UPMC UNAUDITED QUARTERLY DISCLOSURE. FOR THE PERIOD ENDED March 31, 2014

Transcription

1 UPMC UNAUDITED QUARTERLY DISCLOSURE FOR THE PERIOD ENDED March 31, 2014

2 UPMC UNAUDITED QUARTERLY DISCLOSURE FOR THE PERIOD ENDED March 31, 2014 TABLE OF CONTENTS Introduction to Management s Discussion and Analysis...1 Management s Discussion and Analysis Quarter Highlights...2 Operating Component Information...4 Operational Metrics and Indicators...6 Market Share...10 Asset and Liability Management...11 Utilization Statistics Outstanding Debt...14 Debt Covenant Calculations...15 Unaudited Interim Consolidated Financial Statements Review Report of Independent Auditors Consolidated Balance Sheets (unaudited)...18 Consolidated Statements of Operations and Changes in Net Assets (unaudited)...19 Consolidated Statements of Cash Flows (unaudited)...20 Notes to Unaudited Consolidated Financial Statements The following financial data as of and for the three and nine month periods ended March 31, 2014 and 2013 is derived from the unaudited interim consolidated financial statements of UPMC. The unaudited interim consolidated financial statements include all adjustments consisting of normal recurring accruals that UPMC considers necessary for a fair presentation of its financial position and the results of operations for these periods. The financial information as of and for the twelve month period ended June 30, 2013 is derived from UPMC s audited consolidated financial statements. Operating and financial results reported herein are not necessarily indicative of the results that may be expected for any future periods. The information contained herein is being filed by UPMC for the purpose of complying with its obligations under Continuing Disclosure Agreements entered into in connection with the issuance of the series of bonds listed herein and disclosure and compliance obligations in connection with various banking arrangements. The information contained herein is as of March 31, Digital Assurance Certification, L.L.C., as Dissemination Agent, has not participated in the preparation of this Unaudited Quarterly Disclosure, has not examined its contents and makes no representations concerning the accuracy and completeness of the information contained herein. UPMC Unaudited quarterly disclosure March 2014

3 INTRODUCTION TO MANAGEMENT S DISCUSSION AND ANALYSIS Period Ended March 31, 2014 UPMC, doing business as the University of Pittsburgh Medical Center, is one of the world s leading Integrated Delivery and Financing Systems ( IDFS ). UPMC is based in Pittsburgh, Pennsylvania and primarily serves residents of western Pennsylvania. We also draw patients for highly specialized services from across the nation and around the world. UPMC s 22 hospitals and more than 400 clinical locations comprise one of the largest nonprofit health systems in the United States. UPMC has three major operating components: Provider Services, Insurance Services and International and Commercial Services. We are committed to providing the communities that our hospitals, outpatient centers and other health care facilities serve, as well as our insurance members, with high quality, cost-effective health care while continuing to grow our business and execute on our mission to provide Life Changing Medicine. As the stewards of UPMC s community assets, we are guided by our core values of integrity, excellence, respect and teamwork. These values govern the manner in which we serve our communities and are embedded in the execution and delivery of Life Changing Medicine. UPMC continues to make significant investments in equipment, technology, education and operational strategies designed to improve clinical quality at our hospitals and outpatient centers. As a result of our efforts, UPMC is ranked in the top 10 in U.S. News & World Report s Honor Roll of America s Best Hospitals. Investments in our operations and continued capital improvements are expected to become increasingly important as the competitive environment of the western Pennsylvania market and changes to healthcare nationally continue to progress and change the landscape of patient care and reimbursement. We build new facilities, make strategic acquisitions, and enter into joint venture arrangements or affiliations with health care businesses in each case in communities where we believe our mission can be effectively utilized to improve the overall health of those communities. As discussed later, we recently entered into an affiliation agreement with Altoona Regional Hospital, now UPMC Altoona, to help maintain the tradition of strong healthcare Altoona Regional Hospital has provided for decades. By continually evolving and refining UPMC s world-class financial processes, we focus on achieving optimal financial results that support the continued development of our organization, as well as ongoing investment in the future of western Pennsylvania. We are committed to achieving these objectives with unyielding commitments to transparency in reporting and disclosure, enterprise-wide integration, and ongoing process improvement. The purpose of this section, Management s Discussion and Analysis ( MD&A ), is to provide a narrative explanation of our financial statements that enhances our overall financial disclosures, to provide the context within which our financial information may be analyzed, and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows. Unless otherwise indicated, all financial and statistical information included herein relates to our continuing operations, with dollar amounts expressed in thousands (except for statistical information). Beginning July 1, 2013, we began reporting UPMC Altoona as part of our consolidated operations. MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements. UPMC Unaudited quarterly disclosure March

