ROGER WILLIAMS MEDICAL CENTER (Formerly … Auditors’ Report The Board of Trustees Roger Williams Medical Center (Formerly known as Roger Williams Hospital): We have audited the

ROGER WILLIAMS MEDICAL CENTER (Formerly known as Roger Williams Hospital)

Financial Statements

September 30, 2012 and 2011

(With Independent Auditors’ Report Thereon)

Independent Auditors’ Report

The Board of Trustees Roger Williams Medical Center (Formerly known as Roger Williams Hospital):

We have audited the accompanying balance sheets of Roger Williams Medical Center (formerly known as Roger Williams Hospital) (the Medical Center) as of September 30, 2012 and 2011 and the related statements of operations, changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Medical Center’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Medical Center’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Medical Center as of September 30, 2012 and 2011, and the results of its operations, changes in its net assets and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

January 29, 2013

KPMG LLP 6th Floor, Suite A 100 Westminster Street Providence, RI 02903-2321

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

ROGER WILLIAMS MEDICAL CENTER(Formerly known as Roger Williams Hospital)

Balance Sheets


Assets 2012 2011

Current assets:Cash and cash equivalents (restricted cash of $2,453,595 in 2012 and $2,449,059 in 2011 $ 12,265,154 12,411,338 Patient accounts receivable, less allowance for doubtful accounts of $9,405,847 in 2012

and $7,842,800 in 2011 15,838,045 13,870,947 Inventories 3,184,326 3,079,744 Malpractice and professional receivables 61,128 607,048 Prepaid expenses and other current assets 4,146,658 3,537,592 Amounts due from related parties 792,682 675,319

Total current assets 36,287,993 34,181,988

Assets limited or restricted as to use:Funds held by trustee under bond indenture 1,329,911 1,329,911 Board designated investments 5,786,666 5,079,479 Restricted investments:

Interest in perpetual trusts 4,129,362 3,694,529 By donor 4,209,522 4,209,522 By spending policy 13,677,484 12,040,424

Total assets limited or restricted as to use 29,132,945 26,353,865

Property, plant and equipment, net 26,589,568 27,774,968 Malpractice and professional receivables 4,892,824 5,123,068 Investments in joint ventures 3,101,714 3,472,390 Amounts due from related parties 1,905,753 2,492,102 Other assets 858,684 755,785

Total assets $ 102,769,481 100,154,166

Liabilities and Net Assets

Current liabilities:Accounts payable and accrued expenses $ 20,109,053 20,003,390 Current obligations under capital lease 580,305 861,639 Current portion of long-term debt 632,572 672,378 Current portion of malpractice liabilities 61,128 607,048 Amounts due to related parties 1,119,652 — Estimated final settlements due to third-party payors 11,276,996 11,741,286

Total current liabilities 33,779,706 33,885,741

Capital lease obligations, less current portion 521,029 780,518 Long-term debt, less current portion 12,663,184 13,391,326 Deferred gain on investment in joint venture 2,190,667 2,290,144 Asset retirement obligations 699,890 684,345 Malpractice and professional liabilities 9,175,902 9,928,476 Other liabilities 308,801 333,692

Total liabilities 59,339,179 61,294,242

Commitments and contingencies

Net assets:Unrestricted 18,881,358 16,397,505 Temporarily restricted 16,210,060 14,558,368 Permanently restricted 8,338,884 7,904,051

Total net assets 43,430,302 38,859,924

Total liabilities and net assets $ 102,769,481 100,154,166

See accompanying notes to financial statements.

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Statements of Operations

Years ended September 30, 2012 and 2011

2012 2011

Operating revenues:Net patient service revenues $ 156,652,947 151,684,142 Net assets released from restrictions:

Research 5,658,882 5,429,274 General operations 953,984 1,016,711 Free care 11,104 47,650

Other operating revenues 10,071,353 6,614,393

Total operating revenues 173,348,270 164,792,170

Operating expenses:Employee compensation and benefits 82,528,541 80,321,229 Supplies and other 61,036,628 54,317,198 Direct research expenses 5,658,882 5,429,274 License fee 7,058,592 7,402,248 Interest 919,594 1,029,092 Depreciation, amortization and accretion 4,770,931 5,260,717 Provision for bad debts 9,844,043 9,802,883

Total operating expenses 171,817,211 163,562,641

Gain from operations 1,531,059 1,229,529

Non–operating gains (losses):Investment income 334,275 448,829 Expenditures for designated purposes, net (370,610) (521,812) Other 110,657 1,444

Nonoperating gains (losses), net 74,322 (71,539)

Excess of revenues over expenses 1,605,381 1,157,990

Other changes in unrestricted net assets:Change in net unrealized gains (losses) on investments 546,279 (318,350) Funds released from temporarily restricted net assets for capital 332,193 31,958

Increase in unrestricted net assets $ 2,483,853 871,598


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Statements of Changes in Net Assets


2012 2011

Increase in unrestricted net assets $ 2,483,853 871,598

Temporarily restricted net assets:Restricted income on endowment funds 338,387 355,696 Earnings on temporarily restricted net assets 7,644 5,983 Change in net unrealized gains (losses) on investments 2,022,397 (1,791,070) Net realized gain on investments 9,609 667,761 Transfer from affiliate 134,792 — Gifts and grants 6,095,026 5,890,833 Net assets released from restrictions (6,956,163) (6,525,593)

Increase (decrease) in temporarily restricted net assets 1,651,692 (1,396,390)

Permanently restricted net assets:Restricted income on endowment funds 11,104 47,650 Funds transferred to temporarily restricted net assets (11,104) (47,650) Change in market value of perpetual trusts 434,833 (194,646)

Increase (decrease) in permanently restrictednet assets 434,833 (194,646)

Increase (decrease) in net assets 4,570,378 (719,438)

Net assets at beginning of year 38,859,924 39,579,362

Net assets at end of year $ 43,430,302 38,859,924


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Statements of Cash Flows


2012 2011

Cash flows from operating activities:Change in net assets $ 4,570,378 (719,438) Adjustments to reconcile change in net assets to net cash

provided by operating activities:Depreciation and amortization 4,740,614 5,207,190 Accretion for asset retirement obligation costs 30,317 13,724 Amortization of deferred gains (99,477) (99,476) Amortization of deferred financing costs 8,772 8,772 Accretion of original issue discount 17,081 17,670 (Gain) loss on disposal of assets (18,297) 39,804 Equity in income of joint ventures (621,574) (492,430) Net realized and change in net unrealized (gains) losses on

sales of investments (2,568,676) 2,109,420 Change in market value of perpetual trusts 434,833 194,646 Provision for bad debts 9,844,043 9,802,883 Changes in operating assets and liabilities:

Patient accounts receivable (11,811,141) (9,854,641) Other current assets and other assets (49,155) 546,723 Accounts payable, accrued expenses and other liabilities (1,232,495) (2,713,794) Estimated final settlements due to third-party payors (464,290) 2,119,941

Net cash provided by operating activities 2,780,933 6,180,994

Cash flows from investing activities:Additions to property, plant and equipment (3,218,543) (2,298,303) Purchases of investments (6,357,436) (24,537,863) Sales of investments 5,712,199 24,050,399 Distributions from investments in joint ventures 992,250 950,330 Proceeds from sale of equipment 23,730 — Repayment from (advances to) related parties, net 1,588,638 (520,697)

Net cash used in investing activities (1,259,162) (2,356,134)

Cash flows from financing activities:Repayment of long-term debt and capital leases (1,667,955) (2,105,053)

Net cash used in financing activities (1,667,955) (2,105,053)

Net change in cash and cash equivalents (146,184) 1,719,807

Cash and cash equivalents at beginning of year 12,411,338 10,691,531

Cash and cash equivalents at end of year $ 12,265,154 12,411,338

Supplemental disclosure:Capital expenditures financed through capital leases $ 342,104 68,967 Interest paid 925,760 1,039,043


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Notes to Financial Statements


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(1) Organization, Basis of Presentation and Subsequent Events

(a) Organization

Roger Williams Medical Center (Medical Center) an affiliate of CharterCARE Health Partners, a 220-bed acute care general hospital established to provide healthcare services in Providence, Rhode Island and surrounding communities. The Medical Center is a not-for-profit corporation.

CharterCARE Health Partners Inc, (CCHP)

CharterCARE Health Partners and Affiliates (CCHP), a not-for-profit corporation, functions as the parent company. It is the sole member of the following organizations, which together form the continuum of healthcare known as CharterCARE Health Care Partners Inc.

The following are wholly owned subsidiaries of CCHP:

St. Joseph Health Services of Rhode Island (SJHSRI)

St. Joseph Health Services of Rhode Island (SJHSRI) is a 359-bed acute care general hospital established to provide healthcare services in North Providence, Rhode Island and surrounding communities. Additionally, SJHSRI also operates an integrated network of primary care and specialty clinics serving the economically disadvantaged and minority population in Providence, Rhode Island. SJHSRI is a not-for-profit corporation.

Elmhurst Extended Care Facilities, Inc. (Elmhurst)

Elmhurst is a 192-bed skilled nursing home and intermediate care facility and provider of other elder care services. Elmhurst is a not-for-profit corporation.

Roger Williams Realty Corporation (Realty)

Realty holds and manages real estate assets for the benefit of CCHP, owns and leases land and buildings to Elmhurst, and leases clinical and research space to the Medical Center. Realty is a not-for-profit organization.

Roger Williams Medical Associates, Inc. (RWMA)

RWMA is a not-for-profit corporation established to arrange for the provision of medical services to patients of both the Medical Center and SJHSRI and individuals in the communities served by the Medical Center and SJHSRI.

CharterCARE Partners Foundation, Inc. (CCHP Foundation) (Formerly SJ Foundation)

August 22, 2011, SJ Foundation changed its name to CharterCARE Health Partners Foundation Inc. (CCHP Foundation), removed itself from the Official Catholic Directory, and became a subsidiary of CCHP. Effective with the change in name, the Articles of Incorporation were amended. The CCHP Foundation is a not-for-profit corporation whose mission is to raise funds for the benefit of CCHP and its affiliates.




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A Petition for Cy Pres was filed and approved in Rhode Island Superior Court to transfer the funds raised by the SJ Foundation to benefit SJHSRI to SJHSRI. The net assets of SJ Foundation totaling $359,129 were transferred to SJHSRI effective September 30, 2011.

Our Lady of Fatima Ancillary Services (Ancillary Services)

Our Lady of Fatima Ancillary Services is a for-profit organization. Ancillary Services holds the licenses for the SJHSRI outreach laboratories and provides imaging services to area physicians and medical practices. Ancillary Services participates in a joint venture with two unrelated third parties known as Rhode Island PET Services, LLC and MRI Centers of N.E which operates Northwest Rhode Island Imaging in Johnston RI. During 2012 the Northwest Rhode Island Imaging Center was sold to an independent third party. All assets and liabilities associated with the joint venture were settled prior to year end September 30, 2012.

Elmhurst Health Associates, Inc. (EHA)

EHA is a for-profit organization. EHA holds the licenses for the Medical Center outreach laboratories.

SJ Energy, LLC

A single member LLC established to purchase wholesale energy to support the operation needs of CCHP and affiliates.

Rosebank Corporation (Rosebank)

Rosebank holds and manages real estate assets for the benefit of CCHP. Rosebank owns several parking lots on the main campus of the Medical Center and several other properties adjacent to the main campus. Rosebank is a for-profit organization.

Physicians Office Building, Inc. (POB)

POB owns and operates a physician office building located adjacent to the Medical Center’s main campus for the benefit of CCHP’s employed physicians. POB is a not-for-profit organization.

(b) Basis of Statement Presentation

The accompanying financial statements are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (GAAP). In accordance with provisions of the U.S. GAAP, net assets and revenue, expenses, gains, and losses are classified on the existence or absence of donor-imposed restrictions. The Medical Center’s net assets and activities that increase or decrease net assets are classified as unrestricted, temporarily restricted, or permanently restricted.

In connection with the preparation of the financial statements, the Medical Center evaluated subsequent events after the balance sheet date of September 30, 2012 through January 29, 2013, which is the date the financial statements were available to be issued.




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(c) Recently Issued Accounting Pronouncements

In July 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (ASU 2011-07), which requires certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. ASU 2011-07 is effective for the Medical Center’s fiscal year beginning October 1, 2012, and the change in presentation is not expected to significantly impact the Medical Center’s financial position, results of operations or cash flows.

In August 2010, the FASB issued ASU No. 2010-23, Health Care Entities (Topic 954): Measuring Charity Care for Disclosure (ASU 2010-23), which standardizes cost as a basis for charity care disclosures and specifies the elements of cost to be used in charity care disclosures. ASU 2010-23 was effective for the Medical Center’s fiscal year beginning October 1, 2011 and did not significantly impact the Medical Center’s financial position, results of operations, or cash flows.

Also in August 2010, the FASB issued ASU No. 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries (ASU 2010-24), which eliminates the practice of netting claim liabilities with expected related insurance recoveries for balance sheet presentation. Claim liabilities are to be determined with no regard for recoveries and presented gross. Expected recoveries are presented separately. The implementation of ASU 2010-24 effective October 1, 2011 resulted in an increase of $4,900,000 in assets and a corresponding increase in liabilities as of September 30, 2012. ASU 2010-24 permits retrospective application, which the Medical Center adopted. This resulted in an increase of $5,700,000 in assets and a corresponding increase in liabilities as of September 30, 2011.

