Aurora Health Care, Inc. and Affiliates. Unaudited Consolidated Financial Statements and Other Information For the Period Ended March 31, 2018

Transcription

1 Aurora Health Care, Inc. and Affiliates Unaudited Consolidated Financial Statements and Other Information For the Period Ended March 31, 2018 Document Dated as of May 30, 2018

2 AURORA HEALTH CARE, INC. AND AFFILIATES TABLE OF CONTENTS FINANCIAL INFORMATION: Unaudited Consolidated Balance Sheets Unaudited Consolidated Statements of Operations and Changes in Unrestricted Net Assets Unaudited Consolidated Statements of Changes in Net Assets Unaudited Consolidated Statements of Cash Flows Notes to Unaudited Consolidated Financial Statements SUPPLEMENTAL CONSOLIDATING INFORMATION FOR THE PERIOD ENDED MARCH 31, 2018 Unaudited Consolidating Balance Sheet Information Unaudited Consolidating Statement of Operations and Changes in Unrestricted Net Assets Information MANAGEMENT S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION: Key Financial Ratios Historical Utilization Analysis of Results of Operations Analysis of Financial Condition Legal and Regulatory Compliance Internal Control Over Financial Reporting Program Bond Ratings Management

3 ASSETS AURORA HEALTH CARE, INC. AND AFFILIATES UNAUDITED CONSOLIDATED BALANCE SHEETS (In thousands) March 31, 2018 December 31, 2017 CURRENT ASSETS: Cash and cash equivalents $ 171,404 $ 192,883 Investments 1,429,003 1,834,050 Assets whose use is limited or restricted 4,523 5,059 Patient accounts receivable - net of allowance for doubtful accounts of $105,128 in , ,431 Other receivables 55,474 84,939 Inventory 71,316 69,583 Prepaids and other current assets 55,633 57,030 Estimated third-party payor settlements 11,246 13,910 Total current assets 2,522,161 2,972,885 ASSETS WHOSE USE IS LIMITED OR RESTRICTED: Board-designated and other 183, ,087 Contractually-restricted 186, ,841 Donor restricted 60,411 61,104 Debt service reserve 19,158 19,089 Total assets whose use is limited or restricted 450, ,121 PROPERTY, PLANT, AND EQUIPMENT Net 2,445,763 2,106,327 OTHER ASSETS: Intangible assets net 13,942 14,219 Investments in unconsolidated entities 66,469 69,822 Other 51,747 53,230 Total other assets 132, ,271 TOTAL $ 5,550,087 $ 5,660,604 (Continued) 2

4 AURORA HEALTH CARE, INC. AND AFFILIATES UNAUDITED CONSOLIDATED BALANCE SHEETS (In thousands) LIABILITIES AND NET ASSETS March 31, 2018 December 31, 2017 CURRENT LIABILITIES: Current installments of long-term debt $ 136,238 $ 146,444 Accounts payable 176, ,734 Accrued salaries and wages 311, ,774 Other accrued expenses 117, ,252 Estimated third-party payor settlements 27,786 28,358 Total current liabilities 769, ,562 LONG-TERM DEBT Less current installments 1,266,069 1,335,185 OTHER LIABILITIES: Pension and other employee benefit liabilities 275, ,833 Self-insured liabilities 59,647 58,770 Deferred gain 24,215 31,161 Other 46,046 64,887 Total other liabilities 405, ,651 Total liabilities 2,440,683 2,617,398 NET ASSETS: Unrestricted: Controlling interest 2,940,440 2,862,327 Noncontrolling interest in subsidiaries 104, ,051 Total unrestricted net assets 3,044,608 2,977,378 Temporarily restricted 45,827 46,859 Permanently restricted 18,969 18,969 Total net assets 3,109,404 3,043,206 TOTAL $ 5,550,087 $ 5,660,604 See accompanying notes to unaudited consolidated financial statements. (Concluded) 3

5 AURORA HEALTH CARE, INC. AND AFFILIATES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN UNRESTRICTED NET ASSETS (In thousands) Three Months Ended March 31, REVENUE: Patient service revenue (net of contractual allowances and discounts) $ $ 1,230,379 Less provision for bad debts 39,498 Net patient service revenue 1,295,631 1,190,881 Other revenue 118, ,154 Total revenue 1,413,993 1,298,035 EXPENSES: Salaries, wages and fringe benefits 820, ,989 Professional fees 25,427 20,357 Supplies 256, ,723 Depreciation and amortization 58,529 55,204 Interest 11,761 13,719 Maintenance and service contracts 33,308 29,134 Building and equipment rental 12,969 16,700 Hospital tax assessment 24,558 24,568 Utilities 11,559 12,359 Purchased services 33,175 31,260 Other expenses 36,027 32,843 Total expenses 1,324,124 1,203,856 OPERATING INCOME 89,869 94,179 NONOPERATING INCOME: Investment (loss) income net (10,625) 44,030 Other nonoperating income net 5, Total nonoperating (loss) income net (4,662) 44,452 EXCESS OF REVENUE OVER EXPENSES 85, ,631 Pension-related changes other than periodic pension cost 2,636 2,056 Net assets released from restriction for purchase of property and equipment Distributions to noncontrolling interests (21,060) (14,079) Other net (117) (4) INCREASE IN UNRESTRICTED NET ASSETS $ 67,230 $ 127,042 See accompanying notes to unaudited consolidated financial statements. 4