4 Management s Discussion & Analysis Period Ended March 31, 2014 Consolidated Financial Highlights (Dollars in millions) Financial Results for the Nine Months Ended March Operating revenues $ 8,540 $ 7,583 Operating income* $ 176 $ 146 Operating margin 2.1 % 1.9% Operating margin (including income tax and interest expense) 0.8 % 0.6% Gain from investing and financing activities $ 274 $ 263 Excess of revenues over expenses $ 553 $ 417 Operating EBIDA $ 514 $ 462 Capital expenditures and investments $ 335 $ 394 Reinvestment ratio Selected Other Information as of March 31, 2014 June 30, 2013 Total cash and investments $ 4,816 $ 4,205 Unrestricted cash and investments $ 4,043 $ 3,497 Unrestricted cash and investments over long-term debt $ 734 $ 382 Days of cash on hand Days in accounts receivable Average age of plant * Excluding inherent contribution UPMC Altoona affiliation and income tax expense Operating revenues for the nine months ended March 31, 2014 increased $957 million, or 12.6%, as compared to the nine months ended March 31, 2013, due to growth in Insurance Services, the affiliation with UPMC Altoona and increased patient volumes. Operating income for the nine months ended March 31, 2014 increased $30 million over the same period in the prior fiscal year. Operating earnings before interest, depreciation and amortization totaled $514 million, and excess of revenues over expenses, including $107 million related to the inherent contribution recorded due to the UPMC Altoona affiliation, was $553 million. As of March 31, 2014, UPMC had more than $4.8 billion of cash and investments. For the nine months ended March 31, 2014: Hospital medical-surgical admissions and observation cases rose 9% from the comparable period in the prior year. Hospital outpatient revenue per workday rose 18% from the comparable period in the prior year. Physician service revenue per weekday increased 11% from the comparable period in the prior year, and Enrollment in UPMC s Insurance Services grew to more than 2.3 million members, a 9% increase over March 31, UPMC s gain from investing and financing activities for the nine months ended March 31, 2014 was $274 million. UPMC made no material changes to its asset allocation policies during the quarter and continues to have a long-term perspective with regard to its investment activities. UPMC Unaudited quarterly disclosure March

5 Management s Discussion & Analysis Period Ended March 31, 2014 Magee-Womens Hospital of UPMC opened its newly expanded emergency department in January Constructed to meet Magee s growing patient volume, the design of the six-month, $8.5 million project created a better experience for patients, staff, physicians and EMS personnel, all leading to enhanced patient care. Along with easing traffic congestion, the new department brings patients in closer proximity to key hospital services, including imaging, the Womancare Birth Center, surgery suites and patient rooms. The department provides a wide range of services to a diverse patient population, including pregnant women experiencing complications, older patients in need of geriatric services, bariatric patients, cancer patients, and others. Construction began in March 2014 for the UPMC Lemieux Sports Complex in Cranberry Township, Pa. Scheduled for completion in the summer of 2015, the $70 million complex will feature two ice rinks and a performance training center. In addition to serving as a practice rink for the Pittsburgh Penguins and a home to local youth hockey and public skating, it is believed to be the first medical facility in the country to focus specifically on hockey-related injuries and training. The 190,000-square-foot facility will sit on 12 acres. In April 2014, UPMC divested its ownership interest in Beacon Hospital in Ireland. The Whitfield Cancer Centre will not be affected by this transaction. UPMC sold the equity it acquired in the synthetic biology company Intrexon Corporation, resulting in a $38 million gain to operating income in the period. The Intrexon equity was acquired as a result of the merger of a former UPMC-owned gene technology company into Intrexon in This gain reflects the long-standing goal of the ICSD division to generate new revenue streams by leveraging UPMC s medical expertise and management know-how. UPMC Unaudited quarterly disclosure March

6 Management s Discussion & Analysis Period Ended March 31, 2014 Consolidating Statement of Operations Nine Months Ended March 31, 2014 (in millions) Revenues: Provider Services International & Commercial Services Insurance Services Eliminations Consolidated Net patient service revenue less provision for bad debts $ 5,159 $ 81 $ $ (899) $ 4,341 Insurance enrollment revenue 3,577 3,577 Other revenue (69) 622 Total operating revenues $ 5,582 $ 181 $ 3,745 $ (968) $ 8,540 Expenses: Salaries, professional fees and benefits $ 3,116 $ 66 $ 155 $ (22) $ 3,315 Supplies, purchased services and general 2, ,554 (946) 4,711 Depreciation and amortization Total operating expenses 5, ,716 (968) 8,364 Operating income* $ 98 $ 49 $ 29 $ 176 Operating margin % 1.7% 27.6% 0.8% 2.1% Operating margin % (including income tax and interest expense) 0.1% 22.1% 0.8% 0.8% Operating EBIDA $ 424 $ 54 $ 36 $ 514 Operating EBIDA % 7.6% 29.8% 1.0% 6.0% Nine Months Ended March 31, 2013 (in millions) Revenues: Net patient service revenue less provision for bad debts $ 4,584 $ 72 $ $ (785) $ 3,871 Insurance enrollment revenue 3,135 3,135 Other revenue (60) 577 Total operating revenues $ 4,974 $ 172 $ 3,282 $ (845) $ 7,583 Expenses: Salaries, professional fees and benefits $ 2,784 $ 62 $ 144 $ (20) $ 2,970 Supplies, purchased services and general 1, ,101 (825) 4,151 Depreciation and amortization Total operating expenses 4, ,252 (845) 7,437 Operating income* $ 69 $ 47 $ 30 $ 146 Operating margin % 1.4% 27.3% 0.9% 1.9% Operating margin % (including income tax and interest expense) (0.4)% 20.9% 0.9% 0.6% Operating EBIDA $ 373 $ 52 $ 37 $ 462 Operating EBIDA % 7.5% 30.2% 1.1% 6.1% * Excluding inherent contribution UPMC Altoona affiliation and income tax expense UPMC Unaudited quarterly disclosure March

