For The Period. The Cleveland

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1 Interim Unaudited Consolidated Financial Statements and Other Information For The Period Ended June 30, 2013 The Cleveland Clinic Foundation d.b. a. Cleveland Clinic Health System

2 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION Contents Unaudited Consolidated Financial Statements Unaudited Consolidated Balance Sheets... 1 Unaudited Consolidated Statements of Operations and Changes in Net Assets... 3 Unaudited Consolidated Statements of Cash Flows... 7 Notes to Unaudited Consolidated Financial Statements... 8 Other Information Unaudited Consolidating Balance Sheets Unaudited Consolidating Statements of Operations and Changes in Net Assets Unaudited Consolidating Statements of Cash Flows Utilization Payor Mix Research Support Key Ratios Management Discussion and Analysis of Financial Condition and Results of Operations /29/2013

3 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Balance Sheets ($ in thousands) June 30 December Assets Current assets: Cash and cash equivalents $ 131,682 $ 82,793 Patient receivables, net 826, ,948 Investments for current use 55, ,849 Other current assets 292, ,729 Total current assets 1,306,489 1,361,319 Investments: Long-term investments 4,673,429 4,328,069 Funds held by trustees 118, ,319 Assets held by captive insurance subsidiary 80,894 92,897 Donor restricted assets 399, ,243 5,272,807 4,941,528 Property, plant, and equipment, net 3,439,294 3,479,493 Other assets: Pledges receivable, net 131, ,022 Trusts and interests in foundations 111, ,186 Other noncurrent assets 174, , , ,063 Total assets $ 10,436,755 $ 10,205,403 8/29/2013 Page 1

4 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Balance Sheets (continued) ($ in thousands) June 30 December Liabilities and net assets Current liabilities: Accounts payable $ 292,227 $ 320,691 Compensation and amounts withheld from payroll 296, ,125 Current portion of long-term debt 50,915 53,386 Variable rate debt classified as current 490, ,240 Other current liabilities 367, ,460 Total current liabilities 1,497,420 1,544,902 Long-term debt: Hospital revenue bonds 2,350,085 2,372,533 Notes payable and capital leases 84,374 87,218 2,434,459 2,459,751 Other liabilities: Professional and general insurance liability reserves 128, ,926 Accrued retirement benefits 574, ,132 Other noncurrent liabilities 410, ,312 1,113,167 1,198,370 Total liabilities 5,045,046 5,203,023 Net assets: Unrestricted 4,699,557 4,332,388 Temporarily restricted 434, ,234 Permanently restricted 257, ,758 Total net assets 5,391,709 5,002,380 Total liabilities and net assets $ 10,436,755 $ 10,205,403 See notes to unaudited consolidated financial statements. 8/29/2013 Page 2

5 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Statements of Operations and Changes in Net Assets ($ in thousands) Operations Three Months ended June Unrestricted revenues Net patient service revenue $1,587,235 $1,484,597 Provision for uncollectible accounts (108,652) (96,434) Net patient service revenue less provision for uncollectible accounts 1,478,583 1,388,163 Other 165, ,813 Total unrestricted revenues 1,643,585 1,534,976 Expenses Salaries, wages, and benefits 924, ,275 Supplies 164, ,704 Pharmaceuticals 120, ,419 Purchased services 101,899 99,584 Administrative services 37,187 34,302 Facilities 76,312 77,758 Insurance 15,292 16,213 1,440,839 1,366,255 Operating income before interest, depreciation, and amortization expenses 202, ,721 Interest 26,789 26,465 Depreciation and amortization 94,749 89,947 Operating income before special charges 81,208 52,309 Special charges - 2,322 Operating income 81,208 49,987 Nonoperating gains and losses Investment loss (13,803) (40,322) Derivative gains (losses) 34,096 (45,244) Other, net 106 (6,901) Net nonoperating gains and losses 20,399 (92,467) Excess (deficiency) of revenues over expenses 101,607 (42,480) 8/29/2013 Page 3