6 AURORA HEALTH CARE, INC. AND AFFILIATES UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (In thousands) Controlling Interest Unrestricted Noncontrolling Interest Unrestricted Total Unrestricted Temporarily Restricted Permanently Restricted NET ASSETS December 31, 2016 $ 2,439,653 $ 100,119 $ 2,539,772 $ 43,171 $ 18,744 $ 2,601,687 Excess of revenue over expenses 126,669 11, , ,631 Pension-related changes other than net periodic pension costs 2,056 2,056 2,056 Contributions 3,124 3,124 Investment income 2,486 2,486 Net assets released from restrictions for operations (1,336) (1,336) Net assets released from restrictions for purchase of property and equipment (438) Distributions to noncontrolling interest (14,079) (14,079) (14,079) Other net (4) (4) (3) (7) Increase (decrease) in net assets 129,159 (2,117) 127,042 3, ,875 NET ASSETS March 31, 2017 $ 2,568,812 $ 98,002 $ 2,666,814 $ 47,004 $ 18,744 $ 2,732,562 NET ASSETS December 31, 2017 $ 2,862,327 $ 115,051 $ 2,977,378 $ 46,859 $ 18,969 $ 3,043,206 Excess of revenue over expenses 75,030 10,177 85,207 85,207 Pension-related changes other than net periodic pension costs 2,636 2,636 2,636 Contributions 1,224 1,224 Investment loss (529) (529) Net assets released from restrictions for operations (1,153) (1,153) Net assets released from restrictions for purchase of property and equipment (564) Distributions to noncontrolling interest (21,060) (21,060) (21,060) Other net (117) (117) (10) (127) Increase (decrease) in net assets 78,113 (10,883) 67,230 (1,032) 66,198 NET ASSETS March 31, 2018 $ 2,940,440 $ 104,168 $ 3,044,608 $ 45,827 $ 18,969 $ 3,109,404 Total See accompanying notes to unaudited consolidated financial statements. 5

7 AURORA HEALTH CARE, INC. AND AFFILIATES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31, CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ 66,198 $ 130,875 Adjustments to reconcile change in net assets to net cash provided by operating activities: Pension-related changes other than net periodic pension cost (2,636) (2,056) Realized and unrealized gains (losses) on investments, net 20,195 (41,875) (Gain) loss on sale of property, plant, and equipment (119) 320 Recognition of deferred gains (5,729) Amortization of intangible assets and other items Amortization of deferred gains (1,217) (1,396) Depreciation and amortization 58,529 55,204 Provision for bad debts 39,498 Distribution to noncontrolling interest 11,223 7,172 Sales of trading investments, net 379,505 82,953 Increase in accounts receivable (8,131) (30,199) Decrease in accounts payable and accrued expenses (75,331) (67,354) Increase in estimated third-party payor settlements 2, Increase in pension and other employee benefit liabilities 6,974 11,370 Increase (decrease) in self-insured liabilities 877 (2,661) Other changes in assets and liabilities, net 19,653 (9,656) Net cash provided by operating activities 472, ,519 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (475,873) (62,821) Proceeds from sales of property, plant, and equipment Investment in unconsolidated entities (5,177) (3,040) Distributions from unconsolidated entities 1, Net cash used in investing activities (479,825) (64,824) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 215 Repayments of long-term debt (3,235) (5,439) Distribution to noncontrolling interest (11,223) (7,172) Net cash used in financing activities (14,458) (12,396) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (21,479) 96,299 CASH AND CASH EQUIVALENTS: Beginning of period 192, ,664 End of period $ 171,404 $ 203,963 See accompanying notes to unaudited consolidated financial statements. 6

8 AURORA HEALTH CARE, INC. AND AFFILIATES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, DESCRIPTION OF BUSINESS Aurora Health Care, Inc. and its affiliates (Aurora) constitute an integrated health care system providing health care services to communities throughout eastern Wisconsin, northern Illinois, and the upper peninsula of Michigan. Aurora provides a variety of health care related activities, education, philanthropic, medical research and other benefits to the communities in which they operate. Health care services include primary and specialty care, pharmacies, behavioral health care, emergency care, rehabilitation, home care, and end-of-life care. Aurora Health Care, Inc. (the Corporation) is a Wisconsin nonstock, not-for-profit corporation. The Corporation is the parent corporation of a group of nonprofit and for profit corporations and other organizations that own and operate 14 acute-care hospital campuses, one psychiatric hospital, a network of approximately 150 physician clinic facilities, home health services, approximately 70 retail pharmacies, and other health care and related service organizations. The accompanying unaudited consolidated financial statements include the Corporation and its wholly owned or controlled affiliates. All intercompany accounts and transactions have been eliminated in the preparation of the unaudited consolidated financial statements. 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The unaudited consolidated financial statements of Aurora as of March 31, 2018, and for the three months ended March 31, 2018 and 2017, include all material adjustments that management considers necessary to present such information on a basis materially consistent with that of the audited consolidated financial statements. The unaudited consolidated financial statements have been prepared in accordance GAAP for interim reporting and, accordingly, do not include all of the disclosures required in annual financial statements. As such, these unaudited consolidated financial statements should be read in conjunction with the information included under Management s Discussion and Analysis of Results of Operations and Financial Position included in this quarterly report, and the audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016, and the related notes. The audited consolidated financial statements are available from the Municipal Securities Rulemaking Board (MSRB) on its Electronic Municipal Market Access (EMMA) system, found at Additional information can be obtained from the Investor Relations section on Aurora's website found at The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the operating results to be expected for the entire year ending December 31, The preparation of consolidated 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, liabilities, revenues, and expenses as of the date and period of the consolidated financial statements. Actual results could differ from those estimates. 7