7 Management s Discussion & Analysis Period Ended March 31, 2014 Provider Services UPMC s Provider Services include a comprehensive array of clinical capabilities consisting of hospitals, specialty service lines (e.g., transplantation services, woman care, behavioral health, pediatrics, cancer care and rehabilitation services), contract services (emergency medicine, pharmacy and laboratory) and approximately 3,500 employed physicians with associated practices. Also included within Provider Services are supporting foundations and UPMC s captive insurance programs. Hospital activity is monitored in four distinct groups: (i) academic hospitals that provide a comprehensive array of clinical services that include the specialty service lines listed above and serve as the primary academic and teaching centers for UPMC and are located in Pittsburgh; (ii) community hospitals that provide core clinical services mainly to the suburban Pittsburgh, greater Erie, and the greater Altoona populations; (iii) regional hospitals that provide core clinical services to certain other areas of western Pennsylvania; and (iv) preand post-acute care capabilities that include: UPMC HomeCare, a network of home health services, and UPMC Senior Communities, the facilities of which provide a complete network of senior living capabilities in greater Pittsburgh and surrounding counties. For the nine months ended March 31, 2014, Provider Services net patient service revenues of $5.2 billion increased $574 million from the prior year. Operating income of $98 million increased $29 million from prior year as a result of $41 million of revenue related to patient volume and productivity, partially offset by decreased meaningful use revenues of $4 million and higher depreciation expense of $8 million. For the three months ended March 31, 2014, operating income decreased $8 million versus the prior year as a result of decreased patient volume and productivity revenues of $11 million, offset by increased meaningful use revenues of $4 million. Insurance Services UPMC holds various interests in health care financing initiatives and network care delivery operations that have more than 2.3 million members. UPMC Health Plan is a health maintenance organization ( HMO ) offering coverage for commercial and Medicare members. UPMC for You is also an HMO, which is engaged exclusively in providing coverage to Medical Assistance beneficiaries. UPMC Health Network offers preferred provider organization ( PPO ) plan designs to serve both commercial and Medicare beneficiaries. UPMC for Life is a Medicare product line offered by various companies within the Insurance Services division. UPMC Work Partners provides integrated workers compensation and disability services to employers. Community Care Behavioral Health Organization ( Community Care ) is a state-licensed, risk-bearing PPO that manages the behavioral health services for Medical Assistance through mandatory managed care programs in 39 Pennsylvania counties, including Allegheny County, and is managing outreach and coordination in 16 counties in the New York Hudson River region. For the nine months ended March 31, 2014, Insurance Services operating income of $29 million decreased $1 million versus the prior year. New membership resulted in increased operating income of $23 million versus the prior year which was offset by $13 million of expense related to sequestration and $11 million related to underwriting/administrative expenses. For the three months ended March 31, 2014, operating income increased $25 million versus the prior year as a result of increased membership revenues of $6 million and $20 million related to nonrecurring items. International and Commercial Services The goal of UPMC s International and Commercial Services division is to leverage UPMC s capabilities to generate new revenue streams. This is accomplished by exporting medical expertise and management know-how internationally, pursuing commercialization opportunities and developing strategic partnerships with industry leaders. These ventures both support UPMC s core mission and help to revitalize the economy of western Pennsylvania. The first of the major international ventures, ISMETT, a transplant and specialty surgery hospital in Palermo, Italy, has performed nearly 1,500 transplants since its founding in Other international ventures currently include two cancer centers located in Ireland, a contract to provide remote second-opinion pathology consultations for patients in China and Singapore, a national oncology treatment and research center in Kazakhstan, as well as the Advanced Radiosurgery Center of Excellence at San Pietro FBF Hospital in Rome. For the nine months ended March 31, 2014, International and Commercial Services Division operating income of $49 million increased $2 million versus the prior year. The sale of its investment in Intrexon of $38 million in the third quarter and $6 million related to BodyMedia s merger with Jawbone resulted in operating income in the current year. Prior year benefited from the sale of dbmotion, which resulted in $52 million of income. For the three months ended March 31, 2014, operating income decreased $14 million. Operating income increased $38 million as a result of the sale of Intrexon while prior year benefited $52 million from the sale of dbmotion. UPMC Unaudited quarterly disclosure March

8 Management s Discussion & Analysis Period Ended March 31, 2014 Revenue Metrics Provider Services Medical-Surgical Admissions and Observation Visits Inpatient activity as measured by medical-surgical admissions and observation visits at UPMC s hospitals for the nine months ended March 31, 2014 increased 9% from the comparable period in (This includes 18,571 Altoona medical-surgical admissions and observation visits). For the Nine Months Ended March 31 (in thousands) 2014 Change 2013 Trailing 12-Months 300,000 Academic (3%) ,238 Community % 64.2 Regional Regional excl. Altoona % (5%) , , , , , , , ,601 Total Total excl. Altoona % (1%) ,000 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 QUARTER ENDING Outpatient Revenue per Workday UPMC s outpatient activity for the nine months ended March 31, 2014 as measured by average revenue per work day increased by 18% from the comparable period in 2013 (This includes the effects of Altoona outpatient revenue of $176M). Hospital outpatient activity is measured on an equivalent work day (EWD) basis to adjust for weekend and holiday hours. For the Nine Months Ended March 31 Quarterly Average (in millions) (in thousands) 2014 Change 2013 $10.0 Academic $ 5,125 4% $ 4,934 $9.0 $8.5 $9.1 $9.0 Community 2,291 10% 2,075 $8.0 $7.4 $7.5 $7.7 $7.7 $7.8 Regional Regional excl. Altoona 1, % 13% $7.0 Total Total excl. Altoona $ 9,020 8,145 18% 6% $ 7,652 7,652 $6.0 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 QUARTER ENDING Sep-13 Dec-13 Mar-14 UPMC Unaudited quarterly disclosure March