6 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Statements of Operations and Changes in Net Assets (continued) ($ in thousands) Changes in Net Assets Net Assets Temporarily Permanently Unrestricted Restricted Restricted Total Total net assets at April 1, 2012 $ 4,055,321 $ 410,563 $ 245,533 $ 4,711,417 Deficiency of revenues over expenses (42,480) - - (42,480) Donated capital and assets released from restrictions for capital purposes 3,455 (3,402) - 53 Gifts and bequests - 5,737 1,464 7,201 Net investment income - (2,134) - (2,134) Net assets released from restrictions used for operations included in other unrestricted revenues - (4,866) - (4,866) Retirement benefits adjustment 11, ,096 Change in interests in foundations ,995 2,858 Change in value of perpetual trusts - - 6,473 6,473 Net change in unrealized losses on nontrading investments (1,002) - - (1,002) Other (Decrease) increase in net assets (28,888) (3,802) 9,932 (22,758) Total net assets at June 30, 2012 $ 4,026,433 $ 406,761 $ 255,465 $ 4,688,659 Total net assets at April 1, 2013 $ 4,585,856 $ 435,726 $ 255,643 $ 5,277,225 Excess of revenues over expenses 101, ,607 Donated capital and assets released from restrictions for capital purposes 3,360 (3,114) Gifts and bequests - 8, ,348 Transfer of net assets 647 (647) - - Net investment income Net assets released from restrictions used for operations included in other unrestricted revenues - (6,606) - (6,606) Retirement benefits adjustment 6, ,569 Change in interests in foundations - (612) Change in value of perpetual trusts Net change in unrealized gains on nontrading investments (433) - - (433) Other 1, ,951 Increase (decrease) in net assets 113,701 (1,563) 2, ,484 Total net assets at June 30, 2013 $ 4,699,557 $ 434,163 $ 257,989 $ 5,391,709 8/29/2013 Page 4

7 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Statements of Operations and Changes in Net Assets ($ in thousands) Operations Six Months ending June Unrestricted revenues Net patient service revenue $ 3,150,626 $ 3,006,755 Provision for uncollectible accounts (213,905) (203,323) Net patient service revenue less provision for uncollectible accounts 2,936,721 2,803,432 Other 310, ,989 Total unrestricted revenues 3,247,480 3,094,421 Expenses Salaries, wages, and benefits 1,848,090 1,742,138 Supplies 322, ,538 Pharmaceuticals 236, ,658 Purchased services and other fees 191, ,360 Administrative services 70,160 76,662 Facilities 150, ,677 Insurance 30,859 32,439 2,851,411 2,723,472 Operating income before interest, depreciation, and amortization expenses 396, ,949 Interest 53,607 50,273 Depreciation and amortization 191, ,417 Operating income before special charges 150, ,259 Special charges 0 4,403 Operating income 150, ,856 Nonoperating gains and losses Investment return 150, ,529 Derivative gains (losses) 45,699 (27,098) Other, net (26) (6,826) Net nonoperating gains and losses 195, ,605 Excess of revenues over expenses 346, ,461 8/29/2013 Page 5

8 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Statements of Operations and Changes in Net Assets (continued) ($ in thousands) Changes in Net Assets See notes to unaudited consolidated financial statements. Net Assets Temporarily Permanently Unrestricted Restricted Restricted Total Balances at January 1, 2012 $ 3,722,758 $ 399,909 $ 237,920 $ 4,360,587 Excess of revenues over expenses 277, ,461 Donated capital and assets released from restrictions for capital purposes 5,458 (5,108) Gifts and bequests - 10,943 9,077 20,020 Net investment income - 11,089-11,089 Net assets released from restrictions used for operations included in other unrestricted revenues - (10,935) - (10,935) Retirement benefits adjustment 22, ,193 Change in interests in foundations ,995 2,858 Change in value of perpetual trusts - - 6,473 6,473 Net change in unrealized losses on nontrading investments (1,471) - - (1,471) Other Increase in net assets 303,675 6,852 17, ,072 Balances at June 30, 2012 $ 4,026,433 $ 406,761 $ 255,465 $ 4,688,659 Balances at January 1, 2013 $ 4,332,388 $ 425,234 $ 244,758 $ 5,002,380 Excess of revenues over expenses 346, ,617 Donated capital and assets released from restrictions for capital purposes 4,008 (3,596) Gifts and bequests - 24,217 11,249 35,466 Transfer of net assets 992 (992) - - Net investment income - 9,350-9,350 Net assets released from restrictions used for operations included in other unrestricted revenues - (19,438) - (19,438) Retirement benefits adjustment 13, ,139 Change in interests in foundations - (612) Change in value of perpetual trusts - - 1,107 1,107 Net change in unrealized gains on nontrading investments Other 2, ,026 Increase in net assets 367,169 8,929 13, ,329 Balances at June 30, 2013 $ 4,699,557 $ 434,163 $ 257,989 $ 5,391,709 8/29/2013 Page 6

