C ONSOLIDATED F INANCIAL S TATEMENTS
BJC HealthCare
Years Ended December 31, 2013 and 2012
With Report of Independent Auditors
Ernst & Young LLP
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BJC HealthCare
Consolidated Financial Statements
Years Ended December 31, 2013 and 2012
Contents
Report of Independent Auditors.......................................................................................................1
Consolidated Financial Statements
Consolidated Balance Sheets ...........................................................................................................3
Consolidated Statements of Operations and Changes in Net Assets ...............................................4
Consolidated Statements of Cash Flows ..........................................................................................5
Notes to Consolidated Financial Statements ....................................................................................6
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Report of Independent Auditors
The Board of Directors
BJC HealthCare
We have audited the accompanying consolidated financial statements of BJC HealthCare, which
comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related
consolidated statements of operations and changes in net assets and cash flows for the years then
ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements
in conformity with U.S. generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free of material misstatement, whether due to fraud
or error.
Auditor’s Responsibility
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. 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 involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
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Young Global Limited
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1310-1145965
2
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of BJC HealthCare at December 31, 2013 and 2012, and the
consolidated results of its operations, changes in net assets and its cash flows for the years then
ended, in conformity with U.S. generally accepted accounting principles.
ey
February 25, 2014
A member firm of Ernst & Young Global Limited
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BJC HealthCare
Consolidated Balance Sheets
(Dollars in Millions)
December 31
2013 2012
Assets
Current assets:
Cash and cash equivalents
$ 99.6
$ 88.2
Accounts receivable:
Patients (less allowances for uncollectible
accounts – $67.2 in 2013 and $43.0 in 2012)
549.8
566.1
Other
28.6
28.6
Other current assets
212.8
144.7
Total current assets
890.8
827.6
Investments
4,702.1
3,935.6
Property and equipment, net
2,030.6
1,936.8
Other noncurrent assets
172.2
184.2
Total assets
$ 7,795.7
$ 6,884.2
Liabilities and net assets
Current liabilities:
Current maturities of long-term debt
$ 15.6
$ 15.9
Long-term debt subject to self-liquidity
541.5
206.2
Other current liabilities
724.8
574.1
Total current liabilities
1,281.9
796.2
N
oncurrent liabilities:
Long-term debt
770.1
771.1
Self-insurance liabilities
150.5
162.1
Pension/postretirement liabilities
254.2
549.3
Other noncurrent liabilities
162.3
258.5
Total noncurrent liabilities
1,337.1
1,741.0
Total liabilities
2,619.0
2,537.2
N
et assets:
Unrestricted
4,745.8
3,957.7
Temporarily restricted
240.2
215.4
Permanently restricted
190.7
173.9
Total net assets
5,176.7
4,347.0
Total liabilities and net assets
$ 7,795.7
$ 6,884.2
See accompanying notes.
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BJC HealthCare
Consolidated Statements of Operations and Changes in Net Assets
(Dollars in Millions)
Year Ended December 31
2013 2012
Unrestricted revenues:
Patient service revenue (net of allowances and discounts)
$ 3,897.9
$ 3,798.9
Provision for bad debts
(145.8)
(89.8)
Net patient service revenue
3,752.1
3,709.1
Other operating revenue
156.3
140.3
Total unrestricted revenues
3,908.4
3,849.4
Expenses:
Salaries and benefits
1,849.2
1,810.0
Supplies and other
1,643.5
1,605.9
Depreciation and amortization
239.6
239.8
Interest rate swap settlements, net
16.8
13.8
Interest
13.3
17.2
Total expenses
3,762.4
3,686.7
Operating income
146.0
162.7
Investment earnings
287.2
365.7
Unrealized gains (losses) on interest rate swap contracts, net
73.9
(3.0)
Other nonoperating expense, net
(16.6)
(163.3)
Excess of revenues over expenses
490.5
362.1
Unrestricted net assets:
Excess of revenues over expenses
490.5
362.1
Pension and other postretirement liability adjustment
295.2
(76.7)
Net assets released for property acquisitions
2.3
0.1
Other
0.1
12.9
Increase in unrestricted net assets
788.1
298.4
Temporarily restricted net assets:
Contributions, bequests, and grants
18.4
18.4
Investment earnings
31.7
37.9
Net assets released from restrictions
(26.3)
(26.0)
Other
1.0
(12.3)
Increase in temporarily restricted net assets
24.8
18.0
Permanently restricted net assets:
Contributions and bequests
12.8
3.2
Investment earnings
3.4
1.5
Other
0.6
(4.8)
Increase (decrease) in permanently restricted net assets
16.8
(0.1)
Increase in net assets
829.7
316.3
N
et assets at beginning of year
4,347.0
4,030.7
N
et assets at end of yea
r
$ 5,176.7
$ 4,347.0
See accompanying notes.
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BJC HealthCare
Consolidated Statements of Cash Flows
(Dollars in Millions)
Year Ended December 31
2013 2012
Operating activities
Increase in net assets
$ 829.7
$ 316.3
Adjustments to reconcile increase in net assets to net cash
provided by operating activities:
Change in unrealized (gains) losses on interest rate swaps
(73.9)
3.0
Restricted contributions
(31.2)
(21.6)
Depreciation and amortization
239.6
239.8
Provision for bad debts
145.8
89.8
Pension and other postretirement liability adjustment
(295.2)
76.7
Increase in patient accounts receivable, net
(129.5)
(147.6)
Decrease in other current assets
3.8
47.7
Increase in other current liabilities
76.5
80.2
Investments classified as trading, net
(309.2)
(241.6)
Decrease (increase) in other assets
12.1
(12.7)
Decrease in self-insurance liabilities
(9.5)
(2.3)
(Decrease) increase in other noncurrent liabilities
(22.2)
82.1
N
et cash provided by operating activities
436.8
509.8
Investing activities
Purchases of property and equipment, net
(333.4)
(317.0)
Sales of interests in alternative investments
143.3
315.8
Purchases of interests in alternative investments
(600.6)
(443.4)
N
et cash used in investing activities
(790.7)
(444.6)
Financing activities
Payments of debt
(236.9)
(15.7)
Proceeds from issuance of debt
571.0
14.6
Restricted contributions
31.2
21.6
N
et cash provided by financing activities
365.3
20.5
N
et increase in cash and cash equivalents
11.4
85.7
Cash and cash equivalents, beginning of year
88.2
2.5
Cash and cash equivalents, end of year
$ 99.6
$ 88.2
See accompanying notes.
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BJC HealthCare
Notes to Consolidated Financial Statements
(Dollars in Millions)
December 31, 2013 and 2012
1. Organization and Summary of Significant Accounting Policies
Nature of Organization
BJC HealthCare (BJC or the System) is a regional healthcare delivery system operating in
Missouri and southern Illinois. BJC is the sole corporate member of Barnes-Jewish Hospital
(Barnes-Jewish), Christian Health Services Development Corporation (Christian), Missouri
Baptist Medical Center (MBMC), St. Louis Children’s Hospital (Children’s), and Progress West
Hospital (PWH) (collectively, the Institutions).
BJC is a Missouri not-for-profit corporation as described in Section 501(c)(3) of the Internal
Revenue Code (the Code) and has received an Internal Revenue Service (IRS) determination
letter stating that it is exempt from federal income taxes on its related income pursuant to Section
501(a) of the Code. The Institutions are also Missouri not-for-profit corporations as described in
Section 501(c)(3) of the Code, and each has received IRS determination letters stating that they
are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code.
CH Allied Services, Inc. (CHAS), an affiliate of Christian, leases and operates Boone Hospital
Center (BHC) in Columbia, Missouri. The owner and lessor of BHC is the Board of Trustees of
Boone County Hospital (BHC Lessor). The financial position and results of operations of BHC
are included in BJC’s consolidated financial statements. During 2012, CHAS and BHC Lessor
amended the lease agreement (the Lease), extending its current term to December 31, 2020, with
continuing five-year terms thereafter unless the Lease is terminated. Either party has the option
to terminate the Lease during the current term or any successive five-year term by giving notice
two years prior to the end of the then-current term. If the Lease is terminated, certain assets
recorded in BJC’s consolidated financial statements will revert to the BHC Lessor, and BJC will
record a charge equal to the amount of BHC’s unrestricted net assets due to a change in control
over the assets. At December 31, 2013, unrestricted net assets of BHC included in the
consolidated financial statements totaled $139.2.
