Fairview Health Services Years Ended December 31, 2017, 2016, and 2015 With Report of Independent Auditors

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1 C ONSOLIDATED F INANCIAL S TATEMENTS Fairview Health Services Years Ended December 31, 2017, 2016, and 2015 With Report of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements Years Ended December 31, 2017, 2016, and 2015 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Balance Sheets...3 Consolidated Statements of Operations and Changes in Net Assets...5 Consolidated Statements of Cash Flows...7 Notes to Consolidated Financial Statements

3 Ernst & Young LLP Suite South Sixth Street Minneapolis, MN Tel: ey.com Report of Independent Auditors The Board of Directors Fairview Health Services We have audited the accompanying consolidated financial statements of Fairview Health Services, which comprise the consolidated balance sheets as of December 31, 2017, 2016, and 2015, and the related consolidated statements of operations and changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of PreferredOne Administrative Services, Inc. and Subsidiary, a wholly owned subsidiary, which statements reflect total assets constituting 3.0% in 2017 and 3.3% in 2016, and total revenue constituting 5.6% in 2017 and 5.2% in 2016, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for PreferredOne Administrative Services, Inc. and Subsidiary for 2017 and 2016, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of A member firm of Ernst & Young Global Limited

4 expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fairview Health Services at December 31, 2017, 2016, and 2015, and the consolidated results of its operations and changes in net assets and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. April 19, 2018 ey A member firm of Ernst & Young Global Limited

5 Consolidated Balance Sheets December Assets Current assets: Cash and cash equivalents $ 51,503 $ 37,300 $ 31,426 Short-term investments 616, , ,302 Accounts receivable for medical services, less allowance for doubtful accounts of $77,684 in 2017, $56,074 in 2016, and $50,870 in , , ,725 Receivable under third-party payor contracts 4,002 2,233 11,819 Current portion of contributions receivable 9,032 12,304 25,317 Inventories 102, ,482 79,384 Other current assets 148, ,061 52,458 Total current assets 1,516,050 1,188,421 1,075,431 Investments 1,709,040 1,356,524 1,142,503 Assets limited as to use: Held by insurance subsidiaries 68,622 49,672 48,824 Restricted fund investments 35,570 24,878 20,798 Other assets limited as to use 3,059 1,915 1,910 Total assets limited as to use 107,251 76,465 71,532 Other long-term assets: Contributions receivable 11,771 15,495 5,823 Investments in related parties 84,722 77,819 49,842 Goodwill and intangible assets 80,553 70,655 34,613 Other long-term assets 63,523 26,026 31,871 Total other long-term assets 240, , ,149 Land, buildings, and equipment, net 1,383,402 1,000, ,962 Total assets $ 4,956,312 $ 3,812,351 $ 3,394,

6 December Liabilities and net assets Current liabilities: Accounts payable $ 299,364 $ 275,498 $ 229,923 Accrued compensation and benefits 348, , ,400 Payable under third-party payor contracts 10,849 16,836 10,271 Current maturities of long-term debt 23,692 17,948 16,198 Other current liabilities 131,406 76,834 48,215 Total current liabilities 813, , ,007 Other liabilities: Insurance subsidiaries claims reserves 49,070 25,845 17,246 Workers compensation claims reserves 43,812 32,229 34,203 Derivative financial instruments 67,086 68,781 26,169 Other long-term liabilities 77,173 46,778 41,250 Total other liabilities 237, , ,868 Long-term debt 1,387, , ,434 Total liabilities 2,438,396 1,805,896 1,616,309 Net assets: Unrestricted: Fairview Health Services 2,412,555 1,947,967 1,726,492 Non-controlling interests 50,843 12,290 8,406 Total unrestricted 2,463,398 1,960,257 1,734,898 Temporarily restricted 54,518 46,198 43,370 Total net assets 2,517,916 2,006,455 1,778,268 Total liabilities and net assets $ 4,956,312 $ 3,812,351 $ 3,394,577 See accompanying notes

7 Consolidated Statements of Operations and Changes in Net Assets Year Ended December Unrestricted revenues: Net patient service revenue $ 4,704,084 $ 3,857,555 $ 3,615,409 Provision for bad debts (82,738) (54,003) (47,499) Net patient service revenue less provision for bad debts 4,621,346 3,803,552 3,567,910 Other operating revenue 650, , ,785 Net assets released from restrictions 3,093 7,058 3,855 Total unrestricted revenues 5,275,017 4,363,540 3,867,550 Expenses: Salaries and benefits 2,483,099 1,938,283 1,801,352 Supplies 1,389,256 1,197,782 1,019,933 Purchased services 740, , ,573 Utilities and maintenance 151, , ,430 Insurance and rent 81,072 65,452 53,471 State and local taxes 85,830 79,634 67,147 Other operating expenses 58,824 41,087 48,128 Depreciation and amortization 135, , ,010 Interest 51,456 39,711 41,376 Total expenses 5,176,543 4,232,903 3,727,420 Operating income 98, , ,130 Nonoperating gains (losses): Investment income (loss) 198,797 78,728 (10,588) (Losses) gains on interest and basis rate swaps, net (5,545) (3,231) 8,389 Contributions from business combinations (Note 14) 174,948 15,950 Other nonoperating losses, net (9,752) (882) (66,661) Total nonoperating gains (losses) 358,448 90,565 (68,860) Excess of revenues over expenses 456, ,202 71,270 Less amounts attributable to non-controlling interests (4,994) (7,416) (6,362) Excess of revenues over expenses attributable to Fairview Health Services 451, ,786 64,