9 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Statements of Cash Flows ($ in thousands) Six Months ending June Operating activities and net nonoperating gains and losses Increase in net assets $ 389,329 $ 328,072 Adjustments to reconcile increase in net assets to net cash provided by operating activities and net nonoperating gains and losses: (Gain) loss on extinguishment of debt (383) 6,742 Retirement benefits adjustment (13,139) (22,193) Net realized and unrealized gains on investments (139,790) (162,623) Depreciation and amortization 191, ,417 Provision for uncollectible accounts 213, ,323 Donated capital (412) (350) Restricted gifts, bequests, investment income, and other (46,186) (40,440) Accreted interest and amortization of bond premiums (1,355) (793) Net (gain) loss in value of derivatives (58,723) 14,277 Changes in operating assets and liabilities: Patient receivables (287,690) (301,756) Other current assets 54,111 (4,749) Other noncurrent assets (1,337) (1,271) Accounts payable and other current liabilities (47,283) (25,168) Other liabilities (13,341) (81,286) Net cash provided by operating activities and net nonoperating gains and losses 239,227 94,202 Financing activities Proceeds from long-term borrowings 309, ,383 Payments for advance refunding of long-term debt (287,306) (104,259) Principal payments on long-term debt (49,758) (51,215) Debt issuance costs (2,129) (3,826) Change in pledges receivables, trusts and interests in foundations 9,607 (1,059) Restricted gifts, bequests, investment income, and other 46,186 40,440 Net cash provided by financing activities 26, ,464 Investing activities Expenditures for property and equipment (145,303) (212,883) Net change in cash equivalents reported in long-term investments 75,325 (85,868) Purchases of investments (945,636) (876,971) Sales of investments 799, ,598 Net cash used in investing activities (216,373) (418,124) Increase in cash and cash equivalents 48,889 75,542 Cash and cash equivalents at beginning of year 82,793 87,359 Cash and cash equivalents at end of period $ 131,682 $ 162,901 See notes to unaudited consolidated financial statements. 8/29/2013 Page 7

10 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, For further information, refer to the audited financial statements and notes thereto for the year ended December 31, Organization and Consolidation The Cleveland Clinic Foundation (Foundation) is a nonprofit, tax-exempt Ohio corporation organized and operated to provide medical and hospital care, medical research, and education. The accompanying consolidated financial statements include the accounts of the Foundation and its controlled affiliates, d.b.a. Cleveland Clinic Health System (System). The System is the leading provider of healthcare services in northeast Ohio. The System operates eleven hospitals with approximately 3,500 staffed beds. Ten of the hospitals are located in the Cleveland metropolitan area, anchored by the Foundation. The System operates eighteen outpatient family health centers, including ten ambulatory surgery centers, as well as numerous physician offices located throughout a seven-county area of northeast Ohio. In addition, the System operates a hospital and a clinic in Weston, Florida, health and wellness centers in West Palm Beach, Florida and Toronto, Canada, a specialized neurological clinical center in Las Vegas, Nevada, and a specialized cancer center in Sandusky, Ohio. Pursuant to agreements, the System also provides management services for Ashtabula County Medical Center, located in Ashtabula, Ohio with approximately 180 staffed beds, and in cooperation with Abu Dhabi Health Services Company, the Sheikh Khalifa Medical City, a network of healthcare facilities in Abu Dhabi, United Arab Emirates with approximately 760 staffed beds. All significant intercompany balances and transactions have been eliminated in consolidation. 3. 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 the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 4. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 8/29/2013 Page 8

11 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5. Net Patient Service Revenue and Patient Receivables Net patient service revenue before the provision for uncollectible accounts by major payor source for the six months ended June 30, 2013 and 2012, are as follows (in thousands): Medicare $ 923,126 29% $ 887,406 30% Medicaid 104, ,678 3 Managed care and commercial 1,897, ,795, Self-pay 225, ,493 7 $ 3,150, % $ 3,006, % For patient receivables associated with self-pay patients, including patients with deductible and copayment balances for which third-party coverage provides for a portion of the services provided, the System records an estimated provision for uncollectible accounts in the year of service. The System has experienced an increase in the provision for uncollectible accounts as a result of high unemployment, loss of employer-sponsored insurance plans and rising patient responsibility balances. Self-pay writeoffs increased $51.1 million in the first six months of 2013 compared to the same period in The System does not maintain a material allowance for uncollectible accounts from third-party payors. 6. Fair Value Measurement Fair value measurements are defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value is comprised of a three-level hierarchy based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. 8/29/2013 Page 9

