Palmetto Health and Subsidiaries - EMMA · PDF fileConsolidated Financial Statements,...

Consolidated Financial Statements, Management’s Discussion and Analysis and Other Interim Information

Palmetto Health and Subsidiaries

As of December 31, 2012 and September 30, 2012 and for the three months ended December 31, 2012 and 2011


Table of Contents

Consolidated Financial Statements:

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

Statements of Operations ........................................................................................................................................... 3

Statements of Changes in Net Assets ...................................................................................................................... 4

Statements of Cash Flows ....................................................................................................................................... 5-6

Notes to Consolidated Financial Statements .................................................................................................................... 7-38

Management Discussion and Analysis ............................................................................................................................ 39-43

Other Interim Information ............................................................................................................................................... 44-47


Consolidated Balance Sheets December 31, 2012 (Unaudited) and September 30, 2012 (Audited) (dollars in thousands)

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

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December 31, September 30,

2012 2012(Unaudited) (Audited)

AssetsCurrent assets:

Cash and cash equivalents 26,888$ 24,937$ Assets limited as to use 98,605 91,961 Patient accounts receivable, net 204,589 204,001 Other receivables 21,820 30,152 Inventories 18,118 17,562 Other current assets 12,417 9,397

Total current assets 382,437 378,010 Assets limited as to use 654,203 652,071 Property and equipment, net 499,318 487,377 Other assets 60,413 59,870

1,596,371$ 1,577,328$

Liabilities and Net AssetsCurrent liabilities:

Current portion of long-term debt 80,652$ 80,631$ Current portion of related-party capital lease obligations 572 564 Accounts payable 41,794 42,681 Accrued salaries and benefits 45,417 54,329 Other current liabilities 68,598 61,805

Total current liabilities 237,033 240,010 Long-term debt, net 502,136 491,987 Related-party capital lease obligations, net 20,312 20,590 Other noncurrent liabilities 65,528 67,694

Total liabilities 825,009 820,281 Commitments and contingenciesNet assets:

Unrestricted 739,426 725,393 Temporarily restricted 24,677 24,395 Permanently restricted 7,259 7,259

Total net assets 771,362 757,047 1,596,371$ 1,577,328$


Consolidated Statements of Operations For the Three Months Ended December 31, 2012 and 2011 (Unaudited) (dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements. Page 3

December 31, December 31,2012 2011

(Unaudited) (Unaudited)

Unrestricted revenue, gains and other support: Net patient service revenue 306,904$ 300,265$ Provision for uncollectible accounts (54,691) (50,646)

Net patient service revenue less provision for uncollectible accounts 252,213 249,619 Other revenue 21,166 18,267

Total unrestricted revenue, gains and other support 273,379 267,886 Expenses:

Salaries and benefits 144,137 137,737 Supplies and other expenses 100,527 99,663 Depreciation and amortization 13,719 14,353 Interest expense 8,038 7,653

Total expenses 266,421 259,406 Operating income 6,958 8,480 Nonoperating (expenses) income:

Interest expense (125) (250) Investment income, net 9,892 7,099 COPA – Community health improvement projects (1,672) (1,533)

Revenue and gains over expenses and losses before net change in unrealized gain (loss) on derivative financial instruments and trading investments 15,053 13,796

Net change in unrealized gain on derivative financial instruments 3,826 908 Net change in unrealized (loss) gain on trading investments (4,961) 15,123

Revenue and gains over expenses and losses 13,918 29,827 (Decrease) increase in interest in Affiliated Foundations (210) 113 Capital contributions expended and received 55 414 Net adjustment for defined benefit plans 270 275

Increase in unrestricted net assets 14,033$ 30,629$


Consolidated Statements of Changes in Net Assets For the Three Months Ended December 31, 2012 (Unaudited) (dollars in thousands)


UnrestrictedTemporarily Restricted

Permanently Restricted Total

Balance as of September 30, 2012 (Audited) 725,393$ 24,395$ 7,259$ 757,047$ Revenue and gains over expenses and losses 13,918 - - 13,918 (Decrease) increase in interest in Affiliated Foundations (210) 597 - 387 Net adjustment for defined benefit plans 270 - - 270 Contributions and grants - 864 - 864 Net assets released from restrictions used for capital 55 (55) - - Net assets released from restrictions used for operations - (1,124) - (1,124)

Increase in net assets 14,033 282 - 14,315 Balance as of December 31, 2012 (Unaudited) 739,426$ 24,677$ 7,259$ 771,362$


Consolidated Statements of Cash Flows For the Three Months Ended December 31, 2012 and 2011 (Unaudited) (dollars in thousands)

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(Unaudited) (Unaudited)

Cash flows from operating activities:Increase in net assets 14,315$ 31,835$ Adjustments to reconcile increase in net assets to net cash provided by operating activities:

Change in interest in Affiliated Foundations (387) (1,244) Gain on equity method investments (195) (371) Net change in unrealized gains on derivative financial instruments (3,826) (908) Depreciation and amortization 13,719 14,353 Provision for uncollectible accounts 54,691 50,646 Loss on the disposal of property and equipment - 170 Net adjustment for defined benefit plans (270) (275) Changes in operating assets and liabilities:

Patient accounts receivable (55,279) (59,520) Other receivables 8,332 6,385 Accounts payable and accrued salaries and benefits (19,471) (19,550) Other assets 39 (349) Other liabilities 8,723 6,402 Other, net (4,575) (4,669)

Net cash provided by operating activities before trading investments 15,816 22,905 Trading investments (8,776) (29,749)

Net cash provided by (used in) operating activities 7,040 (6,844) Cash flows from investing activities:

Additions to property and equipment (14,778) (12,850) Proceeds from sale of property and equipment - 73

Net cash used in investing activities (14,778) (12,777) Cash flows from financing activities:

Proceeds from issuance of long term debt 9,993 1,851 Payments of long-term debt (34) (58) Payments on capital lease obligations (270) (254)

Net cash provided by financing activities 9,689 1,539 Net increase (decrease) in cash and cash equivalents 1,951 (18,082) Cash and cash equivalents, beginning of year 24,937 35,094 Cash and cash equivalents, end of year 26,888$ 17,012$


Consolidated Statements of Cash Flows (continued) For the Three Months Ended December 31, 2012 and 2011 (Unaudited) (dollars in thousands)



(Unaudited) (Unaudited)Supplemental information – Cash paid during the year for interest 1,074$ 926$ Noncash investing and financing activities:

Accrued capital expenditures 10,671$ 1,077$


Notes to Consolidated Financial Statements For the Three Months Ended December 31, 2012 and 2011 (Unaudited) (dollars in thousands)

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Note 1 - Description of Organization and Summary of Significant Accounting Policies

Organization and Business

In 1998, Richland Memorial Hospital (Richland) and Baptist Healthcare System of South Carolina, Inc. (Baptist) formed Palmetto Health through the execution of a joint operating agreement. Palmetto Health is composed of substantially all of the assets and liabilities of Richland and Baptist. Palmetto Health is organized as a South Carolina nonprofit public benefit corporation exempt from federal and state income taxes under Section 501(c)(3) of the Internal Revenue Code (IRC). The governance of Palmetto Health consists of a 16-member board of directors, with six directors appointed by Richland, six by Baptist, three by the board of Palmetto Health, and Chief Executive Officer who serves as an ex officio voting member of the Board. Both Richland and Baptist elect at least one director each that is a licensed physician or dentist, and Chair of the Board of Trustees of each will be a director without term limit. Palmetto Health also includes its for-profit, wholly owned subsidiaries HealthSource, Inc. and Premier Practice Management-Carolina, Inc. (PPM), and a 72.241%-owned for-profit subsidiary, Parkridge Surgery Center, LLC (Parkridge).

Principles of Consolidation

The consolidated financial statements include all accounts of Palmetto Health and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in affiliates which Palmetto Health does not control are accounted for either at cost or under the equity method.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

Significant estimates include, but are not limited to, accounts receivable allowances, third-party payor receivables and payables, useful lives assigned to capital assets, professional liability and other self-insurance accruals, and pension and post-retirement plan assumptions.

In particular, laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a possibility that recorded estimates associated with these programs will change by a material amount in the near term.

Costs of Borrowing

Deferred financing costs and bond discounts are amortized over the period related obligations are outstanding using the effective interest method.

Interest costs incurred on borrowed funds during the period of construction of capital assets, net of investment earnings on related trusteed funds, are capitalized as a component of the cost of acquiring those assets.



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Cash and Cash Equivalents

Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less.

Palmetto Health maintains bank accounts at financial institutions, of which at December 31, 2012, $1,250 are covered by the Federal Depository Insurance Corporation (FDIC), while the remaining $25,638 is in excess of the federally insured limit of $250 per institution.

Other Receivables

Other receivables include amounts expected to be received and collected in connection with the settlement of Medicare and Medicaid cost report filings. Other receivables also include funds expected to be received from the State of South Carolina disproportionate share program, which enhances Medicaid funding to acute care hospitals. Palmetto Health recognizes revenue monthly based on the provisions of the program, which follows the state fiscal year of July 1 through June 30. Therefore, included in other receivables is an accrual for the funds earned from the program that have not yet been collected during the periods reported.

Inventories

Inventories, consisting principally of medical supplies and pharmaceuticals, are determined using the first-in, first-out (FIFO) method and are stated at the lower of cost or market.

Assets Limited as to Use

Assets limited as to use include assets held by trustees under indenture agreements and designated assets set aside by the Board of Directors, primarily for future capital improvements, over which the board retains control and may, at its discretion, subsequently use for other purposes. Amounts required to meet current liabilities have been reclassified as current assets.

Assets limited as to use are comprised of cash and investments. Investments in equity securities with readily determinable fair values and all investments in debt securities are reported at fair value in the accompanying consolidated balance sheets. Interest and dividend income and realized gains and losses are reported as nonoperating gains or losses in the accompanying consolidated statements of operations, except for investment income on funds held by the trustee, which is included in other revenue. Investment income and realized gains or losses on investments of donor-restricted funds are also included in other revenue unless the income or loss is restricted by donors, in which case the investment income is recorded directly to temporarily or permanently restricted net assets in accordance with the donor’s wishes.