8 Year Ended December Unrestricted net assets, Fairview Health Services: Excess of revenues over expenses $ 451,928 $ 213,786 $ 64,908 Pension and other postretirement liability adjustments 1,413 (1,763) 4,935 Contributions for long-lived assets and other changes 11,247 9,452 9,954 Increase in unrestricted net assets, Fairview Health Services 464, ,475 79,797 Unrestricted net assets, non-controlling interests: Excess of revenues over expenses 4,994 7,416 6,362 Contributions from non-controlling interests 10 6, Contribution from business combinations 43,987 Distributions to non-controlling interests and other changes (10,438) (9,681) (6,344) Increase in unrestricted net assets, non-controlling interests 38,553 3, Temporarily restricted net assets: Contributions and other changes, net 10,223 14,982 6,163 Contribution from business combinations 12,650 Net assets released from restrictions (14,553) (12,154) (12,112) Increase (decrease) in temporarily restricted net assets 8,320 2,828 (5,949) Total increase in net assets 511, ,187 74,176 Net assets at beginning of year 2,006,455 1,778,268 1,704,092 Net assets at end of year $ 2,517,916 $ 2,006,455 $ 1,778,268 See accompanying notes

9 Consolidated Statements of Cash Flows Year Ended December Operating activities Increase in net assets $ 511,461 $ 228,187 $ 74,176 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation and amortization 135, , ,010 Provision for bad debts 82,738 54,003 47,499 Pension and other postretirement liability adjustments (1,413) 1,763 (4,935) Net realized and unrealized (gains) losses on trading investments (168,478) (52,363) 35,375 Change in fair value of interest and basis rate swaps (1,618) (4,378) (11,829) Contribution from business combinations (239,861) (15,951) Loss on extinguishment of debt 9,397 66,661 Other, net (2,704) (10,706) 1,128 Changes in assets and liabilities: Accounts receivable for medical services (89,899) (87,656) (55,894) Other current assets (8,257) (41,178) (3,321) Current liabilities 23,323 41,482 33,900 Other assets and liabilities, net (9,509) (18,972) (19,099) Net cash provided by operating activities before change in trading and alternative investments 240, , ,671 Change in trading and alternative investments (137,038) (183,424) (221,040) Net cash provided by operating activities 103,316 26,963 67,631 Investing activities Purchases of land, buildings, and equipment, net (94,687) (77,462) (118,155) Cash acquired in acquisition, net of cash paid 7,363 31,168 Other investing activities (3,681) Net cash used in investing activities (87,324) (46,294) (121,836) Financing activities Proceeds from issuance of long-term debt 460,809 1, ,151 Principal payments on long-term debt (19,140) (19,463) (16,028) Payments for defeasance of long-term debt (450,177) (442,966) Collateral received on derivative financial instruments, net 35,550 9,808 Other financing activities, net 6,719 7,513 2,143 Net cash (used in) provided by financing activities (1,789) 25,205 50,108 Increase (decrease) in cash and cash equivalents 14,203 5,874 (4,097) Cash and cash equivalents at beginning of year 37,300 31,426 35,523 Cash and cash equivalents at end of year $ 51,503 $ 37,300 $ 31,426 Supplemental disclosure of noncash investing and financing activities Assets acquired through capital leases $ $ 50,501 $ 6,848 Accruals for purchases of buildings and equipment $ 6,977 $ 3,323 $ 6,990 See accompanying notes