9 In May 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) , Revenue from Contracts with Customers (Topic 606). Aurora adopted this guidance on January 1, 2018 using the modified retrospective approach for contracts that were not completed as of that date. Aurora s statements of operations and changes in unrestricted net assets for the reported periods after January 1, 2018 are presented under this amended guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historical accounting guidance. The core principle of the guidance in ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The adoption of this guidance resulted in changes to the presentation of and disclosure of revenue primarily related to uninsured or underinsured patients. Prior to the adoption of this guidance, a significant portion of the provision for bad debts related to self-pay patients, as well as co-pays, co-insurance amounts and deductibles owed to Aurora by patients with insurance. Under the new guidance, the estimated uncollectable amounts due from these patients are generally considered implicit price concessions that are a direct reduction to patient service revenues, with a corresponding material reduction in the amounts presented separately as provision for bad debts. For the three months ended March 31, 2018, Aurora recorded approximately $41.4 million of implicit price concessions as a direct reduction of patient service revenue that would have been recorded as provision for bad debts prior to the adoption of this guidance. At March 31, 2018, Aurora recorded $111.9 million as a direct reduction of accounts receivable that would have been reflected as allowance for doubtful accounts prior to the adoption of ASU Other than these changes in presentation on the consolidated statement of operations and changes in net assets and consolidated balance sheet, the adoption of this guidance did not have a material impact on the consolidated results of operations for the three months ended March 31, Aurora has entered into payment arrangements with patients that allow for payments over a term in excess of one year. Aurora has evaluated historical collections in excess of one year and current market interest rates to determine whether a significant financing component exists which would require an adjustment to the promised amount of consideration from patients and third-party payers. Aurora has determined that the impact of implicit financing arrangements for payment agreements in excess of one year is insignificant to the consolidated statement of operations and changes in net assets. Aurora does not incur significant incremental costs in obtaining contracts with patient. New Accounting Pronouncements - In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Leases. This ASU introduces a lessee model that brings most leases on to the balance sheet. The standard also aligns certain of the underlying principles of the new lessor model with those in ASU No , the new revenue recognition standard. This standard is effective for Aurora as of January 1, Management of Aurora is currently in the process of evaluating the impact of this guidance on its consolidated financial position, results of operations and cash flows. In August 2016, the FASB issued ASU , Presentation of Financial Statements of Not-for-Profit Entities, which is intended to simplify how a not-for-profit presents net assets and other information in the financial statements. This ASU reduces the three current net asset categories to two categories. The standard also provides for enhanced disclosures on liquidity and financial performance. This ASU is effective for annual reporting periods after December 31, Aurora will adopt this standard for annual reporting as of December 31, Management of Aurora does not believe this standard will have a significant impact on its consolidated financial position, results of operations and cash flows. 8

10 In August 2016, the FASB issued ASU , Classification of Certain Cash Receipts and Cash Payments, which amends guidance in Accounting Standards Codification (ASC) 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity of practice that has resulted from the lack of consistent principles on this topic. This standard is effective for Aurora beginning January 1, Management of Aurora anticipates that this ASU will not have a material impact on its statements of cash flows, with the primary change being the movement of certain distributions from equity method investees from cash used in investing activities to cash flows from operations. In November 2016, the FASB issued ASU , Restricted Cash, which amends guidance in ASC 230 on the presentation and activity presented within the statement of cash flows. The primary purpose of the ASU is to reduce the diversity of practice that has resulted from the lack of consistent principles on this topic. This standard is effective for Aurora beginning January 1, Management of Aurora anticipates that this ASU will not have a material impact on its statements of cash flows, with the primary change being the inclusion of restricted cash and cash equivalents in the balances included and reconciled to within the statements of cash flows. 3. NET PATIENT SERVICE REVENUE AND PATIENT RECEIVABLES Net patient service revenue represents the consideration to which Aurora expects to be entitled in exchange for providing patient care. These amounts are due from patients, third-party payers (including managed care payers and government programs) and others, and they include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews and investigations. Generally, patients and third-party payers are billed within days after the services are performed or shortly after discharge. Revenue is recognized as performance obligations are satisfied. Aurora identifies performance obligations based on the nature of the services provided. Revenue associated with performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected charges. Generally, performance obligations satisfied over time relate to patients in hospitals receiving inpatient acute care services. Aurora measures the performance obligation from admission into the hospital to the point when there are no further services required for the patient, which is generally the time of discharge. Revenue associated with performance obligations satisfied at a point in time generally relate to patents receiving outpatient services and is recognized when services are provided. Aurora believes this method provides a faithful depiction of the transfer of services over the term of performance obligations based on the inputs needed to satisfy the obligations. Aurora's patient service performance obligations relate to contracts with a duration of less than one year. we have elected to apply the optional exemption provided in FASB Accounting Standards Codification ( ASC ) (a) and, therefore, we are not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to inpatient acute care services at the end of the reporting period. The performance obligations for these contracts are generally completed when the patients are discharged, which generally occurs within days or weeks of the end of the reporting period. Aurora determines the transaction price based on gross charges for services provided, reduced by contractual adjustments provided to third-party payers, discounts provided to uninsured patients in accordance with policy, and implicit price concessions provided primarily to uninsured patients. Aurora determines estimates of contractual adjustments and discounts based on contractual agreements, charity care policies and historical experience. Implicit price concessions are estimated based on historical collection experience for each financial class of patient. Aurora has elected to use the portfolio approach 9

