Return Fund 9,338 10.56 AAA

PIMCO Total Return Fund 28,135 7.91 AA

Western Asset Limited Duration Bond Fund 16,143 3.40 AA

Western Asset Intermediate Bond Fund 7,947 5.87 AA

Highland Commingled Loan Fund, L.P. 8,760 3.29 B-

US Bank Short-term Investment 30,225 0.89 AAA-

$ 166,298 4.54

Noncurrent investments are summarized as follows (in thousands):

June 30

2011 2010

Cash and cash equivalents $ 14 $ 6,250

Short-term fixed income funds 103,905 90,934

Limited partnerships – equity method of accounting 10,433 8,760

Intermediate fixed income funds 65,250 60,354

High yield bond fund 5,042 —

Mixed asset fund 35,320 31,119

Commodity fund 1,638 1,216

Equity securities 25,751 17,770

$ 247,353 $ 216,403

The Authority has valued the Highland Commingled Loan Fund, L.P. based on the most recent

valuation of this fund, which was as of May 31, 2011. All remaining investments are valued as of

June 30, 2011.

As part of the affiliation agreement, the Board has designated $1.0 million of noncurrent

investments to be used toward providing grants to the University for National Cancer Institute

designation efforts.


June 30, 2011 and 2010

26

Approximately $26.5 million in 2011 and $25.8 million in 2010 of the short-term fixed income

funds are invested in the Merganser Short Term Bond Fund, LLC, which is exempt from SEC

Section 4(2) and Regulation D. Shares in the fund are recorded at estimated fund value.


Assets held by the trustee are summarized as follows (in thousands):

June 30

2011 2010

Fixed income securities $ 1,281 $ 36,213

Investment earnings for cash and cash equivalents, noncurrent investments, and assets limited as to

use consist of the following for the years ended June 30 (in thousands):

2011 2010

Interest and dividend income $ 12,058 $ 7,771

Net realized gains (losses) 655 (126)

Net change in unrealized gains 6,964 11,772

Total investment earnings (losses) $ 19,677 $ 19,417

Note 3: Capital Assets

A rollforward of capital assets by component is as follows (in thousands):

Balance at June 30,

2010 Additions Transfers Sales or

Dispositions

Balance at June 30,

2011

Land $ 17,377 $ 3,523 $ — $ — $ 20,900

Land improvements 2,778 — 17 — 2,795

Buildings and fixed equipment 416,352 30,033 22,553 (1,689) 467,249

Movable equipment 157,154 22,854 15,078 (15,318) 179,768

Construction-in-progress 46,614 104,688 (37,648) — 113,654

Totals at historical cost 640,275 161,098 — (17,007) 784,366

Less accumulated depreciation for

Land improvements (1,242) (179) — — (1,421)

Buildings and fixed equipment (143,205) (22,401) (541) 1,663 (164,484)

Movable equipment (85,011) (17,123) 541 14,377 (87,216)

Total accumulated depreciation (229,458) (39,703) — 16,040 (253,121)

Capital assets, net $ 410,817 $ 121,395 $ — $ (967) $ 531,245


June 30, 2011 and 2010

27

Balance at June 30,

2009 Additions Transfers Sales or

Dispositions

Balance at June 30,

2010

Land $ 17,377 $ — $ — $ — $ 17,377

Land improvements 2,778 — — — 2,778

Buildings and fixed equipment 400,640 2,613 16,372 (3,273) 416,352

Movable equipment 152,421 14,117 4,679 (14,063) 157,154

Construction-in-progress 21,199 46,466 (21,051) — 46,614

Totals at historical cost 594,415 63,196 — (17,336) 640,275

Less accumulated depreciation for

Land improvements (1,064) (178) — — (1,242)

Buildings and fixed equipment (124,751) (21,625) — 3,171 (143,205)

Movable equipment (80,814) (17,074) — 12,877 (85,011)

Total accumulated depreciation (206,629) (38,877) — 16,048 (229,458)

Capital assets, net $ 387,786 $ 24,319 $ — $ (1,288) $ 410,817

Construction-in-progress includes projects related to the construction, refurbishment and

replacement of facilities. The heart center project is a vertical expansion to the existing patient

tower. The expansion is expected to add an additional 84 acute care and ICU beds. Expenditures

on the heart center project were approximately $12.0 million through June 30, 2011 with another

$51.5 million estimated until completion.

