~ PROMEDICA PROMEDICA HEALTHCARE OBLIGATED GROUP. Quarterly Financial Disclosure

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1 PROMEDICA HEALTHCARE OBLIGATED GROUP Quarterly Financial Disclosure Third Quarter 2015

2 The following discussion and analysis of operations provides information that management believes is relevant to an assessment and understanding of the ProMedica Healthcare Obligated Group's results of operations and financial condition. The financial data relating to the Obligated Group, as defined in the Master Trust Indenture, is provided as supplementary information and is not intended to provide information in accordance with accounting principles generally accepted in the United States. This discussion should be read in conjunction with the Obligated Group financial statements for the nine months ended September 30, Organizational Overview ProMedica Health System ("ProMedica") is the parent organization of an integrated health care delivery system that provides health care and related services in 27 counties in northwest and west central Ohio and southeast Michigan, with a Paramount Medicaid product that serves all of Ohio. The nonprofit and business organizations controlled directly or indirectly by ProMedica, own and operate 12 acute area hospitals, various integrated and continuing care providers, insurance companies, physician organizations, and an academic health center corporation. ProMedica also utilizes joint venture and other affiliation agreements to provide health care and related services. Several controlled foundations support the System as fundraising entities for the benefit of ProMedica hospitals and continuing care facilities and services. 2

3 Only some of the nonprofit business organizations within ProMedica are members of the ProMedica Healthcare Obligated Group, ("Obligated Group") and are listed below: Co~ratlon Acute Care The Toledo Hospital Toledo Children's Hospital Wildwood Orthopaedic and Spine Hospital Flower Hospital Defiance Regional Medical Center Bay Park Community Hospital Fostoria Community Hospital St. Luke's Hospital Memorial Hospital Fremont Emma L. Bixby Medical Center Herrick Medical Center TOTAL ACUTE CARE BEDS Long-Term Care/Assisted Living/Other Lake Park Nursing Care Center Goerlich Center for Alzheimer's Care Ebeid Hospice Caring Home Health Services Herrick Manor Provincial House of Adrian Charlotte Stephenson Manor Wildwood Medical Center TOTAL LONG-TERM CARE BEDS Licensed Beds 543< 1 J 151 < 1 ) ('.<) 51 < 3 l 91 ( 4 ) 25lt>) 315 (S) 100 ( 7 ) 101 (H) 35(!,I) 1, n/a n/a 404 Location, Toledo, Ohio Toledo, Ohio Toledo, Ohio Sylvania, Ohio Defiance, Ohio Oregon, Ohio Fostoria, Ohio Maumee, Ohio Fremont, Ohio Adrian, Michigan Tecumseh, Michigan Sylvania, Ohio Sylvania, Ohio Sylvania, Ohio Sylvania, Ohio Tecumseh, Michigan Adrian, Michigan Adrian, Michigan Toledo, Ohio (1) Toledo Children's Hospital is a pediatric acute care hospital located within The Toledo Hospital. Includes 44 bassinets and 45 inpatient psychiatric beds (2) Includes 74 inpatient psychiatric beds, 45 physical rehab beds and 24 bassinets (3) Includes 25 critical access beds, 1 O inpatient psychiatric beds and 16 bassinets (4) Includes 14 bassinets (5) Includes 25 critical access beds (6) Includes 17 bassinets (7) Includes 18 bassinets (8) Includes 11 pediatric beds and 13 bassinets (9) Includes 25 critical access beds. 10 inpatient psychiatric beds Non-Obligated Group Entities and Activities In addition to the acute and continuing care providers that comprise the Obligated Group, ProMedica owns and operates an approximate 329,000 member health plan (ProMedica Insurance Corporation), a captive insurance corporation (ProMedica Indemnity Corporation), a physician corporation (ProMedica Physicians Group) which employed 449 physicians as of September 30, 2015, supporting foundations, and several joint ventures. Additionally, ProMedica Monroe Regional Hospital (a 251 licensed bed facility located in Monroe, Mich igan) is also part of the ProMedica Health System. For the nine months ended September 30, 2015, total net operating revenue of these non-obligated Group entities was $1, million, representing approximately 49.5% of ProMedica's total net operating revenue. The current structure reflects the net financial performance of employed specialists in the financial statements of the hospitals, and therefore the Obligated Group. 3