(2) Significant Accounting Policies

(a) Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, valuation of certain investments, estimated final settlements due third party payors, self-insurance liabilities and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.




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(b) Statements of Operations

All activities of the Medical Center deemed by management to be ongoing, major, and central to the provision of healthcare services are reported as operating revenues and expenses. Other activities deemed to be non–operating include certain investment income (including realized gains and losses not recorded as either temporarily or permanently restricted net assets) and expenditures for designated purposes consisting primarily of research-related expenses.

The Medical Center records net patient service revenues at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Under the terms of various agreements, regulations, and statutes, certain elements of third-party reimbursement are subject to negotiation, audit and/or final determination by the third-party payors. As a result, there is at least a reasonable possibility that the recorded estimates will change by a material amount. Variances between preliminary estimates of net patient service revenues and final third-party settlements are included in net patient service revenues in the year in which the settlement or change in estimate occurs. Adjustments to prior year settlements with third-party payors increased net patient service revenue by approximately $994,000 and $253,000 for the years ended September 30, 2012 and 2011, respectively.

The statements of operations include the excess of revenues over expenses. Changes in unrestricted net assets which are excluded from the excess of revenues over expenses include changes in unrealized gains and losses on investments, transfers to/from affiliates, and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets).

(c) Net Patient Service Revenue

The Medical Center maintains agreements with the Social Security Administration under the Medicare Program, Blue Cross and Blue Shield of Rhode Island, Inc. (Blue Cross), United Health Insurance (United), the State of Rhode Island under the Medicaid Program, and various commercial and managed care payors that govern payments to the Medical Center for services rendered to patients covered by these agreements. The agreements generally provide for per case or per diem rates or payments based on allowable costs, subject to certain limitations, for inpatient care and discounted charges or fee schedules for outpatient care.

Certain agreements with various third-party payors have provisions for retroactive settlements and dispute resolution related to issues such as allowable costs, utilization, and charge structure. Provisions have been made in the financial statements for prior and current years’ estimated settlements with the various third-party payors. Actual adjustments may be materially different from these estimates.

(d) Healthcare Regulatory Environment

The healthcare 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




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licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, Medicare and Medicaid fraud and abuse and security and privacy of health information. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Medical Center is in compliance with fraud and abuse regulations as well as other applicable government laws and regulations. While no known regulatory inquires are pending, compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time.

(e) Meaningful Use

Certain health care providers can earn up to four incentive payments between federal fiscal years 2011 and 2016 if certain specific program criteria are met. In the first year, the providers are required to establish an Electronic Health Record (EHR) system and maintain its meaningful use status for a continuous 90-day period. In subsequent years, such meaningful use must be maintained for the entire 365 day federal fiscal year.

The Medical Center records the revenue related to this program when management is reasonably assured that the Medical Center has complied with the terms of the program. The Medical Center has included $2,605,289 in other revenue related to the program in fiscal year 2012 and zero in fiscal year 2011. The estimate is based on cost report data, which is subject to audit, and the amounts recognized are subject to change. The Medical Center’s attestation of compliance with the meaningful use criteria is subject to audit by the Federal or State government or its designee. As of September 30, 2012 there were meaningful use receivables of $1,881,740 included in prepaid expenses and other current assets. This amount was collected subsequent to September 30, 2012.

(f) Charity Care and Allowance for Doubtful Accounts

The Medical Center provides care to patients who meet certain criteria under the charity care policies without charge or at amounts less than the established rates. Because the Medical Center does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient service revenue.

The Medical Center grants credit without collateral to patients, most of whom are local residents and are insured under third-party agreements. Additions to the allowance for doubtful accounts are made by means of a provision for bad debts. Accounts written off as uncollectible are deducted from the allowance and subsequent recoveries are added. The amount of the provision for bad debts is based upon management’s assessment of historical and expected net collections, trends in federal and other collection indicators. Services rendered to individuals when payment is expected and ultimately not received are written off to the allowance for doubtful accounts (bad debt).




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(g) Cash and Cash Equivalents

Cash equivalents represent highly liquid instruments with a maturity at the date of purchase of three months or less, excluding amounts whose use is limited by board designation, donor or other arrangements under trust agreements. Restricted cash represents amounts designated primarily for research and other purposes.

(h) Inventories

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

(i) Assets Limited or Restricted as to Use

Assets limited or restricted as to use primarily include: (1) assets held by trustees under a bond indenture, (2) board designated assets over which the Board of Trustees retains control and may at their discretion appropriate for spending, (3) interest in perpetual trusts which represents the Medical Center’s donated portion of the donor’s trust, and (4) donor-restricted investments which are funds donated to the Medical Center and are restricted as to time or purpose.

(j) Investment Valuation and Income Recognition

Investments are reported at fair value. The fair value of a financial instrument is the amount that would be received to sell an asset, or the amount that would be paid to transfer a liability, in an orderly transaction between market participants at the measurement date. See note 3 for discussion of fair value measurements.

Investment income or loss (including realized gains and losses on investments, interest and dividends) and unrealized changes in equity interests in the limited partnership are included in the excess of revenues over expenses unless the income or loss is restricted by donor or law. Change in net unrealized gains and losses on investments is excluded from the excess of revenues over expenses.

A decline in the market value of any available for sale security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary, the Medical Center considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assignment includes the reserves for the impairment, the severity and duration of the impairment changes in value subsequent to year end, forecasted performance of the investor, and the general market conditions in the geographic area or industry the investor operates in. During the years ended September 30, 2012 and 2011, the Medical Center did not record any other-than-temporary impairments to its portfolio.

The Medical Center’s management is responsible for the fair value measurements of investments reported in the financial statements. The Medical Center has implemented policies and procedures to




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assess the reasonableness of the fair values provided, and believes the reported fair values at the balance sheet dates are reasonable.

(k) Property, Plant and Equipment

Property, plant and equipment is reported on the basis of cost less accumulated depreciation and amortization. Donated items are recorded at fair market value at the date of contribution. The carrying value of property, plant and equipment is reviewed if the facts and circumstances suggest that it may be impaired. Depreciation of property, plant and equipment is calculated by use of the straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets.

Facilities and equipment under capitalized leases are stated at the present value of minimum lease payments and are amortized using the straight-line method in a manner consistent with the Medical Center normal depreciation policy for owned assets. Such amortization is included in depreciation expense.

(l) Investments in Joint Ventures

Investments in joint ventures in which the Medical Center has a 20% or less interest are accounted for utilizing the cost method. Investments in which the Medical Center has greater than a 20% and less than a 50% interest are accounted for utilizing the equity method. (See note 5).

(m) Asset Retirement Obligations

The Medical Center recognizes the fair value of a liability for legal obligations associated with asset retirements 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 Medical Center capitalizes the cost of the asset retirement obligation 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 statements of operations.