11 as a practical expedient to account for patient contracts as collective groups rather than individually. The financial statement effects of using this practical expedient are not materially different from an individual contract approach. The amount, timing and uncertainty of revenue recognized is affected by the payor, geographical location and service line associated with this revenue. The composition of net patient service revenue by payor for the three months ended March 31, 2018 and March 31, 2017, is as follows (dollars in thousands): March 31, Managed care and all other $ 837,371 65% $ 761,259 64% Medicare 348,935 27% 319,728 27% Medicaid 107,789 8% 108,482 9% Self-pay 1,536 % 1,412 % $ 1,295, % $ 1,190, % The self-pay revenue above includes only revenue from patients without insurance. The revenue related to amounts due from patients for co-insurance and deductibles is included with the related primary insurance coverage. Aurora s patient care operations are organized into regions which are based on patient utilization patterns within a particular geographical area. The composition of net patient service revenue by region and service line for the three months ended March 31, 2018 and March 31, 2017, is as follows (dollars in thousands): North Region For the Three Months Ended March 31, 2018 Central South Other Region Region System Net Patient Service Revenue Hospital $ 171,738 $ 154,787 $ 549,180 $ $ 875, % Clinic 57, , , , % Home Health 4,452 10,000 13,359 27,811 2 % Other 755 5,424 1,490 7,669 % Total $ 234,093 $ 313,457 $ 746,591 $ 1,490 $ 1,295, % North Region For the Three Months Ended March 31, 2017 Central South Other Region Region System Net Patient Service Revenue Hospital $ 153,288 $ 142,349 $ 502,044 $ $ 797, % Clinic 55, , , , % Home Health 3,646 7,946 11,904 23,496 2 % Other 706 5, ,619 1 % Total $ 212,916 $ 294,006 $ 683,455 $ 504 $ 1,190, % 10

12 The composition of patient accounts receivable as of March 31, 2018 and December 31, 2017 are summarized as follows, (dollars in thousands): March 31, 2018 December 31, 2017 Managed care and all other $ 352,947 49% $ 372,341 52% Medicare 133,361 18% 128,353 18% Medicaid 45,394 6% 52,071 7% Self-pay 191,860 27% 162,666 23% $ 723, % $ 715, % The self-pay patient accounts receivable above includes amounts due from patients for co-insurance, deductibles, installment payment plans and amounts due from patients without insurance. Wisconsin assesses a fee or tax on gross patient service revenue. The revenues from this assessment are used to increase payments made to hospitals for services provided to Medicaid and other medically indigent patients. Aurora s patient service revenue reflects this increase in payment for services to Medicaid and other medically indigent patients, and hospital tax assessment expense reflects the fees assessed by the State. For the three months ended March 31, 2018 and 2017, patient service revenue includes $30.2 million and $27.7 million, respectively, related to this program, and expenses include $24.6 million, of tax assessment fees. Laws and regulations governing government and other payment programs are complex and subject to interpretation. As a result, there is a reasonable possibility that recorded estimated third-party settlements could change by a material amount. Changes in estimates relating to prior years increased patient care revenue by approximately $1.1 million and $1.8 million for the three months ended March 31, 2018 and 2017, respectively. Aurora has filed formal appeals relating to the settlement of certain prior-year Medicare cost reports. The outcome of these appeals cannot be determined at this time. 11

13 4. FAIR VALUE Financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, estimated third-party settlements, and long-term debt. Except for long-term debt, the fair values of these instruments approximate their carrying amounts at March 31, 2018 and December 31, 2017, due to their short-term maturities. The fair values of financial assets and liabilities that are measured by the level of significant input as of March 31, 2018 and December 31, 2017 are as follows (in thousands): Assets March 31, 2018 Quoted Prices in Active Markets for Identical Assets (Level 1) Other Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Recurring fair value measurements: Cash equivalents $ 65,277 $ 34,377 $ 30,900 $ Fixed-income securities: U.S. Treasury 84,747 84,747 Corporate bonds and other debt securities 154, ,640 Federal agency 58,151 58,151 Fixed income mutual funds 782, ,903 Domestic equity securities: Large-cap 17,020 17,020 Mid-cap 21,428 21,428 Small-cap 22,662 22, Real estate 30,748 30,748 Equity mutual funds and exchange-traded funds 468, ,537 International equity securities 146, ,016 Other 9,365 9, Total recurring fair value measurements $ 1,861,494 $ 1,532,542 $ 328,845 $ 107 Cash 147,370 Assets valued at net asset value 46,071 Total cash and cash equivalents, investments and assets whose use is limited $ 2,054,935 12

