Lucile Salter Packard Children s Hospital at Stanfordbondholder-information.stanford.edu/pdf/LPCH_2016_financ_stmt.pdf · Lucile Salter Packard Children’s Hospital at Stanford Consolidated

Lucile Salter Packard Children’s Hospital at Stanford Consolidated Financial Statements August 31, 2016 and 2015

Lucile Salter Packard Children’s Hospital at Stanford Index August 31, 2016 and 2015

Page(s)

Report of Independent Auditors ............................................................................................................... 1

Consolidated Financial Statements

Consolidated Balance Sheets ...................................................................................................................... 2

Consolidated Statements of Operations and Changes in Net Assets ......................................................... 3

Consolidated Statements of Cash Flows ..................................................................................................... 4

Notes to Consolidated Financial Statements ......................................................................................... 5–34

Report of Independent Auditors on Accompanying Consolidating Information .............................. 35

Consolidating Balance Sheets ................................................................................................................... 36

Consolidating Statements of Operations and Changes in Net Assets ...................................................... 37

Report of Independent Auditors

To Board of Directors Lucile Salter Packard Children’s Hospital at Stanford

We have audited the accompanying consolidated financial statements of Lucile Salter Packard Children’s

Hospital at Stanford (“LPCH”) and its entities, which comprise the consolidated balance sheets as of

August 31, 2016 and 2015, and the related consolidated statements of operations and changes in net

assets, and of cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

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

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

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

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

whether due to fraud or error.

Auditors’ Responsibility

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

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

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

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

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

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

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

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

organization’s preparation and fair presentation of the consolidated financial statements in order to design

audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an

opinion on the effectiveness of the organization’s internal control. Accordingly, we express no such

opinion. An audit also includes evaluating the appropriateness of accounting policies used and the

reasonableness of significant accounting estimates made by management, as well as evaluating the

overall presentation of the consolidated financial statements. We believe that the audit evidence we have

obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

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

respects, the financial position of LPCH and its entities at August 31, 2016 and 2015, and the results of

their operations and changes in their net assets and their cash flows for the years then ended in

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

December 6, 2016

PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111-4004 T: (415) 498 5000, F: (415) 498 7100, www.pwc.com/us

Lucile Salter Packard Children’s Hospital at Stanford Consolidated Balance Sheets August 31, 2016 and 2015

(in thousands of dollars)

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

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2016 2015

Assets

Current assets

Cash and cash equivalents 532,900$ 335,901$

Patient accounts receivable, net of allowance for doubtful

accounts of $11,670 and $21,300 in 2016 and 2015, respectively 268,174 271,768

Contributions receivable 32,944 8,075

Other receivables 34,060 28,344

Prepaid expenses, inventory and other 17,497 15,559

Total current assets 885,575 659,647

Investments 70,642 69,313

Investments in University managed pools 599,151 717,866

Board designated funds in University managed pools 9,214 159,789

Assets limited as to use, held by trustee 219 89,500

Property and equipment, net 1,429,316 1,078,277

Beneficial interest in trusts, net 15,048 16,079

Contributions receivable, net of current portion 82,707 22,468

Other assets 64,857 57,817

Total assets 3,156,729$ 2,870,756$

Liabilities and Net Assets

Current liabilities

Accounts payable and accrued liabilities 151,224$ 108,452$

Accrued salaries and related benefits 62,712 65,279

Due to related parties 34,189 53,759

Third-party payor settlements 1,849 1,967

Current portion of long-term debt and capital leases 5,695 5,675

Self-insurance reserves and other liabilities 8,612 7,924

Total current liabilities 264,281 243,056

Self-insurance reserves and other liabilities, net of current portion 32,837 34,002

Long-term debt, net of current portion 662,711 554,011

Total liabilities 959,829 831,069

Commitments and contingencies (Note 14)

Net assets

Unrestricted 1,411,433 1,377,043

Temporarily restricted 574,119 458,239

Permanently restricted 211,348 204,405

Total net assets 2,196,900 2,039,687

Total liabilities and net assets 3,156,729$ 2,870,756$

Lucile Salter Packard Children’s Hospital at Stanford Consolidated Statements of Operations and Changes in Net Assets Years Ended August 31, 2016 and 2015



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2016 2015

Operating revenues

Net patient service revenue before provision for doubtful accounts 1,310,951$ 1,314,587$

Provision for doubtful accounts, net 2,433 (10,474)

Net patient service revenue after provision for doubtful accounts 1,313,384 1,304,113

Other revenue 65,089 52,360

Net assets released from restrictions used for operations 23,829 23,352

Total operating revenues 1,402,302 1,379,825

Operating expenses

Salaries and benefits 585,503 518,780

Professional services 18,655 23,151

Supplies 113,386 97,007

Purchased services 476,459 441,783

Other 113,223 134,731

Depreciation and amortization 56,454 58,532

Total operating expenses 1,363,680 1,273,984

Income from operations 38,622 105,841

Interest income 2,351 2,400

Income and gains from University managed pools 9,076 30,923

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

Other (500) (833)

Excess of revenues over expenses 48,435 138,331

Net assets released from restrictions used for purchases of

property and equipment 27 1,999

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

Adjustment for minimum pension liability 1,385 (678)

Transfers to/from University and other (15,447) (50,382)

Increase in unrestricted net assets 34,390 89,270

Changes in temporarily restricted net assets

Contributions 129,868 70,810

Income and gains from University managed pools 9,987 14,549

Change in value of beneficial interest in remainder trusts 164 (254)

Net assets released from restrictions for operations (23,829) (23,352)

Purchase of property and equipment (27) (1,999)

Transfers to/from University and other (283) (878)

Increase in temporarily restricted net assets 115,880 58,876

Changes in permanently restricted net assets

Contributions and other 7,669 850

Change in value of beneficial interest in remainder trusts 1,255 (310)

Transfers to/from University and other (1,981) 523

Increase in permanently restricted net assets 6,943 1,063

Increase in net assets 157,213 149,209

Net assets

Beginning of year 2,039,687 1,890,478

End of year 2,196,900$ 2,039,687$

Lucile Salter Packard Children’s Hospital at Stanford Consolidated Statements of Cash Flows Years Ended August 31, 2016 and 2015



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2016 2015

Cash flows from operating activities

Change in net assets 157,213$ 149,209$

Adjustments to reconcile change in net assets to

net cash provided by operating activities

Depreciation and amortization 55,001 57,603

Loss on extinguishment of long term debt 1,114 -

Premium received related to bond issuance 14,447 -

Provision for doubtful accounts (2,433) 10,474

Loss/(gains) from University managed pools 5,274 (22,123)

Income and gains from Investments (1,460) (668)

Contributions and investment income restricted by donors (30,043) (61,682)

Distributions more than undistributed earnings from investees 1,437 -

Changes in operating assets and liabilities

Patient accounts receivable, net 6,027 (50,937)

Contributions receivable (82,880) 3,063

Due to/from related parties 15,429 51,563

Other receivables, inventory, other assets, prepaid

expenses and other (14,739) (17,015)

Accounts payable and accrued liabilities 8,855 14,321

Accrued salaries and related benefits (2,567) 7,844

Third-party payor settlements (118) 452

Self-insurance and other liabilities (477) 2,824

Cash provided by operating activities 130,080 144,928

Cash flows from investing activities

Purchases of investments in University managed pools - (757)

Sales of Investments in University managed pools 270,000 90,000

Purchase of investment for assets limited as to use (113,458) (44)

Decrease in assets limited as to use 202,871 170,201

Purchases of property and equipment (373,743) (251,099)

Cash provided by (used in) investing activities (14,330) 8,301

Cash flows from financing activities

Payment of long term debt (5,705) (5,375)

Cost of issuance related to debt issuance (1,188) -

Proceeds from issuance of long term debt 100,000 -

Contributions and investment income restricted by donors 24,280 41,714

Transfers to related parties (36,138) (27,824)

Cash provided by financing activities 81,249 8,515

Net increase in cash and cash equivalents 196,999 161,744

Cash and cash equivalents

Beginning of year 335,901 174,157End of year 532,900$ 335,901$

Supplemental disclosures of cash flow information

Interest paid 10,950$ 14,854$

Noncash activities

Accounts payable related to purchases of property and equipment 33,071 18,394

Transfer of permanent restricted contribution from related party 5,985 880

Accrual of net assets transfer to related parties 2,718 24,913

Issuance of refunding bonds 91,931 -

Defeasance of 2008 Notes (90,290) -

Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015


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1. Organization

Lucile Salter Packard Children’s Hospital at Stanford (“LPCH”) operates a licensed acute care

pediatric and obstetric hospital on the Leland Stanford Junior University (“University”) campus in

Palo Alto and operates several inpatient care units on its license in nearby community hospitals.

LPCH also operates outpatient physician clinics in its facilities and other community settings.

The Board of Trustees of the University is the sole corporate member of LPCH and Stanford Health

Care (“SHC”). LPCH has 3,872 full time and part time employees as of August 31, 2016.

LPCH and SHC are the primary clinical affiliates of the Stanford University School of Medicine (the

“Stanford School of Medicine”) for internship and residency programs, clinical research and other

programs that support the Stanford School of Medicine’s academic mission. Within the Stanford

School of Medicine, the Pediatric and Obstetrics Faculty Practice Organization (“FPO”) exists to

advance the missions of the Stanford School of Medicine and LPCH where they intersect in the

delivery of professional medical services.

The related party transactions between LPCH, SHC, the University and the Stanford School of

Medicine are described further in Note 12.

