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Inova Health System

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Inova Health System INOVA HEALTH SYSTEM Audited Consolidated Financial Statements and Other Supplementary Information Relating to the IHS Obligated Group, and Management’s Discussion and Analysis of Results of Operations and Financial Position Fiscal Year Ended December 31, 2020 Inova Health System Management’s Discussion and Analysis of Results of Operations and Financial Position As of and for the Year Ended December 31, 2020 Introduction Inova Health System (“IHS”) is an integrated, not-for-profit health care delivery system that owns, operates and manages clinical, educational, research, and hospital facilities located in northern Virginia, serving northern Virginia, the Washington, D.C. metropolitan area, and contiguous counties in Virginia and Maryland. The principal line of business for IHS is the delivery of acute care hospital services at locations in northern Virginia. IHS also operates an integrated network of health services including ambulatory care, home health care, senior services, assisted living, and other health related services. IHS maintains a group of primary care and specialty physicians, including Signature Partners, a clinically integrated physician network, and Innovation Health (“Innovation”), a joint venture with Aetna offering commercial health insurance plans. The following discussion and analysis provides information that IHS management believes is relevant to an assessment and understanding of IHS’ results of operations and financial position. This analysis should be read in conjunction with IHS’ financial statements for the years ended December 31, 2020 and 2019. The discussion and analysis focuses on the consolidated results of IHS, which management believes provides a fair description and analysis, in all material respects, of the Obligated Group’s results of operations and financial condition, insofar as the Obligated Group represents approximately 92.9% of total operating revenues and 100% of unrestricted net assets of IHS as of and for the year ended December 31, 2020. The information included herein is being provided solely to comply with contractual commitments. This filing does not purport to contain all information that may be material to an investor’s decision to buy, sell, or hold bonds issued by or for the benefit of IHS (“Related Bonds”), and does not constitute or imply any representation that no other information exists that may have a bearing on the financial condition of IHS, the security for any Related Bonds or an investor’s decision to buy, sell or hold any Related Bonds. This report includes information only as of and for the year ended December 31, 2020 and 2019 and such information should not be relied upon as indicative of future financial performance. The COVID-19 pandemic (the “pandemic”) described herein may adversely affect IHS’ future financial performance to an extent that could be material. Results of Operations as of and for the year ended December 31, 2020 and 2019 Operating Revenues. Total operating revenues for IHS for the year ended December 31, 2020 were $4.2 billion, an increase of 10.4% from prior year. Included in total operating revenues is $211.1 million in revenue from the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) Relief Funds (the “Relief Fund”) (See Other COVID-19 Public Health Emergency Disclosure). Net patient service revenue totaled $3.7 billion, an increase of 2.4%, or $88 million compared with prior year. Approximately 50% of this increase is due to acquisition activity during the year related to ambulatory imaging and primary care services. Revenue cycle centralization and standardization initiatives have also contributed to top line yield in both hospital and ambulatory settings offsetting volume declines in late March as a result of the pandemic and related governmental restrictions. There was an improvement in volumes starting on May 1, 2020 when IHS began to restart elective health procedures. A summary of patient activity as of December 31, 2020 and 2019 is as follows: 2020 2019 % Change Admissions $ 86,503 $ 99,507 (13.1%) Inpatient surgeries 19,733 23,407 (15.7%) Outpatient surgeries 43,168 46,535 (7.2%) Emergency visits 346,128 442,079 (21.7%) Urgent care visits 226,620 187,831 20.7%) Deliveries 17,871 18,899 (5.4%) Operating Expenses. Total operating expenses for the year ended December 31, 2020 were $3.9 billion, an increase of 9.3% compared to prior year. Salaries and benefits increased $200.3 million, or 10.9%, primarily due to merit and market-based pay adjustments, increased staffing costs during the pandemic, including agency costs. There was $13.4 million incurred in Emergency Time off (“ETO”) related to paid leave necessitated by the pandemic. Other operating expenses increased $89.6 million, or 6.4%, primarily due to increases in medical supplies and other costs associated with IHS’ response to the