14 Assets December 31, 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Other Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Recurring fair value measurements: Cash equivalents $ 424,731 $ 415,554 $ 9,177 $ Fixed-income securities: U.S. Treasury 65,532 65,532 Corporate bonds and other debt securities 148, ,453 Federal agency 57,763 57,763 Fixed income mutual funds 791, ,695 Domestic equity securities: Large-cap 19,175 19,175 Mid-cap 20,472 20,472 Small-cap 23,803 23,803 Real estate 31,734 31,734 Equity mutual funds and exchange-traded funds 493, ,325 International equity securities 150, ,419 Other 9,064 8, Total recurring fair value measurements $ 2,236,166 $ 1,955,134 $ 280,925 $ 107 Cash 193,902 Assets valued at net asset value 46,045 Total cash and cash equivalents, investments and assets whose use is limited $ 2,476,113 Aurora categorizes assets and liabilities measured at fair value in the consolidated financial statements based upon whether the inputs used to determine their fair values are observable or unobservable. Observable inputs are inputs which are based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity s own assumptions about pricing the asset or liability, based on the best information available under the circumstances. The fair value of all assets and liabilities recognized or disclosed at fair value are classified based on the lowest level of significant inputs. Assets and liabilities that are measured at fair value are disclosed and classified in one of the three categories. Category inputs are defined as follows: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities on the reporting date. Investments in this level generally include exchange-traded equity securities, futures, pooled shortterm investment funds, options, and exchange-traded mutual funds. Level 2 Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Investments in this level generally include fixed income securities, including fixed income government obligations; certificates of deposit; derivatives; as well as certain U.S. and international equities, which are not traded on an active exchange. 13

15 Level 3 Inputs that are unobservable for the asset or liability. Aurora believes its valuation methods and classification in fair value levels are appropriate and consistent with other market participants based on information readily available from its service providers. Transfers between fair value levels are only done when new or additional information regarding the observability of pricing inputs is received that could result in a different classification as of the reporting date. Aurora measures the transfer between fair value levels as of the end of the reporting period. There were no significant transfers between fair value levels during the three months ended March 31, The Level 2 and 3 instruments listed in the fair value tables above utilize the following valuation techniques and inputs: Cash Equivalents Cash equivalents are comprised primarily of money market funds, which are valued based upon a net asset value of $1. Fixed-Income Securities The fair value of fixed-income securities is primarily determined with techniques consistent with the market approach. Significant observable inputs include benchmark yields, reported trades, observable broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Aurora holds interests in a real estate investment trust and an international equity limited partnership where the fair value of the investment held is estimated based on the net asset value of the fund. The following table summarizes the attributes relating to the nature and risk of such investments at March 31, 2018 and December 31, 2017 (dollars in thousands): March 31, 2018 Fair Value December 31, Unfunded Commitments Redemption Frequency Redemption Notice Period Real estate investment trust $ 35,029 $ 35,174 $ Quarterly 90 days International equity limited partnership 11,042 10,871 Monthly 15 days Total $ 46,071 $ 46,045 The real estate investment trust is a core return, fully specified, open-end commingled equity real estate fund diversified by property type and location designed to provide stable, income-driven rate of return over the long term with potential for growth of net investment income and appreciation of value. The objective of the real estate investment trust is to achieve long term aggregate annual return on invested equity of 8% to 10%, gross of fees, by investing in real estate and real estate-related investments, broadly defined, with the majority of the return being realized from income, with modest appreciation, and using leverage when appropriate. The fair value of the real estate investment trust is determined using the calculated net asset value provided by the fund. The fair value of the underlying real estate properties held in the trust is determined giving consideration to the income, cost and sales comparison approaches of estimating property value. The international equity limited partnership s investment objective is long-term total return. The fund pursues its investment objective primarily by investing in equity securities of non-u.s. emerging market

16 companies. The fair value of this fund is determined using the calculated net asset value provided by the fund. 5. INVESTMENTS IN UNCONSOLIDATED ENTITIES AND NONCONTROLLING INTEREST IN SUBSIDIARIES Aurora has a 50% interest in the Wisconsin Collaborative Insurance Company (WCIC). WCIC is a health insurance company formed in partnership with Anthem Blue Cross Blue Shield of Wisconsin (Anthem). Aurora accounts for this investment under the equity method of accounting within investments in unconsolidated entities in the accompanying unaudited consolidated balance sheets. Aurora made additional capital contributions to WCIC of $3.7 million and $1.6 million during the three months ended March 31, 2018 and 2017, respectively. Aurora's investment in WCIC as of March 31, 2018 and December 31, 2017 was $10.3 million and $6.0 million, respectively. Aurora has a 49% interest in Bay Area Medical Center (BAMC), a 99 bed general acute care hospital located in Marinette, Wisconsin. Aurora s investment in BAMC is accounted for under the equity method of accounting and is presented within investments in unconsolidated entities in the accompanying unaudited consolidated balance sheets. Aurora's investment in BAMC as of March 31, 2018 and December 31, 2017, was $26.6 million and $28.8 million, respectively. The carrying amount of Aurora s investment in BAMC was $35.0 million and $34.8 million less than the underlying equity in the net assets of BAMC as of March 31, 2018 and December 31, 2017, respectively. This difference represents a contingent gain which would be recognized in the event of dissolution of BAMC or if Aurora s interest in BAMC were to increase requiring BAMC to be included in the consolidated financial statements of Aurora. Aurora has a 27% interest in Aurora Bay Area Medical Group (ABAMG), which provides inpatient, outpatient and other necessary professional medical services in Marinette, Wisconsin and its surrounding communities. BAMC owns the remaining 73% of ABAMG. Aurora's investment in ABAMG is accounted for under the equity method and is presented within investments in unconsolidated entities in the accompanying unaudited consolidated balance sheets. Aurora leases employees and buildings to ABAMG and recognized $3.0 million and $5.4 million of other revenue for the three months ended March 31, 2018 and 2017, respectively under these leasing agreements. Aurora made additional capital contributions to ABAMG of $1.5 million and $1.4 million during the three months ended March 31, 2018 and 2017, respectively. Aurora s investment in ABAMG was $0.4 million and $0.5 million as of March 31, 2018 and December 31, 2017, respectively. In February 2018, Aurora sold its 50% ownership interest in the Menomonee Falls Ambulatory Surgery Center and its 20% ownership interest in the Froedtert Surgery Center for cash consideration of $5.0 million and $2.0 million, respectively. Aurora's investments in the surgery centers were accounted for under the equity method of accounting and are presented within investments in unconsolidated entities in the accompanying consolidated balance sheets. Aurora's carrying value in the surgery centers totaled $5.8 million as of December 31,