In 2011, LPCH, together with the Stanford School of Medicine, formed Packard Children’s Health Alliance (“PCHA”), a non-profit medical foundation corporation, which affiliated with Packard Medical Group, Inc. (the “Packard Medical Group”), a physician-owned for-profit California professional corporation. The Stanford School of Medicine and LPCH are the members of PCHA, and appoint directors to the governing board. The bylaws of PCHA afford control of PCHA to LPCH and therefore, the activities of PCHA have been included in the consolidated financial statements of LPCH. LPCH has recorded PCHA’s results of operations as an investment in PCHA and it is eliminated in consolidation. There is a professional services agreement between PCHA and Packard Medical Group. Physicians who provide services through PCHA are all and must be employees of the Packard Medical Group and PCHA assumes responsibility for all aspects of the physicians’ practice, including employee practice staff.

PCHA has been organized to operate community based pediatric specialty and subspecialty and obstetrics practices throughout the Bay Area. The objectives of PCHA are to support the overall network by building a presence in growing service areas, expanding education and clinical research programs and enhancing the quality and coordination of care across different care settings. As of August 31, 2016, PCHA includes approximately 157 physicians and other providers in 24 practices located around the San Francisco Bay Area. PCHA also operates five specialty services centers in Capitola, Emeryville, Fremont, Monterey and Walnut Creek. LPCH has entered into a sponsorship agreement with PCHA, wherein LPCH has agreed to provide funding for the development and the operation of PCHA’s physician practices. In 2016, PCHA purchased three physician practices for approximately $816 which were funded by LPCH through a capital contribution.

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

the marketplace as “Stanford Children’s Health.”



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Effective September 1, 2002, LPCH and SHC entered into an agreement whereby LPCH became a

member of the Stanford University Medical Indemnity Trust (“SUMIT”), a not-for-profit, tax-exempt

corporation that is a captive insurance carrier. SUMIT Holding International, LLC (“SHI”) is the sole

owner of SUMIT Insurance Company Ltd. (“SUMIT”) and Stanford University Medical Network Risk

Authority, LLC (“SRA”). SHC and LPCH are the owners of SHI. LPCH’s share of SUMIT net

assets was approximately 21.6% and 24.7% for the years ended August 31, 2016 and 2015,

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

August 31, 2016 and 2015, LPCH had an investment of $16,244 and $19,547 in SUMIT,

respectively, which is reflected on the consolidated balance sheets in other assets.

SRA was formed on September 19, 2012 and began operations on December 1, 2012. SRA

provides risk management services to SHI, the owners of SHI and other affiliated and unaffiliated

parties and serves as attorney-in-fact to Professional Exchange Insurance Company (“PEAC”).

LPCH’s ownership interest in SRA was 18% for the year ended August 31, 2016 and 2015.

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

was a loss of $59 and $12 for year ended August 31, 2016 and 2015, respectively, which is

reflected on the consolidated balance sheets in other assets.

Professional Exchange Insurance Company (“PEAC”), a captive insurance carrier that entered into

business with SRA on October 18, 2012, provides professional liability insurance coverage for

physicians and other licensed healthcare practitioners of PCHA, University Healthcare Alliance (a

subsidiary of SHC) and other affiliated parties. PCHA’s share of net assets in PEAC was 29.4%

and 29.8% for the year ended August 31, 2016 and 2015, respectively. PCHA’s ownership in

PEAC is accounted for using the equity method. PCHA had an investment of $856 and $674 or the

years ended August 31, 2016 and 2015, respectively, which is reflected on the consolidated

balance sheets in other assets.

On September 1, 2006, LPCH and the University entered into a Professional Services Agreement

(“PSA”) pursuant to which the University assigned to LPCH the right to bill and collect all revenue

related to pediatric and obstetric practices on behalf of the University’s School of Medicine (“SoM”)

faculty as the LPCH Medical Group, a division of LPCH.

2. Summary of Significant Accounting Policies

Basis of Presentation

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

Net assets of LPCH and changes therein have been classified and are reported as follows:

Unrestricted net assets – Unrestricted net assets represent those resources of LPCH that are

not subject to donor-imposed stipulations. The only limits on unrestricted net assets are broad

limits resulting from the nature of LPCH and the purposes specified in its articles of

incorporation or bylaws and limits resulting from contractual agreements, if any.

Temporarily restricted net assets – Temporarily restricted net assets represent contributions,

which are subject to donor-imposed restrictions that can be fulfilled by actions of LPCH

pursuant to those stipulations or by the passage of time.



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Permanently restricted net assets – Permanently restricted net assets represent

contributions that are subject to donor-imposed restrictions that they be maintained by LPCH in

perpetuity. Generally, the donors of these assets permit LPCH to use all or part of the

investment return on these assets.

Expenses are generally reported as decreases in unrestricted net assets. Donor-imposed

restrictions expire when the stipulated time period has elapsed, when the stipulated purpose for

which the resource was restricted has been fulfilled, or both. Temporarily restricted contributions

are recorded as temporarily restricted net assets when received and when the restriction expires,

the net assets are shown as released from restriction in the Consolidated Statements of Operations

and Changes in Net Assets. Income earned on temporarily restricted or permanently restricted net

assets for which that income is restricted for a stipulated purpose is recorded in temporarily

restricted net assets. When income is made available for release and when the restriction is

deemed to have been met, those amounts are included in net assets released from restrictions in

the Consolidated Statements of Operations and Changes in Net Assets.

Transfers to Related Parties

Certain amounts previously received from donors have been transferred to related parties.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of demand deposits and money market mutual funds

with an original maturity of three months or less when purchased. These amounts are carried at

cost which approximates fair value. The Federal Deposit Insurance Corporation, or FDIC, insures

a corporation’s funds deposited in a bank up to a maximum of $250 in the event of a bank failure.

As of August 31, 2016, our cash and cash equivalents held in bank deposits exceeded the FDIC

insured amount. We have not experienced any losses in relation to cash and cash equivalents in

excess of FDIC insurance limits.

Assets Limited as to Use, Held by Trustee

Assets limited as to use primarily include assets held by trustees under bond indenture

agreements. The bond indenture terms require that the trustee control the disbursement of bond

proceeds for capital projects. Assets limited as to use consist of money market funds for the year

ended August 31, 2016 and 2015, respectively. Fair values are based on quoted market prices or

broker or dealer price quotations on a specific identification basis.

Contributions Receivable

Contributions are recorded at fair value at the date the promise is received. Donations for specific

purposes are reported as either temporary or permanently restricted net assets and are included as

restricted contributions. Contributions to be received after one year are discounted at an

appropriate discount rate commensurate with the risks involved and applicable to the years in

which the promises are received, and recorded in their respective net asset category. The discount

rates used during the year ended August 31, 2016 and 2015 were determined using Moody’s

average corporate AAA bond rate. Amortization of the discount is included in contribution revenue

in the Consolidated Statements of Operations and Changes in Net Assets. Conditional promises to

give are recognized when the condition is substantially met.

Other Receivables

Other receivables are comprised of nonpatient related receivables for medical services provided.



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Investments

Investments held directly by LPCH consist primarily of mutual funds classified as trading securities

and are stated at fair value. Investment earnings (including realized gains and losses on

investments, interest, dividends and impairment loss on investment securities) are included in

investment income unless the income or loss is restricted by donor or law. Income on investments

of donor restricted funds is added to or deducted from the appropriate net asset category based on

the donor’s restriction.

Investments in University Managed Pools

Investments in University managed pools consist of funds invested in the University’s Merged Pool

(“MP”). The value of its share of the MP is determined by the University, and is based upon the fair

value of the underlying assets held in the MP. Earnings include distributions and increases or

decreases in the value of LPCH’s share of the pool. LPCH may deposit funds in the MP at its

discretion; however, withdrawals require advance notice. All investment gains and losses and the

increases or decreases in the share value are treated as unrealized and included in the excess of

revenues over expenses, unless the income is restricted by donor or law.

Board Designated Funds in University Managed Pools

LPCH’s board of directors approved designating $213,111 in 2014 for future investment in facilities,

programs, and services over which the Board retains control and may at its discretion subsequently

use for other purposes. As of August 31, 2016, the remaining balance of board designated funds

was $9,214. These funds are primarily invested in the MP and were funded from cash and cash

equivalents. In accordance with the instructions of the Board, investment returns earned on board

designated funds are treated as unrestricted income with the principal to remain intact until

required for future investment in facilities, programs, and services.

Beneficial Interest in Trusts

Beneficial interest in trust represent gifts for which LPCH is the trustee and the remainder

beneficiary of certain charitable remainder trusts, where the trust assets are invested and

administered by outside trustees. Beneficiaries sustain a lifetime interest in a portion of the trust

income. Investments held in these trusts are carried at fair value. The discount rate used during the

year ended August 31, 2016 and 2015 were determined using the T-bill rate. The related liabilities

are based on estimated future cash receipts discounted at 1.46% for the year ended August 31,

2016 and ranging from 0.36% to 2.18% for the year ended August 31, 2015.

Additionally, LPCH is the sole beneficiary of a perpetual trust that is carried at the fair market value

of the trust. Income from the trust (interest, net of fees) is distributed to LPCH and included in

interest income.

Property and Equipment

Property and equipment are stated at cost except for donated assets, which are recorded at fair

market value at the date of donation. LPCH capitalizes certain internal costs of computer software

developed or obtained for internal use. Depreciation of property and equipment is computed using

the straight-line method over the estimated useful lives, which are as follows:

Land improvements 10 to 25 years

Buildings and improvements 10 to 40 years

Equipment 3 to 20 years

Ground leases 51 years



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Significant replacements and improvements are capitalized, while maintenance and repairs, which

do not improve or extend the life of the respective assets, are charged to expense as incurred.