Note 4: Long-Term Debt Obligations

During December 2006, the Authority issued tax-exempt Health Facilities Refunding and

Improvement Revenue Bonds (the Series 2006 Bonds). The Series 2006 Bonds were issued in the

aggregate principal amount of $194.6 million. The proceeds, together with certain other available

funds of the Authority, were used to pay or reimburse the Authority the costs of a project consisting of

the construction, renovation and equipping of facilities of the Authority; defease the Series 1999A and

Series 2002 Bonds and pay expenses incurred in connection with the issuance of the bonds.

Simultaneous with the issuance of the Series 1999A Bonds, the Authority and Jayhawk entered into

a Master Trust Indenture with UMB Bank, N.A., Kansas City, Missouri, as trustee. The Master

Trust Indenture provided for the creation of a group of entities (the Obligated Group, consisting of

the Authority and Jayhawk), the members of which agree to be jointly and severally obligated for

the payment of debt service on all obligations issued thereunder. With the issuance of the Series

2002 Bonds, the Supplemental Master Trust Indenture No. 2 was issued modifying the Obligated

Group to further include MAC and MATCS. Supplemental Master Trust Indenture No. 3 was

issued to be inclusive of the Series 2004 Bonds. With the issuance of the Series 2006 Bonds and


June 30, 2011 and 2010

28

Supplemental Master Trust Indenture No. 4, the Authority, Jayhawk and MAC became the only

members of the Obligated Group.

The legal defeasance of the Series 1999A Bonds required funds of $53.7 million, which came from

bond funds of $43.3 million, Authority equity of $6.3 million and debt service reserve funds of $4.1

million. The loss on refunding was $3.7 million and is being amortized as a component of interest

expense through the year 2029 in compliance with GASB Statement No. 23, Accounting and

Financial Reporting for Refundings of Debt Reported by Proprietary Activities. The legal defeasance

of the Series 2002 Bonds required funds of $55.4 million, which came from bond funds of $47.4

million, Authority equity of $3.5 million and debt service reserve funds of $4.5 million. The loss on

refunding was $3.9 million and is being amortized as a component of interest expense through the year

2033. This advance refunding reduced the Authority’s total debt service payments over the 26-year

period by $9.9 million and resulted in an economic gain (difference between the present values of the

old and new debt service payments) of $6.0 million. As part of the issuance of the bonds, there was an

unamortized premium of $4.8 million and $5.3 million as of June 30, 2011 and 2010, respectively.

The Series 1999A bonds were called; however, the Series 2002 bonds are not callable until 2012.

Accordingly, the Series 2002 bonds, aggregating $48.5 million and $49.3 million at June 30, 2011 and

2010, respectively, remain outstanding, but are excluded from the Authority’s balance sheets.

There are several conditions and covenants as required by the Master Bond Indenture, Master

Trust Indenture, Supplemental Master Trust Indenture No. 3, Supplemental Master Trust Indenture

No. 4 and Reimbursement Agreement with which the Obligated Group must comply, including a

covenant requiring a minimum debt service coverage ratio, and limitations on liens or security

interests in property, except for certain permitted encumbrances. The legal defeasance of the Series

1999A Bonds and Series 2002 Bonds resulted in the elimination of the need for a balance to be

held in the debt service reserve funds.