Consolidation
All significant intercompany transactions and account balances have been eliminated in the
consolidated financial statements.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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1. Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles 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 amounts could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid debt instruments with original,
short-term maturities of less than 90 days.
Investments and Investment Earnings
Investments include assets held by trustees under indenture and self-insurance agreements,
foundation assets, and designated assets set aside by the Board of Directors (Board) over which it
retains control and may, at its discretion, subsequently use for other purposes. Investments in
equity and debt securities are measured at fair value.
For purposes of recognizing investment earnings as a component of excess of revenues over
expenses, all investments, except for alternative investments, are considered to be trading
securities. Investment income or loss (including realized and unrealized gains and losses on
investments, interest, and dividends) is included in excess of revenues over expenses unless the
income or loss is restricted by donor or law. Gains and losses with respect to disposition of
marketable securities are based on the average cost method. Investment earnings related to
temporarily and permanently restricted net assets are added to or deducted from the appropriate
net asset balance based on donor intent.
Within established investment policy guidelines, BJC may enter into various exchange-traded
and over-the-counter derivative contracts for economic hedging purposes, including futures,
options, swaps, and forward contracts. BJC has not designated its derivatives related to
marketable securities as hedges, and the change in fair value of these derivatives is recognized in
excess of revenues over expenses.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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8
1. Organization and Summary of Significant Accounting Policies (continued)
BJC invests in alternative investments, generally through limited liability corporations (LLCs)
and limited liability partnerships (LLPs), which are reported using the equity method of
accounting based on information provided by the respective LLCs and LLPs.
The values provided by the respective organizations are based on historical cost, appraisals, or
other estimates that require varying degrees of judgment. Management has utilized the best
available information for reported values, which in some instances are valuations as of an interim
date not more than 90 days before year-end. Generally, the net asset value of BJC’s holdings
reflects net contributions to the organization and an allocated share of realized and unrealized
investment income and expenses. Returns from equity method investments, whether realized or
unrealized, are included in investment earnings in excess of revenues over expenses.
Investment securities purchased and sold are reported based on trade date. Due to the difference
between the trade date and the settlement date, BJC reports receivables for securities sold but not
settled and reports liabilities for securities purchased but not settled. These receivables and
payables are settled from within the investment portfolio and are presented on a net basis within
investments in the consolidated balance sheets.
Securities Lending Program
BJC participates in securities-lending transactions with its investment custodian, whereby a
portion of its securities are loaned to selected established brokerage firms in return for securities
from the brokers as collateral for the securities loaned, usually on a short-term basis of up to 60
days. Collateral provided by the brokerage firms generally approximates 103% of the fair value
of the securities on loan and is adjusted for daily market fluctuations. BJC earns a rebate on the
loaned securities and has risk of loss on the collateral received.
The fair value of collateral held for loaned securities is reported as securities lending program
investments. A corresponding obligation exists for repayment of such collateral upon settlement
of the lending transaction and is included in other current liabilities in the consolidated balance
sheets.
At December 31, 2013, the fair value of the securities on loan totaled $69.6, which is included in
investments and accepted collateral for these securities on loan totaled $72.0, which is included
in other current assets. BJC did not participate in any security lending programs at December 31,
2012.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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9
1. Organization and Summary of Significant Accounting Policies (continued)
BJC also participates in a securities lending arrangement in the investment portfolio of its
sponsored defined benefit pension plan as more fully described in Note 11.
Interest Rate Swaps
BJC uses interest rate swap contracts in managing its capital structure. BJC recognizes these
derivative instruments as either assets or liabilities in the consolidated balance sheets at fair
value. BJC does not account for any of its interest rate swap contracts as hedges, and
accordingly, realized and unrealized gains and losses are reflected in excess of revenues over
expenses in the accompanying consolidated statements of operations and changes in net assets.
BJC also does not offset fair value amounts recognized for derivative instruments and fair value
amounts recognized for cash collateral posted.
Inventory
Inventories, which consist principally of medical supplies and pharmaceuticals, are stated at the
lower of cost or market. Cost is principally determined using average costs.
Property and Equipment
Property and equipment are recorded at cost, if purchased, or at fair value at the date of donation,
if donated. Depreciation is provided on a straight-line basis over the estimated useful lives of the
property. BJC follows the American Hospital Association guidelines for assigning useful lives to
property and equipment purchased. BJC capitalizes certain internally developed software costs in
accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 350-44, Internal-Use Software. Interest cost incurred in connection with
borrowings to finance major construction and facility expansion is capitalized during the
construction period and subsequently amortized over the lives of the related assets.
Asset Impairment
BJC considers whether indicators of impairment are present and performs the necessary test to
determine if the carrying value of an asset is appropriate. Impairment write-downs are
recognized in operating income at the time the impairment is identified.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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10
1. Organization and Summary of Significant Accounting Policies (continued)
Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use by BJC has been limited by donors
primarily for research and education, special programs, patient care, operations, and property and
equipment for a specific time period or purpose. Permanently restricted net assets have been
restricted by donors to be maintained in perpetuity; the income from these funds is used
primarily for special programs, operations, research and education, and patient care or added
back to the corpus in accordance with donor restrictions.
Net Patient Service Revenue and Patient Accounts Receivable
Patient service revenue is reported net of contractual allowances and discounts at estimated net
realizable amounts from patients, third-party payors, and others for services rendered and
includes estimated retroactive adjustments due to future audits, reviews, investigations, and
significant regulatory actions. Net patient service revenue is reported net of provision for bad
debts. Provisions for third-party payor settlements and adjustments are estimated in the period
the related services are provided and adjusted in future periods as additional information
becomes available and as final settlements are determined.
The provision for bad debts is based upon management’s judgmental assessment of historical
and expected net collections considering business and general economic conditions in its service
area, trends in healthcare coverage, and other collection indicators. Throughout the year,
management assesses the adequacy of the allowance for uncollectible accounts based upon its
review of accounts receivable payor composition and aging, taking into consideration recent
write-off experience by payor category, payor agreement rate changes, and other factors. The
results of these assessments are used to make modifications to the provision for bad debts and to
establish an appropriate allowance for uncollectible accounts receivables. For third-party payors,
the provision is determined by analyzing contractually due amounts from payors who are known
to be having financial difficulties. For self-pay patients, the provision is based on an analysis of
past experience related to patients unwilling to pay standard rates charged. The difference
between the standard rate charged (less the negotiated discounted rate) and the amount actually
collected after the reasonable collection efforts have been exhausted are charged off against the
allowance for doubtful accounts. BJC follows established guidelines for placing certain past-due
patient balances with external collection agencies.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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1. Organization and Summary of Significant Accounting Policies (continued)
Contributions, Bequests, and Pledges
Unrestricted contributions and bequests are reported in other nonoperating expense, net when
pledged. Restricted contributions and bequests are reported as additions to the appropriate
restricted net asset balance. Restricted pledges are recorded at fair value in the year notification
is received as an addition to the appropriate restricted net asset balance. Management believes
these are Level 2 fair value measurements (as defined in Note 10) recorded on a nonrecurring
basis. Pledges receivable totaling $28.0 and $24.4 are included in other current assets and other
noncurrent assets at December 31, 2013 and 2012, respectively. These pledges are recorded at
their net present value based on the expected timing of pledge fulfillment using an average credit
adjusted discount rate of 3.1% in 2013 and 3.5% in 2012, which approximates fair value.
Management believes total pledges will be received as follows:
2013 2012
Within one year
$ 7.4
$ 3.4
One to five years
6.1
5.9
After five years
26.9
26.2
40.4
35.5
Less present value factor
(12.1)
(10.7)
Less allowance for uncollectible pledges
(0.3)
(0.4)
$ 28.0
$ 24.4
Performance Indicator
BJC’s performance indicator is excess of revenues over expenses, which includes all changes in
unrestricted net assets other than contributions of long-lived assets, and pension and other
postretirement liability adjustments.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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1. Organization and Summary of Significant Accounting Policies (continued)
Operating and Nonoperating Income
BJC’s primary mission is to meet the healthcare needs in its service areas through a broad range
of general and specialized healthcare services, including inpatient acute care, outpatient services,
physician services, and other healthcare services. Activities directly associated with the
furtherance of this purpose are considered to be operating activities. Other activities that result in
gains or losses peripheral to BJC’s primary mission are considered to be nonoperating. All
unrestricted activities of BJC’s wholly-owned affiliated Foundations (Foundations), including
contribution and grant activity, are classified as nonoperating.