Palmetto Health has designated and reported its entire investment portfolio as a trading portfolio – as defined by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, “Investments – Debt and Equity Securities.” All changes in unrealized gains and losses on investments are also included within revenue and gains over expenses and losses (the performance indicator).



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Property and Equipment

All property and equipment transferred from Richland and Baptist, either by long-term lease in the case of real property or by conveyance of title in the case of personal property, has been recorded at the historical book values of Richland and Baptist. Although the title to the real property noted above has been retained by Richland and Baptist, the operating rights of the real property and improvements thereon have been conveyed to Palmetto Health. In addition, under the leases of real property, improvements on or to leased real property are covered under the lease. Real property under the leases cannot be sold without the prior consent of Richland and Baptist. Should real property held under leases be sold, it is the opinion of Palmetto Health’s management and legal counsel that the proceeds would be retained in Palmetto Health.

Property and equipment is stated at cost or, if donated, at fair value at time of donation. Additions and improvements are capitalized and depreciated over the estimated remaining useful lives of the related assets, primarily using the straight-line method.

A summary of estimated useful lives follows:

Buildings and improvements 5 to 40 yearsLand improvements 3 to 8 yearsEquipment and furniture 3 to 20 years

Other Noncurrent Liabilities

Other noncurrent liabilities include the fair value of derivatives in a liability position with maturities due in more than one year (see Note 12), deferred revenue, certain compensation accruals, and professional and general liability accruals. Deferred revenue represents unearned revenue on certain health care programs. Deferred compensation represents the obligation on retirement compensation for certain executives. Medical malpractice and general liability accruals represent Palmetto Health’s self-insured retention and tail obligations (see Note 14).

Donor-restricted Gifts

Unconditional promises to give cash and other assets are reported at estimated fair value at the date the promise is received. Conditional promises to give are recognized when the conditions are substantially met, and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted net assets if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are classified as unrestricted net assets and reported as net assets released from restrictions. To the extent that restricted resources from multiple donors are available for the same purpose, Palmetto Health expends such gifts on a FIFO basis.

Interest Expense

Proceeds from issuance of long-term debt effectively provide Palmetto Health with capital planning flexibility in the deployment of assets whose use is limited. Management considers associated investing and financing decisions to be nonoperating in nature and, accordingly, a calculated portion of interest expense is classified as nonoperating in the accompanying consolidated statements of operations.



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Operating Income

Consistent with relevant accounting principles and industry practice, the following items are excluded from operating income: nonoperating (expenses) income, net change in unrealized gain on derivative financial instruments and net change in unrealized gain (loss) on trading investments. Nonoperating (expenses) income includes interest expense on debt obtained for investment purposes, net investment income and the Certificate of Public Advantage (COPA) commitment. The change in unrestricted net assets includes (decrease) increase in interest in Affiliated Foundations, contributions received and expended for capital purposes, and net adjustment for defined benefit plans.

Revenue and Gains Over Expenses and Losses

Changes in unrestricted net assets are excluded from revenue and gains over expenses and losses (the performance indicator) consistent with relevant accounting principles and industry practice (see Operating Income above for description of items included in changes in unrestricted net assets).

Unrestricted Revenue, Gains and Other Support

Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined.

In July 2011, the FASB issued ASU 2011-07, “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which amends previous guidance on healthcare entities related to the presentation and disclosure requirements for patient-service revenue, provision for bad debts, and the allowance for uncollectible accounts. The statement requires healthcare entities that recognize significant amounts of patient service revenue at the time services are rendered, even though they do not assess the patient’s ability to pay, to change the presentation of their statement of operations and changes in net assets by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue. Additionally, those healthcare entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The standard also requires disclosures of patient service revenue by major payor source as well as qualitative and quantitative information about changes in the allowance for uncollectible accounts. The standard is effective for fiscal years and interim periods beginning after December 31, 2011, with early adoption permitted. The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations and changes in net assets are required to be applied retrospectively to all prior periods presented. The enhanced disclosures are required to be provided in the period of adoption and subsequent reporting periods. Palmetto Health elected to early adopt the provisions of this statement as of and for the year ended September 30, 2012, and retrospectively applied the presentation requirements to all periods presented. The change in presentation and additional disclosures are reflected in the consolidated statements of operations and changes in net assets and in Note 3. Adoption of the new guidance had no impact on previously reported excess of revenues over expenses or net assets.

Other revenue includes certain capitated arrangements, contributions from donors (when conditions are substantially met), grants, rental income, rebates, equity investee income, Baptist Easley Hospital (BEH) leased employee and service contract revenue (see Note 4), and certain investment income and other miscellaneous income.



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Charity Care

Palmetto Health provides care to patients who meet certain criteria under its charity care policies without charge or at amounts less than its established rates. Because Palmetto Health does not pursue the collection of amounts determined to qualify as charity care, they are not reported as net patient service revenue. Palmetto Health determines the costs associated with providing charity care by aggregating the applicable direct and indirect costs, including salaries, wages and benefits, supplies and other operating expenses, based on data from its costing system.

Palmetto Health maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges foregone for services and supplies furnished under its charity care policies.

Effective October 1, 2011, Palmetto Health adopted ASU 2010-23, “Measuring Charity Care for Disclosure,” which amends previous guidance to require healthcare entities to use cost as the measurement basis for charity care disclosures and defines cost as the direct and indirect costs of providing charity care. In the paragraphs above and below in Note 3, Net Patient Service Revenue and Patient Accounts Receivable, the amended disclosure requirements are reflected, and the related costs of caring for charity care patients in prior periods have been applied retroactively. Since the new guidance amends disclosure requirements only, its adoption did not impact Palmetto Health’s statement of financial position, statement of operations, or cash flow statement.

Income Taxes

Palmetto Health qualifies as an organization exempt from federal and state income taxes on related income under IRC section 501(c)(3). Palmetto Health has three taxable subsidiaries, HealthSource, Inc., Parkridge and PPM. As of September 30, 2012, HealthSource, Inc. has a net operating loss carryforward for federal income tax purposes of $459 that expire beginning September 30, 2012, and continues to expire through September 30, 2024. Parkridge qualifies as a partnership for tax purposes and, as such, is a pass-through entity. Since PPM is an S corporation for tax purposes, all of the income or losses of PPM are considered taxable as unrelated business income. PPM generated losses for the current year. In addition, as of September 30, 2011, Palmetto Health has recorded a tax provision of $120 for estimated taxes associated with unrelated business income. The entire amount was paid in full as of September 30, 2012, and therefore, no additional liability has been recorded on the books. Palmetto Health continues to evaluate tax positions related to ASC 740, “Income Taxes,” which prescribes financial statement recognition threshold and measurement attributes for tax positions taken or expected to be taken in tax returns.

Derivative Instruments and Hedging Activities

Palmetto Health selectively enters into interest rate protection agreements to mitigate changes in interest rates on variable rate borrowings. The notional amounts of such agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to loss. None of these agreements are used for speculative or trading purposes.

Palmetto Health recognizes all derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at their fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, the type of hedging relationship.

Palmetto Health’s derivative instruments are not designated as hedging instruments, requiring the net unrealized gains and losses arising from fair value changes to be recognized in the performance indicator.



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All of Palmetto Health’s interest rate derivative instruments involve elements of credit and market risk in excess of the amounts recognized in the consolidated financial statements. The counterparty to the financial instruments consists of a major financial institution. The Swap counterparty was rated A- by Standard & Poor’s and Baa2 by Moody’s Investors Services as of December 31, 2012. In addition to limiting the amounts of the agreements and contracts it enters into with any one party, Palmetto Health monitors its positions with and the credit quality of the counterparties to these financial instruments. Palmetto Health does not anticipate nonperformance by any of the counterparties.

Impairment of Long-lived Assets

Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, 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 estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. If applicable, assets to be disposed of are separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale are presented separately in the appropriate asset and liability sections of the consolidated balance sheets.

Commitments and Contingencies

Liabilities for loss contingencies, including costs arising from claims, assessments, litigation, fines and penalties and other sources, are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are those whose use by Palmetto Health has been limited by donors to a specific time period or purpose. Permanently restricted net assets, generally representing specified endowments, have been restricted by donors to be maintained by Palmetto Health in perpetuity. Temporarily restricted net assets are generally available to fund designated capital expenditures and specific health care programs of Palmetto Health which include the Children’s Hospital, Cancer Programs, Hospice and Camp Kemo.

Asset Retirement Obligations

The fair value of a liability for legal obligations associated with asset retirements is recorded in the period in which it is incurred, if a reasonable estimate of the fair value of the obligation can be made. When the liability is initially recorded, the cost of the asset retirement obligation is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost associated with the retirement obligation is depreciated over the useful life of the related asset. Upon settlement of the obligation, any difference between the cost to settle the asset retirement obligation and the liability recorded is recognized as a gain or loss in the consolidated statements of operations (see Note 19).



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Fair Value of Financial Instruments

The carrying amount reported in the accompanying consolidated balance sheets for cash and cash equivalents, patient accounts receivable, other receivables, other current assets, accounts payable, accrued salaries and benefits, and other current liabilities, approximates fair value due to the relatively short maturity of the respective instruments.

Recently Issued Accounting Standards

Accounting Standards Update (ASU) 2011-11 amends ASC 210-20, Balance Sheet: Offsetting, to enhance disclosures about financial instruments and derivative instruments that are either offset in accordance with U.S. Generally Accepted Accounting Principles (GAAP) or are subject to an enforceable master netting arrangement or similar agreement. The additional disclosures will facilitate comparisons between financial statements prepared under International Financial Reporting Standards (IFRS) versus U.S. GAAP. The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods and should be applied retrospectively to all comparative periods presented. Palmetto Health is continuing to evaluate this guidance and will adopt this guidance for fiscal year 2014. As this related only to disclosures, this should not impact results of operations, cash flows or financial position.

Note 2 - Joint Operating Agreement and Certificate of Public Advantage (COPA)

The State of South Carolina issued a Certificate of Public Advantage (COPA) in connection with the Joint Operating Agreement arising from Palmetto Health’s formation. Among other conditions, the COPA requires Palmetto Health to:

− Provide an annual report to the South Carolina Department of Health and Environmental Control (DHEC).