10 Notes to Consolidated Financial Statements December 31, 2017, 2016, and Organization and Basis of Presentation Fairview Health Services, an integrated health system, along with its affiliates and subsidiaries (collectively referred to as Fairview) is a nonprofit corporation headquartered in Minnesota and is exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code (the IRC). Fairview offers a broad continuum of health care services through its hospitals, clinics, senior and long-term care facilities, retail and specialty pharmacies, pharmacy benefit management (PBM) services, rehabilitation centers, counseling and home health care programs, physician network, and health insurance products. On January 1, 2017, Fairview became the sole member of Grand Itasca Clinic & Hospital (Grand Itasca) a Minnesota nonprofit corporation that is exempt from federal income taxation under Section 501(c)(3) of the IRC. Grand Itasca includes a multi-specialty clinic, a hospital, pharmacy, and various other programs and services including rehabilitation therapy, home care, and diagnostic imaging. On June 1, 2017, Fairview became the sole member of HealthEast Care System, a Minnesota nonprofit corporation that is exempt from federal income taxation under Section 501(c)(3) of the IRC, which together with its subsidiaries and affiliates operates a diversified health care system (collectively referred to as HealthEast). HealthEast provides a continuum of health services including acute-care and long-term care hospitals, inpatient and outpatient surgery, primary and specialty care, hospice, home care, and medical transportation. See further discussion regarding both transactions within the section Business Combinations (Note 14). Fairview serves the entire Minneapolis-St. Paul metro area, as well as communities throughout greater Minnesota. Fairview owns and operates eleven hospitals, including the University of Minnesota Medical Center, Fairview, a part of which is the University of Minnesota Masonic Children s Hospital (collectively, UMMC), which is the adult and pediatric teaching hospital of the University of Minnesota (the University). UMMC and eight of Fairview s other hospitals are located in the metro area. Fairview s other two hospitals are located in northern Minnesota. Together, Fairview also operates over 100 primary and specialty care clinics, six ambulatory care centers, over 40 retail and specialty pharmacies, as well as senior care housing and long-term care facilities, hospice and home care, medical transportation, and a health plan. The consolidated financial statements include the accounts of Fairview, comprising both taxexempt and taxable entities. All significant intercompany balances and transactions have been eliminated in consolidation

11 2. Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain assets, liabilities, revenues, and expenses reported in the consolidated financial statements and accompanying notes. Although estimates are considered to be fairly stated at the time the estimates are made, actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include currency on-hand, demand deposits with banks or other financial institutions, and short-term investments with maturities of 90 days or less from the date of purchase that have not otherwise been classified as long-term assets due to a designation for long-term purposes. Fairview s cash investments are placed with high-quality financial institutions and may exceed federal depository insurance limits. Inventories Inventories, consisting primarily of drugs and medical supplies, are recorded at the lower of cost or net realizable value on a first-in, first-out basis. Investments Fairview s investments include money market, fixed income, and equity securities, which are carried at fair value, based on quoted market prices, and are classified as trading securities. Investments in commingled funds are recorded at net asset value as a practical expedient to fair value. Investments in companies that hold interests in diversified funds of hedge funds and real estate funds (collectively, alternative investments) are recorded using the equity method of accounting, with the change in value of these investments recorded as investment return in the consolidated statements of operations and changes in net assets. Values of some of the underlying investments may be based on estimates that require varying degrees of judgment, and consequently, these estimates may differ from the values at which investments may be sold. Values for fund of hedge funds are primarily based on financial data supplied by the underlying investee funds. Values for real estate funds are based on the fair value of the underlying real estate. Investments designated for use within one year are classified as short-term investments in the consolidated balance sheets

12 2. Summary of Significant Accounting Policies (continued) Realized investment income on investments held by captive insurance subsidiaries is recorded in other operating revenue on the consolidated statements of operations and changes in net assets. Investment return (including realized and unrealized gains and losses, interest, and dividends) from all other investments and unrealized investment income on funds held by captive insurance subsidiaries are recorded as nonoperating gains or losses, unless restricted by donor or law. Derivative Financial Instruments Derivative financial instruments are recognized as either assets or liabilities based on the net fair value in accordance with the netting provisions in the counterparty agreement. Fairview uses pricing models for various types of derivative instruments that take into account the present value of estimated future cash flows and credit valuation adjustments. Gains or losses resulting from changes in the fair values of derivative financial instruments are reflected within the consolidated statements of operations and changes in net assets as nonoperating gains or losses, as none of the derivative financial instruments are designated as an accounting hedge. Any differences between interest received and paid under swap agreements are reported as nonoperating gains or losses. Investments in Related Parties Investments in entities in which Fairview has the ability to exercise significant influence over operating and financial policies, but does not have operational control, are recorded under the equity method of accounting. Equity method investments are recorded as investments in related parties in the consolidated balance sheets. Goodwill and Intangible Assets Goodwill and intangible assets related to acquisitions are recorded in the consolidated balance sheets. During 2017, 2016, and 2015, Fairview recorded $9,754, $36,042, and $1,549, respectively, of goodwill and intangible assets related to acquisitions

13 2. Summary of Significant Accounting Policies (continued) Land, Buildings, and Equipment Land, buildings, and equipment are recorded at cost and depreciated over estimated useful lives using the straight-line method. The following estimated useful lives are used in calculating depreciation: Land improvements Buildings Building additions and improvements Equipment 5 20 years years years 2 20 years Interest cost, net of related interest income, incurred on funds used during the period for construction of capital assets is capitalized as part of the cost of acquiring those assets. During 2017, 2016, and 2015, capitalized interest relating to construction-in-progress was $102, $171, and $2,234, respectively. Asset Impairment Fairview annually evaluates the carrying values of long-lived assets, goodwill, and intangible assets for impairment. Whenever events or changes in circumstances indicate that the carrying values may not be recoverable, impairment tests are performed to determine whether the carrying values are appropriate using estimated future undiscounted cash flow analyses. Impairment losses are recognized within operating income at the time the impairment is identified. Net Assets Unrestricted net assets are used to account for all transactions related to medical services and other operating and nonoperating activities for which there are no donor-imposed restrictions. Temporarily restricted net assets are those assets whose use by Fairview has been limited by donors or grantors to a specific purpose or time period