Reclassifications
Certain balances in the 2012 consolidated financial statements have been reclassified to conform
to the current year presentation. The effect of such reclassifications did not change total net
assets, unrestricted net assets, or excess of revenues over expenses.
Income Taxes
The authoritative guidance in ASC 740, Income Taxes, creates a single model to address
uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being recognized in the
financial statements. Under the requirements of this guidance, tax-exempt organizations could be
required to record an obligation as the result of a tax position they have historically taken on
various tax exposure items. BJC has not recognized a liability for uncertain tax positions.
Functional Expenses
BJC’s accounting policies conform to U.S. generally accepted accounting principles applicable
to healthcare organizations. Substantially all expenses are related to providing healthcare
services to the community.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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1. Organization and Summary of Significant Accounting Policies (continued)
Adoption of New Accounting Standards
In December 2011, the FASB issued accounting guidance, which was further clarified in
January 2013, requiring additional information intended to help reconcile existing differences in
balance sheet offsetting requirements under U.S. GAAP and International Financial Reporting
Standards. While this standard leaves existing guidance surrounding the offsetting of financial
assets and liabilities unchanged, it requires several additional disclosures, including gross and net
information about instruments and transactions eligible for offset in the balance sheet and
instruments and transactions subject to a master netting arrangement or a similar agreement. The
guidance applies to BJC’s derivatives, which include both interest rate swap contracts and
derivative contracts associated with the Company’s investment program which are held for risk
management purposes. The guidance became effective for BJC on January 1, 2013. While the
adoption of this guidance impacted BJC’s disclosures, it did not affect the Company’s results of
operations, financial condition, or cash flows.
2. Net Patient Service Revenue and Uncompensated Care
BJC provides healthcare services through inpatient, outpatient, and ambulatory care facilities.
Services provided to certain patients are covered by various governmental and third-party
payment programs, including Medicare and Medicaid at contractual rates generally below BJC’s
established rates. Revenue from Medicare and Medicaid programs accounted for approximately
44% and 45% of BJC’s patient service revenue (net of contractual allowances and discounts) for
the year ended December 31, 2013 and 2012, respectively. The composition of patient service
revenue (net of contractual allowances and discounts) by third-party payor is as follows:
2013 2012
Medicare
$ 1,171.0
$ 1,186.4
Medicaid
539.0
528.8
Managed Care
1,927.6
1,804.0
Self-pay
119.2
127.9
Other
141.1
151.8
$ 3,897.9
$ 3,798.9
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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14
2. Net Patient Service Revenue and Uncompensated Care (continued)
BJC grants credit to patients and generally does not require collateral or other security in
extending credit to patients. However, BJC routinely obtains assignment of (or is otherwise
entitled to receive) patients’ benefits payable under their health insurance programs, plans, or
policies (e.g., Medicare, Medicaid, managed care payors, and commercial insurance policies). As
of December 31, 2013 and 2012, 33% and 38%, respectively, of patient accounts receivable, net,
were collectible from governmental payors. The remaining 67% and 62% of patient accounts
receivable, net, in 2013 and 2012, respectively, were collectible primarily from managed care
and commercial insurance payors.
As of December 31, 2013 and 2012, BJC expects to collect approximately 18% and 23% of all
amounts due from self-pay patients (including patients without insurance and patients with
deductibles and copayment balances due for which third-party coverage exists for part of the
bill). In 2013, BJC’s provision for bad debts increased $56.0 due to lower collection rates from
self-pay patients and an increase in receivables due from self-pay patients. As a result, BJC
increased its allowance for uncollectible accounts from $43.0 as of December 31, 2012, to $67.2
as of December 31, 2013.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject
to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will
change by a material amount in the near term. Noncompliance with Medicare and Medicaid laws
and regulations can make BJC subject to significant regulatory action, including substantial fines
and penalties, as well as exclusion from the Medicare and Medicaid programs. The 2013 and
2012 net patient service revenue increased by $5.8 and $22.9, respectively, due to changes in
estimated payment related to third-party payors and certain historical cost report periods. In
addition, during 2012, BJC received $20.2, net of related expenses, which was recorded in 2012
excess of revenues over expenses due to a settlement with the Centers for Medicare & Medicaid
Services (CMS) for past underpayments related to an error in Medicare’s rural floor budget
neutrality adjustment for fiscal years 2004 through 2011.
Uncompensated Care
In support of its mission, BJC provides charity care to patients who lack financial resources and
are deemed to be medically indigent. Policies have been established that define charity care and
provide guidelines for assessing a patient’s ability to pay. Evaluation procedures for charity care
qualification have been established for those situations when previously unknown financial
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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15
2. Net Patient Service Revenue and Uncompensated Care (continued)
circumstances are revealed or when incurred charges are significant when compared to the
individual patient’s income and/or net assets. Charity care also includes services for which the
patient may not participate in the charity care process but are otherwise deemed to meet the
System’s charity care policy. Because BJC does not pursue collection of amounts determined to
qualify as charity care, such amounts are not reported as net patient service revenue. In addition,
BJC provides services to other medically indigent patients under various state Medicaid
programs, which pay providers amounts that are less than the costs incurred for the services
provided to the recipients.
The estimated cost of charity care was $148.9 and $145.2 in 2013 and 2012, respectively. Costs
are estimated using the ratio of BJC’s costs to its charges and applying to gross charity charges.
These ratios are then used to determine the cost of each account that qualifies for charity care.
3. Electronic Health Record Incentive Program
The American Recovery and Reinvestment Act of 2009 included provisions for implementing
health information technology under the Health Information Technology for Economic and
Clinical Health Act (HITECH). The provisions were designed to increase the use of electronic
health record (EHR) technology and establish the requirements for a Medicare and Medicaid
incentive payment program beginning in 2011 for eligible providers that adopt and meaningfully
use certified EHR technology. BJC accounts for meaningful use incentive payments under a gain
contingency model. Medicare EHR incentive payments are recognized as revenues when eligible
providers demonstrate meaningful use of certified EHR technology and the cost report
information for the full cost report year that will determine the full calculation of incentive
payment is available. Medicaid EHR incentive payments are recognized as revenues when an
eligible provider demonstrates meaningful use of certified EHR technology. BJC recognized
$27.2 and $12.1 of meaningful use revenue in 2013 and 2012, respectively. The revenue is
recorded in other operating revenue in the consolidated statements of operations and changes in
net assets. BJC’s attestation of compliance with the meaningful use criteria is subject to audit by
the federal government or its designee. Additionally, EHR incentive payments are subject to
retrospective adjustment upon final settlement of the applicable cost report from which payments
were initially calculated.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
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16
4. Affiliation Agreement With Washington University
BJC had an affiliation agreement with Washington University (the University) that expired on
December 31, 2013. In 2013 this agreement was extended through December 31, 2023. The
agreement may be canceled upon one-year written notice by either party. Under the terms of the
affiliation agreement, the University trains and supervises medical residents and manages certain
clinical and research activities of BJC. The annual expense for these services provided by the
University under the affiliation agreement is based on a fixed payment ($7.7 in 2013 and $7.6 in
2012) plus a payment based on the combined net operating income of Barnes-Jewish, Barnes-
Jewish West County Hospital (one of Barnes-Jewish’s wholly owned affiliates), and Children’s.
Amounts expensed as supplies and other in the consolidated statements of operations and
changes in net assets for these services under the affiliation agreement totaled $95.6 and $91.7 in
2013 and 2012, respectively. Payments to the University are made on a semiannual basis.
In addition to the affiliation agreement, BJC has supplemental agreements with the University
whereby BJC pays the University for certain purchased services and leased facilities and
equipment. These supplemental agreements have varying terms with fixed and variable payment
arrangements. Amounts expensed as supplies and other for these services totaled $121.0 and
$102.0 in 2013 and 2012, respectively.
In addition, BJC received $18.8 and $22.3 from the University in 2013 and 2012, respectively,
for certain purchased services and leased facilities and equipment.