(n) Malpractice Insurance

The Medical Center maintains medical malpractice insurance on a claims-made basis. For the period October 1, 2009 through September 30, 2012, the Medical Center has commercial insurance for the primary layer up to $2 million per claim and up to a $6 million annual aggregate. For the period October 1, 2004 through September 30, 2009 the Medical Center had commercial insurance for the primary layer up to $1 million per claim and up to a $2 million annual aggregate and retains a $1 million per claim and $1 million aggregate self-insured layer above the primary layer for malpractice claims in excess of $1 million. For claims in excess of $2 million the Medial Center maintains commercial excess coverage with another insurer.




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The Medical Center has established reserves to cover the professional liability exposure that may not be covered by current or prior insurance policies, including reserves for estimated claims incurred but not reported to the insurance company. Management is unaware of any claims that would cause the ultimate cost of malpractice claims to vary materially from amounts provided.

(o) Workers Compensation

The Medical Center was self insured for workers compensation claims made prior to December 31, 2008. As of December 31, 2008, the Medical Center obtained commercial insurance for its workers’ compensation liability. In order to provide for the ultimate payment of the self-insured estimated losses, the Medical Center is required to maintain a letter of credit in the amount of $1.5 million.

(p) Gifts and Grants

Unconditional promises to give cash and other assets to the Medical Center are reported at fair value at the date the promise is received. Conditional promises to give are recognized when the conditions are substantially met. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets.

Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as additions to temporarily restricted net assets if the gifts are not expended or placed in service during the year.

(q) Classification of Net Assets

The Medical Center recognizes the provisions of FASB ASC Subtopic 958-205, Classification of Donor-Restricted Endowment Funds subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (ASC 958-205). ASC 958-205 provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and also requires disclosures about endowment funds, including donor-restricted endowment funds and board-designated endowment funds.

Under Rhode Island UPMIFA laws, assets of a donor-restricted endowment fund may be appropriated for expenditure by the Medical Center in accordance with the standard of prudence prescribed by UPMIFA. As the Medical Center has classified under ASC 958-205, net assets as of September 30, 2012 and 2011 as follows:

Permanently restricted net assets contain donor-imposed stipulations that neither expire with the passage of time nor can be fulfilled or otherwise removed by actions of the Medical Center and primarily consist of their historic dollar value of contributions to establish or add to donor-restricted endowment funds.

Temporarily restricted net assets contain donor-imposed stipulations as to the timing of their availability or use for a particular purpose. These net assets are released from restrictions when the specified time elapses or actions have been taken to meet the restrictions. Net assets of donor-restricted endowment funds in excess of their historical dollar value are classified as




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temporarily restricted net assets until appropriated by the Medical Center and spent in accordance with the standard of prudence imposed by UPMIFA.

Unrestricted net assets contain no donor-imposed restrictions and are available for the general operations of the Medical Center. Such net assets may be designated by the Medical Center for specific purposes, including to function as endowment funds.

(r) Income Taxes

The Medical Center is a not-for-profit corporation as described in the Section 501(c)(3) of the Internal Revenue Code and is generally exempt from income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code.

The Medical Center recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition in measurement are reflected in the period in which the change in judgment occurs. The Medical Center did not recognize the effect of any income tax position in either 2012 or 2011.

(s) Fair Value of Financial Instruments

The Medical Center recognizes and discloses the fair value of financial instruments in accordance with FASB ASC Subtopic 820 which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value represents the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants as of the measurement date. FASB ASC Subtopic 820-10 establishes a fair value hierarchy that prioritizes inputs used to measure fair value into three levels:

Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities;

Level 2 – observable prices that are based on input not quoted in active markets, but corroborated by market data; and

Level 3 – unobservable inputs are used when little or no market data is available.

The fair value hierarchy gives the highest level of priority to Level 1 input and the lowest priority to Level 3 input. In determining fair value, the Medical Center utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable input to the extent possible.

The Medical Center has applied the accounting guidance in Accounting Standard Update No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value (NAV) per Share (or Its Equivalent) (ASU 2009-12), which permits the use of NAV or its equivalent reported by each underlying alternative investment fund as a practical expedient to estimate the fair value of the investment. These investments are generally redeemable or may be liquidated at NAV under the original terms of the subscription agreements or operations of the underlying funds. However, it is possible that these redemption rights may be restricted by the funds in the future in accordance with




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the underlying fund agreements, as applicable. Changes in market conditions, the economic environment, or the funds’ liquidity provisions may significantly impact the NAV of the funds and, consequently, the fair value of the Medical Center’s interest in the fund. Although certain investments may be sold in the secondary market, the secondary market is not active and individual transactions are not necessarily observable. It is, therefore, reasonably possible that if the Medical Center were to sell the fund in the secondary market, the sale could occur at an amount materially different than the reported value.

(3) Investments, Assets Limited or Restricted as to Use and Fair Value Measurement

The Medical Center holds investments in domestic and international equities, fixed income securities, mutual funds and real assets. The Medical Center is also the beneficiary of perpetual trusts which hold investments in common collective trusts and commingled funds. The Medical Center also holds shares or units in a limited partnership fund.

Investments in public-traded equity securities are valued based on quoted market prices. To the extent that quoted market prices are not readily available, the fair value may be determined based on broker or dealer quotations or alternate pricing sources with reasonable levels of price transparency. The fair value of corporate bonds (fixed income securities) may be determined based on yields currently available on comparable securities of issuers with similar credit ratings, dealer supplied prices or by discounting future principal and interest payments at prevailing interest rates. Units held in registered mutual funds are based on quoted prices. The Medical Center also holds alternative investments with private equity and real asset strategies. Such alternative investments, held through funds, may hold securities or other financial instruments for which a ready market exists and are priced accordingly. In addition, such funds may hold assets which require the estimation of fair values in the absence of readily determinable market values. Such valuations are determined by fund managers and generally consider variables such as operating results, comparable earnings multiples, projected cash flows, recent sales prices, and other pertinent information, and may reflect discounts for the illiquid nature of certain investments held. The Medical Center’s interest in perpetual trusts are valued based on the funds’ net asset value (NAV) as supplied by the fund administrator or trustee.

The Medical Center’ investment in private limited partnerships are recorded at the estimated fair value based on the Medical Center’s share of the fund’s fair value or number of units outstanding. Private limited partnership funds generally hold assets which require the estimation of fair value in the absence of readily determinable market values. Such valuations are determined by the fund manager and generally consider variables such as operating results, comparable earnings multiples, projected cash flows, recent sales prices and other pertinent information, and may reflect discounts taken for the illiquid nature of certain investments held. The estimated fair value of this investment is based on the most recent valuation provided by the external investment manager and is recorded at NAV as a practical expedient.




