Baylor Health Care System

“Changes to Governing Documents: Effective October 1, 2013, Baylor Health Care System, a Texas nonprofit corporation (BHCS), and Scott & White Healthcare ("SWHC"), a Texas nonprofit corporation, consummated their affiliation pursuant to an Affiliation Agreement (the "Agreement") dated June 19, 2013. BHCS and SWHC formed Baylor Scott & White Holdings (BSW Holdings), a Texas nonprofit corporation. While the receipt of the Internal Revenue Service (IRS) tax-exempt and public charity determination letter for BSW Holdings was pending, BHCS and SWHC formed a Texas limited liability company, Baylor Scott & White Health LLC (BSW Holdings LLC). On December 31, 2013, BSW Holdings received a favorable determination letter from the IRS regarding their tax-exempt and public charity status. Effective March 1, 2014, BSW Holdings LLC was merged into BSW Holdings. BSW Holdings is now the sole member of BHCS and SWHC and has control and substantial reserved powers over all BHCS and SWHC material affiliates including the organization, as more fully described in the exemption application filed with the Internal Revenue Service for BSW Holdings. Pursuant to this transaction, the organizational documents for the organization were amended to give BSW Holdings, the sole member of the organization, control and substantial reserved powers over the organization, including approval of the organization's articles of incorporation and bylaws and amendments thereto, appointment and removal of members of the organization's governing body, approval of dissolutions and mergers, and other similar decisions over the organization.”

“Members or stockholders: The organization is a Texas nonprofit membership organization in which BSW Holdings, a tax-exempt, Texas nonprofit corporation, is the sole member.”

“Election of members of governing body by members, stockholders, or other persons: The sole member, BSW Holdings, elects and removes the members of the governing body.”

“Governing body decisions subject to approval: All rights and powers are reserved to the sole member, BSW Holdings, except only those rights and powers expressly set forth in the bylaws, required by state or federal law, or to meet the requirements and standards promulgated by Joint Commission. For example, the member's reserved rights and powers include, without limitation, approval of the organization's articles of incorporation and bylaws and amendments thereto, appointment and removal of members of the organization's governing body, approval of dissolutions and mergers, and other similar decisions over the organization.”

“Process used to review the Form 990: The Form 990 is prepared and reviewed by BSWH's tax department. During the return preparation process the tax department works with other functional areas including finance, accounting, treasury, legal, human resources, and corporate compliance for advice, information and assistance to prepare a complete and accurate return. Upon completion, the Form 990 is reviewed by the organization's President, financial officer and/or other key officers. A complete final copy of the return is provided to the organization's governing body prior to filing with the IRS.”

“Process used to monitor and enforce compliance with the organization's conflict of interest policy: Persons with an actual or perceived ability to influence the organization have the duty to disclose annually and otherwise promptly as potential conflicts are identified, any familial, professional or financial relationships with entities or individuals that do, or seek to do business with the organization or that compete with the organization. These individuals include the organization's officers, governing body, management, physicians with administrative services agreements and other key personnel who interact with outside organizations or businesses on behalf of the organization. The BSW Holdings Board of Trustees Audit and Compliance Committee and the BSW Holdings Corporate Compliance Committee review all relevant disclosures submitted by these individuals to determine whether a conflict of interest exists and to determine an appropriate resolution, if necessary. Any individual with a perceived or potential conflict is prohibited from voting or participating in the decision making process regarding such transaction with that individual.”