14 2. Summary of Significant Accounting Policies (continued) Non-controlling Interests The consolidated financial statements include entities in which Fairview has less than 100% ownership but otherwise controls in accordance with applicable accounting guidance. Noncontrolling interests represent the portion of excess of revenues over expenses and net assets not attributable to Fairview. Net Patient Service Revenue and Accounts Receivable for Medical Services Net patient service revenue is reported at estimated net realizable amounts, including contractual adjustments and discounts, from patients, third-party payors, and others for services provided. Contractual adjustments arising from various reimbursement arrangements with third-party payors are accrued on an estimated basis in the period in which the services are rendered. For uninsured patients who do not qualify for charity care, Fairview recognizes revenue based on established rates, less certain discounts, as determined by Fairview policies. An estimated provision for bad debts is recorded that results in net patient service revenue being reported at the net amount expected to be received. Fairview has determined, based on an assessment at the consolidated entity level, that patient service revenue is primarily recorded prior to assessing the patients ability to pay, and the entire provision for bad debts related to patient revenue is recorded as a reduction from patient service revenue in the consolidated statements of operations and changes in net assets. Accounts receivable for medical services due from patients and third-party payors for services provided are stated at net realizable amounts. The allowance for doubtful accounts is based upon management s assessment of historical and expected net collections considering historical business and economic conditions, trends in health care coverage, major payor sources, and other collection indicators. This assessment is performed monthly throughout the year, and the results are used to adjust the provision for bad debts and allowance for doubtful accounts to appropriate amounts. Certain reimbursement arrangements are subject to retroactive audit and adjustment. As a result, there is at least a reasonable possibility that recorded estimates could change in the near term. Differences between amounts originally recorded and finally settled are included in operations in the year in which the differences become known

15 2. Summary of Significant Accounting Policies (continued) Charity Care Fairview provides health care services to patients who meet certain criteria under its charity care policies without charge or at amounts less than its established rates. Since collection of these amounts is not pursued, they are excluded from net patient service revenue. The estimated cost of providing charity care was $25,765, $17,511, and $15,130 during 2017, 2016, and 2015, respectively; this amount is estimated by applying an overall cost-to-charge ratio to the charges incurred. Total cost includes wages and salaries, supplies, building maintenance, equipment, and administrative expenses. Fairview also provides a significant amount of other uncompensated care to uninsured and underinsured patients, with the related impact recognized within net patient service revenue and the provision for bad debts. Other Operating Revenue Other operating revenue primarily consists of health insurance services revenue, PBM revenue, income from investments in related parties recorded on the equity basis, unrestricted contributions, and other miscellaneous revenue. Health insurance services revenue consists of health premium revenue, administrative service revenue, and management fees. Health premium revenue is recognized in the period for which services are covered. Membership contracts are generally established on a yearly basis and are subject to cancellation by the employer group upon 30 to 90 days written notice. Administrative service revenue consists of third-party administrative fees from self-insured employer groups and network access fees from other insurance companies and third-party administrators. Third-party administrative fees are recognized as revenue during the period in which PreferredOne Administrative Services, Inc. (PAS) is obligated to provide services to the self-insured employer groups. Network access fees are recognized as revenue during the period in which PAS is obligated to reprice provider claims to discounted rates for the insurance companies and third-party administrators. Both types of administrative service revenue are primarily calculated on a per-employee, per-month basis and are due monthly

16 2. Summary of Significant Accounting Policies (continued) Administrative service revenue is recorded net of certain related fees, which primarily consist of national network access fees, employee assistance program and wellness fees, and pharmacy benefit administrative fees, which are added to the monthly administrative fee billed. Services provided to PBM clients include plan setup, claims adjudication with network pharmacies, formulary management, and reimbursement services. The PBM contractually assumes credit risk when administering pharmacy reimbursement contracts; therefore, revenue is recognized at the cost of the claim in addition to the administrative fees earned for providing the PBM services, except for claims fulfilled at Fairview pharmacies. For claims fulfilled at Fairview pharmacies, claims revenue is not recognized within the PBM as that revenue has been recognized within Fairview pharmacy. Rebates received under arrangements with manufacturers or third-party intermediaries are recorded as liabilities to be paid to the PBM clients, less applicable administrative fees. Under the PBM s pharmacy network contracts, the pharmacy is solely obligated to collect the copayments from the members. Under client contracts, the PBM does not assume liability for member co-payments in pharmacy transactions. As such, the PBM does not include member copayments to retail pharmacies in revenue. Contributions Contributions are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When donor restrictions are satisfied, restricted net assets are reclassified to unrestricted net assets and reported within the consolidated statements of operations and changes in net assets either as net assets released from restriction if the purpose relates to operations or as contributions of long-lived assets if the purpose relates to capital. Donor-restricted contributions whose restrictions are met within the same fiscal year as they are received are reported as unrestricted contributions in the accompanying consolidated financial statements. Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give are reported at fair value when the gift is received and all conditions have been satisfied. All unrestricted contributions are reported within other operating revenue in the consolidated statements of operations and changes in net assets