Through the Foundations, BJC provides support to the University through various grant
processes. These expenses are included in other nonoperating expense, net and net assets
released from restrictions and total $28.9 and $167.7 in 2013 and 2012, respectively. Grants
payable are included in other current and other noncurrent liabilities totaling $160.6 and $148.9
at December 31, 2013 and 2012, respectively. Management believes total grants payable will be
paid as follows:
2013 2012
Within one year
$ 109.8
$ 59.5
One to five years
50.8
89.4
$ 160.6
$ 148.9
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
17
5. Investments
The following is a summary of investments included in the consolidated balance sheets:
2013 2012
Unrestricted investments
$ 3,527.4
$ 3,021.9
Held at foundations
875.2
778.8
Assets limited as to use:
Under self-insurance arrangements
75.8
80.8
Under BHC lease agreement
52.4
48.6
Under indenture agreements
185.7
17.8
4,716.5
3,947.9
Less amounts included in other current assets
(14.4)
(12.3)
$ 4,702.1
$ 3,935.6
The following is a summary of the composition of investments as of December 31:
2013 2012
Cash and temporary cash investments
$ 228.4
$ 229.5
Income securities:
U.S. government and agency obligations
515.2
558.5
Corporate debt securities
917.8
1,002.1
Asset-backed and securitized bonds and notes
467.6
252.2
Other fixed-income funds
8.5
5.5
Equity securities
1,202.4
1,038.3
Alternative investments:
Hedge funds
904.7
504.6
Private equity
461.0
301.3
Other
6.5
13.0
Accrued interest and dividends receivable
11.8
13.2
4,723.9
3,918.2
Less amounts included in other current assets
(14.4)
(12.3)
4,709.5
3,905.9
Amounts due to brokers
(32.7)
(28.8)
Amounts due from brokers
25.3
58.5
$ 4,702.1
$ 3,935.6
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
18
5. Investments (continued)
BJC’s investments are exposed to various kinds and levels of risk. Income securities expose BJC
to interest rate risk, credit risk, and liquidity risk. As interest rates change, the value of many
fixed-income securities with fixed interest rates is affected. Credit risk is the risk that the obligor
of the security will not fulfill its obligation. Liquidity risk is affected by the willingness of
market participants to buy and sell given securities.
Equity securities expose BJC to market risk, performance risk, and liquidity risk. Market risk is
the risk associated with major movements of the equity markets, both domestic and international.
Performance risk is the risk associated with a particular company’s operating performance.
Liquidity risk, as previously defined, tends to be higher for international and domestic small
capitalization equity companies.
Alternative investments have similar risks as income and equity securities although there may be
additional risks. These securities consist principally of non-controlling interests in limited
liability partnerships (LLP) and limited liability corporations (LLC). Because these funds are
invested through LLCs and LLPs, the underlying net asset value of the investments is based on
valuations provided by the managers. Nearly all of the hedge fund manager valuations are
independently priced or verified by third-party administrators. Private equity investments have
restrictions on the timing of withdrawals, up to ten years from initial investment date, which may
reduce liquidity. Certain hedge fund investments also have restrictions on the timing of
withdrawals, up to three years from initial investment date, which may reduce liquidity. BJC has
unfunded commitments of $373.9 to private equity funds as of December 31, 2013.
BJC engages in downside risk mitigation strategies that cover equity, interest rates, foreign
exchange, and bond credit spreads. This economic hedging is based on investment portfolio
exposure to long only equities, foreign exchange, and fixed income. No leverage is utilized for
this hedging activity. These contracts are subject to counterparty credit risk, the risk that
contractual obligations of the counterparties (including BJC) will not be fulfilled. Counterparty
credit risk is managed by requiring high credit standards for BJC’s counterparties, as well as
collateral posting requirements. The counterparties to these contracts are financial institutions
that carry investment-grade credit ratings. These contracts contain collateral provisions
applicable to both parties that mitigate credit risk above a specified mark-to-market posting
threshold that is based on a fixed dollar amount. Pursuant to the collateral posting requirements
under the contracts at December 31, 2013, BJC posted $1.4. No collateral was posted at
December 31, 2012. At December 31, 2013 and 2012, the notional value of income and equity
derivatives were approximately $490.6 and $364.0, respectively. The fair value of income and
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
19
5. Investments (continued)
equity derivatives in an asset position was $4.8 and $7.7 at December 31, 2013 and 2012,
respectively, while the fair value of derivatives in a liability position was $2.6 at December 31,
2013. BJC recognized a loss of $41.6 and $7.3 in 2013 and 2012, respectively, which are
recorded in investment earnings within the consolidated statements of operations and changes in
net assets. These derivatives are included in investments in the consolidated balance sheets at
December 31, 2013 and 2012.
Investment earnings for the years ended December 31 is summarized as follows:
2013 2012
Interest and dividends
$ 87.3
$ 84.0
N
et realized gains
185.1
195.2
N
et unrealized gains
49.9
125.9
Total investment earnings
$ 322.3
$ 405.1
Included in investment earnings
$ 287.2
$ 365.7
Included in temporarily and permanently restricted
net assets
35.1
39.4
Total investment earnings
$ 322.3
$ 405.1
6. Property and Equipment
A summary of property and equipment, net, as of December 31 is as follows:
2013 2012
Land and land improvements
$ 157.3
$ 130.1
Building and improvements
1,805.9
1,651.7
Equipment
2,892.0
2,672.4
4,855.2
4,454.2
Less accumulated depreciation
(2,992.9)
(2,743.7)
1,862.3
1,710.5
Construction-in-progress
168.3
226.3
$ 2,030.6
$ 1,936.8
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
20
6. Property and Equipment (continued)
At December 31, 2013, BJC had outstanding construction contracts totaling $115.2 for various
building construction and renovations. The estimated remaining cost to complete these contracts
totals $12.2 as of December 31, 2013. Net interest capitalized in 2013 and 2012 totaled $2.2 and
$3.8, respectively.
7. Other Current Assets and Liabilities
Other current assets consist of the following as of December 31:
2013 2012
Inventory
$ 76.7
$ 87.4
Due from third-party payors
19.7
13.0
Prepaid expenses
29.7
31.8
Current portion of self-insurance trust
14.4
12.3
Receivable under securities lending program
72.0
–
Other
0.3
0.2
$ 212.8
$ 144.7
Other current liabilities consist of the following as of December 31:
2013 2012
Accounts payable
$ 95.7
$ 85.5
Accrued payroll and related liabilities
237.4
233.7
Accrued expenses and other
92.9
97.4
Due to Washington University
212.4
145.2
Payable under securities lending program
72.0
–
Self-insurance liabilities
14.4
12.3
$ 724.8
$ 574.1
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
21
8. Long-term Debt
Long-term debt consists of the following at December 31:
2013 2012
Series 2011A-B variable rate term bonds, privately placed,
puttable starting in 2021 at which time bonds can be
remarketed or redeemed, interest (0.86% at
December 31, 2013) set at prevailing market rates,
due through 2046
$ 200.0
$ 200.0
Series 2012A-E and Series 2013B variable rate term
bonds, privately placed, puttable starting in 2023 at
which time bonds can be remarketed or redeemed,
interest (0.76% to 0.86% at December 31, 2013) set at
prevailing market rates, due through 2048
371.0
–
Series 2005B and Series 2008A-E variable rate demand
bonds subject to self-liquidity, interest (0.03 % to 0.04 %
at December 31, 2013) set at prevailing rates, due
through 2050
442.0
206.2
Series 2013C variable rate demand bonds subject to self-
liquidity and a put provision that provides for a seven-
month notice and remarketing period, interest (0.13% at
December 31, 2013) set at prevailing market rates, due
through 2050
100.0
–
Series 2005B and Series 2008A-B variable rate demand
bonds, subject to a seven-day put provision, due through
2043
–
235.8
Series 1993A, Series 2003, Series 2005A and
Series 2013A fixed rate debt, interest rates from 3.23%
to 5.25%, due through 2042
199.6
336.5
Other
14.6
14.7
1,327.2
993.2
Less current maturities of long-term debt
(15.6)
(15.9)
Less long-term debt subject to self-liquidity arrangements
(541.5)
(206.2)
$ 770.1
$ 771.1
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
22
8. Long-term Debt (continued)
BJC maintains an Obligated Group structure under its Master Indenture agreement (the Master
Indenture), dated as of April 4, 2006. The Obligated Group members are jointly and severally
liable for all notes issued under the Master Indenture and represent those organizations that own
or operate the principal healthcare facilities of BJC.