− Generally provide 10% of the excess of revenue and gains over expenses and losses to fund public health initiatives and community outreach programs. These terms will be re-evaluated should revenue and gains over expenses and losses as a percent of gross revenue escalate or decline to a point where Palmetto Health’s commitment to public health and other community benefits becomes unbalanced as it relates to Palmetto Health’s profitability or to a point where there is little or no commitment.

− Report on the nature, sources and amount of operational savings and capital cost reductions from avoided capital expenditures.

− Provide one level of care and continue to provide indigent/charity care.

− Provide access to competing facilities for those services not offered by such facilities.

− Maintain mission statements that are substantially similar to those of Baptist and Richland.

Unexpended funds in the amount of $6,815 and $5,097 at December 31 and September 30, 2012, respectively, were included in other current liabilities in the accompanying consolidated balance sheets until expended in accordance with COPA requirements. Compliance with COPA restrictions is the responsibility of Palmetto Health management and is subject to monitoring by DHEC. At December 31 and September 30, 2012, respectively, Board designated funds of $12,045 and $12,043 were set aside by Palmetto Health in a separate bank account equal to accrued but unexpended funds disclosed above of $6,815 and $5,097 at December 31 and September 30, 2012 , respectively, in addition to an estimate of one year’s COPA obligation.



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Note 3 - Net Patient Service Revenue and Patient Accounts Receivable

Palmetto Health has agreements with third-party payors that provide for payments to Palmetto Health at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows:

Medicare

Inpatient acute care and most outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to patient classification systems that are based on clinical, diagnostic and other factors. Inpatient nonacute services, certain outpatient services, and certain defined capital and medical education costs related to Medicare beneficiaries are paid based on formula/cost reimbursement methodologies. Palmetto Health is reimbursed for cost-reimbursable items at a tentative rate with final settlement determined after the submission of annual cost reports by Palmetto Health and audits thereof by the Medicare fiscal intermediary. The Medicare cost reports of Palmetto Health have been audited and final settled by the Medicare fiscal intermediary through the fiscal years ended September 30, 2007, for Palmetto Richland Memorial Hospital, Baptist Medical Center Columbia, and Baptist Medical Center Easley. Net revenue from the Medicare program accounted for approximately 25% of Palmetto Health’s net patient service revenue for both the three months ended December 31, 2012 and 2011.

Medicaid

Inpatient services rendered to Medicaid program beneficiaries are reimbursed on an interim basis at either a prospectively determined rate per discharge or specific rate for each inpatient day and then final settled at cost. Outpatient services are paid on an interim basis based on prospectively determined rates and then final settled at cost. Net revenue from the Medicaid program accounted for approximately 18% of Palmetto Health’s net patient service revenue for both the three months ended December 31, 2012 and 2011.

State Medicaid funding is a vital source of health care service funding for Palmetto Health. Palmetto Health recognized reimbursement from its participation in the South Carolina Medicaid disproportionate share program totaling $2,550 and $2,775 for the three months ended December 31, 2012 and 2011, respectively, net of the Medically Indigent Assistance program tax. There can be no assurance that Palmetto Health will continue to qualify for future participation in this program or that the program will not ultimately be discontinued or materially modified. Any material reduction in such funding would have a correspondingly material adverse effect on Palmetto Health’s financial position and results of operations.

Other

Palmetto Health has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to Palmetto Health, under these agreements, is primarily discounts from established charges, but also include prospectively determined rates per discharge and prospectively determined daily rates.

The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently, government activity has increased with respect to investigations and/or allegations concerning possible violations of fraud and abuse statutes and/or regulations by health care providers. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that Palmetto Health is in compliance with relevant fraud and abuse statutes as well as other applicable government laws and regulations.



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Net patient service revenue is comprised of the following:


Revenue at established charges 964,346$ 895,303$ Contractual adjustments (619,079) (558,938) Charity care (40,913) (38,875) Disproportionate share funding (also see Note 5) 2,550 2,775 Net patient service revenue 306,904$ 300,265$

As discussed previously, ASU 2010-23, “Measuring Charity Care for Disclosure,” was adopted by Palmetto Health in fiscal year 2012 and was applied retrospectively to fiscal year 2011. This guidance requires health care entities to use cost as the measurement basis for charity care disclosures, with cost defined as the direct and indirect costs of providing charity care. The estimated cost for Palmetto Health of providing charity services was $11,948 and $11,207 for the three months ended December 31, 2012 and 2011, respectively. These estimates were based on a calculation which applies the ratio of costs to charges to the gross uncompensated charges associated with providing care to charity patients. The ratio of cost to charges is calculated based on Palmetto Health’s total expenses (less bad debts expense) divided by gross patient service revenue.



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The following table sets forth, for the fiscal periods indicated, Palmetto Health’s net patient service revenue by payor source:

December 31, December 31,

2012 2011

Medicare 25% 25%Medicaid 18% 18%Commercial/managed care/other third-party payors 50% 50%Self-pay 3% 3%All Other 4% 4%

100% 100%

Palmetto Health grants credit to its patients, most of whom are local residents. Palmetto Health generally does not require collateral or other security in extending credit to patients; however, it routinely obtains assignment of (or is otherwise entitled to receive) patients’ benefits payable under their health insurance programs, plans or policies (e.g., Medicare, Medicaid, preferred provider arrangements and commercial insurance policies). The mix of net receivables from patients and third-party payors follows:

December 31, December 31,

2012 2011

Medicare 24% 20%Medicaid 18% 16%Commercial/managed care/other third-party payors 41% 47%Self-pay 17% 17%

100% 100%

Palmetto Health generally maintains two distinct portfolios of patient accounts receivable. One portfolio is largely comprised of billings to third-party payors and related account apportionment due from insured patients (collectively, the active accounts). The other portfolio consists of early-out self-pay accounts and other troubled accounts requiring more focused collections attention. The composition of patient accounts receivable as follows:

December 31, September 30,2012 2012

Active accounts 203,980$ 203,484$ Less – Allowance for uncollectible accounts (29,771) (30,363)

Net active accounts 174,209 173,121 Collection accounts 264,549 239,706 Less – Allowance for uncollectible accounts (234,169) (208,826)

Net collection accounts 30,380 30,880 Patient accounts receivable, net 204,589$ 204,001$



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Accounts receivable are reduced by an allowance for uncollectible accounts. In evaluating the collectability of accounts receivable, Palmetto Health analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for uncollectible accounts and provision for uncollectible accounts, as well as performing a detail review of high dollar accounts on a case by case basis. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for uncollectible accounts. For receivables associated with services provided to patients who have third-party coverage, Palmetto Health analyzes contractually due amounts and provides both an allowance and a provision for uncollectible accounts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet paid, or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayments balances due for which third-party coverage exists for part of the bill), Palmetto Health records a significant provision for uncollectible accounts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates, if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for uncollectible accounts. Palmetto Health’s allowance for uncollectible accounts for self-pay patients was 81% of self-pay accounts receivable at both December 31, 2012 and September 30, 2012. Palmetto Health has not changed its charity care or uninsured discount policies during fiscal years 2012 or 2011. Palmetto Health does not maintain a material allowance for uncollectible accounts from third-party payors, nor did it have significant write-offs from third-party payors.

Note 4 - Other Revenue

Other revenue includes a capitated arrangement for Palmetto Senior Care, whereby member premiums received are based on a per-member, per-month basis, regardless of the related utilization. Revenue recorded in connection with this arrangement was $4,272 and $4,227 for the three months ended December 31, 2012 and 2011, respectively.



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Note 5 - Other Receivables

Other receivables consists of amounts due from federal and state grant programs, amounts due from BEH for service contract, lease employee and sublease revenue (see Note 17), accrued interest income and amounts due from third-party payors. Components of other receivables follow:


Settlement amounts due from third-party payors 4,779$ 4,868$ Amounts due from South Carolina Medicaid disproportionate share program 8,509 11,375 Amounts due from graduate medical education arrangements 181 634 Interest receivable 1,002 1,059 Grant receivables 398 591 Due from BEH (see Note 17) 1,564 1,870 Other 5,387 9,755

21,820$ 30,152$



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Note 6 - Assets Limited as to Use

The composition of Palmetto Health’s assets limited as to use are as follows:

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

Losses Fair Value

By board primarily for capital improvements:

U.S. Treasury and government agencies 93,453$ 1,021$ (184)$ 94,290$

Cash and short-term investments 12,367 - - 12,367

Mutual funds 277,884 11,782 (2,340) 287,326 Common stocks and options 162,307 16,009 (3,371) 174,945 Corporate bonds, mortgage and asset-backed securities, and other 97,200 8,401 (136) 105,465

643,211 37,213 (6,031) 674,393

By trustee primarily under indenture agreement:

U.S. Treasury and government agencies 35,458 372 - 35,830 Cash and short-term investment 22,141 4 - 22,145 Corporate bonds, mortgage and asset-backed securities, and other 20,314 175 (49) 20,440

77,913 551 (49) 78,415

721,124$ 37,764$ (6,080)$ 752,808$

December 31, 2012

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

Losses Fair Value

By board primarily for capital improvements:

U.S. Treasury and government agencies 96,359$ 180$ (2)$ 96,537$ Cash and short-term investments 38,073 - - 38,073 Mutual funds 275,979 14,435 (1,586) 288,828 Common stocks and options 130,346 15,150 (2,678) 142,818 Corporate bonds, mortgage and asset-backed securities, and other 94,620 10,565 (51) 105,134

635,377 40,330 (4,317) 671,390

By trustee primarily under indenture agreement:

U.S. Treasury and government agencies 33,946 483 - 34,429 Cash and short-term investment 11,923 1 - 11,924 Mutual funds 2,020 4 - 2,024 Corporate bonds, mortgage and asset-backed securities, and other 24,121 201 (57) 24,265

72,010 689 (57) 72,642

707,387$ 41,019$ (4,374)$ 744,032$

September 30, 2012



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The composition of net investment income is as follows:


In other revenue – Interest income 87$ 72$ In nonoperating gains and losses:

Interest and dividend income 5,686$ 6,150$ Realized gains, net 4,206 949

9,892$ 7,099$

Note 7 - Property and Equipment

The components of property and equipment follow:


Land and improvements 42,206$ 42,206$ Buildings and improvements 499,894 498,933 Equipment and furniture 682,629 680,093

1,224,729 1,221,232 Accumulated depreciation (812,728) (799,271) Construction-in-progress 87,317 65,416

Property and equipment, net 499,318$ 487,377$

Depreciation expense was $13,494 and $14,107 for the three months ended December 31, 2012 and 2011, respectively.