17 2. Summary of Significant Accounting Policies (continued) Contributions receivable are recorded in the period that the contributions are made and represent unconditional promises to give for various operating and capital purposes. Contributions that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. An allowance for uncollectible pledges receivable is determined based on a review of estimated collectability. Amounts receivable directly from donors are generally expected to be collected within one year. Fairview also records assets related to contributions raised through the University of Minnesota Foundation on Fairview s behalf, which are expected to be received within one to five years. The University of Minnesota Foundation releases funds to Fairview as the donor restrictions, if any, are satisfied. Performance Indicator The performance indicator is excess of revenues over expenses. Changes in unrestricted net assets that are excluded from excess of revenues over expenses include pension and other postretirement liability adjustments, contributions of long-lived assets, contributions from non-controlling interests, and distributions to non-controlling interests. New Accounting Guidance Not Yet Effective In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Revenue from Contracts with Customers (Topic 606). ASU No converged and replaced existing revenue recognition guidance, including industry-specific guidance, and requires revenue to be recognized in an amount that reflects the consideration the entity expects to be entitled in an exchange of goods or services. Fairview has closely assessed the new standard and monitored FASB activity, including the interpretations by the FASB Transition Resource Group for Revenue Recognition, throughout Fairview adopted the standard on January 1, 2018, using the full retrospective method of transition. As part of adopting the standard, Fairview identified revenue streams of like contracts to allow for ease of implementation. Fairview used primarily a portfolio approach to apply the new model to classes of customers with similar characteristics

18 2. Summary of Significant Accounting Policies (continued) The impact of adopting the new standard on Fairview s 2017, 2016, and 2015 total revenue, gains and other support and income from current activities is not material. The impact to income from current activities is not material because the analysis of Fairview s contracts under the new revenue recognition standard supports the recognition of revenue consistent with its current revenue recognition model. In addition, the number of Fairview s performance obligations under the new standard is not materially different from its contract segments under the existing standard. Fairview also does not expect the standard to have a material impact on its consolidated statements of financial position. In February 2016, the FASB issued guidance that leasing arrangements longer than 12 months result in an entity recognizing an asset and liability. This guidance is effective for Fairview beginning on January 1, Fairview is assessing the impact this guidance will have on its consolidated financial statements. In August 2016, the FASB issued guidance related to the presentation of financial statements of not-for-profit entities. The guidance will require net assets to be categorized either as net assets with donor restrictions or net assets without donor restrictions rather than the currently required three classes of net assets. The guidance also requires additional quantitative and qualitative disclosures and expenses to be disclosed by both their natural and functional classifications. This guidance is effective for Fairview beginning on January 1, Fairview is assessing the effect this guidance will have on its consolidated financial statements. In November 2016, the FASB issued guidance related to the statements of cash flows. The guidance will require restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. This guidance is effective for Fairview beginning on January 1, Fairview notes an additional $22,252 of restricted cash and cash equivalents is currently held as of December 31, 2017, which would be added to the cash balances reported on the statement of cash flows under the new guidance. Reclassifications Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the 2017 presentation. These reclassifications had no effect on the change in net assets or net assets as previously reported

19 3. Affiliations Effective January 1, 1997, the University transferred to Fairview certain assets and liabilities related to clinical care at the University of Minnesota Hospital and Clinic and membership rights in certain health-related affiliates, including Range Regional Health Services. Concurrently, Fairview and the University entered into various other agreements, including an affiliation between Fairview and the Academic Health Center (AHC) of the University, a lease of space at the University campus to Fairview, and a purchase services agreement whereby each party purchases certain core infrastructure services from the other. Fairview s bylaws authorize a board of directors of up to 21 members. Three of the 21 members of Fairview s Board of Directors were either appointed by and/or held positions at the University. Under the terms of the academic affiliation agreement (Agreement) with the AHC, Fairview and the University agreed to jointly support the research, education, and patient care missions of Fairview and the AHC. The Agreement expires on December 31, 2026, and renews automatically for six additional terms of ten years each, unless terminated in accordance with its provisions. Effective June 1, 2013, Fairview committed financial support to the University and the AHC through annual academic support payments, payable quarterly. Prior to June 1, 2013, Fairview provided academic support to the University through various fixed and variable grant payments. Revenue and expenses on a gross basis under all of Fairview s agreements with the University were, respectively, $10,810 and $57,527 for 2017; $10,848 and $55,246 for 2016; and $10,419 and $62,475 for These amounts were recorded within other operating revenue and the related expense categories in the consolidated statements of operations and changes in net assets. Amounts receivable from and payable to the University were, respectively, $6,597 and $14,271 at December 31, 2017; $7,695 and $8,116 at December 31, 2016; and $6,792 and $16,027 at December 31, These amounts were recorded within other current assets and accounts payable in the consolidated balance sheets. At the same time as its affiliation with the University, Fairview also entered into an affiliation agreement with University of Minnesota Physicians (UMPhysicians). UMPhysicians is a group of more than 1,100 physicians, including more than 900 University of Minnesota Medical School faculty members who primarily practice at the University of Minnesota Medical Center