The Master Indenture permits BJC to issue Master Notes thereunder to evidence or secure
additional indebtedness on behalf of the Obligated Group. The Obligated Group members are
responsible for making all payments required with respect to obligations under the Master
Indenture. The aggregate par amount of obligations outstanding under the Master Indenture
(other than obligations that have been legally defeased and that are not considered to be
outstanding) totaled $1,312.6 and $978.5 at December 31, 2013 and 2012, respectively. The
Master Indenture imposes various covenants and conditions on BJC, including covenants related
to debt service coverage, additional indebtedness, permitted liens, and the use and maintenance
of facilities. Management believes BJC is in compliance with these covenants and conditions as
of December 31, 2013.
At December 31, 2012, BJC’s bonds were backed by either a standby bond purchase agreement
or by BJC self-liquidity. In the event of a failed remarketing period lasting one year, those bonds
backed by a standby bond purchase agreement would convert to a term loan and the first
installment on the term loan would generally be payable one year and one day after the failed
remarketing. In May 2013, BJC converted $235.8 of its Series 2005B and Series 2008A and
2008B variable rate demand bonds from a daily mode to a weekly mode. The stand-by bond
purchase agreement was terminated in 2013 and the bonds are now supported by self-liquidity.
At December 31, 2013, BJC has $542.0 of variable rate demand bonds that are supported by self-
liquidity.
The variable rate demand bonds, while subject to long-term amortization periods, may be
tendered to BJC at the option of bondholders subject to certain notice period requirements. If the
variable rate demand bonds subject to self-liquidity are not remarketed upon the exercise of put
options, management would utilize internal or external sources to provide the necessary liquidity.
Such bonds are included as long-term debt subject to self-liquidity in current liabilities in the
consolidated balance sheets.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
23
8. Long-term Debt (continued)
In October 2012, on behalf of BJC, tax-exempt Series 2012A-E variable rate term bonds were
issued by the Health and Educational Facilities Authority of the State of Missouri. These bonds
gave BJC the right to draw $271.0 until May 15, 2013. In May 2013, the right was exercised
associated with the private placement bonds and the full $271.0 was drawn to reimburse BJC for
the payment of certain capital expenditures and to re-finance the Series 2003 fixed rate bonds.
The Series 2012A-D bonds mature in 2042 while the Series 2012E bonds mature in 2033. As a
result of the re-financing, BJC recognized a gain on bond refinancing of $1.1, which is included
in supplies and other on the consolidated statements of operations and changes in net assets.
In September 2013, $100.0 of tax-exempt Series 2013A fixed rate bonds were issued by the
Health and Educational Facilities Authority of the State of Missouri on behalf of BJC. The
proceeds of these bonds were used to reimburse BJC for the payment of certain capital
expenditures. This private placement matures in 2042.
In October 2013, $100.0 of tax-exempt Series 2013B variable rate term bonds were issued by the
Health and Educational Facilities Authority of the State of Missouri on behalf of BJC. The
proceeds of these bonds will be used to reimburse BJC for the payment of certain capital
expenditures. This private placement matures in 2048.
In October 2013, $100.0 of tax-exempt Series 2013C variable rate demand bonds were issued by
the Health and Educational Facilities Authority of the State of Missouri on behalf of BJC. These
bonds are backed by self-liquidity and the proceeds will be used to reimburse BJC for the
payment of certain capital expenditures. These bonds mature in 2050.
In 2013, the System incurred $1.3 in costs related to new issuances, which will be amortized
over the life of the bonds.
In 2012, BJC entered into a 30-year loan agreement for $14.6 with a direct lender through the
U.S. Department of the Treasury Community Development Financial Institutions (CDFI) Fund
New Markets Tax Credit (NMTC) program for reimbursement of certain capital expenditures.
The loan has a bi-lateral put/call option that becomes effective in year eight of the loan
agreement. Using the loan proceeds, BJC concurrently loaned $10.3 to a newly created not-for-
profit Special Purpose Entity (SPE). Amounts receivable from the SPE and payable by BJC are
included in other noncurrent assets and long-term debt, respectively.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
24
8. Long-term Debt (continued)
At December 31, 2013, BJC has a general operating line of credit of $300.0. This facility has a
five-year term. In addition, BJC initiated a $100.0 hybrid dedicated bank line of credit in
May 2013. This facility has a three-year term and has the dual function of supporting general
operating requirements and tenders associated with the variable rate demand bonds. No amounts
are outstanding under the lines of credit at December 31, 2013 or 2012.
Scheduled principal payments on long-term debt, including obligations subject to short-term
remarketing as due according to their long-term amortization schedule, as of December 31, 2013,
are as follows:
Scheduled
Year ending December 31:
2014 $ 15.6
2015 15.8
2016 16.5
2017 21.5
2018 22.5
The amount of interest paid, net of interest capitalized, totaled $13.4 and $17.3 in 2013 and
2012, respectively.
9. Derivative Instruments
BJC uses interest rate swap contracts to manage interest rate risk associated with its variable rate
debt obligations. BJC is a party to multiple interest rate swap contracts that effectively convert
various variable rate bonds to fixed rates. Interest rate swap contracts between BJC and third
parties (counterparties) provide for the periodic exchange of payments between the parties based
on changes in a defined index, typically 68% of the one-month LIBOR rate, and a fixed rate.
These contracts are subject to counterparty credit risk, the risk that contractual obligations of the
counterparties (including BJC) will not be fulfilled. Concentrations of credit risk relate to groups
of counterparties that have similar economic or industry characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in economic or other
conditions. Counterparty credit risk is managed by requiring high credit standards for BJC’s
counterparties and, in certain cases, collateral posting requirements. The counterparties to these
contracts are financial institutions that carry investment-grade credit ratings. Certain interest rate
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
25
9. Derivative Instruments (continued)
swap contracts contain collateral provisions applicable to both parties to mitigate credit risk
above a specified mark-to-market posting threshold that is based on either a fixed dollar amount
or on each counterparty’s credit rating.
Pursuant to the collateral posting requirements under the swap contracts, at December 31, 2013
and 2012, BJC posted $7.1 and $40.3, respectively, as collateral, which is reported as other
noncurrent assets in the consolidated balance sheets. BJC does not anticipate nonperformance by
its counterparties.
At December 31, 2013 and 2012, the notional amount of BJC’s outstanding interest rate swap
contracts is $689.6.
The fair value of BJC’s outstanding interest rates swaps at December 31 is as follows:
Derivatives Not Designated as
Hedging Instruments
Balance Sheet
Location 2013 2012
Interest rate swap contracts
Other noncurrent
liabilities
$ (50.1)
$ (107.9)
Interest rate swap contracts Other noncurrent assets
16.3
–
The effects of BJC’s interest rates swaps in the consolidated statements of operations and
changes in net assets for the years ended December 31 are as follows:
Derivatives Not Designated as
Location of Loss
on Derivatives
Recognized in
Excess of Revenues
Amount of Gain (Loss) on
Derivatives Recognized in
Excess of Revenues Over
Expenses
Hedging Instruments Over Expenses 2013 2012
Interest rate swap contracts
Unrealized gain (loss)
on interest rate swap
contracts
$ 73.9
$ (3.0)
Interest rate swap contracts
Interest rate swap
settlements, net
(16.8)
(13.8)
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
26
10. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The Fair Value
Measurements and Disclosures Topic of the FASB ASC establish a fair value hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Certain of BJC’s financial assets and financial liabilities are measured at fair value on a recurring
basis, including money market, fixed income and equity instruments, and interest rate swap
contracts. The three levels of the fair value hierarchy and a description of the valuation
methodologies used for instruments measured at fair value are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities as of
the reporting date. Level 1 primarily consists of financial instruments such as money market
securities and listed equities.
Level 2 – Pricing inputs other than quoted prices included in Level 1 that are either directly
observable or that can be derived or supported from observable data as of the reporting date.
Instruments in this category include certain U.S. government agency and sponsored entity
debt securities and interest rate swap contracts and derivatives.