4 Significant Developments Leadership Updates Tim Jakacki, President of Bixby and Herrick Hospitals, retired in July 2015 after a distinguished career that spanned over four decades. Julie Yaroch, D.O., succeeded Mr. Jakacki as President of ProMedica Bixby and Herrick Hospitals. Dr. Yaroch most recently served as President of ProMedica Defiance Regional Hospital. Darrin Arquette has been appointed President of ProMedica Defiance Regional Hospital. He also serves as executive lead of the Neurosciences service line for ProMedica. Mr. Arquette most recently served as Vice President of Operations at ProMedica Flower Hospital. Addition to ProMedica Healthcare Obligated Group In connection with the Series 2015A debt issuance outlined below, effective September 29, 2015, Memorial Hospital d/b/a ProMedica Memorial Hospital officially became a member of the ProMedica Healthcare Obligated Group. All financial information and ratios included in this disclosure report include the current year as well as prior year results (for comparative purposes) of ProMedica Memorial Hospital. Debt Issuance Public Market Issues - In September of 2015, the Obligated Group issued the following: Series 2015A - $273 million of fixed rate taxable debt. Proceeds will include new money and also indirect refunding of the Series 201 O bonds. Series $47 million (new money) of fixed rate tax-exempt debt. Private Placement Issues - In October of 2015, the Obligated Group issued the following: Series 2015C - $28 million of taxable variable rate debt which refunded the outstanding Series bonds. Series $5 million (new money) of taxable variable rate debt. Series 2015E - $39 million of taxable rate debt which will refund the Series 2006 bonds. 4

5 Significant Developments (cont'd.) Credit Ratings Update In September 2015, Standard & Poor's reaffirmed their credit rating of AA for the ProMedica Healthcare Obligated Group; however, the outlook was lowered from stable to negative based on evolving market conditions and uncertainty about the impact of divestitures and affiliations. In August 2015, Moody's reaffirmed their rating of Aa3 (stable outlook). Affiliation Updates St. Luke's (Please see previous filings for a detailed sequence of events regarding the joinder) ProMedica and St. Luke's Hospital are in the process of developing a divestiture plan that will eventually be approved by the FTC. ProMedica is also taking the necessary steps to remove St. Luke's Hospital from the Obligated Group. On October 23, 2015, ProMedica Health System filed a Request for Extension of Time to Comply with Final Order with the Federal Trade Commission, requesting that the time to complete divestiture be extended until March 31, Until the effective date of divestiture, St. Luke's Hospital will continue to remain a member of ProMedica. University of Toledo Affiliation On August 26, 2015, ProMedica and the University of Toledo signed an Academic Affiliation Agreement to support the academic programs of the UT College of Medicine and Life Sciences, including research, teaching and residencies. The agreement includes a commitment by ProMedica to provide: Academic support payments to the University of Toledo for certain defined services, research, branding rights, and other related services $250 million capital commitment for construction and/or renovation of University of Toledo College of Medicine and Life Sciences facilities The goal is to create an Academic Medical Center at ProMedica Toledo Hospital and Toledo Children's that is among the best in the country. As part of this, substantially all medical students, residents, fellows and other health professional learners will be placed at ProMedica facilities. The University of Toledo Medical Center (UTMC) is not part of this transaction and will retain total control of UTMC. 5

6 Significant Developments (cont'd.) Community Health Center of Branch County On June 29, 2015, ProMedica signed a Letter of Intent contemplating a three-year agreement to provide executive management personnel and consulting services to Community Health Center of Branch County, an 87-bed county hospital located in Coldwater, Michigan. Since such date, ProMedica has conducted due diligence and negotiated a 3-year Management Agreement with Community Health Center which would commence January 1, 2016, during which term ProMedica would have an obligation to purchase the assets of Community Health Center (subject to limited termination rights). During the term of the Management Agreement, Community Health Center will continue to exercise ultimate authority, supervision, direction and control of the hospital through its Board of Trustees. The definitive agreements remain subject to corporate and governmental approval. Project Updates Generations of Care Project ProMedica is embarking on the largest, single construction project in its history - the Generations of Care Project, a $350 million dollar replacement tower on the campus of ProMedica Toledo Hospital and Toledo Children's Hospital. The replacement tower will be a 302-bed patient care tower to replace the nearly 90 year old facility on North Cove Boulevard. The 13-story structure is scheduled to open in 2019 and will include larger, all private rooms featuring user-friend,ly technology for patients and families. Site preparation for the Generations replacement tower will begin by year end with actual construction expected to start mid ~ PROMEDJCA