20 3. Affiliations (continued) Fairview s affiliation agreement with UMPhysicians provides, among other things, that the primary clinical site for UMPhysicians shall be the University of Minnesota Medical Center, and Fairview will maintain the University of Minnesota Medical Center facility in accordance with specified standards. Fairview and UMPhysicians also have a management services agreement pursuant to which UMPhysicians manages the Fairview-owned outpatient specialty clinics that are located at the University of Minnesota Medical Center. The two parties have additional service agreements with each other for medical direction, hospitalist services, professional laboratory and pathology services, anesthesiology services, perfusion services, information services, cardiovascular service line management services, oncology service line management services, and other purchased services. Revenue and expenses on a gross basis under all of Fairview s agreements with UMPhysicians were, respectively, $6,582 and $226,593 for 2017; $6,807 and $219,446 for 2016; and $8,665 and $216,180 for These amounts were recorded primarily within other operating revenue and purchased services in the consolidated statements of operations and changes in net assets. Amounts receivable from and payable to UMPhysicians were, respectively, $36,353 and $65,041 at December 31, 2017; $13,025 and $53,870 at December 31, 2016; and $2,433 and $39,067 at December 31, These amounts were recorded within other current assets and accounts payable in the consolidated balance sheets. Effective June 1, 2013, Fairview, the University, and UMPhysicians entered into agreements (collectively, the M Health agreement) allowing the organizations to better coordinate and align management, oversight, and operation of services delivered by UMPhysicians at Fairview-owned facilities (known as University of Minnesota Health). The term of the agreement is five years from the effective date and automatically renews for successive five-year terms unless terminated by either party. Either party may terminate at the end of the initial or renewal term, for any reason or no reason, by providing no less than 12 months written notice to the other parties prior to the expiration of the then-current term

21 3. Affiliations (continued) On May 12, 2017, the University gave formal written notification of its intent to terminate the current M Health agreement. With the M Health agreement now expiring on June 30, 2018, Fairview, the University, and UMPhysicians have discussed the opportunity to simplify, clarify and improve the partnership between the organizations. The organizations are now negotiating the next evolution of the partnership while the original affiliation agreement entered into in 1997 remains in place. The M Health agreements provide for variable financial support based on financial performance of the combined operation against preassigned targets; if the targets are achieved, the financial support is allocated under the terms of the agreement. The minimum annual academic support commitment is $10,000 in 2018 through 2023, subject to achieving certain targets. University of Minnesota Health also participates in capital funding decisions for the investments Fairview makes within its University of Minnesota Medical Center campus. In February 2016, Fairview, the University, and UMPhysicians finished construction on the M Health Clinics and Surgery Center (CSC) that provides expanded space for outpatient services and replaces certain specialty clinics at the University of Minnesota Medical Center. In conjunction with this development, Fairview entered into a joint venture with UMPhysicians for certain outpatient health care operations and a master agreement establishing the overall management and operations framework of the CSC. Fairview also entered into lease agreements at the new facility that partially replaces existing leases between Fairview and the University for the specialty clinics. 4. Net Patient Service Revenue and Contractual Agreements With Third-Party Payors Fairview provides care to patients under the Medicare and Medicaid programs and through contractual arrangements with other third-party payors. The Medicare and Medicaid programs pay for most services at predetermined rates. Services provided to patients covered by other third-party payors are paid for on the basis of negotiated or contractual payment rates

22 4. Net Patient Service Revenue and Contractual Agreements With Third-Party Payors (continued) Changes in the Medicare and Medicaid programs or certain negotiated contracts could have a material effect on Fairview. Fairview utilizes a process to identify and appeal settlements on cost reports and claims by Medicare and other payors. Routine appeals, cost report settlements, settlements under Medicare rural floor budget neutrality provisions, and other adjustments pertaining to prior periods resulted in an increase (decrease) in net patient service revenue of approximately $7,919, ($3,210), and $6,300 in 2017, 2016, and 2015, respectively, which represented 0.2%, (0.1%), and 0.2%, respectively, of net patient service revenue. Fairview also has negotiated total cost of care payor contracts with various health insurers. Under these agreements, Fairview shares the benefits and, in certain agreements, risks with the insurers for reductions achieved in the total cost of care incurred by these payors at Fairview and non- Fairview service sites and on behalf of their enrollees who are attributed to Fairview primary care physicians or who have enrolled in a product that features Fairview. Attribution is based on where members receive the majority of their primary care visits. Certain of these contracts also have incentives related to the quality of care delivered to this population. In cases where Fairview has accepted downside risk, that risk is capped. Net patient service revenue by major payor source is summarized below: Medicare 27% 29% 25% Medicaid Negotiated contracts, commercial, and other Self-pay % 100% 100%

