Fill and Sign the Maryland Form E

The McLean Hospital Corporation Report on Federal Awards in Accordance with OMB Circular A-133 September 30, 2007 EIN 042697981 The McLean Hospital Corporation Report on Federal Awards in Accordance with OMB Circular A-133 Index September 30, 2007 Page(s) Part I - Financial Statements Report of Independent Auditors .................................................................................................................... 1 Financial Statements and Notes to Financial Statements .......................................................................2-24 Schedule of Expenditures of Federal Awards and Notes to Schedule of Expenditures of Federal Awards........................................................................................................25-27 Part II - Reports on Compliance and Internal Controls Report of Independent Auditors on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards...........................................................28-29 Report of Independent Auditors on Compliance with Requirements Applicable to Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133........................................................................................................................30-31 Part III - Findings Schedule of Findings and Questioned Costs.............................................................................................. 32 Summary Schedule of the Status of Prior Audit Findings........................................................................... 33 Part I Financial Statements PricewaterhouseCoopers LLP 125 High Street Boston, MA 02110 Telephone (617) 530-5000 Facsimile (617) 530-5001 Report of Independent Auditors To the Board of Trustees of The McLean Hospital Corporation In our opinion, the accompanying balance sheets and the related statements of operations, changes in net assets and cash flows present fairly, in all material respects, the financial position of The McLean Hospital Corporation at September 30, 2007 and 2006, and the results of its operations, its changes in net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of The McLean Hospital Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In accordance with Government Auditing Standards, we have also issued our report dated December 20, 2007 on our consideration of The McLean Hospital Corporation's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters for the year ended September 30, 2007. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule of Expenditures of Federal Awards for the year ended September 30, 2007 is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects, in relation to the basic financial statements taken as a whole. December 20, 2007 1 The McLean Hospital Corporation Balance Sheets September 30, 2007 and 2006 2007 (dollars in thousands) Assets Current assets Cash and equivalents Investments Current portion of investments limited as to use Patient accounts receivable, net of allowance for bad debts: 2007 - $1,948; 2006 - $1,902 Research grants receivable Other current assets Receivable for settlements with third-party payers $ 8,700 11,189 16,158 2006 $ 7,698 9,598 23,997 7,687 5,468 4,439 53,641 Investments limited as to use, less current portion Long-term investments Pledges receivable, net, less current portion Interest in the net assets of The Massachusetts General Hospital Property and equipment, net Total assets 55,247 19,185 8,539 2,197 80,436 55,589 Total current assets 7,177 2,565 3,793 419 11,623 6,917 3,528 70,446 49,438 $ $ 197,199 $ Liabilities and Net Assets Current liabilities Current portion of long-term obligations Accounts payable and accrued expenses Accrued compensation and benefits Accrual for settlements with third-party payers Unexpended funds on research grants Due to affiliates 219,587 3,332 5,044 7,092 1,440 7,145 1,502 $ 2,529 6,775 6,172 876 9,311 867 Total current liabilities 25,555 800 2,883 255 Long-term obligations, less current portion 813 2,769 243 3,938 Other liabilities Accrued professional liability Accrued employee benefits Accrued other 26,530 3,825 22,835 20,890 52,328 51,245 86,964 53,453 26,842 74,972 44,225 26,757 167,259 Total liabilities 145,954 Commitments and contingencies Net assets Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ 219,587 The accompanying notes are an integral part of these financial statements. 2 $ 197,199 The McLean Hospital Corporation Statements of Operations Years Ended September 30, 2007 and 2006 (dollars in thousands) 2007 Operating revenue Net patient service revenue Direct academic and research revenue Indirect academic and research revenue Other revenue $ Total operating revenue 91,562 37,206 12,818 10,404 2006 $ 84,321 36,363 13,002 9,917 151,990 70,002 31,423 37,206 5,029 1,903 1,122 Nonoperating gains (expenses) Income from investments Gifts and other Academic and research gifts, net of expenses System development funding 6,575 7,308 (352) 292 (2,740) Income from operations 137,028 5,305 Total operating expenses 63,090 28,758 36,363 5,455 2,159 1,203 146,685 Operating expenses Employee compensation and benefits Supplies and other expenses Direct academic and research expenses Depreciation and amortization Provision for bad debts Interest 143,603 1,062 (140) 2,288 (2,636) Total nonoperating gains, net 4,508 574 Excess of revenues over expenses 9,813 7,149 2,028 1 150 - (3) 545 4,999 (578) (1,113) Other changes in net assets Change in net unrealized appreciation on marketable investments Funds utilized for property and equipment Transfers from affiliates, net Other Change in funded status of defined benefit plan Cumulative effect of accounting changes Increase in unrestricted net assets $ 11,992 The accompanying notes are an integral part of these financial statements. 3 $ 10,999 The McLean Hospital Corporation Statements of Changes in Net Assets Years Ended September 30, 2007 and 2006 (dollars in thousands) Unrestricted Temporarily Restricted Permanently Restricted Net assets at October 1, 2005 $ $ $ 63,973 Increases (decreases) Income from operations Income from investments Gifts and other Academic and research gifts, net of expenses Change in net unrealized appreciation on markeable investments System development funding Funds utilized for property and equipment Transfers from affiliates, net Other Cumulative effect of accounting changes 6,575 1,062 (140) 2,288 41,506 $ 131,775 62 - 6,575 4,777 (1,253) 2,288 179 - 399 - (3) (2,636) 545 4,999 (1,113) 10,999 2,719 461 14,179 Net assets at September 30, 2006 74,972 44,225 26,757 145,954 Increases (decreases) Income from operations Income from investments Gifts and other Academic and research gifts, net of expenses System development funding Funds utilized for property and equipment Transfers from affiliates, net Change in funded status of defined benefit plan 5,305 7,308 (352) 292 (2,740) 2,028 1 150 8,719 509 - 85 - 5,305 16,027 242 292 (2,740) 2,028 1 150 11,992 9,228 85 21,305 (3) (2,636) 545 4,999 (578) (1,113) Change in net assets Change in net assets Net assets at September 30, 2007 3,715 (1,175) - 26,296 Total $ 86,964 $ 53,453 $ 26,842 The accompanying notes are an integral part of these financial statements. 