During November 2004, the Authority issued tax-exempt Variable Rate Demand Health Facilities

Revenue Bonds (the Series 2004 Bonds). The Series 2004 Bonds were issued in the aggregate

principal amount of $60 million with the initial advance of $50 million issued in fiscal year 2005

and a supplemental advance of $10 million issued in fiscal year 2006. The Series 2004 Bonds are

and will continue to be remarketed daily as per the Remarketing Agreement signed with Piper

Jaffray & Co. and bear interest at daily rates.

Payments will be made from funds drawn under an irrevocable direct-pay letter of credit issued

by US Bank National Association. The letter of credit covers the principal amount of the Series

2004 Bonds and up to 35 days accrued interest calculated at an assumed maximum interest rate

of 12% per annum, equaling $56.7 million and $57.6 million in 2011 and 2010, respectively. In

addition, the letter of credit agreement provides loans to the Authority in the amount necessary to

purchase a portion of the variable rate demand revenue bonds if not remarketed. The agreements have

a fee rate of 0.85% per annum and expiration and repayment dates beyond June 30, 2012. There is a

day’s cash on hand and minimum debt service coverage ratio required by the Reimbursement

Agreement.


June 30, 2011 and 2010

29

The Authority entered into a $50 million revolving loan commitment in February 2011 to be used

for working capital needs and general business purposes. At June 30, 2011, $50 million had been

drawn upon it. See further discussion regarding the use of the funds in Note 11.

The Authority entered into a five year, 3.25% promissory note totaling $22.5 million.

A summary of long-term debt and capital lease obligations at June 30 is as follows (in thousands):

2011 2010

Health Facilities Refunding and Improvement Revenue Bonds,

Series 2006, tax-exempt fixed rate term, payable at various

dates through 2037. Interest rate was 5.0% for fiscal years

2011 and 2010. $ 181,610 $ 185,060

Variable Rate Demand Health Facilities Revenue Bonds, Series

2004, tax-exempt variable rate term, payable at various dates

through 2035. Interest rates ranged from 0.05% to 0.33%

during fiscal year 2011 and 0.36% to 0.8% during fiscal year

2010 with debt service calculations assuming a 3.0% rate for

fiscal years 2011 and 2010. 56,100 56,900

Revolving loan commitment, interest payable monthly at 3

month LIBOR (0.25% at June 30, 2011) plus a margin of

.75%, due February 24, 2013. 50,000 —

Promissory note, principal and interest of $406,800 payable

monthly, interest at 3.25%, due July 15, 2016. 22,500 —

Capital lease in annual or monthly installments through 2012.

Interest rate of 4.6% at June 30, 2011 and 2010. 457 894

Subtotal 310,667 242,854

Less current portion of long-term debt 9,125 4,687

Less unamortized bond discounts/premium/loss on refunding 575 498

Total long-term debt, net of current portion $ 300,967 $ 237,669


June 30, 2011 and 2010

30

Scheduled principal repayments on long-term debt are as follows as of June 30, 2011 (in thousands):

Year Ending June 30 Totals Note

Revolving Loan

Commitment Series 2006

Bonds Series 2004

Bonds

Long-Term Financed

Obligations

2012 $ 9,125 $ 4,213 $ — $ 3,555 $ 900 $ 457

2013 59,502 4,352 50,000 3,550 1,600 —

2014 9,884 4,494 — 3,690 1,700 —

2015 10,284 4,644 — 3,940 1,700 —

2016 10,697 4,797 — 4,100 1,800 —

2017–2021 33,900 — — 24,200 9,700 —

2022–2026 42,620 — — 30,920 11,700 —

2027–2031 53,300 — — 39,400 13,900 —

2032–2036 66,155 — — 53,055 13,100 —

2037 15,200 — — 15,200 — —

$ 310,667 $ 22,500 $ 50,000 $ 181,610 $ 56,100 $ 457

Scheduled interest payments on long-term debt are as follows as of June 30, 2011 (in thousands):