17 The summarized financial position and results of operations for the entities accounted for under the equity method as of and for the three month period ended March 31, 2018 and as of and for the year ended December 31, 2017, is as follows (in thousands): As of and for the Three Months Ended March 31, 2018 Bay Area Medical Other Center ABAMG Investees Total Total assets $ 226,293 $ 5,808 $ 63,643 $ 295,744 Total liabilities 102,105 4,412 35, ,173 Equity 124,188 1,396 27, ,571 Total revenue 24,775 5,107 51,616 81,498 Net income (loss) 903 (5,968) 1,881 (3,184) As of and for the Twelve Months Ended December 31, 2017 Bay Area Medical Surgery Other Center ABAMG Centers Investees Total Total assets $ 233,180 $ 6,150 $ 13,754 $ 37, ,116 Total liabilities 105,407 4,169 1,804 24, ,961 Equity 127,773 1,981 11,950 12, ,155 Total revenue 96,759 24,032 13, , ,650 Net income (loss) 3,598 (22,251) 1,020 4,568 (13,065) 16

18 6. LONG-TERM DEBT Long-term debt at March 31, 2018 and December 31, 2017 is summarized as follows (in thousands): March 31, 2018 December 31, 2017 Wisconsin Health and Educational Facilities Authority (WHEFA) fixed-rate bonds: Series 2009A (5.16% weighted average coupon for 2018 and 5.15% for 2017) $ 22,500 $ 22,500 Series 2010A (5.46% weighted average coupon for 2018 and 5.45% for 2017) 157, ,750 Series 2010B (5.00% weighted average coupon for 2018 and 2017) 41,620 41,620 Series 2012A (4.76% weighted average coupon for 2018 and 4.77% for 2017) 203, ,885 Series 2013A (5.19% weighted average coupon for 2018 and 2017) 115, , , ,505 WHEFA variable-rate bonds: Series 1999C (1.23% effective rate for 2018 and 0.85% for 2017) 50,000 50,000 Series 2008A (1.12% effective rate for 2018 and 0.97% for 2017) 80,000 80,000 Series 2008B (1.07% effective rate for 2018 and 0.91% for 2017) 79,470 79,470 Series 2010C (1.39% effective rate for 2018 and 0.94% for 2017) 102, ,465 Series 2012B (1.13% effective rate for 2018 and 0.79% for 2017) 36,000 36,000 Series 2012C (1.13% effective rate for 2018 and 0.79% for 2017) 36,000 36,000 Series 2012D (1.18% effective rate for 2018 and 0.83% for 2017) 53,115 53, , ,050 Unamortized original issue premium, net 9,574 10,016 Total WHEFA debt 988, ,571 Taxable bonds: Taxable Bond Series 2015A (2.07% effective rate for 2018 and 1.48% for 2017) 40,000 40,000 Taxable Bond Series 2016A (1.97% effective rate for 2018 and 2017) 112, ,250 Taxable Bond Series 2016B (1.99% effective rate for 2018 and 2017) 83,510 83,510 Total taxable bonds 235, ,760 Capital lease obligations and financing arrangements 122, ,205 Line of credit (2.19% effective rate for 2018 and 1.87% for 2017) 58,500 58,500 Notes payable 5,434 5,595 Deferred financing costs - net (7,708) (9,002) Total long-term debt 1,402,307 1,481,629 Less amounts classified as current (136,238) (146,444) Long-term debt net of current portion $ 1,266,069 $ 1,335,185 Pursuant to loan agreements with WHEFA, Aurora system entities have borrowed the proceeds of the revenue bonds listed above from WHEFA (WHEFA Bonds). Aurora s obligation to repay WHEFA is secured by Obligations issued under a Master Trust Indenture (the Aurora Indenture). All outstanding debt under the Aurora Indenture represents joint and several obligations of the members of the Obligated Group and are secured by a pledge of unrestricted receivables and a mortgage on Aurora St. Luke s Medical Center. Of the total fixed-rate WHEFA bonds, $47.4 million is collateralized by bond insurance. 17