16 (Continued)

The following tables set forth the Medical Center’s financial assets at September 30, 2012 and 2011 that are accounted for at fair value on a recurring basis:

Fair value measurement at reporting dateQuoted prices

in active Significantmarkets for other Significant

identical observable unobservable Totalassets inputs inputs September 30,

(Level 1) (Level 2) (Level 3) 2012

Cash and cash equivalents $ 188,100 — — 188,100 Fixed income:

Intermediate term bonds — 2,108,680 — 2,108,680 International developed bond funds — 1,886,880 — 1,886,880

Domestic equity 6,435,588 — — 6,435,588 International equity 6,031,391 — — 6,031,391 Real asset funds:

Hard asset funds 611,676 — — 611,676 Natural resources index funds — 598,457 — 598,457 Real estate investment funds (1) — 734,746 261,326 996,072

Limited partnership (2) — — 4,816,827 4,816,827

Total 13,266,755 5,328,763 5,078,153 23,673,671

Funds held in trust by others:Perpetual trust (3) — — 4,129,362 4,129,362 Cash equivalents 1,329,911 — — 1,329,911

Total 1,329,911 — 4,129,362 5,459,273

Total $ 14,596,666 5,328,763 9,207,515 29,132,944

(1) Included in level 3, the investment is illiquid until ten-year lock up ends August 31, 2021. Also has unfunded commitments of $438,674 through February 28, 2013.

(2) Consists of two limited partnerships investing in hedge funds designed to reduce overall portfolio risk. One has quarterly redemptions subject to 25% of the fund’s assets on a given redemption date. In addition to the calendar year-end full redemption option, investors may redeem up to 25% of shares held January 1st on March 31st, June 30th, or September 30th upon 100 days notice. The other has redemptions allowed at quarter-end of rolling 3-year anniversary, with 95 days notice. After initial 3-year lock-up, which ends June 2014, investors may convert to the 2-year share class.




17 (Continued)

(3) Five illiquid perpetual trusts, which the Medical Center has partial noncontrolling ownership in.

Fair value measurement at reporting dateQuoted prices

in active Significantmarkets for other Significant

identical observable unobservable Totalassets inputs inputs September 30,

(Level 1) (Level 2) (Level 3) 2011

Cash and cash equivalents $ 92,499 — — 92,499 Fixed income:

Intermediate term bonds — 2,267,655 — 2,267,655 International developed bonds — 1,730,564 — 1,730,564

Domestic equity 5,828,873 — — 5,828,873 International equity 5,048,778 — — 5,048,778 Real asset funds:

Hard asset funds 712,150 — — 712,150 Natural resources index funds — 999,995 — 999,995 Real estate investment funds (1) — — 99,500 99,500

Limited partnership (2) — — 4,549,411 4,549,411

Total 11,682,300 4,998,214 4,648,911 21,329,425

Funds held in trust by others:Perpetual trust (3) — — 3,694,529 3,694,529 Cash equivalents 1,329,911 — — 1,329,911

Total 1,329,911 — 3,694,529 5,024,440

Total $ 13,012,211 4,998,214 8,343,440 26,353,865

(1) Illiquid until ten-year lock up ends August 31, 2021. Also has unfunded commitments of $600,500 through February 28, 2013.

(2) Consists of three limited partnerships investing in hedge funds designed to reduce overall portfolio risk. One has quarterly redemptions subject to 25% of the fund’s assets on a given redemption date. In addition to the calendar year-end full redemption option, investors may redeem up to 25% of shares held January 1st on March 31st, June 30th, or September 30th upon 100 days notice. One has redemptions allowed at quarter-end of rolling 3-year anniversary, with 95 days notice. After initial 3-year lock-up, which ends June 2014, investors may convert to the 2-year share class. The last had quarterly redemptions with 5% held up to a year.

(3) Five illiquid perpetual trusts, which the Medical Center has partial noncontrolling ownership in.




18 (Continued)

The following table presents additional information about investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended September 30, 2012 and 2011:

Fair value measurements using significantunobservable inputs

Limitedpartnerships

and Perpetualreal assets trust Total

Fair value at October 1, 2010 $ 1,961,005 3,889,175 5,850,180 Transfer from unrestricted net assets 3,099,499 — 3,099,499 Net realized and change in net unrealized

gains and losses (411,593) (194,646) (606,239)

Fair value at September 30, 2011 4,648,911 3,694,529 8,343,440

Purchases 1,861,826 — 1,861,826 Sales (1,616,153) — (1,616,153) Net realized and change in net unrealized

gains and losses 183,569 434,833 618,402

Fair value at September 30, 2012 $ 5,078,153 4,129,362 9,207,515

There were no significant transfers between the levels of the fair value hierarchy during the years ended September 30, 2012 and 2011. The Medical Center invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the value of investment securities will occur in the near term and those changes could materially affect the amounts reported in the financial statements.




19 (Continued)

Investment income on investments and assets limited or restricted as to use are comprised of the following:

September 302012 2011

Unrestricted:Dividends and interest income $ 284,534 220,421 Net realized gains on sales of investments 60,645 243,305

Total investment income included in excessof revenues over expenses 345,179 463,726

Change in net unrealized gains (losses) on investments 546,279 (318,350)

Temporarily restricted:Dividends and interest income 346,031 361,679 Net realized gains on sale of investments 9,609 667,761

355,640 1,029,440

Change in net unrealized gains (losses) on investments 2,022,397 (1,791,070)

Permanently restricted:Change in market value of perpetual trusts 434,833 (194,646)

434,833 (194,646)

$ 3,704,328 (810,900)

Investment income included in other operating revenue for the years ended September 30, 2012 and 2011 was $10,904 and $14,897, respectively.

Funds Held in Trust by Others

Funds held in trust by others represent funds that are held and administered by outside trustees. The Medical Center has funds held by trust relating to the Tax Exempt Revenue Bonds – Series 1998 (note 6) and donor established perpetual trusts. The Medical Center receives a specific portion of the return on the underlying assets of the perpetual trusts. The investment income is recorded as unrestricted investment income in nonoperating gains (losses).




20 (Continued)

(4) Property, Plant and Equipment

The following is a summary of land, building, equipment and construction in progress as of September 30:

September 30Useful lives 2012 2011

Land and land improvements 3 – 25 $ 784,101 784,101 Buildings and building improvements 3 – 40 47,519,663 46,603,362 Equipment 1 – 40 46,446,291 44,317,840

94,750,055 91,705,303

Accumulated depreciation and amortization (68,620,278) (63,960,323) Construction in progress 459,791 29,988

Property, plant andequipment, net $ 26,589,568 27,774,968

Depreciation expense on property, plant and equipment for the years ended September 30, 2012 and 2011 was $4,023,798 and $4,231,097, respectively. Amortization expense on capital lease facilities and equipment for years ended September 30, 2012 and 2011 was $716,816 and $1,015,897, respectively. During the year ended September 30, 2012 there were fixed assets disposals with a book value of $86,092 and accumulated depreciation of $80,659. During the year ended September 30, 2011 there were fully depreciable fixed assets disposals of $39,804.