9 Management s Discussion & Analysis Period Ended March 31, 2014 Revenue Metrics Provider Services (CONTINUED) Physician Service Revenue per Weekday UPMC s physician activity for nine months ended March 31, 2014 as measured by average revenue per week day increased 11% from the comparable period in (This includes the effects of Altoona physician revenue of $55.7M). Physician services activity is measured on a week day basis. For the Nine Months Ended March 31 (in thousands) 2014 Change 2013 Quarterly Average (in millions) $6.0 Academic $ 3,025 5% $ 2,881 Community Community excl. Altoona 2,033 1,738 22% 4% 1,665 1,665 $5.5 $5.0 $4.6 $4.6 $4.6 $5.0 $5.1 $5.0 Total Total excl. Altoona $ 5,058 4,763 11% 5% $ 4,546 4,546 $4.5 $4.0 $4.3 $4.3 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 QUARTER ENDING Sources of Patient Service Revenue The gross patient service revenues of UPMC are derived from third-party payers which reimburse or pay UPMC for the services it provides to patients covered by such payers. Third-party payers include the federal Medicare Program, the federal and state Medical Assistance Program ( Medicaid ), Highmark Blue Cross Blue Shield ( Highmark ) and other third-party insurers such as health maintenance organizations and preferred provider organizations. The following table is a summary of the percentage of the subsidiary hospitals gross patient service revenue by payer. Nine Months Ended March Medicare 43% 42% Medicaid 15% 15% Highmark 19% 21% UPMC Insurance Services 10% 9% National Insurers 7% 6% Other 6% 7% Total 100% 100% UPMC Unaudited quarterly disclosure March

10 Management s Discussion & Analysis Period Ended March 31, 2014 OPERATING METRICS - Insurance Services Membership Membership in the UPMC Insurance Services Division increased to 2,302,722 as of March 31, 2014, which represents a 9.5% increase versus the same period of prior year. 2,500,000 2,238,262 2,263,479 2,302,722 2,038,894 2,103,164 2,130,044 2,000,000 1,956,016 1,843,014 1,500,000 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 QUARTER ENDING As of March 31, 2014 March 31, 2013 June 30, 2013 June 30, 2012 Commercial Health 483, , , ,134 Medicare 124, , , ,179 Medicaid 255, , , ,061 Behavioral Health 722, , , ,526 Sub-Total Health Products 1,586,464 1,534,910 1,555,761 1,355,900 Work Partners and Life Solutions 391, , , ,489 Ancillary Products 324, , , ,625 Total Membership 2,302,722 2,103,164 2,130,044 1,843,014 Medical Expense Ratio UPMC Insurance Services Medical Expense Ratio is stable due to essentially flat premiums and loss experience in all products. Trailing 12-Months 100% 95% 90% % 80% Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 QUARTER ENDING UPMC Unaudited quarterly disclosure March

11 Management s Discussion & Analysis Period Ended March 31, 2014 KEY FINANCIAL INDICATORS (Dollars in millions) Operating Earnings before Interest, Depreciation and Amortization Operating EBIDA for the nine months ended March 31, 2014 increased $52 million as compared to the nine months ended March 31, For the Nine Months Ended March 31 Trailing Twelve Months EBIDA 2014 Change 2013 $800 $746 Operating Income* $ % $ 146 Depreciation and Amortization 338 7% 316 $700 $600 $500 $400 $300 $667 $623 $624 $611 $603 $654 $662 Operating EBIDA $ % $ 462 $200 $100 * Excluding inherent contribution UPMC Altoona affiliation and income tax expense $0 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 FOUR QUARTERS ENDING Dec-13 Mar-14 Unrestricted Cash and Investments Over Long Term Debt Unrestricted cash to long term debt increased by $352 million as compared to June $800 $700 $664 $734 $600 $500 $419 $494 $400 $300 $291 $382 $200 $100 $129 $101 $0 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 QUARTER ENDING Days in Accounts Receivable Consolidated Days in Accounts Receivable continue to remain stable due to UPMC s rigorous procedures in this area. By Division as of March Balance Days Provider Services $ Insurance Services ICSD Consolidated $ 1, Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 QUARTER ENDING UPMC Unaudited quarterly disclosure March