19 Additionally, certain of the WHEFA variable-rate bonds are secured by letters of credit, as described below. The variable-rate demand bonds (VRDBs) are collateralized by $454.1 million of irrevocable direct-pay letters of credit issued by commercial banks. Under certain circumstances, the VRDBs are subject to mandatory purchase by Aurora. The letters of credit provide interim financing to Aurora in the event Aurora is unable to remarket tendered bonds. The letters of credit expire at various dates through 2021 and have various repayment terms. For $327.1 million of the letters of credit, principal payments are due quarterly, beginning the earlier of one year from the date of the advance or two months after the expiration date of the letter of credit and amortize over a three-year period, not to exceed three years from the letter of credit s stated expiration date. For the remaining $127.0 million letters of credit, principal payments are due quarterly, beginning the earlier of one year from the date of the advance or two months after the expiration date of the letter of credit and shall amortize over a two-year period, not to exceed two years from the letter of credit s stated expiration date. At March 31, 2018 and December 31, 2017, no draws were outstanding under the letters of credit. Aurora s repayment obligations to the commercial banks that provide the letters of credit are secured by Obligations issued under the Aurora Indenture. Aurora has three series of taxable bonds outstanding, which were issued directly by Aurora and placed with multiple commercial banks (the Taxable Bonds). The outstanding principal amount of the Taxable Bonds is $235.8 million as of March 31, 2018 and December 31, The Series 2015A Taxable Bonds are subject to a mandatory tender on April 15, Aurora s repayment obligations for the Taxable Bonds are secured by Obligations issued under the Aurora Indenture. In January 2018, Aurora purchased nineteen properties that were previously leased for cash consideration of $433.0 million. Aurora was obligated under capital lease and financing arrangements entered into in connection with certain leasing and sale-leaseback transactions for eighteen of these properties. The transaction resulted in the realization of deferred gains related to these properties of $5.7 million. In connection with this transaction, Aurora derecognized $48.9 million of net capital lease assets and $78.4 million of capital lease liabilities. The net gain was recorded as a reduction to the carrying value of the properties acquired. In August 2017, Aurora entered into a $250.0 million line of credit with a syndicate of commercial banks. The credit facility bears interest at a base rate plus a margin based on Aurora's current bond ratings. Proceeds of a $58.5 million draw in August 2017 and $6.5 million of debt reserve funds were used to refund a mandatory tender of $65.0 million on the 2009B bonds. The $58.5 million draw remains outstanding as of March 31, Aurora s repayment obligations under the credit agreement are secured by Obligations issued under the Aurora Indenture. At March 31, 2018 and December 31, 2017, Aurora had a $60.0 million line of credit with a commercial bank, bearing interest at a commercial bank floating rate or LIBOR plus 0.50%, based upon the option of Aurora. As of March 31, 2018 and December 31, 2017, three letters of credit issued under the line of credit totaling $40.5 million were outstanding. There were no outstanding draws on the line of credit or letters of credit as of March 31, 2018 or December 31, Aurora s repayment obligations under the line of credit are secured by Obligations issued under the Aurora Indenture. 18

20 7. EMPLOYEES BENEFIT PLANS Aurora has a defined benefit pension plan (the Pension Plan) covering substantially all of its employees, hired before January 1, 2013, with at least 1,000 hours of work in a calendar year. Benefits are based on years of service and the employees final average earnings, as defined. Aurora funds the Pension Plan based on the amount calculated by the Pension Plan's actuaries to meet the minimum Employee Retirement Income Security Act (ERISA) funding requirements. During the three months ended March 31, 2018 and 2017, Aurora made no contributions to the Pension Plan. The Pension Plan assets and obligations are measured at December 31. Estimated amounts of the components of net periodic pension income for the three months ended March 31, 2018 and 2017 were as follows (in thousands): Interest cost on projected benefit obligation $ 15,087 $ 15,968 Expected return on plan assets (19,142) (18,520) Net amortization and deferral, and prior service credit 2,888 2,056 Net periodic pension income $ (1,167) $ (496) The amount of net periodic pension income will be adjusted at year-end to reflect actual results, based upon the final annual actuarial valuation. In January 2018, Aurora early adopted ASU , Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. As a result of the adoption of this ASU the net periodic benefit income of $1.2 million has been presented within other nonoperating income (loss) net, previously it was reported within salaries, wages and fringe benefits expense. The net actuarial loss not yet recognized as a component of periodic pension income was $441.7 million and $444.3 million as of March 31, 2018 and December 31, 2017, and is included in unrestricted net assets in the accompanying unaudited consolidated balance sheets. Assumptions used to determine the net periodic pension income for three months ended March 31, 2018 and 2017 were as follows: Discount rate 3.79% 4.42% Expected long-term rate of return on assets 5.50% 5.50% The discount rate used by Aurora is based on a hypothetical portfolio of high-quality bonds with cash flows matching the Pension Plan s expected benefit payments. The expected long-term rate of return is based on the asset allocation of the total portfolio considering capital return assumptions from various sources. Aurora s investment objective is to achieve its targeted long-term rate of return while avoiding excessive risk. Risk is effectively managed through diversifying the asset allocation across a broad spectrum of assets including domestic and international equities and fixed income securities with varying correlations to movements in interest rates along the yield curve. These investments are readily marketable and can be sold to fund benefit payment obligations as they become payable. Overall funded status risk of the Pension Plan is managed by matching the 19