Interest cost capitalized, net of interest earned on the related trusteed project funds, was $153 and $151 for the three months ended December 31, 2012 and 2011, respectively. At December 31, 2012, Palmetto Health had committed to expend an additional $34,469 for the construction of new facilities and purchase of other miscellaneous equipment over the next several years.



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Note 8 - Other Assets

The components of other assets follow:


Interest in net assets of Affiliated Foundations (Note 17) 26,382$ 25,995$ Cash surrender value, prepaids, deposits and other receivables 13,286 10,447 Notes receivable, net – Intermedical Hospital, Inc. (Intermedical), Foundation and RCHCA 2,821 2,818 Investment in affiliates 29,325 29,086 Other 1,016 921

72,830 69,267 Less – Current portion (12,417) (9,397)

Other assets, noncurrent 60,413$ 59,870$

The following investments in affiliates are reported using the equity method of accounting:

Name of InvesteeOwnership Percentage

December 31, 2012

September 30, 2012

Hospital Services, Inc. 26.47% $ 756 $ 731 Carolina Home Therapeutics 49.00% 1,489 1,447 Radiation Oncology, LLC 51.00% 1,615 1,398 Baptist Easley Hospital 50.00% 25,465 25,510

29,325$ 29,086$

Palmetto Health has a 26.47% interest in Hospital Services, Inc. (a shared laundry facility). For the three months ended December 31, 2012 and 2011, Palmetto Health recorded approximately $656 and $646, respectively, as laundry expense for services rendered by Hospital Services, Inc. In addition, Palmetto Health has a 51% interest in Radiation Oncology, LLC (Radiation Oncology), a for-profit joint venture with a group of physicians (Palmetto Health does not exert control).

On September 30, 2007, Palmetto Health’s wholly owned, for-profit subsidiary, HealthSource, Inc., purchased a 49% interest in Coram Healthcare/Carolina Home Therapeutics (CHT) from MedCorp Health Systems, Inc., a wholly owned subsidiary of the Palmetto Health Foundation (the Foundation). The purchase price is a maximum of $2,200 defined as distributions received by Palmetto Health attributable to fiscal years of CHT ending on or before December 31, 2013. Palmetto Health paid the Foundation $149 and $120 during the three months ended December 31, 2012 and, respectively, as a result of distributions from CHT. CHT is a for-profit joint venture whose primary purpose is providing home infusion therapy and home oxygen supply services. The remaining 51% of CHT is owned by Curaflex Health Services, Inc. (Palmetto Health does not exert control).

BEH operates as a nonprofit entity consisting of two equal members: Palmetto Health and Greenville Health Corporation (GHC). The Board is appointed equally by Palmetto Health and GHC or an affiliate of GHC. Palmetto Health accounts for its investment in BEH under the equity method of accounting. See Note 17 for further discussion on services rendered to BEH by Palmetto Health.



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Palmetto Health had a $1,413 promissory note receivable (noninterest-bearing) from the Foundation. The note is payable on demand and is also payable upon the sale, redemption or disposition of the capital stock of Hospital Services, Inc. The note is collateralized by the Foundation’s capital stock in the shared laundry facility. At December 31, 2012 and September 30, 2012, Palmetto Health also had a mortgage with Richland Community Health Care Associates (RCHCA) with outstanding balances of $1,207 and $1,195, respectively, pertaining to property and improvements purchased from Palmetto Health. The monthly payments are based on an amortization of 25 years at an interest rate of 5.0% with final payment due July 1, 2024. Palmetto Health is currently pursuing the foreclosure on this property as payments are no longer being received. A related impairment charge of $332 was recorded to write down the net value of the mortgage to the appraised value of said property.

A summary of combined unaudited financial information of the above mentioned affiliates as of and for the three months ended December 31, 2012 and 2011 follows:

2012 2011Revenues 24,568$ 24,236$ Net income 928 1,104 Assets 85,677 78,364 Equity 62,054 62,536

December 31,

Note 9 - Operating Leases

Palmetto Health leases certain of its business space and equipment under noncancelable operating leases. Rental expense totaled approximately $6,205 and $6,195 for the three months ended December 31, 2012 and 2011, respectively. Future minimum rental payments, reduced by minimum sublease rentals, required under noncancelable leases that have remaining lease terms in excess of one year as of December 31, 2012, follow:

For the year ended:2013 (remaining 9 months) 13,067$ 2014 10,491 2015 6,343 2016 4,134 2017 1,887 Thereafter 31,464

67,386$



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Note 10 – Other Liabilities

Other liabilities included the following:


Fair value of derivatives (see Note 12) 38,750$ 42,576$ Accrued medical malpractice losses (see Note 14) 8,217 7,822 Workers compensation liability (see Note 14) 3,840 4,222 Deferred compensation liability (see Note 15) 8,596 8,237 Post-retirement benefit obligation (see Note 16) 13,009 13,066 Payable to Medicare 37,848 37,848 Funds restricted for COPA program (see Note 2) 5,757 5,097 Accrued interest 11,244 4,578 Asset retirement obligation (see Note 19) 1,143 1,131 Other 5,722 4,922

134,126 129,499 Less – Current portion (68,598) (61,805)

Other liabilities, noncurrent 65,528$ 67,694$

Palmetto Health identified overpayments from Medicare related to the cost to charge ratio used in determining high cost outlier payments. Medicare applied this cost to charge ratio to services provided from April 30, 2010 through May 16, 2011. Palmetto Health recorded a payable of $37,848 for such overpayments in other current liabilities.



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Note 11 - Long-term Debt

Long-term debt of Palmetto Health consists of the following:


Bonds payable:2011 Series current interest paying serial bonds, payable annually and maturing on August 1, 2039, in varying amounts with interest rates ranging from 3.00% to 6.50% 90,430$ 90,430$ 2010 Series A current interest paying serial bonds, payable annually beginning in August 2014, and maturing on December 31, 2017, in varying amounts, with quarterly interest on the drawn balance at 67% of one month LIBOR plus 1.27% (1.41% at December 31, 2012 and 1.42% at September 30, 2012) and interest on the undrawn balance 0.25% 21,897 16,501 2010 Series B current interest paying serial bonds, payable annually beginning in August 2014, and maturing on December 31, 2017, in varying amounts, with quarterly interest on the drawn balance at 67% of one month LIBOR plus 1.27% (1.41% at December 31, 2012 and 1.42% at September 30, 2012) and interest on the undrawn balance 0.25% 8,694 4,097 2010 Series C current interest paying serial bonds, payable annually beginning in August 2014, and maturing on December 31, 2017, in varying amounts, with quarterly interest on the drawn balance at 67% of one month LIBOR plus 1.27% (1.41% at December 31, 2012 and 1.42% at September 30, 2012) and interest on the undrawn balance 0.25% 10,000 10,000 2010 Series D current interest paying serial bonds, payable annually beginning in August 2015, and maturing on December 31, 2015, in varying amounts, with quarterly interest on the drawn balance at 67% of one month LIBOR plus 1.27% (1.20% at December 31, 2012 and 1.21% at both September 30, 2012) and interest on the undrawn balance 0.50% 51 51 2009 Series current interest paying serial bonds, payable annually and maturing on August 1, 2039, in varying amounts with interest rates ranging from 3.00% to 5.90% 118,285 118,285

2007 Series current interest paying bonds, puttable to Palmetto Health on August 1, 2013, due August 1, 2009 to 2039, in varying amounts with interest at index rates established on a 30-day cycle (0.88% at December 31, 2012 and 0.91% at September 30, 2012) 68,815 68,815 2005 Series A current interest paying bonds, payable annually and maturing on August 1, 2035, in varying amounts with interest rates ranging from 3.25% to 5.00% (4.86% at December 31, 2012 and September 30, 2012) 200,200 200,200 2003 Series A current interest paying serial bonds, payable annually and maturing on August 1, 2031, in varying amounts with interest rates ranging from 4.00% to 6.25% 77,875 77,875 2003 Series C current interest paying serial bonds, payable annually and maturing on August 1, 2013, in varying amounts with interest rates ranging from 4.00% to 7.00% 4,040 4,040

Less – Unamortized premiums, discounts and issuance costs (18,265) (18,476) 582,022 571,818



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Note 11 - Long-term Debt (cont’d.)


Notes payable and other long-term debt:Note payable, bearing interest at 30-day LIBOR plus 1.75 (1.96% at December 31, 2012 and 1.97% at September 30, 2012), payable in monthly installments of $13, commencing October 20, 2005, including interest, due September 20, 2020 766 800

766 800 Total notes payable and long-term debt 582,788 572,618

Less – Current portion (80,652) (80,631) 502,136$ 491,987$

Future maturities of long-term debt follow:

Maturities

Net Amortization of Premiums, Discounts and Issuance Costs Payments

2013 13,158$ 636$ 13,794$ 2014 13,716 799 14,515 2015 12,520 804 13,324 2016 13,040 837 13,877 2017 13,673 862 14,535 Thereafter 516,681 14,327 531,008

582,788$ 18,265$ 601,053$

Fair values are based on quoted market prices, if available, or estimated using quoted market prices for similar securities. The estimated fair value of Palmetto Health’s long-term debt as of December 31, 2012 and September 30, 2012 was approximately $646,646 and $631,100, respectively.

In May 2011, Palmetto Health issued the 2011 Series A bonds for $94,695. The bonds were issued, along with a cash payment from Palmetto Health, to (i) advance refund the outstanding amount of the $43,805 principal of the 2008 Series A bonds and the outstanding amount of the $48,410 principal of the 2008B bonds and (ii) pay certain expenses incurred in connection with the issuance of the 2011 Series A bonds.