The net book value of equipment and facilities under capital leases for the years ended September 30, 2012 and 2011 was $3,515,666 and $3,890,378, respectively.

(5) Investments in Joint Ventures

The Medical Center participates in two joint ventures. In 2002, the Medical Center entered into a joint venture with an unrelated third party known as Rhode Island PET Services, LLC (the Company). The Company is a limited liability company formed under the Rhode Island Limited Liability Act. The Medical Center purchased five units for a total investment of $25,000. The investment is accounted for using the cost method.

In 2005, the Medical Center entered into a for-profit joint venture with an unrelated third party to provide radiation therapy services known as Roger Williams Radiation Therapy (RWRT). RWRT received its license and commenced operations effective February 2007. RWRT is a limited liability company formed under the Rhode Island Limited Liability Act.




21 (Continued)

The Medical Center’s total investment in the RWRT joint venture is $4,782,000. The investment is comprised of the right to utilize a building for 30 years with the option to extend for an additional 10 years, radiation therapy equipment, a 30 year prepaid rent obligation and an estimated value of existing business. The Medical Center’s contribution represents a 49% equity share in the joint venture and has been accounted for under the equity method of accounting. The Medical Center is not liable for any obligations insured by the joint venture nor is it obligated to make any further capital contributions or lend funds to the joint venture.

The difference between the net book value of the assets utilized in the joint venture and the investment value assigned was recorded as a deferred gain of $2,684,415. For the years ended September 30, 2012 and 2011, amortization of deferred gain in the amount of $89,480 was recorded.

For the years ended September 30, 2012 and 2011, the Medical Center recognized $621,574 and $492,430 as its share of the financial results of the RWRT joint venture and received distributions totaling $992,250 and $950,330, respectively. Selected financial data of the RWRT joint venture, taken from the December 31, 2011 financial statements are summarized as follows (dollars in thousands):

December 312011 2010

Assets $ 7,315 7,980 Shareholders’ equity 4,150 4,229 Net income 1,123 775

(6) Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following:


Rhode Island Health and Educational Building Corporation(RIHEBC) Tax Exempt Revenue Bonds –Series 1998 (Series 1998 Bonds) (a) $ 11,615,000 12,150,000

Citizens Bank Term Loan (b) 1,833,334 2,000,000 Capital lease obligations (c, d, e, f) 1,101,334 1,642,157 Other debt — 83,363 Less original issue discount on RIHEBC tax exempt

revenue bonds (152,578) (169,659)

14,397,090 15,705,861

Less current portion, long-term debt and capital leaseobligations 1,212,877 1,534,017

$ 13,184,213 14,171,844




22 (Continued)

(a) RIHEBC Revenue Bonds

In December 1998, the Medical Center entered into an agreement with RIHEBC, whereby RIHEBC authorized the issuance of tax-exempt hospital financing revenue bonds in the amount of $19,115,000. The proceeds of the Series 1998 Bonds were used to defease (extinguished in fiscal year 2000) $18,779,000 of previously issued tax-exempt revenue bonds, to fund a debt service reserve fund and pay associated issuance costs.

The Series 1998 Bonds bear fixed interest rates ranging from 4.70% to 5.50% per year, due in annual installments through July 2028, and maturing serially from 2012 to 2028. A portion of the Series 1998 Bonds require the establishment of a sinking fund for the purpose of mandatory redemption of the Series 1998 Bonds. In addition, the sinking fund will be used to redeem the remaining bonds at various maturity dates.

The Series 1998 Bonds are collateralized by a first mortgage on the Medical Center’s real estate and certain tangible personal property. The bond agreements provide, among other things that the Medical Center deposit funds with a designated trustee to provide for future payments of interest and principal. The Medical Center is also required to establish a property reserve fund with the trustee to assure that adequate funds are on hand to maintain the condition of the Medical Center’s property. The Series 1998 Bonds Master Trust Indenture provides for, among other requirements, the maintenance of a minimum debt service coverage ratio (DSC) of 1.10 and limitations on additional indebtedness. Management believes the Medical Center is in compliance with required covenants as of September 30, 2012.

The Medical Center redeemed $2,325,000 in bond principal on August 1, 2008. The redemption was required due to the utilization of the building by the for profit RWRT joint venture.

(b) Citizens Bank Term Loan

On September 26, 2008, the Medical Center entered into a Term Loan Agreement with Citizens Bank. The loan was taken to replace the tax exempt revenue bonds redeemed on August 1, 2008. The amount of term loan is $2,500,000. The term is 10 years with a 15 year amortization period. The loan contains a fixed interest rate of 4.6%. The loan is collateralized by an interest in certain marketable securities held in investments by the Medical Center. Management believes the Medical Center is in compliance with required covenants as of September 30, 2012.

The Medical Center entered into an interest rate swap agreement with Citizens Bank. The interest rate swap agreement notional amount amortizes at the same rate as the related debt principal. The interest rate swap agreement provides for the Medical Center to pay a fixed interest rate of 4.6% in exchange for Citizens Bank paying a variable rate equal to one month USD – LIBOR on the notional amount. The interest rate swap is included in other liabilities on the balance sheet and is valued at $308,801 and $320,000 at September 30, 2012 and 2011, respectively. The activity is recorded in the non–operating section of the statement of operations excess of revenues over expenses. The swap fair value is based predominantly on observable inputs that are corroborated by market data. It is categorized as a Level 2 for purposes of valuation disclosure under FASB ASC Subtopic 820-10.




23 (Continued)

(c) Phillips Master Lease Agreement

On October 27, 2005, the Medical Center entered into a Master Lease Agreement with Phillips Medical Capital, LLC for radiology equipment. The amount of the lease was $1,484,507. The term of the agreement is for five years from the equipment installation date at an average interest rate of 6.9%. Effective February 17, 2007 the master lease was amended to include financing in the amount of $999,370 for additional radiology equipment. The term of the agreement is for five years from the equipment installation date at an average interest rate of 6.3%. At the end of the lease, the Medical Center may purchase the equipment for one dollar. Accordingly, this lease has been recorded as a capital lease and has been paid in full as of September 30, 2012.

(d) Pantheon Lease Agreement

Effective April 2008, the master lease was amended to include financing in the amount of $2,000,000 for the construction of a new cancer center facility including medical and office equipment. The term of the agreement is for sixty-six months at the average interest rate of 5.3%. At the end of the lease, the Medical Center may purchase the facility and equipment for one dollar. Accordingly, this lease has been recorded as a capital lease.