4 $ 167,259 The McLean Hospital Corporation Statements of Cash Flows Years Ended September 30, 2007 and 2006 (dollars in thousands) 2007 Cash flows from operating activities Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities Cumulative effect of accounting changes Change in funded status of defined benefit plan Depreciation and amortization Provision for bad debts Gain on sale of property Net realized and change in unrealized appreciation on investments Change in interest in the net assets of The Massachusetts General Hospital Transfers from affiliates, net Restricted contributions Increase (decrease) in cash resulting from a change in Patient accounts receivable Research grants receivable Other current assets Pledges receivable Accounts payable and accrued expenses Accrued compensation and benefits Accrual for settlements with third-party payers Unexpended funds on research grants Accrued employee benefits and other Due to affiliates $ 21,305 2006 $ 14,179 (150) 5,029 1,903 (17,440) 1,936 (1) (3,634) (4,994) (2,529) 5,277 1 3,634 Net cash provided by financing activities (9,624) 581 (47,276) 51,325 (8,602) Cash flows from financing activities Payments on long-term obligations Proceeds from long-term obligations Transfers from (to) affiliates Restricted contributions 8,327 (11,180) (27,575) 30,153 Net cash used for investing activities (3,416) 1,500 (119) (514) 4,148 222 (5,219) 723 (222) 786 3,221 Cash flows from investing activities Purchase of property and equipment Proceeds from sale of property Purchase of investments Proceeds from sales of investments 1,659 (4,999) (545) (2,413) (2,903) (435) 1,120 (1,731) 920 983 (2,166) 263 635 Net cash provided by operating activities 1,113 5,455 2,159 (506) (8,077) (2,321) 2,058 (1) 545 6,383 281 Net increase in cash and equivalents 1,002 3,614 Cash and equivalents at beginning of year 7,698 4,084 Cash and equivalents at end of year $ 8,700 The accompanying notes are an integral part of these financial statements. 5 $ 7,698 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) 1. Organization The McLean Hospital Corporation (McLean) operates a psychiatric hospital established to provide healthcare services to patients primarily from the Greater Boston area as well as New England and beyond. In addition, McLean conducts research and provides education for physicians and other healthcare professionals. As such, operating revenue includes those generated from direct patient care and reimbursement of research and educational activities. McLean HealthCare, Inc. (MHC) is the sole member of McLean. The Massachusetts General Hospital (MGH) is the sole member of MHC, The General Hospital Corporation, Inc. (General), Massachusetts General Physicians Organization Inc., The MGH Institute of Health Professions, Inc. and The MGH Health Services Corporation. Partners HealthCare System, Inc. (PHS) is the sole member of MGH, The Brigham and Women's/Faulkner Hospitals, Inc., The North Shore Medical Center, Inc., Newton-Wellesley Hospital, Partners Continuing Care, Inc. and Partners International Medical Services, LLC (PIMS). PHS appoints the two physicians who are the members of Partners Community HealthCare, Inc. PHS, together with all of its affiliates, is referred to as "Partners HealthCare." McLean and its parent are tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code. 2. Summary of Significant Accounting Policies Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting. McLean follows the accounting policies and practices of PHS and these statements should be read in conjunction with the Partners HealthCare consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made in the areas of patient accounts receivable, research grants receivable, investments, receivables and accruals for settlements with third-party payers, accrued professional liability, accrued compensation and employee benefits and accrued other. Fair Value of Financial Instruments The fair value of financial instruments approximates the carrying amount reported in the balance sheets for cash and equivalents, investments, investments limited as to use, interest in the net assets of MGH, patient accounts receivable, research grants receivable, pledges receivable and accounts payable, except for long-term obligations which is disclosed in Note 6. Cash and Equivalents Cash and equivalents represent money market and highly liquid debt instruments with a maturity at the date of purchase of three months or less. 6 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) Investments McLean holds investments which represent units in a partnership (Note 3) and are recorded on the equity method of accounting at fair value, with the change in net unrealized appreciation included in excess of revenues over expenses as a component of income from investments. Separately invested investments (marketable investments) are measured at fair value, generally based on quoted market prices, with the change in net unrealized appreciation excluded from excess of revenues over expenses. Income from investments (including realized gains and losses, change in net unrealized appreciation on equity method investments, interest, dividends, and endowment income distributions) is included in excess of revenues over expenses unless the income or loss is restricted by donor or law. Income from investments is reported net of investment-related expenses. A write-down in the cost basis of securities is recorded when the decline in fair value of certain investments below costs has been judged to be other-than-temporary. Depending on any donorimposed restrictions on the underlying investments, the amount of the write-down is reported as a realized loss in either temporarily restricted net assets or in excess of revenues over expenses as a component of income from investments, with no adjustment in the cost basis for subsequent recoveries in fair value. Partners HealthCare has an endowment spending policy for pooled endowment funds. A fixed distribution rate for spending is determined each year which will come from either income and/or net accumulated gains in fair value. Investments Limited as to Use Investments limited as to use primarily include assets whose use is contractually limited by external parties and assets set aside by the Board of Trustees (or management) for identified purposes, over which the Board (or management) retains control and may, at its discretion, subsequently use for other purposes. Certain