Level 3 – Pricing inputs include those that are significant to the fair value of the financial
asset or financial liability and are not observable from objective sources. In evaluating the
significance of inputs, BJC generally classifies assets or liabilities as Level 3 when their fair
value is determined using unobservable inputs that individually, or when aggregated with
other unobservable inputs, represent more than 10% of the fair value of the assets or
liabilities. These inputs may be used with internally developed methodologies that result in
management’s best estimate of fair value.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
27
10. Fair Value Measurements (continued)
The fair value of financial assets and liabilities measured at fair value on a recurring basis was
determined using the following inputs at December 31, 2013:
Fair Value Measurements at Using
Fair Market
Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
Investments:
Cash and short-term investments
$ 228.4 $ 228.4 $ – $ –
Income securities:
U.S. government and agency
obligations
515.2 – 515.2 –
Corporate debt securities
917.8 – 917.8 –
Asset-backed and securitized bonds
and notes
467.6 – 204.3 263.3
Other fixed-income funds
8.5 – 8.5 –
Equity securities
1,202.4 686.7 515.7 –
Other
6.5 – 6.5 –
Total investments
3,346.4 915.1 2,168.0 263.3
Collateral received under securities
lending program
72.0 – 72.0 –
Asset under interest rate swap contracts
16.3 – 16.3 –
Deferred compensation agreements
25.4 25.4 – –
$ 3,460.1 $ 940.5 $ 2,256.3 $ 263.3
Liabilities
Liability under interest rate swap
contracts
$ (50.1) $ – $ (50.1) $ –
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
28
10. Fair Value Measurements (continued)
The fair value of financial assets and liabilities measured at fair value on a recurring basis was
determined using the following inputs at December 31, 2012:
Fair Value Measurements at Using
Fair Market
Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
Investments:
Cash and short-term investments $ 229.5 $ 229.5 $ – $ –
Income securities
U.S. government and agency
obligations 558.5 – 558.5 –
Corporate debt securities 1,002.1 – 1,002.1 –
Asset-backed and securitized bonds
and notes 252.2 – 43.4 208.8
Other fixed-income funds 5.5 – 5.5 –
Equity securities 1,038.3 653.2 385.1 –
Other 13.0 – 13.0 –
Total investments 3,099.1 882.7 2,007.6 208.8
Deferred compensation agreements 22.3 22.3 – –
$ 3,121.4 $ 905.0 $ 2,007.6 $ 208.8
Liabilities
Liability under interest rate swap
contracts $ (107.9) $ – $ (107.9) $ –
The tables above exclude hedge funds, private equity and income and accrued interest, dividend
receivable, and other, totaling $1,377.5 and $819.1 at December 31, 2013 and 2012, respectively,
which are included in investments on the consolidated balance sheets but are not measured at fair
value.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
29
10. Fair Value Measurements (continued)
The following table is a rollforward of assets classified in Level 3 of the valuation hierarchy
defined above.
Asset-Backed
and
Securitized
Bonds and
Notes
Fair value at January 1, 2012 $ –
Purchases 33.8
Settlements (80.2)
Investment earnings 36.4
Transfers in and out/of Level 3 218.8
Fair value at January 1, 2013 208.8
Purchases
99.9
Settlements
(63.4)
Investment earnings
18.0
Transfers in and/or out of Level 3
–
Fair value at December 31, 2013
$ 263.3
The fair values of the securities included in Level 1 were determined through quoted market
prices. The fair values of Level 2 securities (primarily income securities) were determined
through evaluated bid prices based on recent trading activity, and other relevant information,
including market interest rate curves and referenced credit spreads, or estimated prepayment
rates provided by third-party pricing services where quoted market values are not available. The
fair values for interest rate swap contracts were derived through observable market data obtained
from a pricing vendor. With regards to the equity option derivatives, which are included in other
Level 2 securities, market data is used to build an implied volatility figure which is input into a
Black-Scholes model to determine fair value. The fair values of the interest rate swap contracts
are determined based on the present value of expected future cash flows using discount rates
appropriate with the risks involved.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
30
10. Fair Value Measurements (continued)
The valuations reflect a credit spread adjustment to the LIBOR discount curve in order to reflect
the credit value adjustment for nonperformance risk. The BJC credit spread adjustment is derived
from other comparably rated entities’ bonds priced in the market, while the counterparty credit
spread adjustment is based on respective credit default swap spreads. Due to the volatility of the
capital markets, there is a reasonable possibility of changes in fair value and additional gains
(losses) in the near term subsequent to December 31, 2013.
Level 3 assets of $263.3 include certain asset-backed and securitized notes and bonds. These
underlying securities trade less frequently than other income instruments, which generate
potential liquidity risk. In the event pricing cannot be obtained through quoted prices in active
markets, these securities are priced using an option-adjusted discounted cash flow model.
BJC transfers assets in and/or out of Level 3 as significant inputs, including performance
attributes, used for the fair value measurement become observable or unobservable. There were
no significant transfers into or out of Level 1, Level 2, or Level 3 that occurred between
January 1, 2013 and December 31, 2013. BJC recognizes transfers as of the end of the reporting
period.
The carrying value of cash and cash equivalents, accounts receivable, and current liabilities are
reasonable estimates of their fair value due to the short-term nature of these financial
instruments. The value of pledges receivable is estimated by management to approximate fair
value as of the date the pledge is received. The fair value of BJC’s fixed rate bonds is based on
quoted market prices for the same or similar issues and approximates $204.1 and $349.1 as of
December 31, 2013 and 2012, respectively, and represents a Level 2 measurement. The fair
value of BJC’s variable rate bonds approximates the carrying amount of $1,113.0 and $642.1 as
of December 31, 2013 and 2012, respectively, and excludes the impact of third-party credit
enhancements.
11. Postretirement Benefits
BJC sponsors the BJC Defined Contribution Plan, a 401(k) defined contribution plan that covers
substantially all employees. Employer contributions to this plan are based on a percentage of
participating employees’ contributions to a related 403(b) plan. BJC contributed $16.8 and $14.9
to this plan during 2013 and 2012, respectively, which is included in salaries and benefits in the
consolidated statements of operations and changes in net assets.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
31
11. Postretirement Benefits (continued)
BJC sponsors a defined-benefit pension plan (the Plan) covering substantially all full-time
employees who have met certain age requirements and have completed one year of service.
Benefits are based on years of service and employee earnings. BJC’s minimum funding policy is
to contribute annually amounts actuarially determined to fund the benefits of the plans. In 2013
and 2012, BJC had no minimum required pension contributions.
The following table sets forth the funded status of the Plan and accrued pension cost as of
December 31 as actuarially determined:
2013 2012
Change in projected benefit obligation
Projected benefit obligation at beginning of year
$ 1,926.6
$ 1,627.2
Service cost
94.4
79.1
Interest cost
85.9
82.0
Actuarial (gain) loss
(224.4)
171.5
Benefits paid
(37.7)
(33.2)
Projected benefit obligation at end of year
1,844.8
1,926.6
Change in plan assets
Fair value of plan assets at beginning of year
1,382.2
1,152.8
Actual earnings on plan assets
128.5
158.1
Employer contributions
122.2
104.5
Benefits paid
(37.7)
(33.2)
Fair value of plan assets at end of year
1,595.2
1,382.2
Unfunded status
$ (249.6)
$ (544.4)
Accumulated benefit obligation at end of year
$ 1,588.4
$ 1,636.9
Funded (unfunded) status (based on accumulated
benefit obligation)
$ 6.8
$ (254.7)
The unfunded status is included in pension/postretirement liabilities in the consolidated balance
sheets. BJC has other postretirement plans with unfunded benefit obligations of $4.6 and $4.9 at
December 31, 2013 and 2012, respectively.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
32
11. Postretirement Benefits (continued)
Included in unrestricted net assets at December 31 are the following amounts that have not yet
been recognized in net periodic pension cost:
2013 2012
Unrecognized actuarial losses
$ 329.2
$ 623.5
Unrecognized prior service cost
0.4
0.9
$ 329.6
$ 624.4
Changes in plan assets and benefit obligations recognized in unrestricted net assets for the year
ended December 31 are as follows:
2013 2012
Unrecognized actuarial losses
$ (246.5)
$ 109.3
Amortization of actuarial losses
(47.8)
(32.1)
Amortization of prior service cost
(0.5)
(0.5)
$ (294.8)
$ 76.7
The pension and other postretirement liability adjustment of $295.2 for the year ended
December 31, 2013, on the consolidated statements of operations and changes in net assets
includes $0.4 related to the other postretirement plans.