12 Management s Discussion & Analysis Period Ended March 31, 2014 Market Share The chart below shows the increase in UPMC s estimated inpatient market share for the first quarter of fiscal years 2013 and 2014 (July 1 through September 30), by service area (1). For fiscal year 2014, estimated market share is displayed including discharges for UPMC Altoona. This is the most recent market share data currently available. UPMC Inpatient Medical-Surgical Market Share July 1 through September 30 80% 70% FY 2013 FY 2014 MARKET SHARE 60% 50% 40% 30% 20% 60.5% 61.2% 40.8% 42.2% 36.9% 41.4% 10% 0% Allegheny County Southwestern PA (10-County) Western PA (29-County) Discharges The following tables show the change in medical-surgical discharges from all hospitals, as well as UPMC hospitals (including UPMC Altoona in fiscal year 2014), within each service area for the same period. This is the most recent discharge data currently available. Total Medical-Surgical Discharges Within the Service Areas (All Hospitals) FY 2014 and FY 2013 July 1 through September 30 FY 14 FY 13 Percent Change Allegheny County 36,109 36,440 (0.91%) Southwestern Pennsylvania (10-County Region) 77,256 78,714 (1.85%) Western Pennsylvania (29-County Region) 115, ,439 (1.39%) UPMC Medical-Surgical Discharges Within the Service Areas FY 2014 and FY 2013 July 1 through September 30 FY 14 FY 13 Percent Change Allegheny County 22,115 22, % Southwestern Pennsylvania (10-County Region) 32,630 32, % Western Pennsylvania (29-County Region) 47,983 43, % 1 UPMC s three service areas are (1) Allegheny County, (2) a 10-county region including Allegheny, Armstrong, Beaver, Butler, Fayette, Greene, Indiana, Lawrence, Washington and Westmoreland counties and (3) a 29-county region which also includes Bedford, Blair, Cambria, Cameron, Centre, Clarion, Clearfield, Crawford, Elk, Erie, Forest, Huntingdon, Jefferson, McKean, Mercer, Potter, Somerset, Venango, and Warren counties. UPMC Unaudited quarterly disclosure March

13 Management s Discussion & Analysis Period Ended March 31, 2014 Asset and Liability Management During the nine months ended March 31, 2014, UPMC s investment portfolio returned 10.5%. As of March 31, 2014, UPMC utilized 174 external investment managers, including 30 traditional managers, 25 hedge fund managers and 119 private equity managers. UPMC s investment portfolio has a long-term perspective and has generated annualized returns of 10.7%, 7.5% and 11.0% for the trailing one-, three- and five-year periods. As of March 31, 2014, 55% of UPMC s investment portfolio could be liquidated within three days. UPMC s annualized cost of capital during the period was 3.92%. This cost of capital includes the accrual of interest payments, the amortization of financing costs and original issue discount or premium, the ongoing costs of variable rate debt and the cash flow impact of derivative contracts. As of March 31, 2014, the interest rates on UPMC s long-term debt were approximately 85% fixed and 15% variable after giving effect to derivative contracts. Annualized interest cost for the variable rate debt for the period averaged 0.87%. The annualized interest cost for the fixed rate debt was 4.38%. UPMC has a credit facility which expires in June 2016 and has a borrowing limit of $350 million with an option to increase the limit to $400 million. As of March 31, 2014, UPMC had approximately $66 million of letters of credit outstanding under the facility leaving $284 million available to fund operating and capital needs, of which $30 million was drawn. The table below compares reported Investing and Financing Activity for the nine months ended March 31, 2014 and 2013 by type. Investing and Financing Activity by Type Nine Months Ended March (in thousands) Realized gains $ 193,097 $ 209,602 Interest and dividends, net of fees 30,137 22,121 Realized investment revenue $ 223,234 $ 231,723 Unrealized gains on derivative contracts 7,217 10,922 Other unrealized gains 149, ,943 Impairment on cost-based investments (2,600) Investment revenue $ 380,254 $ 363,988 Loss on extinguishment of debt (6,152) (4,418) Interest expense (99,781) (96,814) Gain from investing and financing activities $ 274,321 $ 262,756 UPMC Unaudited quarterly disclosure March

14 Management s Discussion & Analysis Period Ended March 31, 2014 Sources and Uses of Cash UPMC s primary source of operating cash is the collection of revenues and related accounts receivable. As of March 31, 2014, UPMC had approximately $509 million of cash and cash equivalents on hand to fund operations and capital expenditures, and borrowing availability under the credit facility was $284 million, of which $30 million was drawn. Operating EBIDA was $514 million for the nine months ended March 31, 2014, compared to $462 million for the nine months ended March 31, Net cash provided by operating activities was $573 million in the nine months ended March 31, 2014 compared to $317 million provided by operating activities in the nine months ended March 31, Key sources and uses of cash from investing activities for the period ended March 31, 2014 include capital expenditures of $293 million, as well as $24 million to acquire ownership interests in and fund businesses based in western Pennsylvania. Major projects included construction of clinical laboratories, continued expansion of hospital operating rooms, enhancement of enterprise infrastructure, investment in enterprise analytics and investments in various patient care software applications. Additionally, contributions to the defined benefit pension plan of $176 million were made to maintain its funded status and to avoid paying excess premiums to the Pension Benefit Guaranty Corporation. As part of the affiliation with UPMC Altoona, the total cash acquired and recorded in the nine months ended March 31, 2014 was approximately $19 million. UPMC Unaudited quarterly disclosure March