21 duration of plan assets to plan liabilities to mitigate the impact of changes in interest rates on funded status. The asset allocation of the Pension Plan assets at March 31, 2018 and December 31, 2017, was as follows: March 31, 2018 December 31, 2017 Strategic Strategic Target Actual Target Actual Equity securities 33% 33% 33% 33% Fixed-income securities Real estate Cash and cash equivalents 3 3 Total 100% 100% 100% 100% Aurora and certain affiliates sponsor defined contribution and retirement savings plans (the Defined Contribution Plans), whereby Aurora contributes a percentage of participants qualifying compensation up to certain limits as outlined in the Defined Contribution Plans or other amounts as designated by the affiliates board of directors. Included in salaries, wages and fringe benefits expense in the accompanying unaudited consolidated statements of operations and changes in unrestricted net assets for the three months ended March 31, 2018 and 2017 is $41.3 million and $39.9 million, respectively, for contributions to the Defined Contribution Plans. Aurora also sponsors a noncontributory Section 457(b) defined contribution plan (the 457(b) Plan) covering select employees, where participants may contribute a percentage of qualifying compensation up to certain limits as defined by the 457(b) Plan. The 457(b) Plan assets and liabilities, each totaling $137.5 million and $130.6 million at March 31, 2018 and December 31, 2017, respectively, are included in long-term assets whose use is limited or restricted and pension and other employee benefit liabilities, in the accompanying unaudited consolidated balance sheets. The assets of this 457(b) Plan are subject to the claims of the general creditors of Aurora. 8. GENERAL AND PROFESSIONAL LIABILITY INSURANCE Commercial insurance companies have issued policies covering Aurora s primary professional, general and managed care errors and omission liability risks. Aurora s professional and general liability insurance is on an occurrence basis, while managed care errors and omissions liability risks are written on a claims-made basis. Aurora s hospitals, clinics, surgery centers, physicians, and certified registered nurse anesthetist providers that provide health care in Wisconsin are qualified health care providers as defined by Wisconsin state statute, and have separate professional liability limits of $1.0 million per claim and $3.0 million annual aggregate applied to each qualified provider. Losses in excess of these amounts are fully covered through mandatory participation in the State of Wisconsin Injured Patients and Families Compensation Fund (the Fund). Aurora also has professional liability coverage for its providers and affiliates that do not qualify for the Fund coverage, as well as general liability for all of its entities. These coverages provide a number of shared professional liability limits and shared general liability limits totaling $2.0 million per occurrence and $4.0 million annual aggregate for most providers. Losses in excess of these amounts are covered by Aurora s umbrella/excess insurance. 20

22 The professional, general and managed care liabilities discussed above have been ceded back to Aurora Liability Assurance, Ltd. (ALA), a wholly-owned subsidiary of Aurora, through reinsurance agreements. Independent actuaries evaluate the required provision for outstanding losses related to these risks. At March 31, 2018 and December 31, 2017, Aurora has recorded a liability for outstanding losses, including incurred but not reported, discounted at 4.0%, totaling $31.2 million and $32.0 million, respectively. Of this amount, a portion of the liability for outstanding losses was included in accrued expenses and a portion was included in self-insured liabilities in the accompanying unaudited consolidated balance sheets. In the opinion of management, the ultimate disposition of claims incurred to date will not have a material adverse effect on Aurora s consolidated financial position or results of operations. ALA maintains a reinsurance trust account, which in total represents security required by the reinsurance agreement between ALA and the insurance companies. At March 31, 2018 and December 31, 2017, assets held in the trust account were $47.6 million and $49.7 million, respectively. 9. AFFILIATION On April 1, 2018, Aurora and Advocate Health Care Network merged to form Advocate Aurora Health, Inc. To consummate the affiliation, a Delaware exempt corporation (non-profit) named Advocate Aurora Health, Inc. ("Advocate Aurora Health") was formed, which is the sole corporate member of Aurora and Advocate. Advocate Aurora Health is the 10th largest not-for-profit, integrated health system in the United States with 27 hospitals in Illinois and Wisconsin, the largest integrated children s network in the State of Illinois, more than 500 sites of care, nearly 3,400 employed physicians and one of the region s largest home health organizations. Advocate Aurora is a leading employer in the Midwest with more than 70,000 team members, including more than 22,000 nurses. A national leader in clinical innovation, health outcomes, consumer experience and value-based care, the system serves nearly 3 million patients annually. Advocate Aurora is engaged in hundreds of clinical trials and research studies, and is nationally recognized for its expertise in cardiology, neurosciences, oncology and pediatrics. The following information presents the proforma unaudited consolidated results of Advocate Aurora Health as if the merger had occurred on January 1, Three Months Ended March 31, 2018 March 31, 2017 Total revenue $ 2,943,789 $ 2,908,829 Operating income 113, ,201 Excess of revenue over expenses 112, ,847 The proforma information should not be construed to accurately reflect what the actual results would have been had the affiliation been consummated on January 1, 2017, and is not intended to project the Advocate Aurora Health results of operations for any future periods. 10. SUBSEQUENT EVENTS Aurora evaluated events and transactions subsequent to March 31, 2018 through May 30, 2018, the date of financial statement issuance. ***** 21