Upon sale or disposal of property and equipment, the cost and accumulated depreciation are

removed from the respective accounts, and any gain or loss is included in the Consolidated

Statements of Operations and Changes in Net Assets.

Assets under capital leases are recorded at the present value at the inception of the lease and are

amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of

the asset. The amortization of assets recorded under capital leases is included in depreciation and

amortization expense in the accompanying Consolidated Statements of Operations and Changes

in Net Assets.

LPCH holds several ground leases, also classified as property and equipment. These ground

leases are amortized on a straight-line basis over the term of the leases and are reflected as

depreciation and amortization in the Consolidated Statements of Operations and Changes in Net

Assets.

Interest costs incurred on borrowed funds during the period of construction of capital assets are

capitalized, net of any interest earned, as a component of the cost of acquiring the asset.

Impairment and Disposition of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances

indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to

be held and used is measured by a comparison of the carrying amount of an asset to future net

undiscounted cash flows expected to be generated by the asset. If such assets are considered to

be impaired, the impairment to be recognized is measured by the amount by which the carrying

amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at

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

for the years ended August 31, 2016 and 2015.

Other Assets

Other assets include LPCH’s ownership interest in SUMIT, SRA and PEAC, investment in joint

ventures and deposits with vendors, goodwill and deferred debt issuance costs.

LPCH performs an impairment analysis at the reporting unit level when events occur that require

an evaluation to be performed, or at least annually in the fourth quarter. If the carrying value of

goodwill or indefinite lived intangible assets are determined to be impaired, or if the carrying value

of a business that is to be sold or otherwise disposed of exceeds its fair value, then the carrying

value is reduced, including any allocated goodwill, to fair value. Estimates of fair value are based

on appraisals, established market prices for comparative assets or internal estimates of future net

cash flows based on projected performance, depending on circumstances. No impairment of

goodwill is included in the accompanying Consolidated Statement of Operations and Changes in

Net Assets for the years ended August 31, 2016 or 2015.

Deferred debt issuance costs represent costs incurred in conjunction with the issuance of LPCH’s

long-term debt. These costs are amortized on a straight-line basis, which approximates the

effective interest method, over the life of the debt.



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Compensated Absences

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

of $40,305 and $37,237 were recorded as of August 31, 2016 and 2015, respectively, and are

included in accrued salaries and related benefits.

Premiums on Long-Term Debt

Premiums arising from the original issuance of long-term debt are amortized on a straight-line

basis, which approximates the effective interest method, over the life of the debt. The unamortized

portion of these premiums is included in long-term debt.

Excess of Revenues Over Expenses

The Consolidated Statements of Operations and Changes in Net Assets include excess of

revenues over expenses. Changes in unrestricted net assets which are excluded from excess of

revenues over expenses include permanent transfers of assets to and from affiliates for other than

goods and services, contributions of long-lived assets (including assets acquired using

contributions which by donor restriction were to be used for the purposes of acquiring such assets),

adjustment for minimum pension liability, and transfer of funds related to underwater endowments.

Net Patient Service Revenue

Net patient service revenue is reported at the estimated net realizable amounts from patients,

third-party payors including Medi-Cal and others for services rendered. The contractual

commitments and laws and regulations governing the payment for services for government (Medi-

Cal and Medicare) and commercial payors are extremely complex and subject to interpretation. As

a result, there is at least a reasonable possibility that recorded estimates will change by a material

amount in the near term.

The process for estimating the ultimate collectability of receivables involves historical collection

experience, changes in contracts with payors, and significant assumptions and judgment. LPCH

has implemented a standardized approach to this estimation based on the payor classification and

age of outstanding receivables. Account balances are written off against the allowance when

management believes it is probable the receivable will not be recovered. The use of historical

collection experience is an integral part of the estimation of the reserve for doubtful accounts.

Revisions in the reserve for doubtful accounts are recorded as adjustments to the provision for

doubtful accounts.

Charity Care and Community Benefits

LPCH provides care to patients who meet certain criteria under its charity care policy without

charge or at amounts less than its established rates. Amounts determined to qualify as charity

care are not reported as net patient service revenue. LPCH also provides services to patients

under Medi-Cal and other publicly sponsored programs, which reimburse at amounts less than the

cost of the services provided to the recipients. Such amounts are considered community benefits.

Self-Insurance Reserves and Other Liabilities

LPCH self-insures for professional liability risks, postretirement medical benefits, health, dental and

vision, and workers’ compensation. These liabilities are reflected as self-insurance reserves on the

balance sheets.

Professional Liability – LPCH is self-insured through SUMIT (LPCH and SHC Captive

Insurance Company) for medical malpractice and general liability losses under claims-made



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

SUMIT which totals $1,761 and $1,891 for the years ended August 31, 2016 and 2015,

respectively. For the policy year’s September 1, 2015 to September 1, 2016, SUMIT retains

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

next $165,000 is transferred to various reinsurance companies rated “A” or better by AM Best

rating agency. For the policy year’s September 1, 2014 to September 1, 2015, SUMIT retained

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

next $150,000 was transferred to various reinsurance companies rated “A” or better by AM

Best rating agency.

Postretirement Medical Benefits – Liabilities for post-retirement medical claims for current

and retired employees are actuarially determined by SHC and allocated to LPCH.

Health, Dental and Vision – Liabilities for health, dental and vision claims for current

employees are based on estimated costs.

Workers’ Compensation – LPCH purchases insurance for workers’ compensation claims with

a $750 deductible per occurrence. Workers’ compensation insurance provides statutory limits

for the State of California. An actuarial estimate of retained losses (or losses retained within

the deductible) has been used to record a liability.

Fair Value of Financial Instruments

Due to the short-term nature of cash and cash equivalents, accounts payable and accrued

liabilities, and accrued salaries and related benefits, their carrying value approximates their fair

value.

Transactions with the University

LPCH enters into various transactions with the University. LPCH records expense transactions

where direct and incremental economic benefits are received by LPCH. Certain expenses are

allocated from the University to LPCH. Allocated expenses reported as operating expenses in the

Consolidated Statements of Operations and Changes in Net Assets are management’s best

estimates of LPCH’s arms-length payment of such amounts for its market specific circumstances.

To the extent that payments to the University exceed an arms-length estimated amount relative to

the benefit received by LPCH, they are recorded as transfers to the University.

Concentration of Credit Risk

Financial instruments, which potentially subject LPCH to concentrations of credit risk, consist

principally of cash and cash equivalents, patient accounts receivable, and investments in University

managed pools (Note 6).

LPCH invests its cash and cash equivalents in highly rated financial instruments including insured

deposits. As of August 31, 2016, LPCH has invested its cash and cash equivalents with a financial

institution in excess of federal depository insurance limits.

LPCH’s concentration of credit risk relating to patient accounts receivable is limited by the diversity

and number of the patients and payers. Patient accounts receivable consists of amounts due from

governmental programs, commercial insurance companies, private pay patients, and other group

insurance programs.



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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted

in the United States of America requires management to make estimates and assumptions that

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

liabilities at the date of the financial statements and the reported amounts of revenues and

expenses during the reporting period. The most significant estimates relate to patient accounts

receivable allowances and self-insurance reserves. Actual results may differ from those estimates.

Income Taxes

Both LPCH and PCHA are California not-for-profit corporations and have been recognized as tax-

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

Adoption of New Standards

LPCH adopts new standards on a consolidated basis (including PCHA).

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

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

In August 2016, the FASB issued an update to the ASC which makes several modifications to the current reporting requirements for not-for-profit (NFP) entities. The ASC update changes the way NFPs classify net assets and results in significant changes to financial reporting and disclosures for NFPs. The new guidance is effective for fiscal year 2019 for LPCH. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements. In March 2016, the FASB issued an update to the ASC which clarifies the implementation guidance on principal versus agent considerations. This guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new guidance is effective for fiscal year 2019 for LPCH. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements. In February 2016, the FASB issued an update to the ASC which requires lessees to recognize operating and financing lease liabilities and corresponding right-of use assets on the balance sheet. The new guidance is effective for fiscal year 2020 for LPCH. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements. In May 2015, the FASB issued an update to the ASC which modifies reporting requirements for investments that are eligible to be measured at fair value using the net asset value (or its equivalent). The ASC update removes the requirement to categorize these investments within the fair value hierarchy and make certain disclosures. The new guidance is effective for fiscal year 2018 for LPCH. LPCH has adopted this guidance in fiscal year 2016. In April 2015, the FASB issued an update to the ASC which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The new guidance is effective for fiscal year 2017 for LPCH. In August 2015, the FASB issued a supplemental ASU which allows an entity to present debt issuance costs related to a line of credit arrangement as an asset and subsequently amortize the costs ratably over the term of the line of credit arrangement. The recognition and measurement guidance for debt issuance costs is not affected. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements.



13

In May 2014, the FASB issued an update to the ASC to improve the consistency of revenue recognition practices across industries for economically similar transactions. Subsequently, the FASB has issued several amendments and updates to the original standard. The core principle is that an entity recognizes revenue for goods or services to customers in an amount that reflects the consideration it expects to receive in return. The guidance is effective for fiscal year 2019. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements.

3. Net Patient Service Revenue

LPCH has agreements with third-party payors that provide for payments at amounts different from

LPCH’s established rates. A summary of payment arrangements with major third-party payors are

as follows:

Medi-Cal – Inpatient services rendered to State and Managed Medi-Cal program beneficiaries

through June 30, 2013 were reimbursed under contracts with negotiated per diem rates. On

July 1, 2013, the State began reimbursing for Medi-Cal program beneficiaries using an All

Patient Refined-Diagnosis Related Group (APR-DRG) methodology. Outpatient services are

reimbursed based upon prospectively determined fee schedules.