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In December 2010, Palmetto Health entered into agreements allowing for the eventual issuance of 2010 series revenue bonds of $215,000. The availability of the $90,000 from the 2010 Series D bonds, beyond the amount thereof disbursed at the closing is contingent upon all funds from the 2010 series A, B and C must be fully expended. The bonds were issued to (i) finance the acquisition , by construction or purchase, of an approximately 186,000-square foot building and other improvements on one or more parcels of land, and certain machinery, apparatus, equipment, office facilities and furnishings to be installed therein located in Richland County, South Carolina, to be used as an approximately 76 bed hospital, (ii) finance certain additions, expansions and enlargements to Palmetto Health’s existing hospital facilities and certain acquisitions of machinery, equipment, office furnishings and other depreciable assets all constituting hospital facilities in Richland County, and (iii) pay certain expenses incurred in connection with the issuance of the 2010 series bonds. The bonds are issued periodically as funds are expended for the purposes described above. As of December 31, 2012, there was $40,642 of such bonds issued, and $174,358 available for future draws.

In September 2009, Palmetto Health issued the 2009 series revenue bonds for $126,895. The bonds were issued to (i) advance refund the $84,000 outstanding principal amount of the 2003 Series B bonds, (ii) finance certain additions, expansions and enlargements to Palmetto Health’s existing hospital facilities and certain acquisitions of machinery, equipment, office furnishings and other depreciable assets all constituting hospital facilities in Richland County, (iii) fund a debt service reserve fund, (iv) pay other fees and expenses including, but not limited to, swap termination payments and (v) pay certain expenses incurred in connection with the issuance of the 2009 series bonds and refunding of the 2003 Series B bonds.

In March 2007, Palmetto Health issued the 2007 series revenue bonds for $120,000. The bonds were issued to (i) finance the renovation or purchase of an approximately 145,000 square foot building to be used as a children’s hospital on one or more parcels of land, and certain machinery, apparatus, equipment, office facilities and furnishings to be installed therein located in Richland County, SC; certain additions, expansions and enlargements to its existing hospital facility located in Richland County, SC; certain additions and enhancements to equipment at its existing hospital facility located in Pickens County, SC and certain other routine capital expenditures, (ii) fund interest on the 2007 series bonds and (iii) pay the cost of issuance of the 2007 series bonds. Series 2007 index rate bonds are scheduled for mandatory remarketing in August 2013. As a result, Palmetto Health reclassified the outstanding principal balance of $68,815 to the current portion of long-term debt as of September 30, 2012.

In December 2005, Palmetto Health issued the 2005 series A and B revenue bonds for $257,150. The bonds were issued to (i) advance refund a portion of the outstanding $260,050 original principal amount of 2003 Series C bonds, (ii) fund a debt service reserve fund and (iii) pay certain expenses incurred in connection with the issuance of the 2005 series bonds. Palmetto Health utilized a portion of the 2005 series revenue bonds to defease a portion of the outstanding bonds from the 2003 Series C bonds. In April 2008, Palmetto Health refinanced the line of credit debt that current refunded the $47,150 outstanding principal of the 2005 Series B bonds in June 2008 with the issuance of the 2008 Series A bonds for $43,805, which are variable rate demand hospital refunding revenue bonds. Simultaneous with the issuance of the 2008 Series A and B bonds in June 2008, Palmetto Health completed a reoffering of its 2005 Series A bonds, effectively converting the mode from an auction rate to fixed interest rates.



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In August 2003, Palmetto Health issued its 2003 series revenue bonds for $450,000. The bonds were issued to (i) provide funds for the payment of certain capital projects, (ii) fund a debt service reserve fund and (iii) pay certain expenses incurred in connection with the issuance of the 2003 series bonds. Palmetto Health utilized a portion of the 2003 series revenue bonds to defease all of the outstanding bonds from the 1991, 1993, 1995 and 2000 bonds series. The bond indentures between Palmetto Health and a national bank, as trustee, have been released and Palmetto Health no longer has any obligations associated with the defeased issues. Therefore, neither the assets of the trust established in connection with the defeasance of the 1991, 1993, 1995 and 2000 series bonds nor the unpaid principal are included in the accompanying consolidated balance sheets.

Palmetto Health’s bonds payable are collateralized by the Obligated Group’s pledged assets, including all revenues, receipts and income derived in connection with the ownership and operation of the Obligated Group’s property, plant and equipment.

In September 2004, Parkridge completed a loan facility to fund its start-up activities. This facility consists of (i) a $1,500 note payable for the upfitting of the surgery center, (ii) a $1,700 note payable for the purchase of machinery, equipment, furniture and fixtures, (iii) a $700 line of credit for miscellaneous working capital and (iv) a $177 note payable for equipment. This loan facility is secured by the assets of Parkridge and guarantees from physician investors and Palmetto Health of $700 and $232, respectively. Parkridge is not part of the obligated group as defined in the master indenture discussed above.

Note 12 - Derivative Financial Instruments

Palmetto Health utilizes certain derivative instruments to enhance its ability to manage risk related to identified cash flow exposures. Derivative instruments are entered into for periods consistent with the underlying cash flow exposures and do not represent positions independent of those positions. Palmetto Health does not enter into contracts for speculative purposes; however, certain interest rate swap and other contracts are not accounted for as accounting hedges.

Palmetto Health has entered into interest rate swap agreements, some of which contain interest rate caps and call features. These instruments, which are not designated as accounting hedges, have notional amounts tied to bond issuance principal balances.

When the total fair value of certain swaps exceeds a liability of $15,000, Palmetto Health is required to provide collateralization for the excess. The collateralization can take the form of cash held in safekeeping by a third-party bank or by liens on investments in treasuries or government sponsored entities owned by Palmetto Health. As of December 31, 2012 and 2011, there was $27,163 and $34,512, respectively, set aside for such collateral, reported in assets limited as to use. Amount required changes on a weekly basis.



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Of the net fair value of all the derivative instruments at December 31, 2012 and September 30, 2012, $1,158 and $1,315, respectively, is recorded in other current liabilities, with the remaining $37,593 and $41,262, respectively, in other liabilities. The following is a summary of the fair value of the instruments outstanding, excluding any net settlement differential receivable/payable, at December 31, 2012 and September 30, 2012:

TypeNotional Amount

Effective Date

Maturity Date Rate Paid

Rate Received

Increase (Decrease) in

Interest Expense

Swap Fair Value Asset (Liability)

Basis swap 144,000 8/1/03 5/9/18 0.163% 0.604% (265)$ 5,776$ Basis swap 275,000 9/9/05 9/14/15 0.180% 0.586% (435) 930 Fixed payor 46,750 12/15/05 8/1/13 3.650% 0.100% 386 (922) Fixed payor 118,190 3/15/07 8/1/39 3.474% 0.211% 1,323 (34,279) Fixed payor 46,525 8/1/13 7/26/35 3.540% 0.000% - (10,255)

1,009$ (38,750)$

At December 31, 2012

Totals for derivative instruments

TypeNotional Amount

Effective Date

Maturity Date Rate Paid

Rate Received

Increase (Decrease) in

Interest Expense

Swap Fair Value Asset (Liability)

Basis swap 144,000 8/1/03 5/9/18 0.186% 0.770% (240)$ 5,572$ Basis swap 275,000 9/9/05 9/14/15 0.157% 0.802% (244) 556 Fixed payor 46,750 12/15/05 8/1/13 3.650% 0.170% 491 (1,315) Fixed payor 118,190 3/15/07 8/1/39 3.474% 0.240% 970 (36,768) Fixed payor 46,525 8/1/13 7/26/35 3.540% 1.781% - (10,621)

977$ (42,576)$

At September 30, 2012

Totals for derivative instruments

Note 13 - Related-party Obligations with Richland County, Richland and Baptist

Concurrent with the transfer of substantially all net assets to Palmetto Health, the operating rights of associated real property and improvements thereon were conveyed to Palmetto Health through the following leases:

Capital Lease Obligation to Richland County

In exchange for an annual lease payment (including a fixed portion and other expenses assumed by Palmetto Health from Richland County), Richland County and Richland leased to Palmetto Health all of the real property recorded on the Richland property records as of the date Palmetto Health was formed. Real property includes all land, buildings and the building systems. The terms of the leases include a 35-year period with three five-year options, of which two have been exercised. Upon completion of the 35-year original lease period, the remaining lease payments are treated as an operating lease and such payments are included in the operating lease disclosure in Note 9.

The lease payment to the County includes a fixed payment of $1,693 per year. The 35 years of annual payments of $1,693 have been discounted using a 5.5% interest rate to its present value and recorded as a capital lease



Page 29

obligation. In addition, Palmetto Health reimburses Richland County an amount from operations equal to the County’s annual responsibility for the Medically Indigent Assistance Program (MIAP) as determined by the State of South Carolina.

Maturities on the long-term obligation to Richland County for the next five years and the aggregate are as follows:

For the year ended:2013 847$ 2014 1,693 2015 1,693 2016 1,693 2017 1,693 2018 and thereafter 27,527

Total minimum payments 35,146 Amount representing interest (14,262)

Obligations under capital leases 20,884 Obligations due within one year (572)

Long-term obligations under capital leases 20,312$

Assets under capital lease are amortized by the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Such amortization is included in depreciation and amortization in the consolidated financial statements.

The gross amount of assets under capital lease is $26,522 with accumulated amortization of $5,638 and $5,368 at December 31, 2012 and September 30, 2012, respectively.

Additional Payment to Richland and Baptist

Palmetto Health is committed to provide an annual payment from operations to cover certain governance costs of Richland and Baptist. The payment is calculated using a base of $250, subject to adjustment based upon the Consumer Price Index and other expenses, as defined, for an original term of 35 years with three five-year renewal options, of which two have been exercised. Expense of $175 and $169 for the three months ended December 31, 2012 and 2011, respectively, was recorded associated with these payments and is included in supplies and other expense in the accompanying consolidated statements of operations.

Note 14 - Insurance Coverage and Litigation

Medical Malpractice Claims

Palmetto Health purchases professional medical liability insurance coverage to cover medical malpractice claims. There are known claims and incidents that may result in the assertion of additional claims, as well as claims from unknown incidents that may be asserted arising from services provided to patients. Palmetto Health has employed independent actuaries to estimate the ultimate costs, if any, of the settlement of such claims. Accrued malpractice losses totaling $8,216 and $7,822 discounted at 3%, are included in other liabilities as of December 31, 2012 and September 30, 2012, respectively, and, in management’s opinion, provide an adequate reserve for related loss contingencies.