15 Utilization Statistics Period Ended March 31, 2014 The following table, both including and excluding UPMC Altoona, presents selected consolidated statistical indicators of medical-surgical, psychiatric, sub-acute and rehabilitation patient activity for the periods ended March 31, 2014 and 2013 and June 30, 2013 and Incl. Altoona Nine Months Ended March 31 Years Ended June Excl. Altoona Licensed Beds 5,113 4,737 4,734 4,736 4,578 Beds in Service Medical-Surgical 4,085 3,769 3,805 3,816 3,662 Psychiatric Rehabilitation Skilled Nursing Total Beds in Service 4,822 4,472 4,496 4,507 4,339 Patient Days Medical-Surgical 753, , , , ,977 Psychiatric 106,998 99, , , ,301 Rehabilitation 38,560 38,560 35,940 47,616 44,220 Skilled Nursing 25,528 25,528 26,987 35,598 35,482 Total Patient Days 924, , ,281 1,183,132 1,169,980 Observation Days 72,351 64,511 67,176 88,395 79,191 Average Daily Census 3,638 3,385 3,509 3,484 3,413 Admissions and Observation Cases Medical-Surgical 148, , , , ,816 Observation Cases 53,617 47,111 45,766 61,527 53,199 Subtotal 202, , , , ,015 Psychiatric 7,997 6,817 6,538 8,827 8,432 Rehabilitation 2,865 2,865 2,724 3,630 3,486 Skilled Nursing 2,224 2,224 2,229 2,971 2,966 Total Admissions and Observation Cases 215, , , , ,899 Overall Occupancy 75% 76% 78% 77% 79% Average Length of Stay Medical-Surgical Psychiatric Rehabilitation Skilled Nursing Overall Average Length of Stay Emergency Room Visits 515, , , , ,398 Transplants (Pittsburgh) Liver Kidney All Other Total Transplants (ISMETT) Liver Other Total UPMC Unaudited quarterly disclosure March

16 Outstanding debt As Of March 31, 2014 (in thousands) Issuer Original Borrower Series Allegheny County Hospital Development Authority Amount Outstanding UPMC Health System 1997B $ 43,871 UPMC Health System 1998B 9,576 UPMC 2003B 13,974 UPMC 2007A 92,525 UPMC 2007B 65,000 UPMC 2008A 287,684 UPMC 2008B 200,508 UPMC 2008 Notes 92,540 UPMC 2009A 377,356 UPMC 2010A 290,716 UPMC 2010B 100,000 UPMC 2010C 50,000 UPMC 2010D 150,000 UPMC 2010F 95,000 UPMC 2011A 99,440 Monroeville Finance Authority UPMC ,379 Pennsylvania Economic Development Financing Authority UPMC 2013B 73,508 UPMC 2013A 127,596 Erie County Hospital Authority Hamot Health Foundation ,636 Pennsylvania Higher Educational Facilities Authority Hamot Health Foundation ,106 Hamot Health Foundation 2010A 16,090 Hamot Health Foundation 2010C 2,640 UPMC 2010E 296,614 Blair County Hospital Authority Altoona 1998A 6,143 None UPMC 2011B 100,000 UPMC Ireland Loan 198,516 UPMC Swap liabilities 15,443 UPMC UPMC East loan 71,000 Various - Capital Leases and Loans 108,638 Total $ 3,412,499 Includes original issue discount and premium and other. Source: UPMC Records UPMC Unaudited quarterly disclosure March

17 Debt Covenant Calculations Period Ended March 31, 2014 Debt Service Coverage Ratio (Dollars in Thousands) Trailing Twelve-Month Period Ended March 31, 2014 Net Income $ 496,251 Adjusted By: Net Unrealized Gains from Period 1 (91,358) Depreciation and Amortization 1 445,737 Loss on Defeasance of Debt 1 6,152 Asset Impairment Inherent Contribution Altoona Affiliation 1 (107,257) Realized Investment Impairments 2 (16,696) Interest Expense 131,145 Revenues Available for Debt Service $ 864,239 Historical Debt Service Requirements 2007 MTI $ 246,925 Debt Service Coverage Ratio 2007 MTI 3.50X Historical Debt Service Requirements All Debt and Leases $ 308,345 Debt Service Coverage Ratio All Debt and Leases 2.80X Liquidity Ratio As of March 31, 2014 Unrestricted Cash and Investments $ 4,043,068 Master Trust Indenture Debt $ 2,979,449 Unrestricted Cash to MTI Debt 1.36 (1) Non-Cash. (2) Reflects ultimate realization of previously impaired cost-based investments. I hereby certify to the best of my knowledge that, as of March 31, 2014, UPMC is in compliance with the applicable covenants contained in the financing documents for the bonds listed on the cover hereof and all applicable bank lines of credit and no Event of Default (as defined in any related financing document) has occurred and is continuing. C. Talbot Heppenstall, Jr. Treasurer UPMC UPMC Unaudited quarterly disclosure March

18 UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE Period Ended March 31, 2014 UPMC Unaudited quarterly disclosure March

19 Review Report of Independent Auditors The Board of Directors UPMC Pittsburgh, Pennsylvania We have reviewed the consolidated financial information of UPMC and subsidiaries, which comprise the consolidated balance sheet as of March 31, 2014, and the related consolidated statements of operations, changes in net assets, and cash flows for the three-month and nine-month periods ended March 31, 2014 and Management s Responsibility for the Financial Information Management is responsible for the preparation and fair presentation of the interim financial information in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in conformity with U.S. generally accepted accounting principles. Auditor s Responsibility Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion. Conclusion Based on our review, we are not aware of any material modifications that should be made to the consolidated financial information referred to above for it to be in conformity with U.S. generally accepted accounting principles. Pittsburgh, Pennsylvania May 8, 2014 UPMC Unaudited quarterly disclosure March