investments corresponding to deferred compensation are accounted for such that all income and appreciation (depreciation) is recorded as a direct addition (reduction) to the asset balance and corresponding liability balance. Patient Accounts Receivable McLean receives payments for services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care payers, commercial insurance companies, and patients. Patient accounts receivable are reported net of contractual allowances and reserves for denials, uncompensated care, and doubtful accounts. The level of reserves is based upon management's assessment of historical and expected net collections, business and economic conditions, trends in federal and state governmental and private employer health care coverage and other collection indicators. Research Grants Receivable McLean receives research funding from departments and agencies of the U.S. Government, industry and corporate sponsors, and other private sponsors. Research grants receivable include amounts due from these sponsors of externally funded research. The amounts have been billed or are billable to the sponsor, or in limited circumstances, represent accelerated spending in anticipation of future funding. Research grants receivable are reported net of reserves for uncollectible accounts. 7 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) Interest in the Net Assets of The Massachusetts General Hospital MGH holds investment assets for the benefit of McLean. Due to the corporate relationship between MGH, MHC and McLean, these organizations are all financially interrelated. Accordingly, McLean recognizes its interest in the net assets of MGH and adjusts that interest for its share of the change in the net assets of MGH. Changes due to gifts, investment income (including realized gains and losses) and unrealized appreciation are recognized in nonoperating activity. Property and Equipment Property and equipment is reported on the basis of cost less accumulated depreciation. Donated items, exclusive of transfers from related organizations, are recorded at fair value at the date of contribution. All research grants received for capital are recorded in the year of expenditure as a change in net assets. Property and equipment is reviewed for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Depreciation of property 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, which generally range from three to forty years. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized, net of any interest earned, as a component of the cost of acquiring those assets. Asset Retirement Obligations Asset retirement obligations, reported in accrued other, are legal obligations associated with the retirement of long-lived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. McLean records changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. McLean reduces these liabilities when the related obligations are settled. Compensated Absences In accordance with formal policies concerning vacation and other compensated absences, accruals of approximately $3,398 and $3,077 were recorded as of September 30, 2007 and 2006, respectively. Unexpended Funds on Research Grants Research grants received in advance of corresponding grant expenditures are accounted for as a direct addition to investments limited as to use and unexpended funds on research grants. Self-Insurance Reserves McLean is self-insured for employee healthcare, workers' compensation and certain other employee benefits. These costs are accounted for on an accrual basis to include estimates of future payments for claims incurred. 8 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) Net Assets Permanently restricted net assets include only the historical dollar amounts of gifts which are required by donors to be permanently retained. Temporarily restricted net assets include gifts, and income and gains on permanently restricted net assets which can be expended but for which restrictions have not yet been met. Such restrictions include purpose restrictions where donors have specified the purpose for which the net assets are to be spent, or time restrictions imposed by donors or implied by the nature of the gift (capital projects, pledges to be paid in the future, life income funds) or by interpretations of law (gains available for appropriation but not appropriated in the current period). Realized gains and losses are classified as unrestricted net assets unless they are restricted by the donor or law. Unless permanently restricted by the donor, realized gains and unrealized net appreciation on permanently restricted gifts are classified as temporarily restricted until appropriated for spending by McLean in accordance with policies established by Partners HealthCare and the Massachusetts Management of Institutional Funds Act. Net losses on permanently restricted endowment funds are classified as a reduction to unrestricted net assets until such time as the fair value exceeds book value. Unrestricted net assets include all the remaining net assets of McLean. See Note 12 for further information on the composition of restricted net assets. Gifts and Grants Unconditional promises to give cash and other assets to McLean 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. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted gifts in the accompanying financial statements. Gifts of long-lived assets with explicit restrictions that specify use of assets 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 assets are not placed in service during the year. Grants and contracts normally provide for the recovery of direct and indirect costs, subject to audit. McLean recognizes revenue associated with direct and indirect costs as direct costs are incurred. The recovery of indirect costs is based on predetermined rates for U.S. government grants and contracts and negotiated rates for other grants and contracts. Statements of Operations All activities of McLean deemed by management to be ongoing, major and central to the provision of healthcare services, training and research activities are reported as operating revenue and expenses. Other activities are deemed to be nonoperating and include unrestricted gifts (net of fund-raising expenses), net change in unexpended academic and research gifts, substantially all income from investments and system development funding. System development funding represents payments made to PHS for corporate expenses and to support clinical and other 9 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) initiatives provided by PHS for the benefit of Partners HealthCare. Academic and research gifts largely consist of donor contributions (and the related investment income including realized gains and losses) designated to support the clinical, teaching or research efforts of a physician or