Year Ending June 30 Totals Note

Revolving Loan

Commitment Series 2006

Bonds Series 2004

Bonds

Long-Term Financed

Obligations

2012 $ 11,606 $ 669 $ 525 $ 8,738 $ 1,663 $ 11

2013 11,055 530 344 8,561 1,620 —

2014 10,336 386 — 8,380 1,570 —

2015 9,946 238 — 8,189 1,519 —

2016 9,538 85 — 7,988 1,465 —

2017–2021 43,002 — — 36,522 6,480 —

2022–2026 34,533 — — 29,673 4,860 —

2027–2031 24,147 — — 21,209 2,938 —

2032–2036 11,639 — — 10,932 707 —

2037 380 — — 380 — —

$ 166,182 $ 1,908 $ 869 $ 140,572 $ 22,822 $ 11


June 30, 2011 and 2010

31

A rollforward of long-term debt, including the current portion, by component is as follows (in

thousands):

Totals Note

Revolving Loan

Commitment

Series 2006

Bonds

Series 2004

Bonds

Long-Term Financed

Obligations

Balance at

June 30, 2009 $ 250,133 $ — $ 2,807 $ 188,315 $ 57,700 $ 1,311

Retirements (2,807) — (2,807) — — —

Maturities (4,472) — — (3,255) (800) (417)

Balance at

June 30, 2010 242,854 — — 185,060 56,900 894

Additions 72,500 22,500 50,000 — — —

Maturities (4,687) — — (3,450) (800) (437)

Balance at

June 30, 2011 $ 310,667 $ 22,500 $ 50,000 $ 181,610 $ 56,100 $ 457

As of June 30, 2011 and 2010, the fair value of the Authority’s long-term debt was $311.0 million

and $243.5 million, respectively, based upon quoted market prices for the same or similar issues.

The uncapitalized portion of interest cost incurred was $9.6 million and $9.9 million for 2011 and

2010, respectively. The Authority capitalized interest related to certain projects being constructed

in the amount of $2.6 million and $1.4 million for 2011 and 2010, respectively. The increase in

2011 is due to the costs capitalized for the MOB.

Note 5: Medical Office Building Lease Revenue Bonds

A major component of the affiliation agreement between the Authority and University included a

commitment by the Authority to develop and construct an $85 million medical office building for

lease by the University on behalf of UKP. During fiscal year 2010, the Authority, University and

UKP entered into an agreement whereby the University, on behalf of UKP, will lease 89% of the

building for 30 years. These University lease payments, beginning at $3.125 million per year, are

split between core rent and operating components each with their own inflator. The lease

commenced on July 18, 2011 when UKP took occupancy. The Authority assigned the rights to the

University lease payments to provide for approximately $55.2 million of bonds financed through

the Kansas Development Finance Authority (KDFA). The $55.2 million consisted of $49.4 million

of project funds, $5.1 million of capitalized interest funds (in order to pay the interest costs due

before the lease commences), and $0.7 million of issuance costs.


June 30, 2011 and 2010

32

The MOB lease revenue bonds are considered non-recourse to the Authority and the sole source of

payment for the bonds are the University lease payments which have been assigned by the

Authority. There are other provisions to liquidate the bonds should either the lease or the

Affiliation Agreement terminate. A long term liability related to these funds was recognized as

MOB lease revenue bonds which will deplete as the assigned lease payments are made by the

University. These MOB lease revenue bonds and the associated debt service are not included in

the Authority’s debt ratios.

Note 6: Commitments

The Authority leases various facilities and equipment under operating leases. Total rental expense,

which includes provisions for maintenance in some cases, for all operating leases was approximately

$12.0 million and $11.2 million in 2011 and 2010, respectively.

The following is a schedule of future minimum lease payments under operating leases as of

June 30, 2011, that have initial or remaining lease terms in excess of one year (in thousands):

Year Ending June 30 Lease

Payments

2012 $ 4,717 2013 3,243 2014 3,048 2015 2,811 2016 2,550 2017–2021 7,053

Total $ 23,422

Note 10 discloses certain commitments included in the Affiliation Agreement.