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Effective October 1, 2011, Palmetto Health adopted ASU 2010-24, “Presentation of Insurance Claims and Related Insurance Recoveries,” which amends previous guidance to require healthcare entities to record medical malpractice claims and similar liabilities and their anticipated insurance recoveries on a gross basis. This had no effect on the results of operations, cash flows or financial position as all insurance recoveries and related liabilities were previously recorded at gross. Palmetto Healthcare Liability Insurance Program

The PHLIP is a not-for-profit mutual benefit corporation comprised of Palmetto Health and other South Carolina health care systems (collectively, including Palmetto Health, the Members). The PHLIP was established to provide medical malpractice and general liability insurance coverage to the Members. The PHLIP provides claims-made insurance coverage to its Members by utilizing a captive insurance arrangement with a segregated portfolio (the PHLIP Segregated Portfolio) operated within an offshore captive insurance company, Preferred Healthcare Liability Insurance Program (SPC) (PHLIP SPC). PHLIP SPC and the PHLIP Segregated Portfolio are wholly-owned subsidiaries of PHLIP.

Each Member has an equal vote, as provided by the PHLIP bylaws. Although Palmetto Health is a related party to the PHLIP through participation by Palmetto Health management at the director level, Palmetto Health does not exercise significant influence or control. As such, Palmetto Health does not consolidate the assets (ultimately, investments from collected premiums) or liabilities (ultimately, nonreinsured exposure for current and anticipated claims experience) of the PHLIP, PHLIP SPC, or the PHLIP Segregated Portfolio.

Premiums for primary, primary excess and contingent excess coverage amounted to $4,404 and $4,787 and the self-insured retention (or deductible) for reported claims was limited to a maximum of $2,750 for the years ended September 30, 2012 and 2011, respectively. Premium payments have been recorded in other expense in the consolidated statements of operations for the years then ended. Additionally, Palmetto Health is contingently liable for up to 100% of cumulative premiums incurred for primary coverage, or $36,664 at September 30, 2012 (the Potential Premium Assessment). As of December 31, 2012, management believes the likelihood of any Potential Premium Assessment is not probable; hence, no related amounts have been accrued at December 31, 2012. Palmetto Health has provided a letter of credit with a commercial bank in a maximum amount of approximately $5,863 (expiring January 2014) to secure a portion of the maximum obligation for the Retroactive Premium. Management anticipates an updated renewal of this facility under substantially the same terms and conditions at expiration.



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Workers’ Compensation and Employee Health

Palmetto Health is self-insured for workers’ compensation claims and has a stop-loss insurance policy for claims in excess of $500. Palmetto Health has provided a letter of credit with a commercial bank in a maximum amount of $3,450 (expiring October 2013) related to the self-insurance of workers’ compensation. Palmetto Health is also self-insured for its employee group health insurance. Palmetto Health has estimated and recorded accruals in other current liabilities and other liabilities totaling $3,840 and $4,222 at December 31, 2012 and September 30, 2012, respectively, for the self-insurance portion of these arrangements and maintains excess coverages for exposures above self-insured retentions.

Litigation

As a not-for-profit corporation, Palmetto Health is the beneficiary of certain liability caps established under South Carolina Charitable Immunity Statutes. The laws of the state limit the amount that can be recovered for damages for medical services rendered by the facility or the facility’s employees to $300 per claim with a maximum of $600 per occurrence, with liability caps for employed physicians at $1,200 per occurrence. From time to time, Palmetto Health is involved in litigation and regulatory investigations arising in the normal course of business. Based on consultation with legal counsel and given available insurance coverages and related accruals, management believes that these matters will be resolved without a material adverse effect on Palmetto Health’s financial position or results of operations.

Note 15 - Retirement Plans

Palmetto Health Retirement Savings Plan (Savings Plan) is a defined contribution retirement plan. Employees are eligible to participate in the pretax salary reduction portion of the Savings Plan beginning with the first payroll after employment. Employees are eligible for the Palmetto Health match after the completion of 12 months of service in which the employee works 1,000 hours and after reaching the age of 21. Palmetto Health matches up to 140% of employee contributions up to 3.5% of the employee’s eligible compensation. The ultimate level of this employer match is based on years of service. Benefits are vested 20% a year beginning with the second year of employment with employees becoming fully vested after six years. The Savings Plan credits all previous years of vesting service with Baptist and Richland from the date of hire.

With the formation of Palmetto Health, certain Richland employees remained Richland employees and Richland entered into an arrangement with Palmetto Health whereby those employees were then leased to Palmetto Health. Those employees continue to participate in the State of South Carolina Retirement System. The plan requires contributions by employers who elect or are required to participate in the plan. Richland has funded all contributions required by the plan. Information concerning the portion of the South Carolina Retirement System’s assets and vested and nonvested benefits applicable to Richland employees is not available.

Palmetto Health expensed $2,451 and $2,376 related to the above retirement plans in the three months ended December 31, 2012 and 2011, respectively.

Palmetto Health has an unfunded defined benefit supplemental executive retirement plan in which the participant becomes eligible to receive benefit payments in the month coinciding with his respective 62nd birthday. Palmetto Health has a second unfunded defined benefit supplemental executive retirement plan for certain members of senior management. The participants become eligible to receive benefit payments in the month coinciding with the later of their respective 65th birthdays or 36 months of participation.



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The changes in the associated benefit obligation follow:

September 30, September 30,2012 2011

Benefit obligation at beginning of year 7,925$ 7,079$ Service Cost 491 372 Interest cost 317 318 Actuarial (gain)/loss (496) 1,171 Amendments - 36 Benefits paid - (1,051)

Total benefit obligation, end of year 8,237$ 7,925$ Amounts recognized in the unrestricted net assets consist of: Unrecognized actuarial loss (1,067) (1,726) Unrecognized prior service cost (2,098) (2,434)

(3,165)$ (4,160)$

The components of net periodic benefit cost are as follows:


Service Cost 491$ 372$ Interest cost 317 318 Amortization of prior service cost 336 333 Amortization of actuarial loss 163 79

Net periodic postretirement benefit cost 1,307 1,102 Settlement - 54

Total benefit cost 1,307 1,156

Adjustment to liability recognized in unrestricted net assets consist of:Net actuarial (gain) loss (659) 1,039 Prior service cost (336) (298)

(995) 741 Total benefit cost and other charges recognized in unrestricted net assets 312$ 1,897$

Amounts expected to be recognized in net periodic benefit costs in the following year:

Unrecognized actuarial loss 336$ Unrecognized prior service cost 143

479$

The weighted average discount rates used to determine benefit obligations at September 30, 2012 and 2011, were 3.65% and 4.00%, respectively. The rate of compensation increase used to determine benefit obligations at both September 30, 2012 and 2011 was 4.0%.



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Note 16 - Postretirement Benefits Plan

Palmetto Health currently provides defined unfunded health care and drug benefits for certain retired employees. Additionally, certain active employees are eligible for future benefits. Employees who retire with Palmetto Health on and after October 1, 2004, pay the full cost of retiree medical coverage. Palmetto Health has elected to record the unrecognized transition obligation as an operating expense on a prospective basis as part of the future annual benefit cost. The changes in the associated benefit obligation follow:

September 30. September 30.2012 2011

Benefit obligation at beginning of year 13,564$ 10,809$ Service cost 31 - Interest cost 510 477 Actuarial (gain)/loss (277) 2,974 Benefits paid (762) (696)

Total benefit obligation, end of year 13,066 13,564 Amounts recognized in the unrestricted net assets consist of: Unrecognized actuarial (loss) gain (348) (625) Unrecognized prior service credit 475 526 Unrecognized net transition obligation (3,643) (4,296)

(3,516)$ (4,395)$

The components of net periodic postretirement benefit cost are as follows:September 30, September 30,

2012 2011Service cost at end of period 31$ -$ Interest cost on accumulated postretirement benefit obligation 510 477 Amortization of transition obligation 653 653 Amortization of unrecognized prior service cost (51) (51) Amortization of net gain - (104) Net periodic postretirement benefit cost 1,143 975

Adjustment to liability recognized in unrestricted net assets consist of:Net actuarial (gain) loss (277) 3,078 Prior service credit 51 51 Net transition obligation (653) (653)

(879) 2,476 Total benefit cost and other charges recognized in unrestricted net 264$ 3,451$

Amounts expected to be recognized in net periodic benefit costs in the following year:Unrecognized actuarial loss 653$ Unrecognized prior service cost (51)

602$



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The weighted average discount rates used to determine benefit obligations at September 30, 2012 and 2011, were 3.65% and 4.00%, respectively.


Health care cost trend rate assumptions:Initial trend rate, pre-Medicare 8.00% 8.00%Initial trend rate, post-Medicare 8.00% 8.00%Ultimate medical trend rate 5.00% 5.00%Pharmacy initial trend rate 8.00% 8.00%Pharmacy ultimate trend rate 5.00% 5.00%Ultimate trend rate is reached in year 2018 2017

September 30, September 30, September 30, September 30,2012 2011 2012 2011

Sensitivity to the assumed health care cost trend rates:Effect on total of service and interest cost components (58)$ (58)$ 69$ 69$ Effect on postretirement benefit obligation (1,279) (1,334) 1,520 1,480

1% Increase1% Decrease

The weighted average discount rates used to determine net cost for the years ended September 30, 2012 and 2011 were 3.65% and 4.00%, respectively.

The benefits expected to be paid, net of Medicare Part D Subsidy, in each of the years 2013 to 2017 are $814, $810, $824, $834 and $830, respectively. The aggregate benefits expected to be paid in the five years from 2018 to 2022 are $3,938. The expected benefits are based on the same assumptions used to measure Palmetto Health’s benefit obligation at September 30, 2012.

Note 17 - Related Parties

At the formation of Palmetto Health, certain Richland employees elected to remain employees of Richland in order to continue to participate in the State of South Carolina Retirement System. Those employees are leased to Palmetto Health under an employee lease agreement. The total payments by Palmetto Health to Richland under the employee lease agreement amounted to $2,378 and $2,726 for the three months ended December 31, 2012 and 2011, respectively. Palmetto Health had on deposit $804 for both the three months ended December 31, 2012 and September 30, 2012, with Richland as a deposit equal to two payrolls for employees leased by Richland to Palmetto Health. The deposit is included in other current assets.

Palmetto Health provides certain services to BEH, a 50% owned joint venture (see Note 8), and recorded $1,928 and $1,797 for the three months ended December 31, 2012 and 2011, respectively, in other revenue of related service contract and sublease revenue (see Note 5 for related receivable).