In addition, Disproportionate Share (“DSH”) is another Medi-Cal program that provides for

supplemental funding when a hospital is considered by the State to have relatively more Medi-

Cal utilization than the norm. LPCH must re-qualify for DSH annually. LPCH did not qualify

for DSH in 2016 and 2015.

HMO/PPO and Other – Managed care contracts such as those with HMOs and PPOs

reimburse LPCH at per diem rates or a percent of charges basis, which are less than full

charges. Net patient service revenue by major payor before the provision for doubtful accounts

for the years ended August 31 is as follows:

LPCH PCHA Total LPCH PCHA Total

Medi-Cal 254,028$ 6,340$ 260,368$ 264,638$ 6,593$ 271,231$

HMO/PPO 905,987 61,822 967,809 931,798 57,596 989,394

Other 79,247 3,527 82,774 54,622 (660) 53,962

1,239,262$ 71,689$ 1,310,951$ 1,251,058$ 63,529$ 1,314,587$

20152016

Included above in the Medi-Cal net patient services revenue is $51,793 and $79,775 for Medi-

Cal Fee-For-Service and Managed Care payments for fiscal years 2016 and 2015, respectively,

under the hospital provider fee program.

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

represent 28%, 12% and 15%, and 26%, 11% and 14%, of LPCH net patient accounts

receivable at August 31, 2016 and 2015, respectively. Amounts due from Blue Cross, Blue

Shield and the State of California’s Medi-Cal program represent 24%, 10% and 9%, and 22%,

14% and 15%, of PCHA net patient accounts receivable at August 31, 2016 and 2015,

respectively. LPCH does not believe significant credit risks exist with these payors.



14

Hospital Quality Assurance Fee Program

The State of California enacted AB 1383 in 2009, as amended by AB 1653 in 2010, which

established a Hospital Quality Assurance Fee Program (“QAF”) and a Hospital Fee Program.

These programs imposed a provider fee on certain California general acute care hospitals that,

combined with federal matching funds, would be used to provide supplemental payments to certain

hospitals and support the State’s effort to maintain health care coverage for children. The effective

period of the Hospital Fee Program was April 1, 2009 through December 31, 2010. The State

received final approval from the Centers for Medicare & Medicaid Services (CMS) in December of

2010 on the rates to pay Medi-Cal managed care plans. Subsequent legislation allowed for three

additional QAF and Hospital Fee programs, the latest of which runs from January 1, 2014 through

December 31, 2016. In December 2014, CMS approved the fee-for-service Medi-Cal supplement

payments portion of this thirty month extension. CMS approved both the expansion population and

non-expansion population portion of the first of four potential managed care supplemental

payments of this thirty month program in April 2016 and June 2015, respectively.

For the years ended August 31, 2016 and 2015, respectively, LPCH recognized $51,793 and

$79,775 in net patient service revenue for Medi-Cal Fee-For-Service (“FFS”) and Managed Care

supplemental payments and $24,196 and $43,156, in other expense in the Consolidated Statement

of Operations and Changes in Net Assets for QAF paid to California Department of Health Care

Services (“DHCS”).

4. Charity Care and Community Benefits

LPCH is committed to advocacy, outreach, education, and research to improve the health status of

children and pregnant women. LPCH continually reaffirms its commitment to its community by

developing innovative programs to enhance its own and the community’s capacity to care for

children and pregnant women. These programs include:

Health Professions Education

Graduate Medical Education

Social Services Internships

Community Programs

Mobile Adolescent Health Services

Pediatric Weight Control Programs

CareAVan

Community Health Education

Perinatal Outreach Programs

Support to Ravenswood Family Health Center

Child Safety & Inquiry Presentation Programs



15

Family and Children Health Advocacy

LPCH’s direct charity care and uncompensated costs of medical services to government-covered

patients for the years ended August 31 is as follows:

2016 2015

Charity care at established rates 5,758$ 10,160$

Estimated cost of charity care 1,555 2,753

Estimated cost of medical services provided to

government covered patients (not including Medicare) 212,717 219,644

214,272$ 222,397$

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

(not including Medicare) in 2016 was due to higher Medi-Cal charges in relation to the applicable

costs. The estimated uncompensated cost of Medi-Cal services provided to government covered

patients do not include offset of funds from the QAF program. Additionally, LPCH invests in

improving the health of children of San Mateo and Santa Clara counties primarily by providing

health professional education and community health services.

5. Contributions Receivable

Contributions receivable and contribution revenue are included in the financial statements in the

appropriate net asset category. Contributions are recorded at the discounted net present value of

the future cash flows, using discount rates ranging from 3.2% to 5.3% for 2016 and 1.8% to 5.4%

for 2015.

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

2016 2015

In one year or less 33,182$ 8,372$

Between one year and five years 55,921 3,836

More than five years 45,369 25,000

134,472 37,208

Less: Discount/allowance (18,484) (6,665)

Less: Reserves for uncollectible pledges (337) -

Total contributions receivable, net 115,651 30,543

Less: Current portion (32,944) (8,075)

Contributions receivable, net of current portion 82,707$ 22,468$

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



16

2016 2015

Plant replacement and expansion 108,552$ 24,377$

Clinical services 7,099 3,812

Indigent care and other - 2,354

115,651$ 30,543$

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

no conditional pledges as of August 31, 2016 and 2015, respectively.

6. Investments and Investments in University Managed Pools

The composition of investments held directly by the organization at August 31 is as follows:

Cost Fair Value Cost Fair Value

Investments

Mutual funds 71,389$ 70,642$ 69,925$ 69,313$

2016 2015

Board designated funds, short-term investments and other noncurrent investment funds are

invested in University Merged Pool (MP), holding a variety of investments, which consist of cash

and cash equivalents, government and corporate debt securities, equity securities and mutual

funds, real estate, investment in partnerships, and other.

Cost Fair Value Cost Fair Value

Beneficial interest in investments

in University managed pools 395,748$ 599,151$ 399,560$ 717,866$

Board designated funds 9,214 9,214 156,809 159,789

404,962$ 608,365$ 556,369$ 877,655$

2016 2015

Losses and gains on LPCH’s beneficial interest in investments in University Merged Pool of

($5,274) and $22,123 for the years ended August 31, 2016 and 2015, respectively, represent the

change in the fair value of LPCH’s share of the MP.

The MP is the primary investment pool in which funds are invested. The MP is invested with the

objective of maximizing long-term total return. It is a unitized pool in which the fund holders

purchase investments and withdraw funds based on a monthly share value. The MP’s investments

at August 31, 2016 and 2015 are as follows:



17

2016 2015

Assets

Cash and cash equivalents 4 % 5 %

Fixed income 6 5

Public equities 27 26

Real estate 9 9

Natural resources 9 8

Absolute return 20 21

Private equities 25 26

100 % 100 %

7. Fair Value Measurements

U.S. Generally Accepted Accounting Principles (GAAP) defines fair value as the price received

upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market

participants and establishes a hierarchy of valuation inputs based on the extent to which the inputs

are observable in the marketplace. Observable inputs reflect market data obtained from

independent sources. In contrast, unobservable inputs reflect the entity’s assumptions about how

market participants would value the financial instrument. Valuation techniques used under U.S.

GAAP must maximize the use of observable inputs to the extent available.

The following describes the hierarchy of inputs used to measure fair value and the primary

valuation methodologies used for financial instruments measured at fair value on a recurring basis:

Level 1 Quoted prices in active markets for identical assets or liabilities, at the reporting date,

without adjustment. Market price data is generally obtained from relevant exchange or

dealer markets.

Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as

quoted prices for similar assets or liabilities, quoted prices in markets that are not

active, or other inputs that are observable or can be corroborated by observable market

data for substantially the same term of the assets or liabilities. Inputs are obtained from

various sources including market participants, dealers and brokers.

Level 3 Unobservable inputs that are supported by little or no market activity and that are

significant to the fair value of the assets or liabilities.

A financial instrument’s categorization within this hierarchy is based upon the lowest level of input

that is significant to the fair value measurement.

The following table summarizes consolidated LPCH’s assets and liabilities measured at fair value

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



18

Level 1 Level 2 Level 3 Total

Assets

Cash and cash equivalents 532,900$ -$ -$ 532,900$

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

Investments (mutual funds) 70,642 - - 70,642

Beneficial interest in trusts - - 15,048 15,048

Total assets (subject to fair value 603,761$ -$ 15,048$ 618,809$

leveling)

Investments in Stanford University

managed pools (measured at NAV) 608,365

Total assets 1,227,174$

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

August 31, 2016.

The following table presents the 2016 activities of financial instruments of which fair value

measurement is using Level 3 inputs:

Balance at September 1, 2015 16,079$

Realized gains (losses) (321)

Unrealized gains (losses) 1,419

Charitable trusts (2,129)

Balance at August 31, 2016 15,048$

The following table summarizes consolidated LPCH’s assets and liabilities measured at fair value

as of August 31, 2015, based on the inputs used to value them.


Assets

Cash and cash equivalents 335,901$ -$ -$ 335,901$

Assets limited as to use, held by trustee 89,500 - - 89,500

Investments (mutual funds) 69,313 - - 69,313

Beneficial interest in trusts - - 16,079 16,079

Total assets (subject to fair value 494,714$ -$ 16,079$ 510,793$

leveling)

Investments in Stanford University

managed pools (measured at NAV) 877,655

Total assets 1,388,448$

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

August 31, 2015.