Note 7: Income Taxes

The Authority has received a private letter ruling from the Internal Revenue Service holding that it

is exempt from federal income taxes on related income as an integral part of the State of Kansas

and is a ―governmental unit‖ as described in Section 170(b)(1)(A)(v) of the Internal Revenue Code

(the Code).

The Authority has not been required to file a return related to unrelated business income and thus

there is not a statute of limitations.


June 30, 2011 and 2010

33

Note 8: Retirement Plans

Kansas Public Employees Retirement System Plan

The Kansas Public Employees Retirement System Plan is an umbrella organization administering

the following three statewide retirement systems under one plan as provided by K.S.A. 74, Article

49: Kansas Public Employees Retirement System (KPERS), Kansas Police and Fire Retirement

System, and Kansas Retirement System for Judges. Employees of the Authority who were

participants in KPERS prior to their transfer to the Authority effective October 1, 1998, continue to

participate in KPERS. In addition, certain non-director-level employees hired after that date were

required to participate in KPERS after one year of service. As of January 1, 2004, employees who

were hired between October 1, 1998 and December 31, 2003, were given a choice between

continuing their participation in KPERS or participating in the University of Kansas Hospital

Retirement Savings Plan (the Savings Plan). Employees hired after December 31, 2003, will

generally participate in the Savings Plan.

The KPERS plan is a cost-sharing, multiemployer, defined benefit plan. KPERS is intended to be a

qualified retirement plan under Section 401(a) of the Code. Information relating to KPERS,

including stand-alone financial statements, is available by writing to KPERS, 611 South Kansas

Avenue, Suite 100, Topeka, Kansas 66603-3869 or accessing the internet at www.KPERS.org.

KPERS members may retire at age 65, at age 62 with ten years of service credit, or at any age

when a member’s combined age and years of service equal 85. KPERS members with ten or more

years of service credit may retire as early as age 55 with an actuarially reduced monthly benefit.

Benefits are based on credited service, final average salary and a statutory multiplier.

The law governing KPERS requires an actuary to make an annual valuation of the liabilities and

reserves and a determination of the contributions required to discharge the KPERS liabilities. The

actuary then recommends to the KPERS’ Board of Trustees the state wide employer-contribution

rates required to maintain the three systems on the actuarial reserve basis. The employer

contribution rate to KPERS was 6.74% for the period from January 1, 2011 through June 30, 2011,

6.14% for the period from January 1, 2010 through December 31, 2010, 5.54% for the period from

January 1, 2009 through December 31, 2009, and 4.93% for the period from July 1, 2008 through

December 31, 2008. Employee contributions are also made on a federal pretax basis at the

statutory rate of 4.0%. Employer contributions made and expensed during the years ended June 30,

2011, 2010 and 2009, were approximately $3.4 million, $3.2 million and $3.0 million, respectively.

Combined employer and employee funding for the years ended June 30, 2011, 2010 and 2009, was

$5.5 million, $5.4 million and $5.2 million, respectively.


June 30, 2011 and 2010

34

Savings Plan

Effective October 1, 1998, the Authority established the University of Kansas Hospital Defined

Contribution Plan (the Defined Contribution Plan) under Section 401(a) of the Code. Eligibility for

the Defined Contribution Plan was initially limited to certain designated employees, including (1)

employees who transferred to the Authority on October 1, 1998, and were participants in (or in a

waiting period for) the 403(b) mandatory retirement plan maintained by the Kansas Board of

Regents and (2) senior executives, directors, practicing physicians, and designated information

services employees of the Authority. Effective January 1, 2004, the Defined Contribution Plan was

amended and restated as the Savings Plan. The Savings Plan is available to all new employees, as

well as those who made the one-time irrevocable election to participate in the Savings Plan in lieu

of the KPERS plan.