department as directed by the donor. These gifts are reported as unrestricted support as any donor restrictions are of a general nature that are inherent in the normal activities of the organization and do not require classification of these gifts as temporarily or permanently restricted. The statements of operations include excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses include change in unrealized appreciation on marketable investments, transfers of assets to and from affiliates, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for acquisition of such assets) and change in funded status of the defined benefit plan. In September 2006, the Securities and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify and assess the materiality of financial statement misstatements. Although the SAB was directly applicable to public companies, McLean elected to follow the prescribed guidance. Prior to fiscal 2006, McLean recorded estimated accruals for settlements with third-party payers and certain other liabilities above specific accrual amounts. In addition, changes in third-party payer settlement estimates were generally amortized into income over a period not to exceed five years rather than recorded in total in the year of the change in estimate. The adoption of SAB 108 as of October 1, 2005 resulted in a decrease in accruals for settlements with third-party payers of $869 and a decrease in accounts payable and accrued expenses of $1,297. Adjustment of other differences resulted in a decrease in property and equipment of $1,943. The impact of these adjustments resulted in a net increase of $223 in unrestricted net assets. For the years ended September 30, 2007 and 2006, adjustments to prior year estimates resulted in an increase to income from operations of $1,733 and $2,130, respectively. Net Patient Service Revenue McLean maintains agreements with the Centers for Medicare and Medicaid Services (CMS) of the United States Department of Health and Human Services (DHHS) under the Medicare Program, The Commonwealth of Massachusetts under the Medical Assistance Program (Medicaid) and various managed care payers that govern payment to McLean for services rendered to patients covered by these agreements. The agreements generally provide for payments based on allowable costs, subject to certain limitations, or per diem rates for inpatient care and discounted charges or fee schedules for outpatient care. Net patient service revenue is reported at estimated net realizable amounts from patients, thirdparty payers, and others for services rendered and includes estimated retroactive revenue adjustments due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Contracts, laws and 10 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) regulations governing the Medicare and Medicaid programs and managed care payer arrangements are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Charity Care McLean provides either full or partial charity care to patients who cannot afford to pay for their medical services based on income and family size. Charity care is reported at gross charges with an offsetting allowance, as there is no expectation of collection. Accordingly, there is no net patient service revenue related to charity care. Other Revenue Other revenue primarily consists of institutional revenue (for example, billing for services provided to other healthcare providers) and tuition revenue. 3. Investments and Investments Limited as to Use Investments are either separately invested or included in pooled investment funds. The Partners HealthCare System Pooled Investment Accounts (Partnership) is structured as a single general partnership composed of four investment pools, with PHS and substantially all of its affiliates participating in the pools as partners. Each partner's interest in the Partnership is based on its underlying investments in one or more of the four separate pools. Amounts included in the investment pools are accounted for using the fair value method whereby each partner is assigned a number of units based on the fair value of the assets of a pool at the time of entry of the funds into the pool. Current fair value is used to determine the number of units allocated to additional amounts placed in a pool and to value withdrawals from a pool. Income from investments of the pools, including realized gains and losses, is allocated on a unitized basis to a partner based on the partner's share of units in a pool. The Partnership participates in a securities lending program with its custodian bank whereby securities are loaned to qualified financial institutions in exchange for collateral. Investments that have been loaned to another institution are reported as pledged assets in the consolidated financial statements of Partners HealthCare. Cash or investments received as collateral on the securities lending transaction are also reported as assets in the consolidated balance sheets. Because the collateral must be returned in the future, a corresponding liability is reported in the consolidated financial statements. 11 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) The composition of investments and investments limited as to use is as follows: September 30, 2007 Gross Gross Unrealized Unrealized Appreciation Depreciation Cost Pooled investments Invested cash equivalents Equities U.S. Government, domestic and foreign fixed income securities Private partnerships and other Accruals, net $ 2,845 11,550 $ 2,850 $ - Fair Value $ 2,845 14,400 16,084 13,309 187 (61) (33) - 16,342 18,002 187 43,975 7,895 (94) 51,776 661 1,731 - - 661 1,731 903 Separately invested Invested cash equivalents Equities U.S. Government and domestic fixed income securities 319 4,726 - - - 903 3,295 - $ 47,270 Cost Pooled investments Invested cash equivalents Equities U.S. Government, domestic and foreign fixed income securities Private partnerships and other Accruals, net $ 3,081 9,400 $ 7,895 $ (94) 3,295 $ 55,071 September 30, 2006 Gross Gross Unrealized Unrealized Appreciation Depreciation $ 1,248 $ (130) Fair Value $ 3,081 10,518 18,728 14,012 218 169 2,861 - (224) (6) - 18,673 16,867 218 45,439 4,278 (360) 49,357 424 1,519 - (3) 424 1,516 838 - - 2,781 - (3) 2,778 (363) $ 52,135 Separately invested Invested cash equivalents Equities U.S. Government and domestic fixed income securities $ 48,220 12 $ 4,278 $ 838 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) The fair value and gross unrealized depreciation of investments and investments limited as to use, with a fair value less than cost, that are not deemed to be other-than-temporarily impaired at September 30, 2007 are as follows: 12 Months or Greater Gross Fair Unrealized Value Depreciation Less than 12 Months Gross Fair Unrealized Value Depreciation Pooled investments U.S. Government, domestic and foreign fixed income securities Private partnerships and other $ 304 584 $ (52) (33) $ 360 - $ (9) - $ 888 $ (85) $ 360 $ (9) Securities with unrealized depreciation are reviewed each quarter to determine whether these investments are other-than-temporarily impaired. Externally managed marketable investments with fair value below cost are considered to be other-than-temporarily impaired and, accordingly, the unrealized depreciation is recognized as realized losses. All other investments are subject to a further review, which considers factors including the anticipated holding period for the investment and the extent and duration of below cost valuation. Based on management's evaluation of investments with a fair value less than cost at September 30, 2007, no other-than-temporary impairment was determined to have occurred. 