12 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. Fair Value Measurement (continued) A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The carrying values of accounts receivable and accounts payable are reasonable estimates of fair value due to the short-term nature of these financial instruments. Investments, other than alternative investments, are recorded at their fair value. Other noncurrent assets and liabilities have carrying values that approximate fair value. The fair value of the System s pledges receivable is based on discounted cash flow analysis using Treasury yield curve interest rates consistent with the maturities of the pledges receivable and adjusted for consideration of the donor s credit. The fair value of the pledges receivable was $177.1 million and $195.9 million at June 30, 2013 and December 31, 2012, respectively. The carrying value of the System s pledges receivable was $174.1 million and $184.4 million at June 30, 2013 and December 31, 2012, respectively. Pledges receivable would be classified as level 3 in the fair value hierarchy. The fair value of the System s long-term debt is estimated by discounted cash flow analyses using current borrowing rates for similar types of borrowing arrangements and adjusted for the System s credit. Inputs, which include reported/comparable trades, broker/dealer quotes, bids and offerings, are obtained from various sources, including market participants, dealers, brokers and various news media/market information. The fair value of long-term debt was $2.9 billion at June 30, 2013 and $3.1 billion at December 31, The carrying value of the System s long-term debt was $2.9 billion at both June 30, 2013 and December 31, Long-term debt would be classified as level 2 in the fair value hierarchy. 8/29/2013 Page 10

13 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. Fair Value Measurement (continued) The following tables present the financial instruments measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, based on the valuation hierarchy (in thousands): June 30, 2013 Level 1 Level 2 Level 3 Total Assets Securities lending collateral $ 91 $ $ $ 91 Cash and investments: Cash and cash equivalents 305, ,043 Fixed income securities: U.S. treasuries 829, ,681 U.S. government agencies 17,615 17,615 U.S. corporate 14, , ,286 U.S. government agencies asset-backed 8,359 8,359 Corporate asset-backed 4,737 4,737 Foreign 28,610 28,610 Commingled fixed income funds 529, ,996 Common and preferred stocks U.S. 545,660 3, ,438 Foreign 469, ,568 Commingled equity funds 807, ,860 Less securities under lending agreement (89) (89) Total cash and investments 2,164,833 1,558,271 3,723,104 Perpetual and charitable trusts 61,020 61,020 Investments under securities lending agreement Total assets at fair value $ 2,165,013 $ 1,619,291 $ $ 3,784,304 Liabilities Interest rate swaps $ $ 126,723 $ $ 126,723 8/29/2013 Page 11

14 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. Fair Value Measurement (continued) December 31, 2012 Level 1 Level 2 Level 3 Total Assets Securities lending collateral $ 91 $ $ $ 91 Cash and investments: Cash and cash equivalents 331, ,478 Fixed income securities: U.S. treasuries 877, ,266 U.S. government agencies 15,648 15,648 U.S. corporate 14, , ,640 U.S. government agencies asset-backed 11,016 11,016 Corporate asset-backed 4,944 4,944 Foreign 29,037 29,037 Commingled fixed income funds 510, ,496 Common and preferred stocks: U.S. 474,058 3, ,678 Foreign 435, ,333 Commingled equity funds 738, ,956 Less securities under lending agreement (89) (89) Total cash and investments 2,132,672 1,465,731 3,598,403 Perpetual and charitable trusts 60,562 60,562 Investments under securities lending agreement Total assets at fair value $ 2,132,852 $ 1,526,293 $ $ 3,659,145 Liabilities Interest rate swaps $ $ 185,446 $ $ 185,446 8/29/2013 Page 12