7 Operating Income and Operating Cash Flow The total operating revenue for the Obligated Group was $1, million for the nine months ending September 30, 2015, an increase of $20.7 million or 1.8% over the same period in The increase in revenue was largely due to increases in inpatient pediatric and psychiatric volumes as well as emergency center visits. Long-term care patient/resident days continued to decline as the Lake Park nursing care facility ramped down to a minimum number of patients during transition to the new skilled nursing facility which opened late October. This facility is a joint venture between ProMedica and HCR Manor Care which is headquartered in Toledo, Ohio. The state-of-the-art facility has 120 beds and provides medically complex and intensive rehabilitation services for short-term patients transitioning from hospital to home and is located on ProMedica Flower Hospital's campus. Net Revenue (in millions) $1,200.0 $1,000.0 $800.0 $600.0 $400.0 $200.0 $- YTD 9/3 0/2015 YTD 9/3 0/ ~ PRO M EDJ CA

8 Operating Income and Operating Cash Flow (Cont'd.) ProMedica contracts with all major payers and no one payer represents more than 9% of the revenue base. Paramount serves around 233,000 Medicaid lives throughout the state of Ohio. This amount has increased by 11,400 since the end of The expansion in membership is due to Paramount serving the entire state since July 2013 instead of NW Ohio and the increased eligibility available in Ohio beginning in 2014 due to the passage of the Affordable Care Act. Paramount has more extensive plan offerings in 2015 for the individual health insurance marketplace and enrollment in this plan grew by 1,600 lives after open enrollment. The Medicare Advantage product saw increased enrollment after the open enrollment period to around 15,000 members. Commercial business remains steady in our Ohio marketplace but has declined in Michigan. Blue Cross 11% Managed Care 24% Self Pay, 1% Medicare, 44% Medicaid, 20% September 30, 2015 Note: Medicare and Medicaid HMOs are included within Medicare and Medicaid. "Blue Cross" includes both Anthem BCBS {9%) and BCBS of Michigan (2%). These payers are contracted separately. Charity care for the nine months ended September 30, 2015 decreased from the prior year comparable period, from 1.51 % to 1.39% of gross revenue. Bad debt decreased from 1.28% to 0. 79% of gross revenue over the prior year comparable period. Key drivers for the decline in both charity care and bad debt were more patient access to insurance coverage through Ohio Medicaid expansion and the Patient Protection and Affordable Care Act (PPACA). 8

9 Operating Income and Operating Cash Flow {Cont'd.) Total operating expenses for the nine months ended September 30, 2015 increased by $43.6 million or 4.0% over the same period in The implementation of a new electronic medical record system along with increased expenses associated with the employed physicians and increased staffing were the main drivers of the increase in expenses. The remaining increase is primarily due to increased drug costs per case. Profitability (OOO's omitted) $135,000 $112,500 $90,000 $67,500 $45,000 $22,500 $- Operating Income YTD 9/ 3 0/ 2015 $53,610 Operating Cash Flow YTD9/30/2014 Operating income for the nine months ended September 30, 2015 was $30.6 million compared to $53.6 million for the prior year comparable period with operating margins of 2.6% and 4.6% respectively. Operating cash flow was 9.3% or $109.5 million compared to 11.1% or $128.5 million for the prior year comparable period. 9

10 Balance Sheet and Cash Position Unrestricted cash and investments were $1.6 billion as of September 30, 2015, which represented days cash on hand as of September 30, 2015, compared to days cash on hand as of December 31, Days cash increased due to the receipt of bond proceeds from the issuance of the Series 2015 bonds. Approximately $143.8 million of investments have liquidity provisions that may restrict their ability to be liquidated in 30 days or less. ProMedica maintains a highly diversified investment portfolio through its pooled investment program and utilizes an independent investment advisor to assist with the asset allocation, performance and compliance monitoring and manager selection. Investment income for the nine months ended September 30, 2015 was a loss of $50.3 million, reflecting $90.2 million of unrealized losses (including $1.2 million of loss on interest rate swaps). Days Cash on Hand YTO 9/ 30/ /31/