13 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) Investments and investments limited as to use are recorded in the balance sheet as follows: September 30, 2007 2006 Current assets Investments Current portion of investments limited as to use $ 11,189 16,158 $ 9,598 23,997 27,347 19,185 8,539 Investments limited as to use, less current portion Long-term investments $ 33,595 11,623 6,917 55,071 $ 52,135 Investments limited as to use consist of the following: September 30, 2007 Current Long-Term Portion Portion Internally designated funds Reserve for capital expenditures Unexpended academic and research gifts Other $ 4,466 4,045 $ 13,048 5,860 September 30, 2006 Current Long-Term Portion Portion $ 5,531 7,000 $ 6,031 5,557 8,511 14 11,588 - 9,311 - 502 $ 12,531 7,145 Externally limited funds Unexpended funds on research Held by trustees under debt and other agreements 18,908 277 2,155 35 16,158 $ 19,185 $ 23,997 $ 11,623 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) Investment income and gains (losses) from cash and equivalents, investments (including longterm) and investments limited as to use are comprised of the following: Years Ended September 30, 2007 2006 Unrestricted Dividends and interest income Endowment income distributions, net of reinvested gains Net realized gains (losses) on investments Trading gains Other-than-temporary impairment Change in net unrealized appreciation on equity method investments $ 1,178 2,322 $ 1,046 2,147 2,373 (289) 5,172 15 5,138 7,555 (1,423) 8,719 $ 6,371 (5) 1,164 Total temporarily restricted investment activity 913 (2,141) 2,750 (121) Change in net unrealized appreciation on equity method investments 6,327 857 (2,322) Temporarily restricted Dividends and interest income Endowment income distributions Net realized gains (losses) on investments Trading gains Other-than-temporary impairment 6,330 (3) 10,756 Total unrestricted investment activity (1,124) 10,756 - Total investment activity included in excess of revenues over expenses Change in net unrealized appreciation on marketable investments 4,275 (14) 3,715 19,475 $ 10,042 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) Investment income included in operating results and excess of revenues over expenses are comprised of the following: Years Ended September 30, 2007 2006 Investment income included in operations and reported in Other revenue Investment income included in nonoperating gains (expenses) and reported in Income from investments Academic and research gifts, net of expenses Total investment activity included in excess of revenues over expenses 4. $ 649 $ 7,308 2,799 $ 10,756 619 1,062 4,649 $ 6,330 Pledges Receivable Pledges receivable represent unconditional promises to give and are net of allowances for uncollectible amounts. Pledges are recorded at the present value of their estimated future cash flows. Pledges collectible within one year are classified as other current assets and total $1,508 and $1,297 as of September 30, 2007 and 2006, respectively. Estimated cash flows due after one year are discounted using published treasury bond and note yields that are commensurate with estimated collection risks. The blended discount rate was 4.1% and 4.6% for 2007 and 2006, respectively. Pledges are expected to be collected as follows: September 30, 2007 2006 Amounts due Within one year In one to five years In more than five years $ Total pledges receivable 1,808 2,482 20 $ 1,318 4,170 34 4,310 259 Net pledges receivables $ 16 4,925 346 Less: Allowance for uncollectibles 597 4,051 Less: Unamortized discount 5,522 100 3,705 $ 4,825 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) 5. Property and Equipment Property and equipment consists of the following: September 30, 2007 2006 Land and land improvements Buildings and building improvements Equipment Construction in progress $ 1,550 87,443 11,977 10,131 $ 1,672 89,598 10,480 4,979 111,101 (55,512) Accumulated depreciation Property and equipment, net $ 106,729 (57,291) 55,589 $ 49,438 For the years ended September 30, 2007 and 2006, fully depreciated assets with an original cost of $6,808 and $5,553, respectively, were written off. In 2005, McLean sold 26.2 acres of land to Northland Development Company for $14,376 and recorded a net gain of $10,567. McLean has also executed purchase and sale agreements to sell 24.7 acres of land for development of a senior housing community and a research and development facility. The sale is expected to take place in 2008, after the necessary permits are obtained. In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. ("FIN") 47, Accounting for Conditional Asset Retirement Obligations. Under FIN 47 an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. McLean implemented FIN 47 at September 30, 2006 and recorded conditional asset retirement obligations of approximately $243. These conditional asset retirement obligations relate to certain materials requiring specific remediation efforts. Upon implementation of FIN 47, McLean recorded a $243 reduction in unrestricted net assets which was recorded as a cumulative effect of a change in accounting principle. 17 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) 6. Long-Term Obligations Long-term obligations consist of the following: September 30, 2007 2006 Note payable to PHS Partners HealthCare Capital Framework Loan, variable interest rate of 5.10% and 5.11% at September 30, 2007 and 2006, respectively, final maturity in 2015 $ Less current portion 26,167 3,332 $ 23,419 2,529 $ 22,835 $ 20,890 The Partners HealthCare Capital Framework Loan bears interest at a variable rate based upon the weighted average cost of Partners HealthCare's debt, reset annually, effective October 1. Aggregate maturities and payments of long-term obligations during the next five years are as follows: 2008 - $3,332; 2009 - $3,463; 2010 - $3,636, 2011 - $3,160 and 2012 - $3,325. Long-term obligations have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying amounts for this debt is a reasonable estimate of its fair value. Interest expense approximates interest paid during the years ended September 30, 2007 and 2006. 