15 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. Fair Value Measurement (continued) Financial instruments at June 30, 2013 and December 31, 2012, are reflected in the consolidated balance sheets as follows (in thousands): June December Cash, cash equivalents, and investments measured at fair value (including securities under lending agreement of $89 at June 30, 2013 and December 31, 2012) $ 3,723,193 $ 3,598,492 Alternative investments accounted for under the equity method 1,736,726 1,601,678 Total cash, cash equivalents, and investments $ 5,459,919 $ 5,200,170 Perpetual and charitable trusts measured at fair value $ 61,020 $ 60,562 Interests in foundations 50,888 50,624 Trusts and interests in foundations $ 111,908 $ 111,186 Interest rate swaps (Note 7) are reported in other noncurrent liabilities in the consolidated balance sheets. The following is a description of the System s valuation methodologies for assets and liabilities measured at fair value. Fair value for Level 1 is based upon quoted market prices. Fair value for Level 2 is determined as follows: Investments classified as Level 2 are primarily determined using techniques that are consistent with the market approach. Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs, which include broker/dealer quotes, reported/comparable trades, and benchmark yields, are obtained from various sources, including market participants, dealers, and brokers. The fair value of perpetual and charitable trusts in which the System receives periodic payments from the trust is determined based on the present value of expected cash flows to be received from the trust using discount rates ranging from 3.8% to 5.0%, which are based on Treasury yield curve rates or the assumed yield of the trust assets. The fair value of charitable trusts in which the System is a remainder beneficiary is based on the System s beneficial interest in the investments held in the trust, which are measured at fair value. 8/29/2013 Page 13

16 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. Fair Value Measurement (continued) The fair value of interest rate swaps is determined based on the present value of expected future cash flows using discount rates appropriate with the risks involved. The valuations include a credit spread adjustment to market interest rate curves to appropriately reflect nonperformance risk. The credit spread adjustment is derived from other comparably rated entities bonds recently priced in the market. The System manages credit risk based on the net portfolio exposure with each counterparty. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the System believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 7. Interest Rate Swaps The System s objective with respect to interest rate risk is to manage the risk of rising interest rates on the System s variable-rate debt and certain variable-rate operating lease payments. Consistent with its interest rate risk management objective, the System entered into various interest rate swap agreements with a total outstanding notional amount of $625.5 million and $637.3 million at June 30, 2013 and December 31, 2012, respectively. During the term of these transactions, the System pays interest at a fixed-rate and receives interest at a variable-rate based on the London Interbank Offered Rate (LIBOR) or the Securities Industry and Financial Markets Association Index (SIFMA). The swap agreements are not designated as hedging instruments. Net interest paid or received under the swap agreements is included in derivative gains on the consolidated statements of operations and changes in net assets. 8/29/2013 Page 14

17 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7. Interest Rate Swaps (continued) The following table summarizes the System s interest rate swap agreements (in thousands): Notional Amount at Expiration June 30 December 31 Swap Type Date System Pays System Receives Fixed % 100% of LIBOR $ $ 1,460 Fixed % 100% of SIFMA 11,810 15,345 Fixed % 68% of LIBOR 37,670 39,065 Fixed % 68% of LIBOR 29,300 29,700 Fixed % 68% of LIBOR 139, ,975 Fixed % 100% of LIBOR 41,710 42,590 Fixed % 68% of LIBOR 32,085 32,675 Fixed % 100% of LIBOR 62,500 62,500 Fixed % 100% of LIBOR 62,500 62,500 Fixed % 79% of LIBOR 2,604 2,634 Fixed % 70% of LIBOR 5,208 5,268 Fixed % 70% of LIBOR 2,604 2,634 Fixed % 100% of LIBOR 50,000 50,000 Fixed % 100% of LIBOR 79,375 79,375 Fixed % 100% of SIFMA 68,600 68,600 $ 625,491 $ 637,321 The following table summarizes the location and amounts of the values for the System s interest rate swap agreements (in thousands): Derivatives not designated as hedging instruments Interest rate swap agreements Liability Derivatives June 30, 2013 December 31, 2012 Balance Sheet Balance Sheet Location Fair Value Location Fair Value Other noncurrent Other noncurrent liabilities $126,723 liabilities $185,446 The following table summarizes the location and amounts of derivative gains (losses) on the System s interest rate swap agreements (in thousands): Derivatives not designated as hedging instruments Interest rate swap agreements Quarter ended Six months ended Location of June 30 June 30 Gain (Loss) Recognized Derivative gains (losses) $34,096 ($45,244) $45,699 ($27,098) 8/29/2013 Page 15