Effective December 2009, the master lease was amended to include financing in the amount of $1,000,000 for equipment. The term of the agreement is five years at the average interest rate of 5.5%. At the end of the lease, the Medical Center may purchase the equipment for one dollar. Accordingly, this lease has been recorded as a capital lease.

Effective March 2010, the master lease was amended to include financing in the amount of $380,000 for the purchase of a chiller. The term of the agreement is five years at the average interest rate of 6.1%. At the end of the lease, the Medical Center may purchase the equipment for one dollar. Accordingly, this lease has been recorded as a capital lease.

(e) Olympus Master Lease Agreement

Effective April 2011, the Medical Center entered into a Lease Agreement with Olympus America, Inc. for various pieces of hardware and software pertaining to the Endoworks Image Manager System. The amount of the lease was $68,967. The term of the agreement is for three years from the equipment installation date at an average interest rate of 6.0%. At the end of the lease, the Medical Center may purchase the equipment for one dollar. Accordingly, this lease has been recorded as a capital lease.

(f) Cisco Lease Agreement

Effective November 2011, the Medical Center entered into a Lease Agreement with Cisco Systems for various pieces of IS hardware. The amount of the lease was $342,104. The term of the agreement is for five and a half years from the equipment installation date at a fixed interest rate of 3%. At the end of the lease, the Medical Center may purchase the equipment for one dollar. Accordingly, this lease has been recorded as a capital lease.




24 (Continued)

Aggregate maturities and payments of long-term debt and capital lease obligations during the next five years and thereafter are as follows:

Long-term Capital leaseobligations obligations

Year:2013 $ 632,572 580,305 2014 658,844 329,006 2015 685,162 67,204 2016 715,785 69,238 2017 750,718 55,581 Thereafter 9,852,675 —

$ 13,295,756 1,101,334

Interest paid on long-term debt and capital lease obligations was $925,760 and $1,039,043 for the years ended September 30, 2012 and 2011, respectively.

Debt obligations are reported in the consolidated balance sheet at principal value less unamortized discount, which totaled $11,462,422 at September 30, 2012. The fair value of these obligations at September 30, 2012, as estimated based on quoted market prices for related bonds totaled $13,479,926.

(7) Line of Credit Borrowings

The Medical Center has a collateralized line of credit with a maximum borrowing line of $11,600,000 that is renewable on an annual basis. The line of credit is collateralized by gross receipts, accounts receivable, insurance policies, insurance proceeds, and other instruments evidencing an interest now owned or acquired by borrower. There was no outstanding balance against the line as of September 30, 2012 and 2011. The line of credit is payable upon demand.




25 (Continued)

(8) Commitments

The Medical Center leases various equipment under non–cancelable operating lease agreements expiring through 2017. Future minimum payments by year under non–cancelable operating leases with terms of one year or more consist of the following:

Amount

Year:2013 $ 687,187 2014 634,459 2015 546,883 2016 306,480 2017 and thereafter 14,926

$ 2,189,935

Rental expense, including rentals under leases with terms of less than one year, for the years ended September 30, 2012 and 2011 were $916,858 and $1,160,103, respectively.

The Medical Center has additional lease commitments that are based on procedures performed. They are non–cancelable agreements but the future dollar commitments of the Medical Center are not quantifiable as they are volume driven.

(9) Disproportionate Share Program and Charity Care

The Medical Center is a participant in the State of Rhode Island’s Disproportionate Share Program, which was established in 1995 to assist hospitals that provide a disproportionate amount of uncompensated care. Under the program, Rhode Island hospitals, including the Medical Center receive federal and state Medicaid funds as additional reimbursement for treating a disproportionate share of low-income patients. Payments to the Medical Center under the Disproportionate Share Program of approximately $5,584,000 and $8,467,000 for the years ended September 30, 2012 and 2011, respectively, are included in net patient service revenues in the accompanying statements of operations.

The Medical Center estimates the cost of providing charity care by calculating a ratio of cost to gross charges and then multiplying that ratio by the gross uncompensated charges associated with providing care to charity patients. For the years ended September 30, 2012 and 2011, the Medical Center recorded approximately $3,732,981 and $2,961,531 in charity care costs, respectively.

(10) License Fee

The State of Rhode Island assesses a license fee to all Rhode Island hospitals based on each hospital’s gross patient service revenue. The 2012 fee is based on 2010 gross patient service revenue. The 2011 fee is based on 2009 gross patient revenue. The Medical Center’s license fee expense was $7,058,592 and $7,402,248 for each of the years ended September 30, 2012 and 2011, respectively.




26 (Continued)

(11) Pension Plan

The Medical Center has a defined contribution pension plan (the Plan) which covers substantially all employees of the Medical Center. Employees are fully vested immediately upon becoming eligible to participate in the Plan. The amount of each employer contribution is discretionary and determined by the Board of Trustees. As of September 30, 2012 and 2011, accrued expenses include pension plan contributions payable of $1,760,555 and $1,846,649, respectively. Pension expense was approximately $855,000 and $1,015,000 for the years ended September 30, 2012 and 2011, respectively.

(12) Concentration of Credit Risk

Financial instruments that potentially subject the Medical Center to concentration of credit risk consist of patient accounts receivable and certain investments. Investments, which include government and agency securities, stocks and corporate bonds, are not concentrated in any corporation or industry or with any single counterparty.

The Medical Center receives a significant portion of its payments for services rendered from a limited number of government and commercial third-party payors, including Medicare, Medicaid, and Managed Care Payers (Blue Cross of Rhode Island and United Healthcare). Revenue from self pay and third-party payors are as follows:

2012 2011

Medicare 45% 46%Managed Care 29 28Medicaid 14 13Self pay 5 5Other 7 8

100% 100%

The Medical Center maintains several bank accounts at one institution, which are insured by the Federal Deposit Insurance Corporate (FDIC) up to $250,000. At September 30, 2012, the Medical Center had cash balances of $11,266,086 in excess of the insured limits at such institutions.

The Medical Center has not experienced any losses in such amounts, and evaluates the credit worthiness of the financial institutions with which it conducts business. Management believes the Medical Center is not exposed to any significant credit risk with respect to its cash balances.

(13) Endowments

The Medical Center’s endowment consists of 117 funds established for a variety of purposes, including both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Medical Center to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.