19

The following table presents the 2015 activities of financial instruments of which fair value

measurement is using Level 3 inputs:

Balance at September 1, 2014 17,028$

Realized gains (losses) (385)

Unrealized gains (losses) (564)

Balance at August 31, 2015 16,079$

8. Property and Equipment

Property and equipment consist of the following as of August 31, 2016 and 2015:

LPCH PCHA Consolidated LPCH PCHA Consolidated

Land and improvements 32,246$ -$ 32,246$ 31,514$ -$ 31,514$

Buildings and improvements 462,050 3,895 465,945 409,869 871 410,740

Equipment 303,298 7,200 310,498 292,854 2,115 294,969

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

856,978 11,095 868,073 793,621 2,986 796,607

Less: Accumulated depreciation (414,916) (5,815) (420,731) (360,293) (3,990) (364,283)

Construction-in-progress 977,143 4,831 981,974 638,807 7,146 645,953

Property and equipment, net 1,419,205$ 10,111$ 1,429,316$ 1,072,135$ 6,142$ 1,078,277$

2016 2015

Ground lease accumulated amortization totals $11,113 and $10,601 for the years ended

August 31, 2016 and 2015, respectively.

Total depreciation and amortization expense for the years ended August 31, 2016 and 2015, is

$56,454 and $58,532, respectively.

Capitalized interest expense, net of interest income was $10,897 and $4,110 for the years ended


9. Long-Term Debt and Capital Leases

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



20

Effective

Year of Interest

Maturity 2016/2015 2016 2015

California Health Facilities

Financing Authority

Variable rate bonds

Series 2014B 2034-2043 0.66%/0.52% 100,000 100,000

Fixed rate bonds

Series 2016A 2016-2033 4.87%/N/A 73,675 -

Series 2016A Premium 14,470 -

Series 2016B 2052-2055 4.99%/N/A 100,000 -

Series 2016B Premium 14,382 -

Series 2014A 2025-2043 4.74%/4.74% 100,000 100,000

Series 2014A Premium 7,720 8,006

Series 2012A 2044-2051 4.93%/4.93% 200,000 200,000

Series 2012A Premium 10,016 10,302

Series 2012B 2016-2027 4.70%/4.70% 42,195 44,600

Series 2012B Premium 5,948 6,488

Fixed rate put bonds

Series 2008A Legally defeased in 2016 N/A/1.41% - 30,340

Series 2008B Legally defeased in 2016 N/A/1.41% - 30,340

Series 2008C Legally defeased in 2016 N/A/1.41% - 29,610

668,406 559,686

Less: Current portion of long term debt (5,695) (5,675)

Long term debt 662,711$ 554,011$

Outstanding Principal

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

and amounted to approximately $711,846 and $569,300 at August 31, 2016 and August 31, 2015,

respectively. All bonds held at August 31, 2016 are considered to be Level 2 fair value

measurements.

In 2003, LPCH entered into a master indenture of trust (the “LPCH Master Indenture”) as the sole

initial member of an obligated group (“LPCH Obligated Group”), the purpose of which is to provide

for issuance of obligations (“Obligations”) to secure indebtedness of the members of the LPCH

Obligated Group on a joint and several basis.

Obligations issued under the LPCH Master Indenture are collateralized by a lien on the gross

revenues of LPCH. The LPCH Master Indenture also includes various covenants, the most

restrictive of which include maintenance of a minimum annual debt service coverage ratio,

limitations on additional indebtedness, restrictions on the disposition or transfer of assets, mergers

and entry into and withdrawal from the LPCH Obligated Group. During the year ended August 31,

2016, LPCH was in compliance with its covenants.

In July 2003, California Health Facilities Financing Authority (“CHFFA”) issued, on behalf of LPCH,

revenue bonds in the aggregate par amount of $115,000 (collectively, the “2003 Bonds”). The



21

2003 Bonds were comprised of $60,000 of Series A and B auction rate revenue bonds and

$55,000 of Series C fixed rate revenue bonds.

In August 2008, CHFFA issued, on behalf of LPCH, three series of revenue bonds in the aggregate

par amount of $93,450 (collectively, the “2008 Bonds”). The 2008 Bonds were comprised of

Series A, B and C variable rate revenue bonds. Proceeds of the 2008 Bonds were used to redeem

the 2003 Series A and B bonds, refinance an outstanding bank loan and pay a portion of the costs

of issuance. The 2008 Bonds initially bore interest at a weekly rate, which reset every 7 days.

In March 2012, LPCH converted the 2008 Bonds from short term variable rate bonds into five-year

fixed rate put bonds with no gain or loss.

In March 2012, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate

par amount of $251,045 (collectively, the “2012 Bonds”). The 2012 Bonds were comprised of

$200,000 Series A bonds (at a premium of $11,288) and $51,045 Series B bonds (at a premium of

$8,351), each series issued as fixed rate bonds. The rates for the Series B bonds are fixed,

however range from 3-5% over the life of the bonds. Proceeds of the 2012 Series A bonds

primarily were used for financing the acquisition, construction, and expansion of the hospital and to

pay a portion of the costs of issuance. Proceeds of the 2012 Series B bonds were used for the

legal defeasance and redemption of 2003 Series C bonds and to pay a portion of the costs of

issuance.

In May 2014, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate par

amount of $200,000 (collectively, the “2014 Bonds”). The 2014 Bonds were comprised of

$100,000 Series A bonds and $100,000 Series B bonds. Proceeds of the 2014 Bonds primarily will

be used for financing the acquisition, construction, and expansion of the hospital and to pay a

portion of the costs of issuance. The 2014 Series A bonds were issued as fixed rate bonds. The

rates for the Series A bonds are fixed, however range from 4-5% over the life of the bonds. The

2014 Series B bonds were issued in a floating index mode with monthly interest rate resets and

were directly placed with The Northern Trust Company. The 2014 Series B bonds are not subject

to remarketing or tender until May 8, 2024 and are classified as long-term liabilities.

In March 2016, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate

par amount of $176,975 (collectively, the “2016 Bonds”). The 2016 bonds were comprised of

Series A and B revenue bonds. Proceeds of the 2016 Series A were used for the legal defeasance

and redemption of the 2008 Series A, B and C revenue bonds. Proceeds of the 2016 Series B were

used to finance a portion of the ongoing construction, and expansion of the hospital, and to pay for

the cost of issuance.

All the bonds issued by CHFFA on behalf of LPCH are a limited obligation of the CHFFA and are

payable solely from payments made by LPCH and secured by an Obligation issued pursuant to the

LPCH Master Indenture.



22

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

Scheduled

Principal

Maturities Interest

Year ending August 31,

2017 5,695$ 28,101$

2018 5,800 27,844

2019 5,845 27,580

2020 6,135 27,317

2021 6,365 27,003

Thereafter 586,030 577,027

615,870$ 714,872$

10. Retirement Plans

LPCH provides retirement benefits through defined benefit and defined contribution retirement

plans covering substantially all benefit eligible employees and previously leased employees.

Defined Contribution Pension Plan

Employer contributions to the defined contribution retirement plan are based on a percentage of

participant annual compensation. Employer contributions to this plan which are vested immediately

to participants totaling $28,978 and $26,996 for the years ended August 31, 2016 and 2015,

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

Operations and Changes in Net Assets.

Postretirement Medical Benefit Plan

LPCH currently provides health insurance coverage for certain of its employees and previously

leased employees, through the SHC plan, upon retirement as early as age 55, with years of service

as defined by specific criteria. The health insurance coverage for retirees who are under age 65 is

the same as that provided to active employees. A Medicare supplement option is provided for

retirees over age 65.

For purposes of the August 31, 2016 benefit plan liability valuations, LPCH has assumed future

mortality according to the RP 2014 White Collar mortality table and MSS 2007 projection table

(actuarial developed scale based on the rates published by the Social Security Administration).

LPCH has recorded a liability totaling $16,749 and $18,204 for the years ended August 31, 2016

and 2015, respectively, included in self-insurance reserves on the Consolidated Balance Sheets.

This represents the obligation for its employees and previously leased employees. LPCH

reimburses SHC for costs related to this plan on a periodic basis, and in 2016 has recorded

expense of $159 and an increase of $1,614 to net assets to decrease the minimum benefit liability.

Defined Benefit Pension Plans

Certain LPCH employees and previously leased employees are covered by a noncontributory

defined benefit pension plan held by SHC. SHC’s defined benefit pension plan benefits are based



23

on years of service and the employee’s compensation. Contributions to the plans are based on

actuarially determined amounts sufficient to meet the benefits to be paid to plan participants.

SHC and LPCH have an arrangement whereby SHC assumes the pension liability of the LPCH

employees and previously leased employees. However, LPCH is required to reimburse SHC for

the annual expense incurred for these employees and previously leased employees. LPCH paid

$195 and $286 in cash for the years ended August 31, 2016 and 2015, respectively, which

represented current year pension expenses related to LPCH employees and previously leased

employees.

The remainder of certain other LPCH employees and previously leased employees not covered by

the previously described plans are covered by a frozen noncontributory defined benefit pension

plan (the “LPCH Frozen Pension Plan”). Benefits are based on years of service and the

employee’s compensation. Contributions to the plan are based on actuarially determined amounts

sufficient to meet the benefits to be paid to plan participants.

The following tables present information on plan assets and obligations, costs, and actuarial

assumptions for the LPCH Frozen Pension Plan for the years ended August 31, 2016 and 2015,

respectively.