7. Leases McLean has noncancelable operating leases for certain equipment and a building. Rental expense under these and other contracts approximated $2,080 and $2,106 in 2007 and 2006, respectively. Minimum future lease commitments under noncancelable leases are as follows: Operating Leases 2008 2009 $ $ Total lease payments 18 707 119 826 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) 8. Pension and Postretirement Healthcare Plans Pension Plan Substantially all employees of MGH and its affiliates are covered under The Massachusetts General Hospital Cash Balance Retirement Plan (MGH Plan), a noncontributory defined benefit plan. Benefits under the MGH Plan consist of annual allocations to participants' accounts based on the participants' age, years of service and salary. Interest is credited to participants' accounts annually at market rates. Pension expense under the MGH Plan for all affiliates amounted to $67,026 in 2007 and $46,371 in 2006. The amount of pension expense allocated to McLean was $3,952 in 2007 and $3,235 in 2006. Postretirement Healthcare Benefit Plan McLean also provides subsidized healthcare benefits for qualified retired employees on a selfinsured basis. These benefits are administered through an insurance company and are accounted for on the accrual basis, which includes an estimate of future payments for claims incurred. McLean uses a measurement date of June 30 for the postretirement healthcare benefit plan. Benefit Obligation Change in Benefit Obligation 2007 2006 Benefit obligation at beginning of year Service cost Interest cost Assumption changes Actuarial (gain) loss Benefits paid $ 4,165 2 245 302 (500) $ 5,133 3 280 (66) (648) (537) Benefit obligation at end of year $ 4,214 $ 4,165 Weighted-Average Assumptions Used to Determine End of Year Benefit Obligation Discount rate Healthcare cost trend rate for next year Rate to which the cost trend rate is to decline Year that rate reaches the ultimate trend rate 19 2007 2006 6.25% 9.00% 5.00% 2012 6.25% 9.00% 5.00% 2011 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plan. A one-percentage-point change in assumed healthcare cost trend rates would have the following effect: One-Percentage-Point Increase Effect on postretirement benefit obligation $ One-Percentage-Point Decrease 181 $ (166) Plan Assets Change in Plan Assets 2007 2006 Fair value of plan assets at beginning of year Actual return on plan assets Net employer contributions (disbursements) Benefits paid $ 4,689 738 (44) (500) $ 5,076 236 (86) (537) Fair value of plan assets at end of year $ 4,883 $ 4,689 McLean's benefit plan weighted-average target asset allocation ranges as well as actual allocations by asset category for 2007 and 2006 are as follows: Percentage of Plan Assets 2007 2006 Asset Category Target Allocation Domestic equity securities Foreign equity securities Fixed income securities 40% - 60% 10% - 30% 20% - 40% 50.4% 24.9% 24.7% 49.0% 22.4% 28.6% 100% 100% 100% The investment objective is to achieve the highest reasonable total return after considering (i) plan liabilities, (ii) funding status and projected cash flows, (iii) projected market returns, valuations and correlations for various asset classes, and (iv) Partners' ability and willingness to incur market risk. Funded Status In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS 158 focuses primarily on balance sheet reporting for the funded status of benefit plans and requires recognition of benefit liabilities for under-funded plans and benefit assets for over-funded plans, with offsetting impacts to unrestricted net assets. McLean elected to early adopt the balance sheet recognition provisions of SFAS 158 as of September 30, 2006. The impact of adoption resulted in a net decrease of $1,093 in unrestricted net assets, which was recorded as a cumulative effect of a change in accounting principle. 20 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) SFAS 158 also requires companies to measure benefit plan assets and liabilities and determine the discount rate for subsequent year expense recognition as of the balance sheet date for financial reporting purposes, thus eliminating the opportunity to use a measurement date up to 90 days prior to the balance sheet date. The effective date for this change is 2009. McLean currently uses a June 30 measurement date and will adopt a September 30 measurement date in 2009 as required. Converting to the new measurement date will require a one-time adjustment to unrestricted net assets per the transition guidance in SFAS 158. The funded status of the plan, and the related amounts recognized in the balance sheet, follows: End of Year 2007 Fair value of plan assets at measurement date Net disbursements recorded after measurement date Benefit obligation at measurement date Funded status $ 4,883 (364) (4,214) 2006 $ 4,689 (408) (4,165) $ 305 $ 116 Amounts recognized in the balance sheet consist of: Noncurrent assets $ 305 $ 116 Amounts recognized in unrestricted net assets consist of: Actuarial net loss $ 943 $ 1,093 Expected Cash Flows Information about the expected cash flows for the postretirement healthcare benefit plan follows: Expected employer contributions 2008 $ 519 Gross Benefit Payments Expected benefit payments (receipts) 2008 2009 2010 2011 2012 2013 and thereafter $ Net Periodic Benefit Cost 567 570 555 532 502 1,986 Medicare Subsidy $ 2007 (48) (47) (46) (44) (41) (161) 2006 Service cost Interest cost Expected return on plan assets Amortization of actuarial net loss $ 2 245 (352) 66 $ 3 280 (381) 124 Net periodic benefit cost (benefit) $ (39) $ 26 21 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) The actuarial net loss of McLean for the retirement healthcare benefit plan that will be amortized from unrestricted net assets into net periodic benefit cost in 2008 is $50. Weighted-Average Assumptions Used to Determine Net Periodic Cost 2007 6.25% 7.50% 9.00% 5.00% 2011 Discount rate Expected return on plan assets Healthcare cost trend rate for this year Rate to which the cost trend rate is to decline Year that rate reaches the ultimate trend rate 2006 5.75% 7.50% 10.00% 5.00% 2011 Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effect: One-Percentage-Point Increase Effect on service and interest cost 9. $ 11 One-Percentage-Point Decrease $ (10) Professional Liability Insurance McLean insures substantially all of its professional and general liability risk on a claims-made basis in cooperation with PHS affiliates and other organizations in the Greater Boston area through a captive insurance company, Controlled Risk Insurance Company Ltd. (CRICO). The policy covers claims made during its term, but not those occurrences for which claims may be made after expiration of the policy, except for certain tail liabilities which CRICO has assumed on an occurrence basis through December 31, 2007. Management intends to renew its coverage on a claims-made basis and has no reason to believe that it will be prevented from such renewal. McLean follows the accounting policy of establishing reserves to cover all professional liability claims incurred but not reported to the insurance company as of the end of the year (tail liability), excluding the tail liability assumed by CRICO. These reserves have been estimated by consulting actuaries on a discounted basis using an interest rate of 5.75% at September 30, 2007 and 2006. Management is not aware of any claims against McLean or factors affecting CRICO that would cause the expense for professional liability risks to vary materially from the amount provided. 