Participants in the Savings Plan who are at the director level or above are required to contribute

5.5% of their compensation to the Savings Plan on a pretax basis. The Authority then makes a

mandatory employer contribution equal to 8.5% of each participant’s compensation to the Savings

Plan.

Participants who are not director-level or above are required to contribute 4% of their salary

(increases to 5.5% after 20 years of service) to this plan. The Authority will contribute a

percentage of the participant’s pay as shown in the following table, based on years of service or

status.

Years of Service Contribution Percentage

Less than 5 3.0% 5 to 9 4.0 10 to 14 5.0 15 to 19 6.0 20 or more 8.5 Director and above 8.5

Contributions during the years ended June 30, 2011 and 2010, from the Authority were approximately

$7.5 million and $6.7 million, respectively, and from the participants were $7.2 million and $6.5

million, respectively. The Authority has the right at any time and without the consent of any party

to terminate the Savings Plan in its entirety. Additionally, the Authority has the right to change the

provisions of the Savings Plan, including the contribution requirements.


June 30, 2011 and 2010

35

Participants will vest in the Authority’s contributions based on years of service as set forth below.

Years of Service

Vested Percentage in Authority

Contributions and

Investment Returns

Less than 3 0%

3 25

4 50

5 75

6 or more 100

Physicians Retirement Plan

The Authority makes a mandatory employer contribution of 25% of the participant’s annual

compensation up to a threshold of $49,000 for certain physicians.

Contributions during the years ended June 30, 2011 and 2010, from the Authority were $1.4 million

and $1.8 million, respectively.

Voluntary Savings Plan

The University of Kansas Hospital Voluntary Retirement Savings Plan (the Voluntary Savings

Plan) was established under Code Section 457(b). The Voluntary Savings Plan allows employees

classified as 0.5 FTE or greater to contribute a portion of their compensation to the Voluntary

Savings Plan on a pretax basis, up to a maximum of the lesser of a threshold of $16,500 or 100% of

the participant’s gross compensation.

Employees of the Authority are eligible to participate in the Voluntary Savings Plan without regard

to whether they are eligible to participate in KPERS or the Savings Plan.

Note 9: Insurance

The Authority is exposed to various risks of loss related to torts; theft of, damage to and destruction

of assets; errors and omissions; natural disasters; as well as from employees’ workers’

compensation, general and professional liability and employee health care.


June 30, 2011 and 2010

36

The Authority purchases commercial insurance for risks of loss related to torts; theft of, damage to,

and destruction of assets and errors and omissions, with varying deductibles. The Authority

continues to maintain such insurance coverage, and settled claims have not exceeded the

commercial coverage, after deductibles were met, in the past three years.

As of October 1, 2003, the Authority’s coverage related to workers’ compensation changed to

include a provision for a deductible of $275,000 per incident and $275,000 for each employee for

an occupational disease to be paid by the Authority. The insurer pays claims in excess of the

$275,000 limit. The Authority records a liability for the estimated amount of claims and related

expenses that have been incurred, but not reported or paid, as of the balance sheet date based upon

an actuarial analysis. Changes in the Authority’s workers’ compensation undiscounted claims

liability in fiscal 2011 and 2010 are summarized below and are included in other accrued liabilities

in the balance sheets (in thousands):

2011 2010

Balance at beginning of year $ 1,024 $ 1,072

Incurred related to

Current year 1,388 1,000

Prior years 262 (383)

Total incurred 1,650 617

Paid related to

Current year 673 424

Prior years 617 241

Total paid 1,290 665

Balance at end of year $ 1,384 $ 1,024

Through September 30, 1998, the University of Kansas Hospital was insured under a claims-made

policy with respect to institutional professional liability, with limits of $1 million per incident and

an aggregate annual liability of $3 million in each policy year.