The change in pension assets and the related change in benefit obligations, using a measurement

date as of and for the years ended August 31, 2016 and 2015 are as follows:



24

2016 2015

Change in plan assets

Fair value of plan assets at beginning of year 5,664$ 5,853$

Actual return on plan assets 820 (108)

Employer contributions 422 300

Benefits paid (516) (381)

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

Change in benefit obligation

Projected benefit obligation at beginning of year 8,046$ 7,749$

Interest cost 311 273

Actuarial (gain) loss 859 405

Benefits paid (516) (381)

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

Funded status at end of year and

net amount recognized in balance sheet (2,310)$ (2,382)$

Net amount recognized in balance sheet (2,310)$ (2,382)$

Amounts not yet reflected in net periodic benefit cost

and included in other changes in net assets

Accumulated net (loss) (2,686)$ (2,457)$

Adjustment for minimum pension liability (2,686) (2,457)

Cumulative employer contributions in excess of net

periodic benefit cost 376 75

Net amount recognized in balance sheet (2,310)$ (2,382)$

The estimated net loss that will be amortized from other changes in net assets into net periodic

benefit cost over the next fiscal year is $118.

Due to the LPCH pension plan being frozen, the accumulated benefit obligation is the same as the

projected benefit obligation at the end of the year.



25

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

components:

2016 2015

Interest cost 311$ 273$

Expected return on assets (295) (348)

Amortization of net loss 105 75

Total net periodic benefit cost 121$ -$

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

following components:

2016 2015

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

Net loss (gain) arising during period 334 861

Amortization of net (loss) (105) (75)

Total recognized in unrestricted net assets 229$ 786$

Total recognized in net periodic benefit cost and

unrestricted net assets 350$ 786$

The decrease to net assets to adjust the minimum pension liability of $229 is included in the

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

2016. The respective decrease to net assets for the year ended August 31, 2015 was $786.

Actuarial Assumptions

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

years ended August 31:

2016 2015

Weighted-average assumptions

to determine benefit obligations

Discount rate 3.18 % 4.03 %

Rate of compensation increase N/A N/A



26

The discount rate, expected rate of return on plan assets, and the projected covered payroll growth

rates used in determining the above accrued benefit costs are as follows for the years ended

August 31:

2016 2015

Weighted average assumptions

to determine net periodic benefit costs

Discount rate 4.03 % 3.66 %

Rate of compensation increase N/A N/A

Expected return on assets 5.50 % 6.25 %

LPCH utilizes an independent investment consulting firm to provide an estimate of the future

expected returns for each asset class based on LPCH’s asset allocation targets. The evaluation of

the future expected returns resulted in the use of 5.50% as the assumption for the expected return

on plan assets.

Plan Investments

The investments of the LPCH Frozen Pension Plan have been invested to ensure stability of

returns as well as to preserve the asset base of investments. Changing market cycles require

flexibility in asset allocation to allow movement of capital within the asset classes for the purpose of

increasing investment return and/or reducing risk. The plan asset allocation for the LPCH Frozen

Pension Plan as of the measurement date August 31 is 69% fixed income, 30% equity, and 1%

cash as of August 31, 2016 and 70% fixed income and 29% equity, and 1% other as of August 31,

2015.

Fair Value of Plan Assets

The plan assets measured at fair value are as follows for the year ended August 31, 2016:


Assets

Cash and cash equivalents 65$ -$ -$ 65$

Public equities 1,894 - - 1,894

Fixed income 4,431 - - 4,431

Other - - - -

Total plan assets 6,390$ -$ -$ 6,390$



27

The plan assets measured at fair value are as follows for the year ended August 31, 2015:


Assets

Cash and cash equivalents 40$ -$ -$ 40$

Public equities 1,628 - - 1,628

Fixed income 3,996 - - 3,996

Other - - - -

Total plan assets 5,664$ -$ -$ 5,664$

Concentration of Risk

LPCH manages a variety of risks, including market, credit, and liquidity risks, across plan assets

through our investment managers. Concentration of risk is defined as an undiversified exposure to

one of the above–mentioned risks that increases the exposure of the loss of plan assets

unnecessarily. LPCH management minimizes risk by diversifying exposure to such risks across a

variety of instruments, markets, and counterparties.

Plan Contributions

LPCH expects to contribute $0 to the LPCH Frozen Pension Plan during the fiscal year ending

August 31, 2017.

Estimated Future Benefit Payments

The following table presents the expected benefit payments:


2017 668$

2018 660

2019 656

2020 620

2021 581

Next 5 Years 2,594

11. Temporarily and Permanently Restricted Net Assets

The endowment is intended to generate investment income that can be used to support their

current operating and strategic initiatives. LPCH invests the majority of the endowments in the

University’s MP.

LPCH’s Board of Directors has adopted the University’s investment and spending policies for its

permanently restricted assets that provide for annual amounts (payout) to be distributed to

appropriate temporarily restricted funds supporting operating and strategic activities of LPCH.

Through the combination of investment strategy and payout policy, the hospital is striving to

provide a reasonably consistent payout from the endowment to support operations, while

preserving the purchasing power of the endowment adjusted for inflation. Consistent with the

Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), when determining the

appropriate payout, the Board considers the purposes of the endowment, the duration and

preservation of the endowment, general economic conditions, the possible effect of inflation or



28

deflation, the expected return from income and the appreciation of investments, and investment

policy.

The current University Board of Trustees approved targeted spending rate is 5.5%, which was

adopted by the Board of Directors of LPCH. The payout amount is determined by applying a

smoothing rule that limits payout in a given year to the sum of 70% of the previous year’s actual

rate and 30% of the long-term spending target rate applied to the projected per share value of the

endowment. The smoothing rule and the diversification of the investment asset allocation attempt

to mitigate the impact of short-term market volatility on the flow of funds to support LPCH’s

operations.

LPCH classifies as permanently restricted net assets (a) the original value of gifts donated to the

permanent endowment, (b) the original value of subsequent gifts to the permanent endowment,

and (c) accumulations to the permanent endowment made in accordance with the direction of the

applicable donor gift instrument at the time the accumulation is added to the fund. The remaining

portion of the donor-restricted endowment fund that is not classified in permanently restricted net

assets is classified as temporarily restricted net assets until those amounts are authorized for

expenditure.

Net unrealized losses on permanently restricted endowment funds are classified as a reduction to

unrestricted net assets until such time as the fair value equals or exceeds historic value. The

aggregate amount by which fair value was below historic value was approximately $10 and $0 as

of August 31, 2016 and 2015, respectively.

Changes in LPCH’s endowment, for the years ended August 31, 2016 and 2015, are as follows:

Temporarily Permanently

Unrestricted Restricted Restricted Total

Endowment at beginning of year -$ 103,166$ 204,405$ 307,571$

Investment returns

Earned income - 16,134 - 16,134

Unrealized and realized gains/(losses) - (8,746) 1,255 (7,491)

Total investment returns/(losses) - 7,388 1,255 8,643

Amounts distributed for operations - (15,462) - (15,462)

Contributions received from donors - - 5,763 5,763

Other - (156) (75) (231)

Net (decrease) increase in endowment - (8,230) 6,943 (1,287)

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

2016



29

Temporarily Permanently

Unrestricted Restricted Restricted Total

Endowment at beginning of year -$ 105,530$ 203,342$ 308,872$

Investment returns

Earned income - 15,162 - 15,162

Unrealized and realized losses - (2,202) (310) (2,512)

Total investment returns - 12,960 (310) 12,650

Amounts distributed for operations - (14,266) - (14,266)

Contributions received from donors - 2 850 852

Other - (1,060) 523 (537)

Net (decrease) increase in endowment - (2,364) 1,063 (1,301)

Endowment at end of year -$ 103,166$ 204,405$ 307,571$

2015

All of LPCH’s endowments are classified as donor-restricted.

Return Objectives and Risk Parameters

LPCH has adopted endowment investment and spending policies that attempt to provide a

predictable stream of funding to programs supported by its endowment while seeking to maintain

the purchasing power of endowment assets. Under this policy, the return objective for the

endowment assets is to generate optimal total return while maintaining an appropriate level of risk

for LPCH. LPCH expects its endowment funds over time, to provide at least an average rate of

return of approximately 5% annually. Actual returns in any given year may vary from this amount.

Strategies Employed for Achieving Investment Objectives

To achieve its long-term rate of return objectives, LPCH relies on a total return strategy in which

investment returns are achieved through both capital appreciation (realized and unrealized gains)

and current yield (interest and dividends). LPCH targets a diversified asset allocation that places

greater emphasis on types of investments as described in Note 6 to achieve its long-term

objectives within prudent risk constraints. Portfolio asset allocation targets as well as expected

risk, return and correlation amongst the asset classes are reevaluated annually by the asset

manager and reported to the Board of Directors.

Permanently restricted net assets consist of investments to be held in perpetuity and invested to

generate income to support the following purposes at August 31:

2016 2015

Permanently restricted

Education 27,009$ 27,009$

Plant replacement and equipment 4,598 4,598


Indigent care and other 32,735 30,343

211,348$ 204,405$



30

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

2016 2015

Temporarily restricted

Education 13,042$ 14,386$

Plant replacement and equipment 460,689 344,017


Indigent care and other 15,576 19,472

574,119$ 458,239$

12. Related-Party Transactions

Transactions with SHC

LPCH and SHC share certain functions, including various information systems, human resources,

managed care contracting, and materials management. The costs for these shared services,

which are included in purchased services in the Consolidated Statements of Operations and

Changes in Net Assets, are allocated between SHC and LPCH based on management’s best

estimates. LPCH’s total cost for shared services was $30,416 and $28,556 for the years ended


LPCH also purchases various services from SHC. These services include operating room, cardiac

catheterization, interventional radiology, radiation oncology, and laboratory. The cost of these

services, which is included in purchased services in the Consolidated Statements of Operations

and Changes in Net Assets, is charged back to LPCH based on a percentage of charges intended

to approximate costs or a cost per procedure. LPCH’s total cost for services purchased from SHC

was $47,214 and $47,087 for the years ended August 31, 2016 and 2015, respectively.