20 Consolidated Balance Sheets (Unaudited) (in thousands) March June Current assets Cash and cash equivalents $ 509,060 $ 203,118 Patient accounts receivable, net of allowance for uncollectible accounts of $126,285 at March 31, 2014 and $116,974 at June 30, , ,316 Other receivables 459, ,329 Other current assets 198, ,405 Total current assets 1,908,182 1,463,168 Board-designated, restricted, trusteed and other investments 4,306,726 4,001,631 Beneficial interests in foundations 406, ,932 Net property, buildings and equipment 3,877,248 3,725,077 Other assets 375, ,759 Total assets $ 10,873,988 $ 9,893,567 Current liabilities Accounts payable and accrued expenses $ 537,358 $ 381,435 Accrued salaries and related benefits 416, ,125 Current portion of insurance reserves 386, ,542 Current portion of long-term obligations 323, ,859 Other current liabilities 384, ,954 Total current liabilities 2,048,867 1,631,915 Long-term obligations 3,089,167 3,096,010 Pension liability 85, ,809 Long-term insurance reserves 262, ,339 Other noncurrent liabilities 187, ,788 Total liabilities 5,674,074 5,276,861 Unrestricted net assets 4,561,004 4,002,255 Restricted net assets 638, ,451 Total net assets 5,199,914 4,616,706 Total liabilities and net assets $ 10,873,988 $ 9,893,567 See accompanying notes UPMC Unaudited quarterly disclosure March

21 Consolidated Statements of Operations and Changes in Net Assets (Unaudited) (in thousands) Unrestricted net assets Nine Months Ended March 31 Three Months Ended March Net patient service revenue: Patient service revenue (net of contractual allowances and discounts) $4,517,272 $4,038,901 $1,481,305 $1,359,600 Provision for bad debts (175,833) (168,327) (56,297) (50,473) Net patient service revenue less provision for bad debts 4,341,439 3,870,574 1,425,008 1,309,127 Insurance enrollment revenue 3,577,021 3,134,956 1,193,383 1,090,438 Other revenue 621, , , ,302 Total operating revenues 8,540,455 7,582,834 2,838,187 2,621,867 Expenses: Salaries, professional fees and employee benefits 3,315,987 2,969,325 1,124,125 1,013,143 Supplies, purchased services and general 4,710,521 4,151,138 1,536,648 1,439,538 Depreciation and amortization 337, , , ,539 Total operating expenses 8,364,506 7,436,376 2,774,107 2,560,220 Operating income (excluding inherent contribution UPMC Altoona affiliation and income tax expense) 175, ,458 64,080 61,647 Inherent contribution UPMC Altoona affiliation 107,257 Asset impairment charge 10,737 1,890 Income tax expense (4,042) (3,339) (2,537) (955) After-tax operating income $279,164 $153,856 $61,543 $62,584 Investing and financing activities: Investment revenue 380, ,988 74, ,557 Interest expense (99,781) (96,814) (33,379) (32,426) Loss on extinguishment of debt (6,152) (4,418) (1,734) Gain from investing and financing activities 274, ,756 41, ,397 Excess of revenues over expenses 553, , , ,980 Other changes in unrestricted net assets 5,264 (17,895) 939 (10,662) Increase in unrestricted net assets 558, , , ,318 Restricted net assets Contributions and other changes (870) 21, ,817 Net realized gains and unrealized gains on restricted investments 7,581 6,181 1,407 3,602 Assets released from restriction for operations and capital purchases (8,391) (18,609) (2,833) (4,486) Net increase in beneficial interests in foundations 26,139 25,080 11,724 13,501 Increase in restricted net assets 24,459 34,317 10,376 16,434 Increase in net assets 583, , , ,752 Net assets, beginning of period 4,616,706 4,175,219 5,085,656 4,432,501 Net assets, end of period $5,199,914 $4,608,253 $5,199,914 $4,608,253 See accompanying notes UPMC Unaudited quarterly disclosure March

22 Consolidated Statements of Cash FLOWS (Unaudited) (in thousands) Nine Months Ended March Operating activities Increase in net assets $ 583,208 $ 433,034 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation and amortization 337, ,913 Provision for bad debts 175, ,327 Change in beneficial interest in foundations (26,139) (48,233) Change in pension liability (119,734) (84,868) Restricted contributions and investment revenue (6,711) (12,846) Unrealized gains on investments (149,803) (123,943) Realized gains on investments (223,234) (209,602) Net change in non-alternative investments 135, ,112 Inherent contribution UPMC Altoona affiliation (107,257) Changes in operating assets and liabilities: Accounts receivable (162,934) (167,408) Other current assets (68,449) (42,160) Accounts payable and accrued liabilities 21,214 (13,625) Insurance reserves 56,460 99,811 Other current liabilities 115,848 (103,209) Other noncurrent liabilities 11,165 (4,944) Net cash provided by operating activities 573, ,359 Investing activities Purchase of property and equipment (net of disposals) (292,660) (370,995) Cash acquired UPMC Altoona affiliation 19,538 Investments in joint ventures (23,886) (22,000) Net change in investments designated as nontrading 344 6,304 Net change in alternative investments 25,325 (44,740) Net decrease in other assets (41,059) 52,263 Net cash used in investing activities (312,398) (379,168) Financing activities Repayments of long-term obligations (167,889) (271,037) Borrowings of long-term obligations 206, ,466 Restricted contributions and investment income 6,711 12,846 Net cash provided by financing activities 45, ,275 Net change in cash and cash equivalents 305,942 94,466 Cash and cash equivalents, beginning of period 203, ,824 Cash and cash equivalents, end of period $ 509,060 $ 340,290 Supplemental Information Capital lease obligations incurred to acquire assets $ 18,502 $ 39,354 UPMC Unaudited quarterly disclosure March