Effective October 1, 1998, the Authority purchased commercial general and professional liability

insurance covering the Authority, its employed physicians and owned subsidiaries. General liability

coverage is an occurrence-based policy with limits of $1 million each occurrence and $3 million on

an annual aggregate basis. Professional liability coverage is extended on a claims-made basis with

limits of $1 million per medical incident and $3 million annual aggregate. A $50,000 deductible

per occurrence applies to all claims made subsequent to October 1, 2002 through September 30, 2005.

A $100,000 deductible per occurrence applies to all claims made subsequent to September 30, 2005.

The Authority records a liability for the estimated amount of claims that have been incurred, but

not reported or paid, as of the balance sheet date based upon an actuarial analysis. The Authority,

its employed physicians and subsidiaries participate in the Health Care Stabilization Fund as required

by Kansas statutes. The first layer of coverage ($200,000 per claim and $600,000 aggregate) is

through the primary insurer and the second layer of coverage ($800,000 per claim and $2,400,000

aggregate) is through the Health Care Stabilization Fund. Umbrella liability limits of $20 million

each occurrence and $20 million annual aggregate are also carried above each of these coverages.


June 30, 2011 and 2010

37

Changes in the Authority’s portion of the undiscounted liability for general/professional claims in

fiscal 2011 and 2010 are as follows and are included in other accrued liabilities in the balance

sheets (in thousands):

2011 2010


Incurred related to

Current year 509 628

Prior years (455) (337)

Total incurred 54 291

Paid related to

Prior years 69 347

Total paid 69 347


Due to the liquidation of the Authority’s previous insurance carrier for umbrella coverage and the

statutory limits of both Kansas and Missouri guaranty funds, the Authority is at risk for general/

professional claims in excess of $1,100,000 (excluding attorney fees) brought in Kansas and made

between November 1, 2000 and October 1, 2001 (policy period of umbrella coverage). The Authority

performs a quarterly review of claims with insurers, loss control, Authority administration, and risk

management and is not aware of any claim reasonably expected to exceed the limits described above.

The Authority maintains insurance related to healthcare claims of its employees. This agreement

provides that as of January, 1, 2011 the Authority retains risk for $300,000 per employee ($200,000

per employee previously). Before January 1, 2011 this was limited by an aggregate based on the

number of employees covered, however the aggregate limit was dropped as of that date. The Authority

records a liability for the estimated amount of claims that have been incurred, but not reported or paid,

as of the balance sheet date. Changes in the Authority’s portion of the liability for accrued healthcare

claims in fiscal 2011 and 2010 are summarized below and are included in accrued salaries, wages, and

benefits in the balance sheets (in thousands):

2011 2010


Incurred related to


Prior years 349 (422)

Total incurred 34,659 31,935

Paid related to


Prior years 7,720 7,179

Total paid 33,404 32,165



June 30, 2011 and 2010

38

In the event claims-made policies are not renewed or replaced with equivalent insurance coverage,

claims based on occurrences during their term, but reported subsequently, will be uninsured.

Management is currently not aware of any incidents that would result in losses that would have a

material adverse impact on the accompanying financial statements.

Note 10: Related-Party Transactions

During the years ended June 30, 2011 and 2010, the Authority incurred expenses of approximately

$5.9 million and $5.7 million, respectively, related to the contract services provided by the

University. An additional $28.0 million and $22.2 million in Authority expenses were in direct

support to the School of Medicine for the years ended June 30, 2011 and 2010, respectively. The

Authority also expensed $61.3 million and $50.3 million, respectively, and recorded revenue of

$20.0 million and $20.1 million, respectively, related to contracted services from UKP and its

affiliated physicians for the years ended June 30, 2011 and 2010. As part of the affiliation

agreement, the Authority also provided additional support to UKP in the amount of $18.6 million

and $14.0 million for the years ended June 30, 2011 and 2010, respectively. At June 30, 2011

and 2010, the Authority had a net payable to the University of $1.5 million and $0.9 million,

respectively.