18 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7. Interest Rate Swaps (continued) The System has used various derivative contracts in connection with certain prior obligations and investments. Although minimum credit ratings are required for counterparties, this does not eliminate the risk that a counterparty may fail to honor its obligations. Derivative contracts are subject to periodic mark-to-market valuations. A derivative contract may, at any time, have a positive or negative value to the System. In the event that the negative value reached certain thresholds established in the derivative contracts, the System is required to post collateral, which could adversely affect its liquidity. At June 30, 2013 and December 31, 2012, the System posted $65.5 million and $119.0 million, respectively, of collateral that is included in funds held by trustee in the consolidated balance sheets. In addition, if the System were to choose to terminate a derivative contract or if a derivative contract were terminated pursuant to an event of default or a termination event as described in the derivative contract, the System could be required to pay a termination payment to the counterparty. 8. Pensions and Other Postretirement Benefits The System has two defined benefit pension plans, including the CCHS Retirement Plan, which covers substantially all of the System s employees. The benefits provided are based on age, years of service and compensation. The System s policy is to fund at least the minimum amounts required by the Employee Retirement Income Security Act. The CCHS Retirement Plan ceased benefit accruals as of December 31, 2009 for substantially all employees. Benefit accruals ceased for remaining employees at various intervals through December 31, The System also maintains a nonqualified defined benefit supplemental retirement plan (SRP), which covers certain of its employees. The System sponsors two noncontributory, defined contribution plans, and a contributory, defined contribution plan. The Cleveland Clinic Investment Pension Plan (IPP) is a noncontributory, defined contribution plan, which covers substantially all of the System s employees. The System s contribution for the IPP is based upon a percentage of employee compensation and years of service. The System also sponsors a noncontributory, defined contribution plan, which covers certain of its employees. The System s contribution to the plan is based upon a percentage of employee compensation, as defined, determined according to age. The System sponsors a contributory, defined contribution plan, which covers substantially all employees. The System s contribution to the contributory plan is determined based on employee contributions. 8/29/2013 Page 16

19 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 8. Pensions and Other Postretirement Benefits (continued) The components of net periodic benefit cost are as follows (in thousands): Quarter Ended June 30 Six Months Ended June Amounts related to defined benefit pension plans: Service cost $ 365 $ 397 $ 729 $ 794 Interest cost 16,430 18,210 32,860 36,420 Expected return on assets (21,844) (20,818) (43,689) (41,636) Net amortization and deferral 5,886 10,563 11,773 21,126 Total defined benefit pension plans 837 8,352 1,673 16,704 Defined contribution plans 47,143 45,451 97,128 91,663 $ 47,980 $ 53,803 $ 98,801 $ 108,367 As of June 30, 2013, the System has made contributions of $48.6 million to the defined benefit pension plans. The System expects to make additional contributions of $21.0 million to the defined benefit pension plans for the remainder of Hospital Revenue Bonds In May 2013, pursuant to certain agreements between the System and the State of Ohio (State) acting by and through the Ohio Higher Education Facility Commission, the State issued $105.4 million of Hospital Revenue Bonds (the Series 2013A Bonds), comprised of $62.6 million of fixed-rate bonds and $42.8 million of index-rate bonds, and $201.2 million of variable-rate Hospital Revenue Bonds (the Series 2013B Bonds) for the benefit of the System. Proceeds from the sale of the Series 2013A Bonds were used to refund all of the outstanding fixed-rate Series 2003A Bonds, and proceeds from the sale of the Series 2013B Bonds were used to refund all of the outstanding variable-rate Series 2004B Bonds. The balance of the proceeds has been or will be used to finance certain capital expenditures of the System and pay the cost of issuance. 10. Special Charges In the first six months of 2012, the System incurred and recorded special charges of $4.4 million related to exit and disposal costs associated with the closing of Huron Hospital (Huron) in Services previously provided at Huron have been migrated to other System hospitals and to a new community health center. Therefore, the closure of Huron is not considered a discontinued operation. The System did not incur or record any special charges in the first six months of Subsequent Events The System evaluated events and transactions occurring subsequent to June 30, 2013 through August 29, 2013, the date the financial statements were issued. During this period, there were no subsequent events requiring recognition in the consolidated financial statements. 8/29/2013 Page 17