10. Transactions with Affiliated Corporations McLean received fund-raising, investment management, legal, financial and administrative services from PHS and affiliates. These services are reimbursed on an estimated cost basis and amounted to $13,940 in 2007 and $12,421 in 2006. McLean received salary and other expense reimbursements from PHS of $346 in 2007 and $415 in 2006. 22 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) During 2007 and 2006, McLean received net funds from PHS. These equity transfers are reported separately as changes in net assets and are excluded from excess of revenues over expenses. Amounts transferred were as follows: Years Ended September 30, 2007 2006 Transfers from (to) PHS Liability transfer to PHS 1 - $ (1) 5,000 $ 11. $ 1 $ 4,999 Concentration of Credit Risk Financial instruments that potentially subject McLean to concentration of credit risk consist of patient accounts receivable, research grants receivable, pledges receivable and certain investments. McLean receives a significant portion of its payments for services rendered from a limited number of government and commercial third-party payers, including Medicare, Medicaid, Blue Cross and Blue Shield of Massachusetts, Harvard Pilgrim Health Care and Tufts Associated Health Plan. Research funding is provided through many government and private sponsors. Pledges receivable are due from multiple donors. McLean considers the credit risk for pledges to be minimal based on history and the financial wherewithal of donors, most of which are individuals or organizations well known to the hospital. Investments, which include government and agency securities, stocks and corporate bonds, and private partnerships and other investments are not concentrated in any corporation or industry or with any single counterparty. McLean has not historically incurred any significant credit losses outside the normal course of business. 12. Restricted Net Assets Restricted net assets are available for the following purposes: September 30, 2007 2006 Temporarily restricted Charity care Buildings and equipment Clinical care, research and academic $ 5,241 5,016 33,968 53,453 $ 44,225 $ 454 26,388 $ 452 26,305 $ 23 $ $ Permanently restricted Charity care Clinical care, research and academic 6,051 7,037 40,365 26,842 $ 26,757 The McLean Hospital Corporation Notes to Financial Statements September 30, 2007 and 2006 (dollars in thousands) 13. Functional Expenses Total operating expenses by function are as follows: Years Ended September 30, 2007 2006 Healthcare services Research and academic General and administrative 82,726 50,024 13,935 $ 76,219 49,365 11,444 $ 14. $ 146,685 $ 137,028 Investment Transfer Effective October 1, 2007, the Board of Trustees of McLean approved the permanent transfer of substantially all unrestricted investments to its parent, MHC. In addition, in conjunction with the board resolution, all system development funding will become the responsibility of MHC. Temporarily and permanently restricted investments, as well as externally limited investments, will continue to be included in the financial statements of McLean. McLean will account for this transaction as a net asset transfer in fiscal 2008. The impact of this transfer will be to reduce investments and unrestricted net assets by $56,643. 15. Contingencies McLean is subject to complaints, claims and litigation which have risen in the normal course of business. In addition, McLean is subject to reviews 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 by healthcare institutions, including McLean, has increased. 24 The McLean Hospital Corporation Schedule of Expenditures of Federal Awards Year Ended September 30, 2007 Federal CFDA Number RESEARCH AND DEVELOPMENT AND RESEARCH TRAINING CLUSTER Research and Development Direct Programs Department of Health and Human Services National Institutes of Health National Institute on Deafness & Other Communication Disorders National Center for Complementary & Alternative Medicine Mental Health Research Grant Alcohol Research Programs Drug Abuse Research Programs National Center for Research Resources Neurological Disorders Research Biological Basis Research Child Health and Human Development Aging Research Total Federal Expenditures Pass-Through Number 93.173 93.213 93.242 93.273 93.279 93.389 93.853 93.854 93.865 93.866 $ Subtotal - Department of Health and Human Services 227,461 1,382,170 10,201,163 (37,485) 12,139,718 300,160 3,596,015 (33,551) 97,516 613,005 28,486,172 Department of Defense Military Medical Research and Development 12.420 1,155,974 Subtotal - Department of Defense 1,155,974 Department of Education & United States Secret Service 21.000 (28,303) Subtotal - Department of Education & United States Secret Service National Science Foundation Education and Human Resources (28,303) 47.076 261,911 Subtotal - National Science Foundation 261,911 Total Research and Development Direct Programs 29,875,754 Research and Development Passed Through Other Organizations Department of Health and Human Services National Institutes of Health Albany Medical College Brigham and Women's Hospital, Inc. Brigham and Women's Hospital, Inc. Eagle Vision Pharmaceutical Corporation Harvard Medical School Harvard Medical School Harvard Medical School Harvard Medical School Harvard Medical School Harvard School of Public Health Harvard University Joslin Diabetes Center Joslin Diabetes Center Massachusetts General Hospital McGill University Molecular Insight Pharmaceuticals, Inc. MyNeurolab.com Natural Pharmacia International Natural Pharmacia International Research Foundation for Mental Hygiene Research Foundation for Mental Hygiene Research Foundation for Mental Hygiene 93.213 93.226 93.273 93.848 93.121 93.156 93.242 93.242 93.242 93.853 93.242 93.827 93.847 93.279 93.242 93.865 93.853 93.213 93.273 93.242 93.866 93.866 25 1 R21 AT003371-01A1 1 P01 HS11534-04 1 R01 AA016318-01 R43 DK076429 K12 DE014528 6 D01 HP000002-01-03 5 R01 MH069721 5 R01 MH59559-04 K01 MH071714 5 P30 AG024409-03 