27 (Continued)

Endowment net assets consist of the following at September 30, 2012 and 2011:

2012Temporarily Permanently

Unrestricted restricted restricted Total

Donor-restricted endowment funds $ — 13,677,484 4,209,522 17,887,006 Board-designated endowment funds 5,786,666 — — 5,786,666

Total endowment netassets $ 5,786,666 13,677,484 4,209,522 23,673,672

2011Temporarily Permanently

Unrestricted restricted restricted Total

Donor-restricted endowment funds $ — 12,040,424 4,209,522 16,249,946 Board-designated endowment funds 5,079,479 — — 5,079,479

Total endowment netassets $ 5,079,479 12,040,424 4,209,522 21,329,425

Change in endowment net assets for the year ended September 30, 2012 are as follows:

Temporarily PermanentlyUnrestricted restricted restricted Total

Endowment net assets,September 30, 2011 $ 5,079,479 12,040,424 4,209,522 21,329,425

Interest and dividends 101,100 343,283 — 444,383 Net realized and change in net

unrealized gains and losses 606,087 2,032,006 — 2,638,093 Appropriation of endowment assets — (738,229) — (738,229)





28 (Continued)

Change in endowment net assets for the year ended September 30, 2011 are as follows:

Temporarily PermanentlyUnrestricted restricted restricted Total


Interest and dividends 48,852 360,403 — 409,255 Net realized and change in net

unrealized gains (75,040) (1,123,309) — (1,198,349) Appropriation of endowment assets — (832,860) — (832,860)


(a) Interpretation of the Relevant Law

The portion of the donor-restricted endowment funds that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriate for expenditure by the Board of Trustees in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Medical Center considers the following factors in making a determination to appropriate or accumulated donor-restricted endowment funds:

The duration and preservation of the fund

The purpose of the Medical Center and the donor restricted endowment fund

General economic conditions

The possible effect of inflation and deflation

The expected total return from income and the appreciation of investments

Other resources of the Medical Center

The investment policies of the Medical Center

Funds with Deficiencies

From time to time the fair value of assets associated with individual donor-restricted endowment funds may fall below the fund’s historic dollar value. There were no deficiencies of this nature reported in unrestricted net assets as of September 30, 2012 and 2011.

(b) Return Objectives and Risk Parameters

The Medical Center has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to the Medical Center and programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets, including both donor-restricted and board designated funds. Under this policy, as approved by the Medical Center




29 (Continued)

Board of Trustees the endowment assets are invested in a manner that is intended to produce results that exceed the total return of a benchmark composed of 12.5% S&P 500, 2.5% Dividend achievers select, 9% Russell 1000 Growth, 3% Russell 2000, 19% MSCI AEFE, 7% MSCI Emerging, 10% Barclays Cap Agg, 8% Citi WGBi, 20% HFR Fund of Funds, 6% S&P Natural Resources, and 3% FTSE EPRA/NAREIT. The Medical Center expects its endowment funds, over a full market cycle, to provide an average annual real rate of return of approximately 5% plus inflation annually. Actual returns in any given year or period of years may vary from this amount.

(c) Strategies Employed for Achieving Objectives

To satisfy its long-term rate-of-return objective, the Medical Center relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Medical Center targets a diversified asset allocation that places emphasis on investments in domestic, international and emerging market equities, fixed income, hedge funds, real assets and alternate equities to achieve its long-term return objectives within prudent risk constraints.

(d) Spending Policy and How the Investment Objectives Relate to Spending Policy

The Medical Center uses a spending policy designed to preserve the value of the endowment in real terms and to generate a predictable stream of income to support spending. The Medical Center manages investments in accordance with policies established by the Board of Trustees. Investment earnings are allocated to the endowment net assets based upon the amount of the endowment balances included in both the temporarily and permanently restricted net assets. The portion of the donor–restricted endowment funds that represents the cumulative earnings less spending out of the fund is classified as temporarily restricted net assets.




30 (Continued)

(14) Restricted Net Assets

Restricted net assets are available for the following purposes:


Temporarily restricted:Accumulated net realized and unrealized gains on

permanently restricted donations subject to spendingpolicy – general operations $ 13,677,484 12,040,424

Special purpose funds 751,027 931,512 Research 1,781,549 1,586,432

$ 16,210,060 14,558,368

Permanently restricted:Healthcare services $ 3,788,570 3,788,570 Free bed 420,952 420,952 Interest in perpetual trusts 4,129,362 3,694,529

$ 8,338,884 7,904,051

(15) Functional Expenses

Total operating expenses for the Medical Center by function are as follows for the years ended:


Healthcare services $ 124,988,377 115,469,201 General and administrative 41,169,952 42,664,166 Direct research 5,658,882 5,429,274

$ 171,817,211 163,562,641




31 (Continued)

(16) Related-Party Transactions

The Medical Center has made advances to or paid expenses on behalf of several affiliated organizations. Amounts outstanding due from (to) consisted of the following:


SJ Energy $ 80,907 (22,167) Realty 124,405 211,840 Elmhurst 1,254,864 1,386,789 EHA 349,123 349,123 Rosebank 108,797 458,807 POB 35,491 52,975 RWMA 577,478 664,408 CCHP (1,119,652) 75,433 CCHP Foundation 9,817 — SJHSRI 157,553 (9,787)

1,578,783 3,167,421

Less current portion (326,970) 675,319

Noncurrent portion $ 1,905,753 2,492,102

The Medical Center leases certain office and medical facilities from Realty under terms of various lease agreements that expire through 2014. For the years ended September 30, 2012 and 2011, the Medical Center was charged $661,116 annually for rent expense. As of September 30, 2012, no rent payments are owed to Realty.

The Medical Center provides Realty with maintenance services and charged Realty $1,598,807 and $1,644,856 for the years ended September 30, 2012 and 2011, respectively. As of September 30, 2012, $124,405 in maintenance services is owed to the Medical Center.

The Medical Center provided services to Elmhurst including administrative, personnel, human resource services, and data processing. The fees for these services total $201,684 for the year ended September 30, 2011. These services are no longer provided in by the Medical Center for the year ended September 30, 2012.

CCHP provided services to RWMC including administrative, information support, accounting and finance, business office, purchasing and legal. Fees for these services, as well as shared expenses, such as insurance, are allocated to the Medical Center and SJHSRI equally. The fees for services total $10,161,761 and $7,160,169 for the year ended September 30, 2012 and 2011, respectively.

The advances to and amounts owed to SJ Energy, CCHP, SJHSRI, RWMA, Elmhurst, Rosebank, EHA, CCHP Foundation, Realty and POB are non–interest bearing.




32

(17) Contingencies

The Medical Center is subject to complaints, claims, and litigation that have arisen in the normal course of business. In addition, the Medical Center is subject to investigations by various federal and state government agencies to assure compliance with applicable laws, some of which are subject to different interpretations. Recently, governmental review of compliance with these laws and regulations has increased, resulting in fines and penalties for noncompliance by particular healthcare providers.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Medical Center believes that it is in compliance with these laws and regulations.

Documents

ROGER WILLIAMS MEDICAL CENTER (Formerly … Auditors’ Report The Board of Trustees Roger Williams Medical Center (Formerly known as Roger Williams Hospital): We have audited the