In addition to the services described above, LPCH purchases services from SHC that include

services provided by interns and residents, maintenance and certain operating expenses, including

utilities and capital projects. These services totaled $33,371 and $30,064 for the years ended

August 31, 2016 and 2015, respectively, and are included in purchased services and other

expenses in the Consolidated Statements of Operations and Changes in Net Assets or in property

and equipment, net, in the Consolidated Balance Sheets.

Transactions with the University

LPCH records operating expense or equity transfers to account for transactions with the University.

LPCH purchases services from the University including telecommunications, transportation, certain

utilities, rent, legal, and internal audit. Costs incurred by LPCH for these services purchased from

the University were approximately $23,261, and $28,300 for the fiscal years ended August 31,

2016 and 2015, respectively, and are recorded as professional services, purchased services, and

other expenses in the Consolidated Statements of Operations and Changes in Net Assets for those

fiscal years or as property and equipment, net, in the Consolidated Balance Sheets. The total

recoveries from the University, including rent and certain salary and benefits, was $3,537 and

$3,213 as of August 31, 2016 and 2015, respectively.



31

Transactions with Stanford School of Medicine (SoM)

Services purchased from the University and specifically, the Stanford School of Medicine, include

clinical services that benefit LPCH, including hospital based physicians, medical direction, blood

products, and medical library services. Payment for these services is based on management’s

best estimate of market value. On September 1, 2006, LPCH and the University entered into a

Professional Services Agreement (“PSA”) which assigned to LPCH the right to bill and collect all

revenue related to pediatric and obstetric clinical services on behalf of the Stanford School of

Medicine faculty. In return, LPCH reimburses the University for the services provided by the

physician faculty. The PSA is revised periodically, most recently as of September 1, 2010. The

expense recorded related to payments and accruals for all of these services amounted to

approximately $209,132 and $188,900 for the fiscal years ended August 31, 2016 and 2015,

respectively. The collections received from external parties by LPCH as agent on behalf of SoM

was recorded in other revenue and purchased services. The amounts were $16,737 and $12,700

as of August 31, 2016 and August 31, 2015, respectively.

Transactions with the Lucile Packard Foundation for Children’s Health

The Lucile Packard Foundation for Children’s Health (“LPFCH”) is a private charity dedicated to

promoting, protecting, and sustaining the physical, mental, emotional and behavioral health of

children in the Bay Area. In addition to serving as a community grant maker, LPFCH is the primary

community fundraising agent for LPCH and the pediatric faculty and programs at the University.

Although these three entities share similar missions, LPFCH is governed by a separate board that

is independent of LPCH and the University. LPCH purchases and records as expense fundraising

services provided by LPFCH. All contributions raised by LPFCH through community fundraising

that are specifically designated for LPCH are recorded by LPCH rather than LPFCH. Contributions

recorded as a result of LPFCH fundraising efforts are as follows:

2016 2015

Unrestricted gifts 7,026$ 2,075$

Temporarily restricted gifts 127,663 70,810

Permanently restricted gifts 5,763 850

Total gifts 140,452$ 73,735$



32

13. Operating Leases

The organization leases various equipment and facilities under operating leases expiring at various

dates. Total rental expense (included in other operating expenses in the Consolidated Statements

of Operations and Changes in Net Assets) under these leases for the years ended August 31, 2016

and 2015 was $27,512 and $26,513, respectively. Net minimum future operating lease payments

for periods subsequent to August 31, 2016 are as follows:

LPCH PCHA Total


2017 19,978$ 3,563$ 23,541$

2018 18,529 3,005 21,534

2019 17,040 1,961 19,001

2020 12,347 809 13,156

2021 3,637 283 3,920

Thereafter 6,722 478 7,200

78,253$ 10,099$ 88,352$

Net Minimum Future Operating

Leases Payments

14. Commitments and Contingencies

LPCH is aware of certain asserted and unasserted legal claims. While the outcome cannot be

determined at this time, management is of the opinion that the liability, if any, from these actions

will not have a material effect on LPCH’s financial position.

As with many medical centers across the country, information security and privacy is a growing risk

area based on developments in the law and expanding mobile technology practices. LPCH has

policies, procedures, and training in place to safeguard protected information, but select incidents

have occurred in the past and may occur in the future involving potential or actual disclosure of

such information (including, for example, certain identifiable information relating to patients). In

most cases, there has been no evidence of unauthorized access to, or use/disclosure of, such

information, yet laws may require reporting to potentially affected individuals and federal and state

governmental agencies. Governmental agencies have the authority to investigate and request

further information about an incident or safeguards, to cite LPCH for a deficiency or regulatory

violation, and/or require payment of fines, corrective action, or both. California law also allows a

private right to sue for a breach of medical information. The cost of such possible consequences

has not been material to date to LPCH, and LPCH management does not believe that any future

consequences of these incidents will be material to its consolidated financial statements.

The healthcare industry is subject to numerous laws and regulations of federal, state and local

governments. Compliance with these laws and regulations can be subject to future government

review and interpretation, as well as to regulatory actions unknown or unasserted at this time.

Government activity with respect to investigations and allegations concerning possible violations of

regulations by healthcare providers could result in the imposition of significant fines and penalties,

as well as significant repayments for patient services previously billed. LPCH is subject to similar

regulatory reviews, and while such reviews may result in repayments and/or civil remedies that



33

could have a material effect on LPCH’s financial results of operations in a given period,

management believes that such repayments and/or civil remedies would have a material effect on

LPCH’s financial position.

Effective May 1, 2011, LPCH entered into a seven year agreement with Dell Marketing L.P., a

Texas limited partnership (“Dell”), pursuant to which Dell will provide certain information technology

services to LPCH. Under the terms of the agreement, LPCH will be charged a fixed annual service

charge plus expenses, payable monthly, for core services, as defined, and additional fees plus

expenses for special projects. The annual fixed service charges are subject to adjustment under

certain conditions, but unless so adjusted, amount to approximately $7,000 for each year through

to 2018. Adjustments are expected for variations in the number of devices, user demand, and

project specific work that may increase the amount above the baseline in any given period. LPCH

has signed several other information technology contracts with commitments from fiscal year 2015

to fiscal year 2024. The total commitment for these information technology contracts was

approximately $73.7 million as of August 31, 2016.

California’s Hospital Seismic Safety Act requires licensed acute care functions to be conducted

only in facilities that meet specified seismic safety standards. Facilities classified by the State of

California as noncompliant in the event of an earthquake must be retrofitted, replaced or removed

from acute-care service by applicable deadlines prior to 2020 or 2030. There are separate and

distinct seismic safety standards for structural frame performance and for nonstructural element

performance. LPCH complies with the structural frame requirements for the existing hospital

building allowing its use indefinitely past 2030. LPCH will be retrofitting discrete areas of the

existing hospital for compliance to the nonstructural standards by 2020.

LPCH relies upon services located in the SHC hospital facility. Through the construction of a New

Stanford Hospital, as well as through planned retrofits of the existing SHC facility, SHC services

that support LPCH will be compliant to seismic safety regulations within available

deadlines. Amendments of the Hospital Seismic Safety Act via SB 90, permit the Office of

Statewide Health Planning and Development (OSHPD) to extend the structural compliance

deadline for SHC until January 1, 2020 due to its status as a trauma center. At this time, SHC has

approval from OSHPD for extensions under SB 90 for all subject buildings to July 2019. These

extensions will allow sufficient time to construct the new hospital, and mitigate deficiencies of the

existing facility.

In June 2011, the Palo Alto City Council certified the Final Environmental Impact Report, land use

changes, permits and a Development Agreement with Stanford Hospital, LPCH and Stanford

University as part of the Renewal Project. In July 2011, the Palo Alto City Council provided final

approval for the Renewal Project at the second reading of the Development Agreement. The

Renewal Project will rebuild Stanford Hospital and expand LPCH to assure adequate capacity,

meet State-mandated earthquake safety standards, and provide modern, technologically-advanced

hospital facilities. The Renewal Project also includes replacement of outdated laboratory facilities

at the Stanford School of Medicine and remodeling of Hoover Pavilion.

The cost of LPCH’s project is expected to exceed its originally estimated amount of $1.2 billion

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

of subcontractors, among other factors. LPCH management believes that sources of funding are

adequate to cover remaining costs. LPCH has recorded $966,750 in construction in progress

related to this project as of August 31, 2016.



34

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

construction will be completed in calendar year 2017.

As of August 31, 2016, the remaining commitment on all contracts, including the Project Renewal

was approximately $188,563.

LPCH is directly liable under irrevocable letters of credit totaling $9,060 at August 31, 2016,

including $7,638 required as security for the workers’ compensation deductible plan as described in

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

facilities. No amounts have been drawn on these letters of credit as of August 31, 2016. LPCH

also serves as guarantor for $1,000 loan of South County Community Health Center in

East Palo Alto.

Approximately 40% of LPCH employees are covered by collective bargaining arrangements.

These employees are members of two unions; approximately 31% are covered by an agreement

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

August 26, 2017.

In 2013, LPCH became the guarantor on a ten year building lease under which the total rent

payments over the life of the lease will be approximately $6,137 as of August 31, 2016.