pandemic. In response to and partially offsetting these cost increases, IHS initiated cost cutting measures primarily in the administrative functions (See COVID-19 and Public Health Emergency discussion below). Operating Income. Operating income was $280.3 million, or 6.7% of total operating revenues, for the year ended December 31, 2020, as compared to $219.7 million, or 5.8% of total operating revenues in 2019. Investment Income and Other, net. Net gain from investments was $783.2 million, resulting in a net margin of 21.3% for the year ended December 31, 2020 in comparison to investment income of $883.9 million and a net margin of 23.4% for the year ended December 31, 2019. Financial Position as of December 31, 2020 Current Assets and Liquidity. IHS’ balance sheet maintains unrestricted cash and investments as of December 31, 2020 of $7.0 billion, of which $4.8 billion represents investments that can be liquidated within 3 days. Operating cash flow for the year ended December 31, 2020 was $515.5 million, compared to $445.8 million for the year ended December 31, 2019. The financing activities of cash flow for the year ended December 31, 2020 includes $260.0 million from new debt issuance, and ($182.5) million related to the purchase of the Inova Center for Personalized Health (“ICPH”) campus. Investments. The following table summarizes the asset allocation for the Strategic Fund and the Capital Fund, which together comprised the Board designated funds as of December 31, 2020 and 2019 (dollars in thousands): 2020 2019 Amount % Amount % Strategic fund Cash and cash equivalent $ 116,431 1.8% $ 89,721 1.6% Fixed income 1,120,172 17.5% 909,464 16.6% Public equity 3,623,408 56.7% 3,087,297 56.4% Growth hedge fund 354,116 5.5% 322,063 5.9% Private investments 608,532 9.5% 310,066 5.7% Diversifiers 389,564 6.1% 577,320 10.5% 6,212,223 97.1% 5,295,931 96.7% Capital fund 182,953 2.9% 178,052 3.3% Total $ 6,395,176 100.0% $ 5,473,983 100.0% Fixed income securities are primarily investment-grade U.S. bonds with maturities ranging from 1 year to 30 years. Public equity securities are typically exchange traded U.S. and non-U.S. stocks. Growth hedge funds and diversifiers include strategies with moderate to low correlation with more traditional equity and fixed income sectors. Private investments include early stage venture capital and buyout funds and real assets. IHS maintains a separate portfolio comprised of short duration, high quality bonds (Capital Fund). This fund was established to ensure that IHS would have sufficient liquidity to complete critical construction projects in the event of a major financial market disruption. Property, Plant, and Equipment. Capital expenditures were $285.9 million for the year ended December 31, 2020, which included $96.4 million of major hospital expansion and renovation projects primarily at the Inova Fairfax and Loudoun Hospitals, and $80.9 million of equipment replacements and upgrades. Approximately $45 million was spent for the Eastern Region Development Plan (the Plan). This Plan includes the development of a new acute care hospital to replace the existing Alexandria Hospital, and new ambulatory center and Healthplex facility in the region. The remainder of the capital expenditures related to IT projects, and capital expenditures for the ICPH campus. All planned capital expenditures are regularly evaluated based upon business need, economic conditions and IHS’ financial position and will be financed through a combination of operating cash flow, donations, tax-exempt borrowing, taxable borrowing, and cash reserves if necessary. Debt Structure and Liability Management. At December 31, 2020, total long-term debt outstanding, plus the commercial paper (“CP”) program discussed below, was approximately $2.0 billion, or 20.4% of capitalization. IHS’ capital structure is diversified to mitigate interest rate risk by utilizing different modes and durations of long-term debt as well as interest rate swaps. As of December 31, 2020, 73.6% of IHS underlying long-term debt is in some form of fixed rate. Inova also holds two fixed-payer swap contracts and one variable-payor swap contract with combined notional amounts of $219 million. As of December 31, 2020, the swaps had a combined fair market value of ($9.3) million. IHS’ effective fixed rate debt percentage, taking into account these swaps, was approximately 79.9% as of December 31, 2020. IHS maintains a self-liquidity taxable CP program with $100.0 million outstanding of short-term debt having maturity dates from 1 to 270 days. The outstanding CP is included in Notes payable and other liabilities in the current liabilities section of the accompanying Consolidated Balance Sheets. In March 2020, IHS drew on its existing lines of credit ($237.5 million) which were fully repaid in December, 2020. As a result, there were no amounts outstanding on these credit lines as of December 31, 2020 and 2019, respectively.
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