Palmetto Health is affiliated with the Palmetto Health Foundation (the Foundation). During the three months ended December 31, 2012 and 2011, Palmetto Health received no contributions from the Affiliated Foundation and Palmetto Health paid $665, respectively, in operating expenses of the Affiliated Foundation for both periods.



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The Foundation was established through the merger of the Baptist Medical Center Columbia Foundation into the Richland Memorial Hospital Foundation for the sole purpose of supporting the mission, purposes and activities of Palmetto Health, and its related organizations. The directors of this foundation include certain officers and board members of Palmetto Health, as well as other community leaders. The Foundation is constituted so as to attract support and contributions directly or indirectly from persons in the community in which it operates and was not formed for pecuniary profit or financial gain.

Palmetto Health follows ASC 958, “Not-for-profit Entities,” in accounting for contributions and funds held by the Foundation for the benefit of Palmetto Health. The following table sets forth selected unaudited financial information of the Foundation at December 31, 2012 and September 30, 2012:

December 31, 2012

September 30, 2012

Assets 30,000$ 28,635$ Liabilities 2,691 2,640 Unrestricted net assets 3,305 3,151 Temporary and permanently restricted net assets 24,004 22,844

Note 18 - Fair Value Measurements

ASC 820, “Fair Value Measurements and Disclosures,” establishes a framework for measuring fair value. That framework provides a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. That hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that Palmetto Health has the ability to access.

Level 2 – Inputs to the valuation methodology include:

- Quoted prices for similar assets or liabilities in active markets;

- Quoted prices for identical or similar assets or liabilities in inactive markets;

- Inputs other than quoted prices that are observable for the asset or liability, and

- Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Changes in economic conditions or valuation techniques may require the transfer of financial instruments from one fair value to another. In such instances, the transfer is reported at the beginning of the reporting period. For the fiscal years ended September 30, 2012 and 2011, there were no transfers in and out of level 1, 2, or 3.



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The following tables set forth the level, within the fair value hierarchy, Palmetto Health’s financial instruments at fair value as of December 31, 2012 and September 30, 2012:

Level 1 Level 2 Level 3 Total

U.S. Treasury and government agencies 130,120$ -$ -$ 130,120$ Cash and short-term investments 34,512 - - 34,512 Mutual funds 287,326 - - 287,326 Common stocks and options 104,854 - - 104,854 Corporate bonds, mortgage and asset backed securities, and other - 120,051 - 120,051 Alternative investments - - 75,945 75,945

Assets at fair value 556,812 120,051 75,945 752,808 Derivative instruments, net - swaps - (38,750) - (38,750)

Liabilities at fair value - (38,750) - (38,750) Total financial instruments at fair value 556,812$ 81,301$ 75,945$ 714,058$

At December 31, 2012

Level 1 Level 2 Level 3 Total

U.S. Treasury and government agencies 130,966$ -$ -$ 130,966$ Cash and short-term investments 49,995 - - 49,995 Mutual funds 290,852 - - 290,852 Common stocks and options 73,511 - - 73,511 Corporate bonds, mortgage and asset backed securities, and other - 123,533 - 123,533 Alternative investments - - 75,175 75,175

Assets at fair value 545,324 123,533 75,175 744,032 Derivative instruments, net - swaps - (42,576) - (42,576)

Liabilities at fair value - (42,576) - (42,576) Total financial instruments at fair value 545,324$ 80,957$ 75,175$ 701,456$

At September 30, 2012

The table below sets forth a summary of changes in the fair value of Palmetto Health’s Level 3 financial instruments for the period ended December 31, 2012 and September 30, 2012:

December 31, 2012

September 30, 2012

Balance, beginning of year 75,175$ 49,609$ Purchases - 21,905 Unrealized gain (loss) 919 3,760 Settlements, net (149) (99)

Balance, end of year 75,945$ 75,175$



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Palmetto Health estimates the fair value of investments in corporate bonds, mortgage and asset backed securities, and other based on fair values determined by independent vendors. The vendors compile prices from various sources and may apply matrix pricing for similar bonds where no price is observable in an actively traded market. If available, the vendor may also use quoted prices for recent trading activity of assets with similar characteristics to the bond being valued.

Palmetto Health estimates the fair value of investments in alternative investments using the reported net asset value as a practical expedient for fair value. The use of net asset value as a practical expedient for fair value is permitted under GAAP for investments in entities that meet the description of an investment company and whose underlying investments are measured at fair value. The table below is a summary of the alternative investments held by Palmetto Health as of December 31, 2012 and September 30, 2012:

December 31, 2012

September 30, 2012

Equity long/short hedge fund of funds 5,854$ 5,866$ Nonewritten notification by 9/15 for

redemption at 12/31 of each yearGlobal macro hedge fund of funds 5,618 5,627 None 106 days US macro hedge fund of funds 859 837 None N/A - currently liquidatingDiversified multistrategy fund of funds 63,614 62,845 None 5-90 days Balance, end of year 75,945$ 75,175$

Unfunded Commitments Redemption Notice Period

The Equity long/short hedge fund of funds oversees various managers which seek to earn attractive returns by generally focusing on investments in global equities, both long and short, but may also use other securities and instruments deemed appropriate by the investment manager to carry out the overall objective of the fund. The investment manager has broad and flexible investment authority and may trade in any type of security, issuer, or group of related issuers, country, region, etc., believed to help the fund achieve its investment objectives.

The Global macro hedge fund of funds oversees various managers whose investment objective is to seek risk-adjusted returns while preserving capital during difficult market periods, through exposure to the financial, metal, energy, agricultural, currency and other markets, in addition to diversify its portfolio through investment in a range of funds or managed accounts seeking to implement trading strategies in numerous U.S. and international currency, futures, options, forward and other derivative markets.

The US macro hedge fund of funds seeks lower volatility than traditional markets, investing primarily in non-directional hedge fund strategies. By investing in a broadly diversified portfolio of alternative asset managers, the fund seeks to produce consistent, above-average, risk adjusted, long-term rates of return with low correction relative to the equity and fixed income markets. Palmetto Health is currently liquidating out of this fund.

The Diversified multistrategy fund of funds oversees various managers which seek diversification by investment strategy. Strategy sectors include, among others, Long Short, Event Driven, Fundamental Macro, Systematic Macro (CTA), Relative Value, and Multi-Strategy. Currently all investments in this fund of funds is in the initial one year lock-out period. After the lock-out expires, a 5-90 day notice period is required.

Management estimates the fair value of interest rate swaps, based primarily on Level 2 inputs. Management also considers the creditworthiness of Palmetto Health and its counterparties in estimating the fair value of interest rate swaps; however, the effect of credit valuation adjustments was not significant to the fair value measurements as of December 31, 2012.



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Note 19 - Asset Retirement Obligations

Palmetto Health has estimated asset retirement obligations of $1,143 and $1,131 as of December 31, 2012 and September 30, 2012, respectively, which arose primarily from a legal obligation to remove asbestos in facilities at the time of major renovation or demolition, which are included in noncurrent liabilities. The related accretion expense was $13 and $12 for the three months ended December 31, 2012 and 2011, respectively.

Note 20 - Functional Expenses

Palmetto Health provides health care services to residents within its geographic location. Expenses based on functional classification related to providing these services are as follows:

December 31, 2012

December 31, 2011

Health care services 233,607$ 228,879$ General and administrative 32,814 30,527

266,421$ 259,406$

Note 21 - Subsequent Events

As required by ASC 855, “Subsequent Events,” Management of Palmetto Health has evaluated events that occurred between January 1, 2013, and February 14, 2013 (the date of issuance) to determine whether any of those events required recognition or disclosure in the 2013 financial statements. Palmetto Health is not aware of any subsequent events that would require recognition in the financial statements; however, the items noted below were identified for disclosure.

As discussed in Note 12, when the total fair value of certain swaps exceeds a liability of $15,000, Palmetto Health is required to provide collateralization for the excess. As of February 14, 2013, the amount of such collateral required decreased to $18,333 due to an unfavorable change in market conditions.


Management Discussion and Analysis For the Three Months ended December 31, 2012 (dollars in thousands)

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RESULTS OF OPERATIONS Palmetto Health’s earnings are reported in accordance with generally accepted accounting principles (GAAP). Management believes that earnings reported under GAAP provides a meaningful representation of its fundamental earnings power and can be used in performing period-over-period financial analysis and comparison with peer group data. This measure is also used by management in making resource allocation and other budgetary and operational decisions. Operating Income

2012 2011 $ %

Operating income 6,958$ 8,480$ (1,522)$ -17.95%

ChangeThree Months Ended

December 31,

Operating income decreased $1,522 or 17.95% from the three months ended December 31, 2011 to the three months ended December 31, 2012. This decrease is due to the increase in unrestricted revenue, gains, and other support of $5,493 or 2.05%, offset by the increase in operating expenses of $7,015 or 2.70%. Unrestricted Revenue, Gains and Other Support

2012 2011 $ %

Revenue at established charges 964,346$ 895,303$ 69,043$ 7.71%Contractual adjustments (608,521) (550,460) (58,061) 10.55%Charity care (51,471) (47,353) (4,118) 8.70%Disproportionate share funding 2,550 2,775 (225) -8.11%Net patient service revenue 306,904 300,265 6,639 2.21%Less: Provision for uncollectible accounts (54,691) (50,646) (4,045) 7.99%Net patient service revenue less provision for uncollectible accounts 252,213 249,619 2,594 1.04%Other revenue 21,166 18,267 2,899 15.87% Total 273,379$ 267,886$ 5,493$ 2.05%


December 31,

The increase in unrestricted revenue, gains and other support was primarily a result of an increase in negotiated managed care rates, an average 6% price increase at the beginning of October 2012, and increases in radiology volumes, offset by a decrease in surgery volumes. In addition, this increase in other revenue was primarily due to $1.4 million recorded as a result of meeting “meaningful use” of electronic health records requirements per the American Recovery and Reinvestment Act (ARRA).