15. Functional Expenses

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

LPCH PCHA Total LPCH PCHA Total

Patient services 1,148,607$ 83,604$ 1,232,211$ 1,065,727$ 75,844$ 1,141,571$

Management and general 114,122 6,479 120,601 112,345 6,760 119,105

Fundraising 10,868 - 10,868 13,308 - 13,308

Total functional expenses 1,273,597$ 90,083$ 1,363,680$ 1,191,380$ 82,604$ 1,273,984$

20152016

16. Subsequent Events

The Board of Directors of LPFCH and the Board of Directors of LPCH approved a binding

memorandum of understanding pursuant to which LPCH would become the sole member of

LPFCH, effective September 1, 2016. The bylaws of LPFCH afford control of LPFCH to LPCH and

therefore, the activities of LPFCH will be included in the consolidated financial statements of LPCH

starting September 1, 2016.

LPCH has evaluated subsequent events occurring between the end of the most recent fiscal year

and December 6, 2016, the date the financial statements were available for issuance.

Report of Independent Auditors

on Accompanying Consolidating Information

To the Board of Directors

Lucile Salter Packard Children’s Hospital at Stanford

We have audited the consolidated financial statements of Lucile Salter Packard Children’s Hospital at

Stanford (“LPCH”) as of August 31, 2016 and 2015 for the year then ended and our report thereon

appears on pages 1 of this document. That audit was conducted for the purpose of forming an opinion on

the consolidated financial statements taken as a whole. The consolidating information is the responsibility

of management and was derived from and relates directly to the underlying accounting and other records

used to prepare the consolidated financial statements. The consolidating information has been subjected

to the auditing procedures applied in the audit of the financial statements and certain additional

procedures, including comparing and reconciling such information directly to the underlying accounting

and other records used to prepare the financial statements or to the financial statements themselves and

other additional procedures, in accordance with auditing standards generally accepted in the United

States of America. In our opinion, the consolidating information is fairly stated, in all material respects, in

relation to the consolidated financial statements taken as a whole. The consolidating information is

presented for purposes of additional analysis of the consolidated financial statements rather than to

present the financial position, changes in net assets and cash flows of the individual entities and is not a

required part of the consolidated financial statements. Accordingly, we do not express an opinion on the

financial position, results of operations and changes in net assets and cash flows of the individual entities.

December 6, 2016

PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111-4004 T: (415) 498 5000, F: (415) 498 7100, www.pwc.com/us

Lucile Salter Packard Children’s Hospital at Stanford Consolidating Balance Sheets August 31, 2016 and 2015


36

LPCH PCHA Elimination Consolidated LPCH PCHA Elimination Consolidated

Assets

Current assets

Cash and cash equivalents 532,329$ 571$ -$ 532,900$ 335,077$ 824$ -$ 335,901$

Patient accounts receivable, net of allowance for doubtful

accounts of $11,670 and $21,300 in 2016 and 2015, respectively 261,963 6,211 - 268,174 264,460 7,308 - 271,768

Contributions receivable 32,944 - - 32,944 8,075 - - 8,075

Other receivables 33,224 836 - 34,060 27,345 999 - 28,344

Prepaid expenses, inventory and other 16,961 536 - 17,497 15,159 400 - 15,559

Total current assets 877,421 8,154 - 885,575 650,116 9,531 - 659,647

Investments 70,642 - - 70,642 69,313 - - 69,313

Investments in University managed pools 599,151 - - 599,151 717,866 - - 717,866

Board designated funds in University managed pools 9,214 - - 9,214 159,789 - - 159,789

Assets limited as to use, held by trustee 219 - - 219 89,500 - - 89,500

Property and equipment, net 1,419,205 10,111 - 1,429,316 1,072,135 6,142 1,078,277

Beneficial interest in trusts, net 15,048 - - 15,048 16,079 - - 16,079

Contributions receivable, net of current portion 82,707 - - 82,707 22,468 - - 22,468

Other assets 11,191 12,252 41,414 64,857 14,021 11,798 31,998 57,817

Total assets 3,084,798$ 30,517$ 41,414$ 3,156,729$ 2,811,287$ 27,471$ 31,998$ 2,870,756$

Liabilities and Net Assets

Current liabilities

Accounts payable and accrued liabilities 147,114$ 4,110$ -$ 151,224$ 103,257$ 5,195$ -$ 108,452$

Accrued salaries and related benefits 60,735 1,977 - 62,712 63,834 1,445 - 65,279

Due to related parties 17,359 16,830 - 34,189 40,793 12,966 - 53,759

Third-party payor settlements 1,849 - - 1,849 1,967 - - 1,967

Current portion of long-term debt and capital leases 5,695 - - 5,695 5,675 - - 5,675

Self-insurance reserves and other liabilities 8,612 - - 8,612 7,924 - - 7,924

Total current liabilities 241,364 22,917 - 264,281 223,450 19,606 - 243,056

Self-insurance reserves and other liabilities, net of current portion 32,837 - - 32,837 34,002 - - 34,002

Long-term debt, net of current portion 662,711 - - 662,711 554,011 - - 554,011

Total liabilities 936,912 22,917 - 959,829 811,463 19,606 - 831,069

Commitments and contingencies

Net assets

Unrestricted 1,362,419 7,600 41,414 1,411,433 1,337,180 7,865 31,998 1,377,043

Temporarily restricted 574,119 - - 574,119 458,239 - - 458,239

Permanently restricted 211,348 - - 211,348 204,405 - - 204,405

Total net assets 2,147,886 7,600 41,414 2,196,900 1,999,824 7,865 31,998 2,039,687

Total liabilities and net assets 3,084,798$ 30,517$ 41,414$ 3,156,729$ 2,811,287$ 27,471$ 31,998$ 2,870,756$

20152016

Lucile Salter Packard Children’s Hospital at Stanford Consolidating Statements of Operations and Changes in Net Assets August 31, 2016 and 2015


37

LPCH PCHA Elimination Consolidated LPCH PCHA Elimination Consolidated

Operating revenues

Net patient service revenue before provision for doubtful accounts 1,239,261$ 71,690$ -$ 1,310,951$ 1,251,058$ 63,529$ -$ 1,314,587$

Provision for doubtful accounts, net 3,622 (1,189) - 2,433 (9,972) (502) - (10,474)

Net patient service revenue after provision for doubtful accounts 1,242,883 70,501 - 1,313,384 1,241,086 63,027 - 1,304,113

Other revenue 45,532 10,141 9,416 65,089 32,783 8,153 11,424 52,360

Net assets released from restrictions used for operations 23,804 25 - 23,829 23,352 - 23,352

Total operating revenues 1,312,219 80,667 9,416 1,402,302 1,297,221 71,180 11,424 1,379,825

Operating expenses

Salaries and benefits 560,806 24,697 - 585,503 499,768 19,012 - 518,780

Professional services 17,517 1,138 - 18,655 20,745 2,406 - 23,151

Supplies 104,222 9,164 - 113,386 88,958 8,049 - 97,007

Purchased services 428,927 47,532 - 476,459 396,117 45,666 - 441,783

Other 107,501 5,722 - 113,223 128,987 5,744 - 134,731

Depreciation and amortization 54,624 1,830 - 56,454 56,805 1,727 - 58,532

Total operating expenses 1,273,597 90,083 - 1,363,680 1,191,380 82,604 - 1,273,984

Income from operations 38,622 (9,416) 9,416 38,622 105,841 (11,424) 11,424 105,841

Interest income 2,351 - - 2,351 2,400 - - 2,400

Income and gains from University managed pools 9,076 - - 9,076 30,923 - - 30,923

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

Other (500) - - (500) (833) - - (833)

Excess of revenues over expenses 48,435 (9,416) 9,416 48,435 138,331 (11,424) 11,424 138,331

Net assets released from restrictions used for purchases of

property and equipment 27 - - 27 1,999 - - 1,999

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

Adjustment for minimum pension liability 1,385 - - 1,385 (678) - - (678)

Transfers to University and other (17,599) 2,152 - (15,447) (53,160) 2,778 - (50,382)

Increase in unrestricted net assets 32,238 (7,264) 9,416 34,390 86,492 (8,646) 11,424 89,270

Changes in temporarily restricted net assets

Contributions 129,868 - - 129,868 70,810 - - 70,810

Income and gains from University managed pools 9,987 - - 9,987 14,549 - - 14,549

Change in value of beneficial interest in remainder trusts 164 - - 164 (254) - - (254)

Net assets released from restrictions for operations (23,829) - - (23,829) (23,352) - - (23,352)

Purchase of property and equipment (27) - - (27) (1,999) - - (1,999)

Transfers to/from University and other (283) - - (283) (878) - - (878)

Increase in temporarily restricted net assets 115,880 - - 115,880 58,876 - - 58,876

Changes in permanently restricted net assets

Contributions and other 7,669 - - 7,669 850 - - 850

Change in value of beneficial interest in remainder trusts 1,255 - - 1,255 (310) - - (310)

Transfers to University and other (1,981) - - (1,981) 523 - - 523

Increase (decrease) in permanently restricted net assets 6,943 - - 6,943 1,063 - - 1,063

Increase in net assets 155,061 (7,264) 9,416 157,213 146,431 (8,646) 11,424 149,209

Net assets

Beginning of year 1,999,824 7,865 31,998 2,039,687 1,853,393 16,511 20,574 1,890,478

End of year 2,154,885$ 601$ 41,414$ 2,196,900$ 1,999,824$ 7,865$ 31,998$ 2,039,687$

20152016

Documents

Lucile Salter Packard Children s Hospital at Stanfordbondholder-information.stanford.edu/pdf/LPCH_2016_financ_stmt.pdf · Lucile Salter Packard Children’s Hospital at Stanford Consolidated