The prior service cost and actuarial loss included in unrestricted net assets and expected to be
recognized in net periodic pension cost during the year ending December 31, 2014, total $0.2 and
$19.0, respectively. The impact of the change in discount rate on the projected benefit obligation
of the Plan was a decrease of approximately $227.4 at December 31, 2013.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
33
11. Postretirement Benefits (continued)
No plan assets are expected to be returned to BJC during the year ending December 31, 2014.
2013 2012
Weighted-average assumptions used to determine
benefit obligations for the year ended December 31
Discount rate
5.25%
4.50%
Rate of increase in compensation levels
4.00
4.00
Weighted-average assumptions used to determine
expense for the year ended December 31
Discount rate
4.50%
5.13%
Rate of compensation increases
4.00
4.00
Expected long-term rate of return
7.75
7.75
BJC determines the long-term rate of return for plan assets in consultation with its external
investment advisor. BJC reviews historical market performance by investment asset class along
with current economic outlooks for asset class performance in order to estimate its long-term rate
of return assumption. Peer data and historical returns are reviewed to check for reasonableness of
BJC’s long-term rate of return assumption.
2013 2012
Components of net periodic benefit cost:
Service cost
$ 94.4
$ 79.1
Interest cost
85.9
82.0
Expected earnings on plan assets
(106.4)
(95.9)
Amortization of prior service cost
0.5
0.5
Recognized net actuarial loss
47.8
32.1
N
et periodic benefit cost
$ 122.2
$ 97.8
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
34
11. Postretirement Benefits (continued)
BJC’s goal is to maintain parity between the duration of assets and liabilities to meet the
anticipated growth of plan liabilities. The plan’s assets are invested in a portfolio designed to
preserve principal and obtain competitive investment earnings and long-term investment growth,
consistent with actuarial assumptions, with a reasonable and prudent level of risk. Diversification
is achieved by allocating funds to various asset classes and investment styles and by retaining
multiple investment managers with complementary philosophies, styles, and approaches.
Derivatives may be used to gain market exposure in an efficient and timely manner; however,
derivatives may not be used to leverage the portfolio beyond the market value of the underlying
investments. Plan assets may also be loaned to established brokerage firms in return for
securities collateral. At December 31, 2013, plan assets on loan included in the fair value of plan
assets totaled $4.5. The fair value of accepted collateral of $4.7 is recorded net of an equal
obligation to return the collateral upon completion of the lending arrangement. BJC did not
participate in a securities lending program at December 31, 2012.
BJC’s defined benefit pension plan asset allocation by asset category is as follows:
Target
Asset Plan Assets at December 31
Asset Category Allocation 2013 2012
Cash –%
0.1%
2.8%
Growth 50.0
62.2
59.1
Income 25.0
25.4
27.4
Illiquid 25.0
12.3
10.7
Total 100.0%
100.0%
100.0%
The growth asset category consists of public equities and hedge funds. The income category is
made up of fixed asset funds and securities. Lastly, the illiquid asset category includes limited
partnership investments in private equity and income, and illiquid real asset funds.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
35
11. Postretirement Benefits (continued)
The fair value of pension plan assets was determined using the following inputs at December 31,
2013:
Fair Value Measurements at Using
Fair Market
Value
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservab
le Inputs
(Level 3)
Cash and short-term investments
$ 20.7 $ 20.7 $ – $ –
Income securities:
U.S. government and agency
obligations
25.4 – 25.4 –
Corporate debt securities
212.4 – 212.4 –
Asset-backed and securitized
bonds and notes
146.9 – 44.6 102.3
Equity securities
649.0 427.5 221.5 –
Alternative investments:
Hedge funds
344.6 – – 344.6
Private equity
194.8 – – 194.8
Other
1.4 1.2 0.2 –
$ 1,595.2 $ 449.4 $ 504.1 $ 641.7
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
36
11. Postretirement Benefits (continued)
The fair value of pension plan assets was determined using the following inputs at December 31,
2012:
Fair Value Measurements at Using
Fair Market
Value
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservab
le Inputs
(Level 3)
Cash and short-term investments $ 73.6 $ 73.6 $ – $ –
Income securities:
U.S. government and agency
obligations 6.8 – 6.8 –
Corporate debt securities 258.5 – 258.5 –
Asset-backed and securitized
bonds and notes 79.9 – – 79.9
Equity securities 539.7 339.7 200.0 –
Alternative investments:
Hedge funds 250.4 – – 250.4
Private equity 147.8 – – 147.8
Other 25.5 20.8 4.7 –
$ 1,382.2 $ 434.1 $ 470.0 $ 478.1
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
37
11. Postretirement Benefits (continued)
The following table is a rollforward of the pension plan assets classified in Level 3 of the
valuation hierarchy defined above:
Asset-Backed
and
Securitized
Bonds and
Notes
Hedge
Funds
Private
Equity
Fair value at January 1, 2012 $ – $ 211.0 $ 68.0
Purchases, sales and settlements, net 12.6 15.0 69.2
Actual earnings on plan assets 7.1 24.4 10.6
Transfers in and/or out of Level 3 60.2 – –
Fair value at January 1, 2013 79.9 250.4 147.8
Purchases, sales and settlements, net
15.1 71.7 24.7
Actual earnings on plan assets
7.3 22.5 22.3
Transfers in and/or out of Level 3
–
– –
Fair value at December 31, 2013
$ 102.3 $ 344.6 $ 194.8
Fair value methodologies for Level 1 and Level 2 assets are consistent with the inputs described
in Note 10. BJC transfers assets in and/or out of Level 3 as significant inputs, including
performance attributes, used for the fair value measurement become observable or unobservable.
There were no significant transfers between Level 1, Level 2, or Level 3 that occurred between
January 1, 2013 and December 31, 2013. BJC recognizes transfers as of the end of the reporting
period.
Private equity investments have restrictions on the timing of withdrawals, up to 10 years from
initial investment date, which may reduce liquidity. Certain hedge fund investments also have
restrictions on the timing of withdrawals, up to one year from initial investment date, which may
reduce liquidity. These investments represent the Plan’s ownership interest in the net asset value
(NAV) of the respective partnership.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
38
11. Postretirement Benefits (continued)
Level 3 securities consist of limited partnership interests in hedge funds and private equity. ASC
Subtopic 820-10 allows for the use of a practical expedient for the estimation of the fair value of
investments in investment companies for which the investment does not have a readily
determinable fair value. The NAV per share, or its equivalent, was used as a practical expedient
for fair value of the Plan’s interest in hedge funds and private equity funds. Valuations provided
by the respective fund’s management consider variables such as the financial performance of
underlying investments, recent sales prices of underlying investments, and other pertinent
information. At December 31, 2013, the Plan has commitments to fund $174.5 in alternative
investments.
The Level 3 assets also consist of certain asset-backed and securitized bonds and notes of $102.3
at December 31, 2013 and trade less frequently than other income instruments which generates
potential liquidity risk. In the event pricing cannot be obtained through quoted prices in active
markets, these securities are priced using an option-adjusted discounted cash flow model.
A summary of expected cash flows for contributions and amounts to be paid to the Plan’s
participants and beneficiaries is as follows:
Expected employer contribution in 2014 $ 81.0
Expected benefit payments:
2014 $ 49.5
2015 56.4
2016 64.1
2017 72.6
2018 81.1
2019–2023 557.7
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
39
12. Professional and General Liability Insurance
BJC self-insures for professional and general liability claims to the extent of certain self-insured
limits. Substantially all BJC services are covered under the self-insurance program. Effective
November 15, 2006, self-insured retentions were between $5.0 and $8.0 per occurrence with no
aggregate. BJC purchased a claims-made policy providing $2.0 in coverage effectively reducing
the self-insured retention for professional liability to $3.0 from November 15, 2006, to the
present for its hospitals, excluding Barnes-Jewish and Children’s, which have a self-insured
retention of $8.0. This claims-made policy was renewed through November 2014. In addition,
various umbrella insurance policies have been purchased to provide coverage in excess of self-
insured limits. The estimated cost of claims is actuarially determined based upon past experience
and discounted using a discount rate of 4% in 2013 and 2012. The reserve includes provisions
for asserted and unasserted claims and incidents that have occurred but have not been reported.