The Authority has an agreement with the Kansas Board of Regents to lease the real estate where

the Authority’s facilities were built. The real estate on which these buildings are located is owned

by the Kansas Board of Regents. The Authority owns the buildings that comprise the 620-bed

teaching and treatment facility, radiation oncology facility, an MOB, and a utility plant. The

Authority has a lease agreement to lease the real estate for a period of 99 years at an annual rate of

$1.00. The Authority and the University lease certain space to each other under various

agreements without compensation.

Note 11: Business Combination

On June 20, 2011, the Authority purchased the Kansas City area business assets and operations of

US Oncology (USON), certain assets from Kansas City Cancer Centers (KCCC), and assumed

certain liabilities of both USON and KCCC. KCCC is a ten location physician group in the Kansas

City area who provided cancer treatment and research to patients and USON had managed the

operations of the ten clinics in the Kansas City area. The results of these operations have been

included in the financial statements since that date. The Kansas City area assets purchased from

USON and KCCC include equipment of approximately $15 million, inventories, supplies, prepaid

expenses, intangibles and goodwill, and in the aggregate, these USON and KCCC assets total

approximately $41 million. The intangible assets were assigned a useful life of three years and the

goodwill was assigned a useful life of 25 years.

As a result of this transaction with USON and KCCC, the Authority in conjunction with the

University of Kansas School of Medicine and the faculty practice plan and two of its foundations,

manages and operates all ten of the outpatient locations as the University of Kansas Cancer Center.


June 30, 2011 and 2010

39

Note 12: Acquired Intangible Assets and Goodwill

The carrying basis and accumulated amortization of recognized intangible assets at June 30, 2011

was (in thousands):

2011

Gross Carrying Amount

Accumulated Amortization

Amortized intangible assets

Goodwill $ 25,182 $ 30

Other 405 —

$ 25,587 $ 30

Amortization expense totaling $30 and $0 was recorded for the years ended June 30, 2011 and

2010, respectively. Estimated amortization expense for each of the following five years is (in

thousands):

2012 $ 1,142

2013 1,142

2014 1,142

2015 1,007

2016 1,007

Note 13: Litigation

The Authority has been named as the defendant in a number of lawsuits regarding matters

generally incidental to business. The final outcome of any of these lawsuits cannot be determined

at this time. However, management is of the opinion that any ultimate liability to which the

Authority may be exposed will not have a material effect on the Authority’s financial position.

Note 14: Collective Bargaining Units

The Kansas University Nurses Association and Public Service Employees Local Union 1290 P.E.

represent approximately 31.9% of the Authority’s employees. The Authority negotiates directly

with these collective bargaining units. Current collective bargaining agreements were renewed

during fiscal year 2010 and expire in 2013. Management views its relationship with its employees

and their respective collective bargaining units as satisfactory.


June 30, 2011 and 2010

40

Note 15: Current Economic Conditions

The current protracted economic decline continues to present health systems with difficult

circumstances and challenges, which in some cases have resulted in large and unanticipated

declines in the fair value of investments and other assets, large declines in contributions,

constraints on liquidity and difficulty obtaining financing. The financial statements have been

prepared using values and information currently available to the Authority.

Current economic and financial market conditions, including the rising unemployment rate, have

made it difficult for certain of the Authority’s patients to pay for services rendered. As employers

make adjustments to health insurance plans or more patients become unemployed, services

provided to self-pay and other payers may significantly impact net patient service revenue, which

could have an adverse impact on the Authority’s future operating results. Further, the effect of

economic conditions on the state of Kansas may have an adverse effect on cash flows related to the

Medicaid programs.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in

the financial statements could change rapidly, resulting in material future adjustments in

investment values and allowances for accounts receivable that could negatively impact the

Authority.

Note 16: Subsequent Events

Subsequent to June 30, 2011, the Authority is in the process of securing financing of $125 million

through the Kansas Development Finance Authority to fund certain facilities and equipment. The

planned financing will be a combination of fixed and variable rate debt that is estimated to be split

between $100 million fixed and $25 million variable.

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