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Operating Expenses

2012 2011 $ %

Salaries and benefits 144,137$ 137,737$ 6,400$ 4.65%Supplies and other expenses 100,527 99,663 864 0.87%Depreciation and amortization 13,719 14,353 (634) -4.42%Interest expense 8,038 7,653 385 5.03% Total expenses 266,421$ 259,406$ 7,015$ 2.70%


December 31,

Operating expenses increased primarily due to salaries and benefits. Several factors caused salaries and benefits to increase $7,015 or 2.70%, including 1) an increase from the 2.17% overall pay increase effective January 2012 and 2) an increase in FTEs of 1% which was largely a result of the addition of physician practices. Supplies and other expenses remained relatively flat, increasing $864 or 0.87%, due primarily to management cost saving initiatives, offset by price increase and inflation. Depreciation and amortization expense decreased $634 or 4.42% due to a discretionary reduction in capital spending over the last few years as result of the economic downturn. Interest expense increased $385 or 5.03% primarily due to the issuance of the $40,642 in Series 2011 bonds, which are fixed rate bonds, of which proceeds are being used for the construction of the new Baptist Parkridge Hospital, in addition to routine capital.

Revenue and gains over expenses and losses

2012 2011 $ %

Revenue and gains over expenses and losses 13,918$ 29,827$ (15,909)$ -53.34%

Three Months EndedDecember 31, Change

Revenues and gains over expenses and losses decreased $15,909, primarily a result of the $20,084 decrease in net change in unrealized (losses) gains on trading investments to a $4,961 loss for the three months ended December 31, 2012 from a $15,123 gain for the three months ended December 31, 2011. In addition, there was a decrease in operating income of $1,522 described above. There were offsetting increases in investment income of $2,793 and in the net change in unrealized gains on derivative financial instruments of $2,918 to a $3,826 gain for the three months ended December 31, 2012 compared to $908 for the three months ended December 31, 2011. The changes in the trading investments, derivative financial instruments, and investment income are due to changes in market conditions.



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Increase in unrestricted net assets

2012 2011 $ %

Increase in unrestricted net assets 14,033$ 30,629$ (16,596)$ -54.18%

Three Months EndedDecember 31, Change

The change in unrestricted net assets decreased primarily from the decrease in revenue and gains over expenses of $15,909 described above.



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LIQUIDITY, FINANCIAL RESOURCES, AND FINANCIAL POSITION

December 31, 2012

September 30, 2012 $ %

Total cash, cash equivalents and assets limited as to use 779,696$ 768,969$ 10,727$ 1.39%Total assets 1,596,371 1,577,328 19,043 1.21%Total liabilities 825,009 820,281 4,728 0.58%Total net assets 771,362 757,047 14,315 1.89%

Change

The Corporation's unrestricted cash and investments (at market value) were approximately $701,281 at December 31, 2012 and $696,327 at September 30, 2012, representing 255 and 244 days of cash operating expenses, respectively. The increase is primarily due to the operating results as described above, in addition to the receipt of proceeds from the issuance of Series 2010 bonds that were used in funding routine equipment.

The Corporation's long-term debt balances (excluding current maturities) were $502,136 at December 31, 2012 and $491,987 at September 30, 2012, due to the issuance of $9,993 in Series 2010 bonds. The Corporation's ratio of unrestricted cash and investments to long-term debt (excluding current maturities) was 139.66% at December 31, 2012, and 141.53% at September 30, 2012.

Total assets increased $19,043 or 1.21% due to primarily to operating results, which increased total cash, cash equivalents, and assets limited as to use $10,727 or 1.39%. Net patient accounts receivable remained relatively flat. There was an $8,332 decrease in other receivables from prior year, partially due to timing of South Carolina Disproportionate share program payments. Also contributing to the increase in total assets was an $11,941 increase in net property and equipment partially as a result of the progress on the construction of the Parkridge Hospital which is projected to be operational by December 2013. In addition there was an increase of $3,020 in other current assets as a result of timing of prepayments. Total liabilities increased $4,728 or 0.58% due the $10,170 increase in net long term debt (including current portion). This increase, as discussed above, was due to the issuance of $40,642 in Series 2010 bonds, offset by principal payments on bonds in August 2012. The a $4,627 increase in the other liabilities (current and noncurrent) corresponds with the $3,826 increase in the fair market value of derivative financial instruments during the three months ended December 31, 2012 for a total liability of $38,750. There was also an offsetting decrease of $8,912 in accrued salaries and benefits due to timing. Net assets increased $14,315 or 1.89%, most of which relates to the increase in unrestricted net assets of $14,033 described previously.



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In August 2007, DHEC approved the CON for the $115,000 Baptist Parkridge Hospital. The hospital’s construction is on schedule and is projected to be operational by December 2013.

In conjunction with the Parkridge Hospital opening discussed above, Palmetto Health is constructing an 80,000 square foot ambulatory services building that is designated for use by the hospital and Palmetto Health owned physician practices. Completion is projected to be in December 2013 as well.

In December 2012, a CON was submitted to DHEC for the $3,559 Baptist imaging upgrade, which includes purchase and installation of two new CT scanners’s, in addition to related renovations and relocation of another CT scanner to the northeast outpatient imaging location. This CON is currently under DHEC review.

In December 2012, a CON was submitted to DHEC for the $4,608 hybrid operating room, which enables both open surgical and close endovascular procedures in the same place. This project includes angiography imaging equipment, space renovation, and the addition of a control room. This CON is currently under DHEC review.

Other than those mentioned above, there are no other significant CON’s or approval by the Corporation’s Board of Directors for any other outside of routine capital expenditures, which are approximately $60,000 annually. Although no other major capital expenditures have either an approved CON or have been approved by the Board as of the date of this statement, the Board continually considers strategic capital expenditures and could approve such expenditures at any time in the future.


Other Interim Information For the Three Months ended December 31, 2012 (dollars in thousands)

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MEDICAL STAFF PROFILE

Each of Palmetto Health's hospitals has a separate medical staff. Appointments are made in conjunction with the applicable staff bylaws for each hospital. The active and consulting staffs provide substantially all of the admissions at each of Palmetto Health's hospitals. The following table represents a breakdown of active and consulting medical staffs at Palmetto Health’s two hospitals:

(% Board Average (% Board AverageSpecialty Number Certified) Age Number Certified) AgeAnesthesiology 21 100% 53 24 88% 50Cardiology 32 66% 53 - - N/ADentistry 24 42% 49 12 92% 50Emergency Medicine 33 82% 44 24 83% 45Family Practice 57 84% 45 21 81% 46Internal Medicine 146 79% 48 108 83% 49Nephrology 21 95% 44 - - N/ANeurology 8 88% 47 8 75% 47Neurosurgery 5 60% 51 6 67% 49OB/GYN 52 73% 47 43 84% 48Ophthalmology 23 74% 48 18 94% 47Orthopedics 32 75% 47 20 100% 53 Pathology 15 100% 50 16 100% 51Pediatrics 146 45% 45 80 94% 43Psychiatry 50 86% 48 41 83% 49Radiology 32 100% 51 28 100% 49Surgery 55 89% 52 42 93% 52Urology 9 100% 53 8 100% 57TOTALS/AVERAGE 761 80% 49 499 89% 49

PALMETTO HEALTH'S ACTIVE AND CONSULTING MEDICAL STAFF PROFILE

PALMETTO HEALTH RICHLAND PALMETTO HEALTH BAPTIST



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HISTORICAL UTILIZATION STATISTICS

The following table contains, for the fiscal periods indicated, selected historical utilization statistics for Palmetto:

2012 2011

Licensed Beds 1,138 1,138Staffed Beds 956 1,036

Patient Days: Adult/Pediatric 58,000 56,697 Medical Rehabilitation 1,421 1,372 BMU*/ Substance Abuse 5,802 5,781 Newborn/NICU 10,676 10,500Total 75,899 74,350

Admissions: Adult/Pediatric 11,572 10,770 Medical Rehabilitation 151 150 BMU*/Substance Abuse 490 561 Newborn/NICU 1,561 1,503Total 13,774 12,984

Length of Stay (Adult/Pediatric) 5.01 5.26

Occupancy Percentage: Licensed Beds 72.50% 71.00% Staffed Beds 86.30% 78.00%

Emergency Department Visits 35,083 31,651Radiological Procedures 281,702 266,146

_________________*Behavioral Medicine Unit.

Three Months Ended December 31,



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HISTORICAL COVERAGE OF MAXIMUM ANNUAL DEBT SERVICE

The following table shows, for the fiscal periods indicated, Palmetto Health's income available for debt service, calculated in accordance with the Master Indenture, and the extent to which principal and interest requirements on all long-term debt and capitalized leases outstanding at that time were covered by such revenues.

2012 2011Revenues and gains over expense 13,918$ 29,827$ Plus: Depreciation and Amortization 13,719 14,353 Interest 8,163 7,903 Net change in unrealized gain on derivative financial instruments (3,826) (908) Net change in unrealized loss (gain) on trading investments 4,961 (15,123)Income available for debt service 36,935$ 36,052$ Maximum Debt Service Requirement on all long-term debt (1) 11,614$ 11,491$ Debt service coverage (times) 3.18 3.14

Three Months Ended December 31,

(1) Includes debt service requirements for all bond indebtedness and the Corporation's capitalized leases. For purposes of calculation of debt service coverage, maximum debt service requirement is prorated for one quarter of coverage (3 months).



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CAPITALIZATION The table below sets forth, for the fiscal periods indicated, the capitalization of Palmetto Health:

December 31, 2012

September 30, 2012

Series 2011 Bonds 90,430$ 90,430$ Series 2010 Bonds 40,642 30,649Series 2009 Bonds 118,285 118,285Series 2007 Bonds 68,815 68,815Series 2005 Bonds 200,200 200,200Series 2003 Bonds 81,915 81,915Other Long-Term Indebtedness 21,650 21,954Total Long-Term Debt 621,937 612,248Less: Current Maturities (81,224) (81,195) Unamortized Bond Discount (18,265) (18,476)Net Long-Term Debt 522,448 512,577Total Unrestricted Net Assets 739,426 725,393Total Capitalization 1,261,874$ 1,237,970$

Net Long-Term Debt as a Percentage of Total Capitalization (1) 41% 41%

(1)

Total Unrestricted Net Assets includes assets of Parkridge Surgery Center, which is not a Member of the Obligated Group or obligated on the Series 2011, 2010, 2009, 2007, 2005, or 2003 Obligations. If these assets were excluded, Net Long-Term Debt as a Percentage of Total Capitalization would have remained the same.

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