23 Notes to Unaudited Consolidated Financial Statements (In Thousands) 1. Basis of Presentation UPMC is a Pennsylvania nonprofit corporation and is exempt from federal income tax pursuant to Section 501(a) of the Internal Revenue Code (the Code ) as an organization described in Section 501(c)(3) of the Code. Headquartered in Pittsburgh, Pennsylvania, UPMC is one of the world s leading integrated delivery and financing systems. UPMC comprises nonprofit and for-profit entities offering medical and health-care-related services, including health insurance products. Closely affiliated with the University of Pittsburgh ( University ) and with shared academic and research objectives, UPMC partners with the University s Schools of the Health Sciences to deliver outstanding patient care, train tomorrow s health care specialists and biomedical scientists, and conduct groundbreaking research on the causes and course of disease. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ( GAAP ) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. The accompanying unaudited interim consolidated financial statements include the accounts of UPMC and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. For further information, refer to the audited consolidated financial statements and notes thereto as of and for the year ended June 30, New Accounting Pronouncements In July 2013, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) related to ASU , Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities and ASU Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. These changes require an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The enhanced disclosures will enable users of an entity s financial statements to understand and evaluate the effect or potential effect of master netting arrangements on an entity s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. Other than the additional disclosure requirements, the adoption of these changes had no impact on UPMC s financial position or results of operations. In July 2011, the FASB issued ASU , Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers. ASU addresses the timing, recognition, and classification of the annual health insurance industry assessment fee imposed on health insurers by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, PPACA ). The mandatory annual fee of health insurers will be imposed for each calendar year beginning on or after January 1, This update requires that the liability for the fee be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The adoption of ASU has not materially affected UPMC s financial position or results of operations. 3. reclassifications Certain reclassifications were made to the prior period accompanying financial statements to conform to the current period presentation. These reclassifications had no impact on the changes in net assets or excess of revenues over expenses previously reported. 4. Significant transactions On July 1, 2013, UPMC, Altoona Regional Health System ( Altoona ) and Altoona s supporting foundation, The Foundation for Life, executed an Integration and Affiliation Agreement (the Agreement ) providing for an affiliation between UPMC and Altoona. Altoona is a multi-institutional nonprofit health system that includes hospitals and a network of other health care providers servicing the city of Altoona and a larger multi-county area in western Pennsylvania. The transaction is intended to preserve and UPMC Unaudited quarterly disclosure March

24 Notes to Unaudited Consolidated Financial Statements (In Thousands) enhance the mission of Altoona and to enhance Altoona s ability to provide high-quality health services to the greater Altoona region. On the date of the affiliation, the articles of incorporation and bylaws of Altoona were amended such that UPMC became the sole corporate member of Altoona. As a result of the affiliation, UPMC acquired approximately $366,000 of total assets, consisting primarily of $151,000 of property, plant and equipment, $94,000 of investments and $66,000 of accounts receivable, and assumed approximately $251,000 of Altoona s liabilities including $151,000 of current and long-term liabilities and $100,000 of long-term debt obligations. Pursuant to the Agreement, UPMC will provide Altoona with a total investment of $250,000 over a 10-year period that will support expansion and enhancement of medical services for the communities that Altoona serves. Additionally, UPMC provided seed funding in the amount of $10,000 to The Foundation for Life. UPMC applied the not-for-profit business combination accounting guidance. The guidance primarily characterizes business combinations between not-for-profit entities as nonreciprocal transfers of assets resulting in the contribution of the acquiree s net assets to the acquirer. The guidance prescribes that the acquirer recognize an excess of the acquisition date unrestricted net assets acquired over the fair value of the consideration transferred as a separate credit in its statement of operations as of the acquisition date. Accordingly, UPMC recognized contribution income related to the unrestricted net assets acquired in the transaction of $107,257 in its statements of operations and changes in net assets for the nine months ended March 31, The contribution income recorded for the nine months ended March 31, 2014 is based on a preliminary estimate of the fair market values of the unrestricted net assets acquired. The evaluations necessary to assess the fair value of certain unrestricted net assets acquired is still in process. These values are subject to change when final asset valuations are obtained and the potential for liabilities has been assessed. 5. Net Patient Service Revenue and Accounts Receivable The provision for bad debts is based upon management s assessment of historical and expected net collections considering historical business and economic conditions, trends in health care coverage, and other collection indicators. UPMC records a significant provision for bad debts in the period services are provided related to self-pay patients, including both uninsured patients and patients with deductible and copayment balances due for which third-party coverage exists for a portion of their balance. Periodically throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off experience. The results of this review are then used to make any modifications to the provision for bad debts to establish an appropriate allowance for uncollectible accounts. Accounts receivable are written off after collection efforts have been followed in accordance with internal policies. Net patient service revenue is reported at estimated net realizable amounts in the period in which services are provided. The majority of UPMC s services are rendered to patients under Medicare, Highmark, and Medical Assistance programs. Reimbursement under these programs is based on a combination of prospectively determined rates and historical costs. Amounts received under Medicare and Medical Assistance programs are subject to review and final determination by program intermediaries or their agents. For the nine months ended March 31, 2014 and 2013, the percentage of patient service revenue, net of contractual allowances, derived from third party payers and self-pay patients is as follows: Nine Months Ended March Third party 94% 93% Self-pay 6% 7% 100% 100% Laws and regulations governing the Medicare and Medical Assistance programs are extremely complex and subject to interpretation. Compliance with such laws and regulations are subject to government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medical Assistance programs. As a result, there is at least a reasonable possibility that the recorded estimates may change. UPMC Unaudited quarterly disclosure March