11 Third Quarter - September 30,2015 Balance Sheet and Cash Position (Cont'd.) As of September 30, 2015, the Obligated Group had $89.1 million recorded as contingent current portion of long-term debt. This amount represents the outstanding variable rate demand bonds and direct bank notes that have a contractual maturity in excess of one year, but due to terms within the applicable agreement, are recorded as contingency current in accordance with generally accepted accounting principles. Cash to Debt Ratios (x) Cash to Demand Debt Cash to Total Debt YT0 9/30/ /31/ 2014 Unrestricted net assets as of September 30, 2015 decreased by $78.5 million to $1,603.0 million, compared to $1,681.6 million as of December 31, 2014 primarily due to declines in the investment markets and transfers to affiliated entities. Total debt outstanding was $850.5 million, or 35% of capitalization. 11

12 Third Quarter - September 30,2015 Calendar Year Acute Discharges 65,241 62, 198 Newborn Discharges 7,354 7,159 Outpatient Surgeries 40,778 36,938 Emergency Room Visits 305, ,606 ALOS-Acute % of Staffed Beds (Acute Care) 58% 59% Home Health Admissions 11,943 10,914 Home Care Visits 187, ,517 L TC Patient/Resident Days 116, ,336 Inpatient Hospice Days 3,465 3,195 Year-To-Date 3rd Quarter ,212 48,627 5,328 5,622 30,493 29, , , % 58% 9,202 7, , ,206 78,600 90,694 2,733 2,610 Obligated Group Acute Care Hospital Revenue Sources Medicare< 1 ) Medicaid< 1 l Blue Cross Managed Care Self Pay Totals Calendar Year % 45.0% 18.0% 15.4% 11.1% 10.6% 24.4% 25.4% 1.8% 3.6% 100.0% 100.0% Year-To-Date 3rd Quarter % 44.8% 19.6% 17.8% 10.9% 10.9% 23.7% 24.5% 1.3% 2.0% 100.0% 100.0% < 1 J Includes Medicare and Medicaid HMOs. 12

13 PROMEDICA HEALTHCARE OBLIGATED GROUP Unaudited Statement of Operations September 30, 2015 & 2014 (In thousands of dollars) Unrestricted revenues, gains, and other support: September 30, September 30, Net patient service revenue $ 1,172,178 $ 1,180,496 Provision for bad debt (35,349) (61,090) Net patient service revenue less bad debts 1,136,829 1, 119,406 Net assets released 5, 115 5,060 Other 32,597 29,418 Total revenues, gains, and other support 1,174,541 1,153,884 Expenses: Salaries, wages, and employee benefits 440, ,139 Food and drugs 89,281 81,580 Medical Expense Contracted fees 100, ,269 Supplies 146, ,620 Insurance 10,963 10,699 Utilities 13,959 14,226 Depreciation and amortization 59,423 56,725 Interest 19,392 18, 189 Other 264, ,827 Total expenses 1,143,905 1,100,274 Operating income (loss) 30,636 53,610 Other income: Investment Income 39,938 68,997 Net unrealized gains (losses) (88,997) (26,624) Change in fair value of interest rate swap (1,248) (6,037) Other 1,442 2,167 Excess (deficiency) of revenues over expenses (18,229) 92, 113 Contributions and other Net assets released from restrictions 3,178 1,733 Transfers (to) from affiliated entities (63,265) (22,497) Other non-operating income (227) (13) Cumulative affect of change in accounting principle Increase (decrease) in unrestricted net assets $ (78,543) $ 71,336