23 4. Net Patient Service Revenue and Contractual Agreements With Third-Party Payors (continued) Fairview grants credit without collateral to its patients, most of whom are residents in the communities served by Fairview and are insured under third-party payor agreements. The mix of accounts receivable (net of contractual discounts) for medical services at December 31 consists of the following: Medicare 21% 20% 20% Medicaid Negotiated contracts, commercial, and other Self-pay % 100% 100% Fairview s allowance for doubtful accounts increased by $21,610 from December 31, 2016 to December 31, 2017, and by $5,204 from December 31, 2015 to December 31, 2016, as a result of recent acquisitions and continued trends of higher gross accounts receivable driven by the growth of net patient service revenue in addition to a higher allowance required on increased outstanding self-pay receivables. Fairview does not maintain a significant allowance for doubtful accounts from third-party payors. Two negotiated contract payors accounted for a combined 29%, 31%, and 34% of net patient service revenue for 2017, 2016, and 2015, respectively, and 26%, 29%, and 30% of accounts receivable for medical services (net of contractual discounts) at December 31, 2017, 2016, and 2015, respectively

24 5. Land, Buildings, and Equipment Land, buildings, and equipment at December 31 consist of the following: Land and improvements $ 116,604 $ 64,698 $ 66,300 Buildings and improvements 1,692,411 1,406,951 1,387,404 Equipment 804, , ,660 Leased facilities and equipment 100,550 96,043 32,246 2,713,824 2,248,634 2,167,610 Accumulated depreciation and amortization (1,380,125) (1,277,882) (1,221,742) 1,333, , ,868 Construction-in-progress 49,703 30,194 37,094 $ 1,383,402 $ 1,000,946 $ 982,962 Depreciation expense, including amortization of assets under capital leases, was $133,444, $114,575, and $125,010 for 2017, 2016, and 2015, respectively

25 6. Investments The composition of Fairview s investments, including those with limited uses, at December 31 is summarized as follows: Cash and cash equivalents $ 410,226 $ 267,588 $ 282,998 Certificates of deposit 6, ,443 Asset-backed securities 65,165 61,022 45,180 Collateralized mortgage obligation securities 6,973 4,677 2,718 Commercial mortgage-backed securities 29,546 31,180 21,407 Commercial paper 2,410 2, Corporate debt securities 329, , ,996 Equity mutual funds 633, , ,630 Equity securities 61,748 50,723 76,874 Fixed income mutual funds 126, , ,702 Municipal debt securities 52,310 52,922 6,248 U.S. government agency and mortgagebacked securities 138, ,215 90,120 U.S. Treasury debt securities 188, , ,008 Equity commingled funds 83,788 64,252 52,493 Fund of hedge funds 158, , ,744 Hedge funds 135, ,624 22,177 Private capital funds 3,105 2,000 Real estate investment trusts 975 1,228 1,749 $ 2,433,018 $ 1,924,652 $ 1,683,

26 6. Investments (continued) Alternative investments accounted for using the equity method of accounting and investments in certain entities that calculate net asset value (NAV) per share (or its equivalent), including restricted and unrestricted assets, are as follows: Balance Reported at December 31 Unfunded Redemption Redemption Commitments Frequency Notice Period Equity commingled funds $ 83,788 $ 64,252 $ 52,493 $ Monthly 5 days Equity long/short hedge funds 82,690 65,177 Monthly/ Quarterly days Opportunistic fixed-income hedge fund 24,026 18,044 Quarterly 60 days Strategic fixed-income hedge fund 29,129 26,403 22,177 Annually 120 days Fund of hedge funds 158, , ,743 Semiannually 95 days Real estate investment trust 975 1,228 1,749 Monthly/ Quarterly 0 20 days Private capital fund 3,105 2,000 17, years N/A Total $ 382,202 $ 305,258 $ 192,162 $ 17,000 Fairview s investments are exposed to various types and levels of risk. Equity securities and equity mutual funds expose Fairview to market risk, performance risk, and liquidity risk for both domestic and international investments. Market risk is the risk associated with major movements of the equity markets. Performance risk is the risk associated with a company s operating performance. Fixed-income securities and fixed-income mutual funds expose Fairview to interest rate risk, credit risk, and liquidity risk. As interest rates change, the value of many fixed-income securities is affected, including those with fixed interest rates. Credit risk is the risk that the obligor of the security will not fulfill its obligations. Liquidity risk is affected by the willingness of market participants to buy and sell particular securities. Liquidity risk tends to be higher for equities related to small capitalization companies and certain alternative investments, such as private capital funds, hedge funds, and fund of hedge funds. Through Fairview s investments in hedge funds and fund of hedge funds, Fairview is indirectly involved in investment activities, such as securities lending, trading in futures and forward contracts, and other derivative products. Derivatives are used to adjust underlying manager portfolio risk exposure. While these financial instruments may contain varying degrees of risk, Fairview s risk with respect to such transactions