“Process for determining compensation: The organization, a controlled affiliate of BHCS, recognizes that those chosen to lead the organization are vital to its ongoing success and growth. Thus, it must attract, retain and engage the highest quality officers and key employees to lead the organization and help BHCS maintain its national reputation for achieving high targets for medical quality, patient safety, and patient satisfaction. A significant portion of the organization's officers' and key employees' total compensation is based on significant performance achievements. This strategy, known as the Performance Award Program, places a greater emphasis on the importance of the organization achieving targeted improvements in the areas of people, quality, patient satisfaction and financial stewardship, annually. Total executive compensation is part of an integrated talent management strategy developed by the BHCS Board of Trustees and its Compensation and Governance Committee (C&G Committee) to attract, motivate, and retain the best leadership resources for the organization. Executive compensation is determined pursuant to guidelines outlined in the intermediate sanction rules under IRC Section 4958 including taking steps to meet the rebuttable presumption standard of reasonableness under Treasury Regulation 53.4958-6, as summarized below. When making compensation decisions, the organization compares itself to similar-sized, and structured businesses including other integrated health care service systems and other similar-sized organizations, both locally and nationally. The BHCS Board of Trustees and C&G Committee, on behalf of the organization, work directly with an independent compensation expert(s) to identify reasonable and competitive market rates as well as provide an annual review of the total compensation of the organization's top management officials and key employees. The C&G Committee is made up of members of the BHCS Board of Trustees, who are independent, community volunteers. Guided by the information provided by the independent compensation expert(s), the C&G Committee approves and recommends to the BHCS Board of Trustees salary increases, earned incentives, and benefit offerings for the organization's President, other officers and/or key employees to be comparable to similar organizations for similar services and/or positions. Furthermore, the C&G Committee is charged with the responsibility of reviewing annually the major elements of the executive compensation program to assure designs remain consistent with the business needs, market practices, and compensation philosophy. As part of the decision making process, the C&G Committee will often meet in executive session to discuss and review recommendations made by the independent compensation expert(s). During the executive session no officer or key employee whose compensation is being reviewed is present during these discussions. All decisions are contemporaneously documented in the C&G Committee minutes which are timely reviewed and approved by the C&G Committee.”

“Process for making governing documents, conflict of interest policy, & financial statements available to the public: The organization's articles of incorporation and amendments thereto are made available to the public by the filing of those documents with the Texas Secretary of State. Also, the organization is included within the combined financial statements of BHCS that are made available to the public by the posting of those documents through DAC Bond. The organization's other governing documents and conflicts of interest policy are not made available to the public.”

“Irving Prengler transferred from a related organization during the tax year. He devoted an average of 40 hours per week to the organizations before and after the transfer.”

“Contract Labor: Program service expenses 6,005,187. Management and general expenses 0. Fundraising expenses 0. Total expenses 6,005,187. Other Purchased Services: Program service expenses 50,563,497. Management and general expenses 0. Fundraising expenses 0. Total expenses 50,563,497. Repairs & Maintenance: Program service expenses 15,165,190. Management and general expenses 0. Fundraising expenses 0. Total expenses 15,165,190. Professional Fees: Program service expenses 35,494,633. Management and general expenses 0. Fundraising expenses 0. Total expenses 35,494,633. Corporate Overhead: Program service expenses -4,268,557. Management and general expenses 0. Fundraising expenses 0. Total expenses -4,268,557.”

“Transfers Between Entities Under Common Control 103,247,388. Changes in Net Assets of Related Foundation 4,426,295. Captive Investment Income (Subpart F) -30,128. Contributed Capital-Foreign Captive -2,313,014.”

“As a result of the changes in the governance structure described in Part VI, Line 4, the oversight and selection process of the organization's audit and compilation of its financial statements including the selection of the independent accountant was transferred to the Audit and Compliance Committee of Baylor Scott & White Health LLC effective October 1, 2013 and subsequently transferred to Baylor Scott & White Holdings on March 1, 2014.”

“One of the organization's members of the governing body also serves as a board member of a related partnership that is controlled by the organization. Based on the Form 990 instructions, this relationship results in a business transaction on Schedule L since the organization and the related partnership have entered into business transactions in excess of certain thresholds. These members were appointed by BSW Holdings, the organization's parent, to serve as community board representatives of those related partnerships to ensure the partnership is operated in a charitable manner and in accordance with BSW Holdings' tax exempt status. The appointment of these members to serve on the governing body of the related partnership is consistent with IRS guidance such as Revenue Ruling 98-15 and other related rulings requiring the exempt organization to maintain control of partnerships and joint ventures. These board members do not have a financial interest in the organization or the related partnership, do not receive any financial benefit from transactions between the organization and the related partnership, and serve only in a voluntary capacity as an independent community board member. Therefore, these members are reflected as independent board members on Part I, Line 4 and Part VI, Line 1b of the Form 990.”