20 OTHER INFORMATION Unaudited Consolidating Balance Sheets ($ in thousands) June 30, 2013 Consolidating December 31, 2012 Consolidating Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments & Group Group Eliminations Consolidated Group Group Eliminations Consolidated Assets Current assets: Cash and cash equivalents $ 47,754 $ 83,928 $ - $ 131,682 $ 6,757 $ 76,036 $ - $ 82,793 Patient receivables, net 812,971 29,808 (16,046) 826, ,159 30,742 (18,953) 752,948 Due from affiliates 5,413 35,849 (41,262) - 15, (15,885) - Investments for current use - 55,430-55, ,419 55, ,849 Other current assets 269,120 26,396 (2,872) 292, ,423 27,239 (1,933) 349,729 Total current assets 1,135, ,411 (60,180) 1,306,489 1,208, ,515 (36,771) 1,361,319 Investments: Long-term investments 4,485, ,665-4,673,429 4,146, ,726-4,328,069 Funds held by trustees 115,305 3, , ,139 3, ,319 Assets held by captive insurance subsidiary - 80,894-80,894-92,897-92,897 Donor restricted assets 387,976 12, , ,035 12, ,243 4,989, ,762-5,272,807 4,651, ,011-4,941,528 Property, plant, and equipment, net 3,166, ,864-3,439,294 3,198, ,949-3,479,493 Other assets: Pledges receivable, net 126,595 5, , ,174 4, ,022 Trusts and beneficial interests in foundations 76,731 35, ,908 76,503 34, ,186 Other noncurrent assets 176,699 4,370 (6,479) 174, ,381 4,138 (4,664) 172, ,025 44,619 (6,479) 418, ,058 43,669 (4,664) 423,063 Total assets $ 9,670,758 $ 832,656 $ (66,659) $ 10,436,755 $9,442,694 $804,144 ($41,435) $10,205,403 Liabilities and net assets Current liabilities: June 30, 2013 Consolidating December 31, 2012 Consolidating Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments & Group Group Eliminations Consolidated Group Group Eliminations Consolidated Accounts payable $ 270,763 $ 21,809 $ (345) $ 292,227 $ 298,528 $ 23,296 $ (1,133) $ 320,691 Compensation and amounts withheld from payroll 287,655 8, , ,942 3, ,125 Current portion of long-term debt 47,544 3,371-50,915 48,606 4,780-53,386 Variable rate debt classified as current 421,510 68, , ,640 68, ,240 Due to affiliates 11,682 5,948 (17,630) ,863 (15,885) - Other current liabilities 307,635 76,473 (16,446) 367, ,744 84,468 (19,752) 431,460 Total current liabilities 1,346, ,052 (34,421) 1,497,420 1,381, ,190 (36,770) 1,544,902 Long-term debt: Hospital revenue bonds 2,344,647 5,438-2,350,085 2,364,224 8,309-2,372,533 Notes payable and capital leases 73,320 14,085 (3,031) 84,374 76,393 12,041 (1,216) 87,218 2,417,967 19,523 (3,031) 2,434,459 2,440,617 20,350 (1,216) 2,459,751 Other liabilities: Professional and general insurance liability reserves 52,245 76, ,718 51,508 65, ,926 Accrued retirement benefits 574, , , ,132 Other noncurrent liabilities 404,804 31,316 (25,759) 410, ,733 5,582 (3) 455,312 1,031, ,789 (25,759) 1,113,167 1,127,373 71,000 (3) 1,198,370 Total liabilities 4,795, ,364 (63,211) 5,045,046 4,949, ,540 (37,989) 5,203,023 Net assets: Unrestricted 4,238, ,683 (3,448) 4,699,557 3,878, ,499 (3,446) 4,332,388 Temporarily restricted 402,936 31, , ,406 31, ,234 Permanently restricted 233,607 24, , ,481 23, ,758 Total net assets 4,874, ,292 (3,448) 5,391,709 4,493, ,604 (3,446) 5,002,380 Total liabilities and net assets $ 9,670,758 $ 832,656 $ (66,659) $ 10,436,755 $9,442,694 $804,144 ($41,435) $10,205,403 See notes to unaudited consolidated financial statements. Please refer to Management s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Weston Hospital, which became a member of the Obligated Group in May 2013, is reported in the Obligated Group for all periods presented. 8/29/2013 Page 18