BJC has a revocable self-insurance trust of $75.8 and $80.8 as of December 31, 2013 and 2012,
respectively, which is used for the payment of professional and general liability claim
settlements and expenses. During 2013 and 2012, $15.1 and $11.8, respectively, of professional
and general liability expenses were included in supplies and other in the consolidated statements
of operations and changes in net assets. In addition, at December 31, 2013 and 2012, BJC
recorded net insurance receivables of $13.9 and $15.9, respectively, included in other noncurrent
assets in the consolidated balance sheets.
13. Operating Leases
Lease expense for the years ended December 31, 2013 and 2012, totaled $73.1 and $72.4,
respectively.
Future minimum lease payments under noncancelable operating leases with terms of one year or
more are as follows:
Year ending December 31:
2014 $ 36.1
2015 25.9
2016 24.8
2017 24.0
2018 23.3
Thereafter 173.4
$ 307.5
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
40
14. Contingencies
The U.S. Department of Justice and other federal agencies are increasing resources dedicated to
regulatory investigations and compliance audits of healthcare providers. BJC is not exempt from
these regulatory efforts and has received correspondence from federal agencies with regard to
such initiatives. In consultation with legal counsel, management estimates these matters will be
resolved without material adverse effect on BJC’s consolidated financial position or consolidated
results of operations. BJC has an established formal corporate compliance function designed to
monitor compliance with applicable laws and regulations.
BJC is involved as both plaintiff and defendant in litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel, these matters will
be resolved without a material adverse effect on BJC’s consolidated financial position, operating
results or cash flows.
In October 2013, a petition was filed against BJC in the Circuit Court of the City of St. Louis,
Missouri, alleging violations of wage and hour laws, breach of contract and unjust enrichment
claims. The suit seeks to certify a class of former and current non-exempt (hourly) employees. At
this time, there have been no rulings and no class has been certified. Management believes it has
substantial defenses and intends to contest the allegations of the Petition, but at this early stage
cannot predict the potential outcome of the case.
15. Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are available for the following purposes at December 31:
2013 2012
Healthcare services:
Research and education
$ 97.2
$ 90.8
Special programs
78.4
70.6
Patient care
32.4
26.8
Operations
27.3
23.2
Property and equipment
4.9
4.0
$ 240.2
$ 215.4
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
41
15. Temporarily and Permanently Restricted Net Assets (continued)
Permanently restricted net assets at December 31 are summarized below, the income from which
is expendable to support the following:
2013 2012
Healthcare services:
Special programs
$ 77.4
$ 78.0
Operations
44.1
30.5
Research and education
43.3
41.0
Patient care
25.9
24.4
$ 190.7
$ 173.9
16. Endowments
The Foundations’ endowments consist of approximately 569 individual funds established for a
variety of purposes. The Foundations’ endowments include both donor-restricted endowment
funds and funds designated by the Foundations’ Boards of Directors to function as endowments.
Net assets associated with endowment funds are classified and reported based on the existence or
absence of donor-imposed restrictions in accordance with U.S. GAAP.
The Foundations have interpreted Missouri’s enacted version of the Uniform Prudent
Management of Institutional Funds Act of 2006 (the Missouri Statute) as requiring the
preservation of the fair value of the original gift as of the gift date of a donor-restricted
endowment fund, absent explicit donor stipulations to the contrary.
As a result of this interpretation, the Foundations classify as permanently restricted net assets:
(a) the original value of gifts donated to a permanent endowment, (b) the original value of
subsequent gifts to a permanent endowment, and (c) accumulations to a permanent endowment
made in accordance with the direction of the applicable donor gift instrument at the time the
accumulation is added to the fund. The remaining portion of the permanent endowment fund that
is not classified as permanently restricted net assets is classified as temporarily restricted net
assets until those amounts are appropriated for expenditure by the Foundations in a manner
consistent with the standards prescribed by the Missouri Statute.
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
42
16. Endowments (continued)
In accordance with the Missouri Statute, when investing, reinvesting, purchasing, acquiring,
exchanging, selling, managing property, appropriating appreciation, developing and applying
investment and spending policies, and accumulating income, the Board of Directors of each
affiliated foundation shall act with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in like capacity and familiar with
these matters would use in the conduct of an enterprise of like character and with like aims to
accomplish the purposes of the institution receiving the benefit of the institutional endowment
fund.
In exercising such judgment, the Foundations’ Boards of Directors shall consider the following
factors in making a determination to appropriate or accumulate donor-restricted funds:
• The duration and preservation of the fund
• The purposes of the Foundation and the endowment fund
• General economic conditions
• The possible effects of inflation and deflation
• The expected total return from income and appreciation of investments
• The investment policies of the Foundation
At December 31, 2013, the endowment net asset composition by type of fund consisted of the
following:
Unrestricted
Temporarily
Restricted
Permanently
Restricted Total
Donor-restricted
endowment funds
$ – $ 108.2 $ 143.4 $ 251.6
Board-designated
endowment funds
128.4 – – 128.4
Total funds
$ 128.4 $ 108.2 $ 143.4 $ 380.0
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
43
16. Endowments (continued)
At December 31, 2012, the endowment net asset composition by type of fund consisted of the
following:
Unrestricted
Temporarily
Restricted
Permanently
Restricted Total
Donor-restricted
endowment funds $ – $ 92.0 $ 141.9 $ 233.9
Board-designated
endowment funds 118.4 – – 118.4
Total funds $ 118.4 $ 92.0 $ 141.9 $ 352.3
For the years ended December 31, 2013 and 2012, the changes in the endowment net assets are
as follows:
Unrestricted
Temporarily
Restricted
Permanently
Restricted Total
Endowment net assets,
January 1, 2012 $ 101.4 $ 72.5 $ 140.6 $ 314.5
Investment return:
Investment income 1.6 2.8 – 4.4
Net appreciation 13.2 24.5 0.5 38.2
Total investment return 14.8 27.3 0.5 42.6
Contributions – – 1.9 1.9
Appropriations, net of
recoveries (4.4) (7.6) – (12.0)
Other changes 6.6 (0.2) (1.1) 5.3
Endowment net assets,
January 1, 2013
118.4 92.0 141.9 352.3
Investment return:
Investment income
2.4 4.1 – 6.5
Net appreciation
10.2 18.7 0.4 29.3
Total investment return
12.6 22.8 0.4 35.8
Contributions
– – 1.2 1.2
Appropriations, net of
recoveries
(4.2) (6.7) – (10.9)
Other changes
1.6 0.1 (0.1) 1.6
Endowment net assets,
December 31, 2013
$ 128.4 $ 108.2 $ 143.4 $ 380.0
BJC HealthCare
Notes to Consolidated Financial Statements (continued)
(Dollars in Millions)
1310-1145965
44
16. Endowments (continued)
Return Objectives and Risk Parameters
The Foundations have adopted investment and spending policies for endowment assets that
attempt to provide a stream of funding to programs supported by its endowment while seeking to
maintain the purchasing power of the endowment assets. Endowment assets include those assets
of donor-restricted funds that the organization must hold in perpetuity or for a donor-specified
period(s) as well as board-designated funds. Under this policy, as approved by the Foundations’
Boards of Directors, the endowment net assets are invested in a manner that is intended to
produce results that exceed the price and yield results of their relevant benchmarks while
assuming a reasonable level of investment risk. The Foundations expect its endowment funds,
over time, to generate a total annualized rate of return, net of fees, 5% greater than the rate of
inflation, as measured by the Consumer Price Index (CPI), over a rolling five-year period. Actual
returns in any given year may vary from this amount.
Strategies Employed for Achieving Objectives
The Foundations rely on a total return strategy in which investment earnings are achieved
through both capital appreciation (realized and unrealized) and current yield (interest and
dividends, net of fees).
Spending Policy
The Foundations have adopted a policy in which earnings are allocated annually for spending
ranging from 4% to 5% of the 36-month rolling average market value of the endowment fund
investment pool.
In establishing this policy, the Foundations consider the long-term expected return on the
endowment whereby the current policy allows the endowment assets to grow at an average of
CPI annually and to provide additional annual support for endowment administration of 1%.
17. Subsequent Events
BJC evaluated events and transactions occurring subsequent to December 31, 2013 through
February 25, 2014, the date the consolidated financial statements were issued. During this
period, there were no subsequent events that required recognition in the consolidated financial
statements.
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