2 R01 MH31340 1 R01 DK60754 1 R01 DK073843-01A2 5 U01 DA019378-02 N01MH90002 1 R43 HD046194-01 1 R43 NS055600-01 R42 AT00766-01 2 R44 AA015220-03A2 N01MH60012 1 R01 AG16381-01A1 P01 AG017617-06 27,745 (2,149) 9,434 3,425 107,348 (4,164) 840 78,239 139,971 4,952 19,251 3,692 35,424 138,526 103,671 (113,911) 3,335 (410) 69,598 29,154 102,534 129,421 The McLean Hospital Corporation Schedule of Expenditures of Federal Awards Year Ended September 30, 2007 Federal CFDA Number 93.279 93.279 93.279 93.279 93.213 93.242 93.242 93.279 93.242 93.865 University of Chicago University of Chicago University of Cincinnati University of Cincinnati University of Maryland University of Texas Southwestern Medical University of Texas Southwestern Medical University of Texas Southwestern Medical Yale University Yale University Pass-Through Number R01 DA014644-06 R01 DA017323-02 5 R01 DA14644-03 1 R01 DA017323-01A2 5 P01 AT002605-02 5 P50 MH66172-05 5 P50 MH66172-05 5 P01 DA008227-16 5 R21 MH067066-02 2 U19 HD35482-10 $ Subtotal - Department of Health and Human Services 9 28,307 1,640 14,069 52,470 63,006 73,741 44,401 (138) 53,757 1,217,188 Department of the Navy University of Arizona 12.300 Subtotal - Department of the Navy Department of Education Southwest Educational Development Laboratory N00014-05-1-0807 (6,497) (6,497) 84.133 ED-03-CO-0048 7,962 Subtotal - Department of Education 7,962 Total Research and Development Pass-Through Programs 1,218,653 Total Research and Development 31,094,407 Research Training Direct Programs Department of Health and Human Services National Institutes of Health Alcohol Research Career Development Awards Drug Abuse Research Programs Drug Abuse Research Service Awards Mental Health Research Career/Scientist Development Awards Drug Abuse and Addiction Research Programs 93.271 93.278 93.277 93.281 93.279 135,621 264,559 464,104 162,678 920,058 Subtotal - Department of Health and Human Services 1,947,020 Total Research Training Direct Programs 1,947,020 Research Training Passed Through Other Organizations Department of Health and Human Services National Institute of Health Harvard Medical School 93.242 5 T32 MH016259-28 57,695 Subtotal - Department of Health and Human Services 57,695 Department of Education City of Boston 84.334 BPS06221 1,132 Subtotal - Department of Education 1,132 Total Research Training Pass-Through Programs 58,827 Total Research Training 2,005,847 Total Research and Development and Research Training Cluster OTHER PROGRAMS Passed Through from the Commonwealth of Massachusetts Temporary Assistance for Needy Families Social Services Block Grant 33,100,254 93.558 93.667 350 274 Total Other Programs 624 Total Federal Expenditures $ 26 33,100,878 The McLean Hospital Corporation Notes to Schedule of Expenditures of Federal Awards September 30, 2007 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards includes the federal grant transactions of The McLean Hospital Corporation (the "Hospital") recorded on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in or used in the preparation of the basic financial statements. Negative amounts represent adjustments or credits to amounts reported as expenditures in prior years. Pass-through numbers are provided where available. 2. Facilities and Administrative Costs The predetermined facilities and administrative cost rates were based on financial information submitted utilizing the method prescribed in OASC-3. The Hospital negotiated and was awarded a predetermined facilities and administrative cost rate of 61% for the period October 1, 2003 through September 30, 2007 for research and development. The Hospital also was awarded a fixed fringe benefit rate of 25% for the period October 1, 2006 through September 30, 2007. 3. Subrecipients During fiscal 2007, the Hospital provided to subrecipients in the Research and Development and Research Training Program $2,682,516, as follows. These amounts are included in the accompanying Schedule of Expenditures of Federal Awards: Adcare Hospital Autism Speaks Beth Israel Deaconess Hospital Boston University Brandeis University Brown University Cab Health and Recovery Services Exploratorium Massachusetts General Hospital Mercy Hospital Northeastern University Research Foundation Mental Hygiene Research Foundation of the State University of New York Reginald Clark and Associates Rhode Island Hospital Stanley Street Treatment Resources Temple University Tufts University University of California University of New Mexico University of North Carolina University of Rochester University of Texas Wellesley College $ $ 27 26,240 222,706 76,707 163,620 179,883 7,758 15,655 24,615 370,511 95,456 320,061 156,202 89,353 13,602 10,322 373,413 76,634 3,858 29,067 29,875 101,773 100,211 136,468 58,526 2,682,516 Part II Reports on Compliance and Internal Controls PricewaterhouseCoopers LLP 125 High Street Boston, MA 02110 Telephone (617) 530-5000 Facsimile (617) 530-5001 Report of Independent Auditors on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards To the Board of Trustees of The McLean Hospital Corporation We have audited the financial statements of The McLean Hospital Corporation as of and for the year ended September 30, 2007 and have issued our report thereon dated December 20, 2007. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control over Financial Reporting In planning and performing our audit, we considered The McLean Hospital Corporation's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of The McLean Hospital Corporation's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of The McLean Hospital Corporation's internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control 28 that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether The McLean Hospital Corporation's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain matters that we reported to management of The McLean Hospital Corporation in a separate letter dated December 19, 2007. This report is intended solely for the information and use of The McLean Hospital Corporation’s Board of Trustees, management, federal awarding agencies and pass-through entities, and is not intended to be and should not be used by anyone other than these specified parties. December 20, 2007 29 PricewaterhouseCoopers LLP 125 High Street Boston, MA 02110 Telephone (617) 530-5000 Facsimile (617) 530-5001 Report of Independent Auditors on Compliance with Requirements Applicable to Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 To the Board of Trustees of The McLean Hospital Corporation Compliance We have audited the compliance of The McLean Hospital Corporation with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to each of its major federal programs for the year ended September 30, 2007. The McLean Hospital Corporation's major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the