14 PROMEDICA HEALTHCARE OBLIGATED GROUP Unaudited Balance Sheet (in thousands of dollars) ASSETS September December CURRENT ASSETS Cash and cash equivalents Marketable securities Accounts receivable, net Assets limited as to use or restricted Inventories Securities lending collateral Other current assets TOTAL CURRENT ASSETS ASSETS WHOSE USE IS LIM ITED Restricted funds Bond indenture agreement funds Internally designated for capital acquisition Other segregated investments TOTAL ASSETS WHOSE USE IS LIMITED Property, plant and equipment, net OTHER ASSETS Deferred bond issuance costs. net Goodwill Other intangible assets Investments in affiliated companies Other assets TOTAL OTHER ASSETS TOTAL ASSETS $154,097 18, , , , ,865 2,755 10,816 1,385,849 14,923 1,414, ,522 4,259 18, , ,129 52,860,859 $58,514 36, , ,541 48, ,408 2, ,371,092 12,743 1,386, ,297 4, , ,863 $2,581,280 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable and accrued liabilities Accrued compensation and benefits Current installments of long-term debt Contingent current installments of long-term debt Estimated third-party payor settlements Professional liability and workers' compensation Accrued post retirement health care benefits Other TOTAL CURRENT LIABILITIES OTHER LIABILITIES Accrued professional liabilities and workers' compensation, less current portion Deferred compensation Pension Accrued post retirement health care benefits, less current portion Other TOTAL OTHER LIABILITIES Long-term debt, net of current installments TOTAL LIABILITIES NET ASSETS Unrestricted Temporarily restricted Permanently restricted TOTAL NET ASSETS TOTAL LIABILITIES AND NET ASSETS $131,930 66,609 10,985 89,105 39, , ,602 5,707 8,324 61,951 2,469 37, , ,371 1,255,090 1,603, ,605,769 $2,860,859 $ ,302 11,825 90,655 54, , ,137 65,016 2,566 36, , , ,032 1,681,556 2, ,684,248 $2,581,280

15 PROMEDICA HEALTHCARE OBLIGATED GROUP Unaudited Statement of Changes in Net Assets for the nine months ended September 30, 2015 (in thousands of dollars) Temporarily Permanently Unrestricted Restricted Restricted Total NET ASSETS AS OF DECEMBER 31, 2014 Excess of revenues over expenses Investment Income Restricted contributions Transfers (to) from affiliated entities Other non-operating revenue Net assets released from restrictions $ 1,681,556 $ 2,692 (18,228) - (2) - 2,407 (63,265) - (227) - 3,178 (2,342) $ - $ 1,684,248 (18,228) (2) 2,407 (63,265) (227) Increase (decrease) in net assets (78,542) 63 (78,479) NET ASSETS AS OF SEPTEMBER 30, 2015 $ 1,603,014 $ 2,755 $ - $ 1,605,769

16 PROMEDICA HEALTHCARE OBLIGATED GROUP Unaudited Consolidated Statements of Cash Flows- Obligated Group For the Period Ended September 30, 2015 (in thousands of dollars) Cash flows from operating activities Increase (decrease) in net assets Adjustments to reconcile increase (decrease) in net assets to net cash provided by operating activities Inherent contribution received in the acquisition of St. Lukes net assets Depreciation and amortization Provision for bad debts Net assets released from restrictions Change in net unrealized (gains) losses on investments Realized (gains) losses on investments (Increase) decrease in, net of acquistion: Accounts receivable Supplies and other current assets Other assets Increase (decrease) in, net of acquistion: Accounts payable and accrued liabilities Estimated third-party payor settlements Net cash provided (used) by operating activities Cash flows from investing activities Acquisition of property and equipment, net of disposals Acquisition of businesses, net of cash acquired Less amounts released from restrictions Cash outflows for property and equipment (Increase) decrease in: Cash acquired in acquisition of St. Lukes Marketable securities and total assets limited as to use Net cash provided (used) by investing activities Cash flows from financing activities Proceeds of issuance of long term debt Repayment of long term debt Contributions and other Net cash provided (used) by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Year to Date September 30, 2015 ($78,479) 59,423 35,349 (3, 178) 88,997 (26,656) (35,066) (114,764) (5,578) 23,392 (15,638) (72, 198) (113,336) 3, 178 (110, 158) (72,365) (182,523) 325,759 50,000 (25,455) 350,304 95,583 58,514 $154,097 Year to Date September 30, 2014 $72,826 56,725 61,090 (1,733) 26,624 (57,207) (103,852) (19,554) 952 5,301 4,387 45,559 (73,698) 1,733 (71,965) 34,420 (37,545) 0 0 (2,497) (2,497) 5,517 76,926 $82,443