27 6. Investments (continued) is limited to its capital balance in each investment. Due to the volatility in the capital markets, there is a reasonable possibility of subsequent changes in fair value resulting in additional gains and losses in the near term. Investment return is summarized and reported in the consolidated statements of operations and changes in net assets as follows: Dividends and interest $ 35,123 $ 29,422 $ 28,995 Investment expenses, net (3,288) (2,227) (3,759) Net realized gains 56,595 12,157 52,759 Unrealized gains (losses) on trading investments 113,567 40,814 (88,471) $ 201,997 $ 80,166 $ (10,476) Other operating revenue $ 902 $ 574 $ 353 Nonoperating gains (losses) 198,797 78,728 (10,588) Contributions and other changes, net, in temporarily restricted net assets 2, (241) $ 201,997 $ 80,166 $ (10,476)

28 7. Debt Fairview s long-term debt is summarized as follows: Annual Interest Rates Final Scheduled Maturity Amount Outstanding at December Health Care System Revenue Bonds: Series 2017A 2.00% 5.00% 2047 $ 202,100 $ $ Series 2017B Taxable 3.13% ,415 Series 2017C Taxable 2.79% ,410 Series 2015A 2.00% 5.00% , , ,255 Series 2015 Taxable 4.16% , , ,440 Series 2008B 6.50% , , ,165 Series 2008C Variable ,375 84,375 84,375 Series 2008D Variable ,125 28,125 28,125 Series 2008E Variable , , ,000 Senior housing revenue bonds and notes Capital lease obligations Other Various fixed rate Various 55,663 52,722 60,336 Various fixed rate Various 77,873 76,457 33,051 Various fixed rate Various 16,375 20,934 18,686 1,394,761 1,008, ,433 Net unamortized premium 28,259 6,232 6,424 Unamortized debt issuance costs (11,926) (9,778) (10,225) Current maturities of long-term debt (23,692) (17,948) (16,198) $ 1,387,402 $ 986,679 $ 955,434 In October 2010, Fairview tendered the Series 2008C, 2008D, and 2008E bonds; terminated the related letters of credit; and entered into direct purchase agreements with two financial institutions for those bonds in the aggregate principal amount of $222,500. In October 2016, Fairview entered into an amendment modifying the terms of the Series 2008C and 2008D bonds and renewing the bonds for an additional two years, setting the expiration coterminous with the 2008E bonds in October As part of this amendment, Fairview also modified the terms of its Series 2008E direct purchase agreement. The Series 2008C, 2008D, and 2008E bonds have a one-year term-out provision, which would cause the bonds to be due in their entirety in October 2019, unless Fairview renews the direct purchase agreements or enters into new direct purchase agreements with other financial institutions. Fairview has continued to disclose the aggregate maturities in accordance with the original loan agreements and respective principal payment schedules

29 7. Debt (continued) In September 2015, the City of Minneapolis, on behalf of Fairview, issued Series 2015A taxexempt bonds in the aggregate principal amount of $111,255 to refund the principal amount of previously outstanding revenue bonds and provide new money to fund facility expansion. At the same time, Fairview also issued Series 2015 Taxable private placement bonds in the aggregate principal amount of $352,440 to refund the principal amount of previously outstanding revenue bonds. The Series 2015A bonds were issued at a premium of $11,808. Fairview recorded a $66,661 loss on extinguishment of debt related to these transactions, which is recorded on a net basis in other nonoperating gains (losses). In August 2017, the Housing and Redevelopment Authority of the City of Saint Paul, on behalf of Fairview, issued Series 2017A tax-exempt bonds in the aggregate principal amount of $202,100 to refund existing HealthEast and Grand Itasca debt. At the same time, Fairview also entered into taxable term loans with two financial institutions for a total of $190,825 to refund existing HealthEast taxable direct placement debt. The Series 2017A bonds were issued at a premium of $22,628 and recorded in long-term debt. Fairview was able to issue the new debt at lower interest rates than the original debt acquired. These issuances resulted in a $9,397 loss on early extinguishment of debt related to these transactions, which is recorded on a net basis in other nonoperating gains (losses) in the consolidated statement of operations and changes in net assets. The Fairview Obligated Group (Obligated Group) is defined under the Master Trust Indenture dated September 1, 2015, between Fairview and U.S. Bank National Association, as amended and supplemented from time to time (the MTI). Under the terms of the MTI, members of the Obligated Group are jointly and severally liable for the debts and other obligations of each other and subject to various restrictive covenants, including limitations on incurring additional debt, sale of assets, and the maintenance of certain ratios, including days cash on hand, debt to capitalization, and debt service coverage. On August 30, 2017, Fairview entered into the Third Supplement to Master Indenture, which admitted HealthEast Care System, HealthEast St. Joseph s Hospital, HealthEast St. John s Hospital, HealthEast Woodwinds Hospital, and Grand Itasca Clinic and Hospital as obligated affiliates as permitted under Section 9.01 of the MTI. As of December 31, 2017, the Obligated Group consists of Fairview Health Services, Fairview Pharmacy Services, Range Regional Healthcare Services, HealthEast, HealthEast St. Joe s Hospital, HealthEast St. John s Hospital, HealthEast Woodwinds Hospital, and Grand Itasca Clinic and Hospital (collectively, Obligated Affiliates)