21 OTHER INFORMATION Unaudited Consolidating Statements of Operations and Changes in Net Assets ($ in thousands) Operations Three Months Ended June 30, 2013 Three Months Ended June 30, 2012 Consolidating Consolidating Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments & Group Group Eliminations Consolidated Group Group Eliminations Consolidated Unrestricted revenues Net patient service revenue $ 1,572,823 $ 63,716 $ (49,304) $ 1,587,235 $ 1,457,009 $ 73,349 $ (45,761) $ 1,484,597 Provision for uncollectible accounts (104,638) (4,014) - (108,652) (91,848) (4,586) - (96,434) Net patient service revenue less provision for uncollectible accounts 1,468,185 59,702 (49,304) 1,478,583 1,365,161 68,763 (45,761) 1,388,163 Other 122,592 64,306 (21,896) 165, ,749 48,790 (21,726) 146,813 Total unrestricted revenues 1,590, ,008 (71,200) 1,643,585 1,484, ,553 (67,487) 1,534,976 Expenses Salaries, wages, and benefits 918,267 54,731 (48,271) 924, ,595 57,011 (44,331) 873,275 Supplies 151,723 13,104 (267) 164, ,299 9,786 (381) 154,704 Pharmaceuticals 117,355 3, , ,221 4, ,419 Purchased services 95,745 9,201 (3,047) 101,899 96,282 6,334 (3,032) 99,584 Administrative services 27,584 15,757 (6,154) 37,187 26,103 13,553 (5,354) 34,302 Facilities 70,002 7,675 (1,365) 76,312 70,958 8,106 (1,306) 77,758 Insurance 14,195 13,193 (12,096) 15,292 14,571 14,725 (13,083) 16,213 1,394, ,168 (71,200) 1,440,839 1,320, ,713 (67,487) 1,366,255 Operating income before interest, depreciation, and amortization expenses 195,906 6, , ,881 3, ,721 Interest 26, ,789 25, ,465 Depreciation and amortization 89,559 5,190-94,749 84,648 5,299-89,947 Operating income (loss) before special charges 80,092 1,116-81,208 54,350 (2,041) - 52,309 Special charges , ,322 Operating income (loss) 80,092 1,116-81,208 52,028 (2,041) - 49,987 Nonoperating gains and losses Investment loss (13,187) (616) - (13,803) (37,657) (2,665) - (40,322) Derivative gains (losses) 34,871 (775) - 34,096 (44,448) (796) - (45,244) Other, net 156 (50) (6,889) (12) - (6,901) Net nonoperating gains and losses 21,840 (1,441) - 20,399 (88,994) (3,473) - (92,467) Excess (deficiency) of revenues over expenses 101,932 (325) - 101,607 (36,966) (5,514) - (42,480) 8/29/2013 Page 19

22 OTHER INFORMATION Unaudited Consolidating Statements of Operations and Changes in Net Assets (continued) ($ in thousands) Changes in Net Assets Consolidating Obligated Non-Obligated Adjustments & Group Group Eliminations Consolidated Total net assets at April 1, 2012 $ 4,202,994 $ 511,193 $ (2,770) $ 4,711,417 Deficiency of revenues over expenses (36,966) (5,514) - (42,480) Donated capital, excluding assets released from restrictions for capital purposes Restricted gifts and bequests 6,189 1,012-7,201 Restricted net investment loss (2,171) 37 - (2,134) Net assets released from restrictions used for operations included in other unrestricted revenues (4,226) (640) - (4,866) Retirement benefits adjustment 11, ,096 Change in restricted net assets related to interests in foundations - 2,858-2,858 Change in restricted net assets related to value of perpetual trusts 4,678 1,795-6,473 Net change in unrealized losses on nontrading investments (1,002) - - (1,002) Other (678) 43 (Decrease) increase in total net assets (22,310) 230 (678) (22,758) Total net assets at June 30, 2012 $ 4,180,684 $ 511,423 $ (3,448) $ 4,688,659 Total net assets at April 1, 2013 $ 4,763,097 $ 517,576 $ (3,448) $ 5,277,225 Excess (deficiency) of revenues over expenses 101,932 (325) - 101,607 Donated capital, excluding assets released from restrictions for capital purposes Restricted gifts and bequests 8, ,348 Restricted net investment income Net assets released from restrictions used for operations included in other unrestricted revenues (6,613) 7 - (6,606) Retirement benefits adjustment 6, ,569 Change in restricted net assets related to interests in foundations Change in restricted net assets related to value of perpetual trusts Net change in unrealized gains on nontrading investments (433) - - (433) Other 136 1,815-1,951 Increase in total net assets 111,768 2, ,484 Total net assets at June 30, 2013 $ 4,874,865 $ 520,292 $ (3,448) $ 5,391,709 See notes to unaudited consolidated financial statements. Please refer to Management s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Weston Hospital, which became a member of the Obligated Group in May 2013, is reported in the Obligated Group for all periods presented. 8/29/2013 Page 20

23 OTHER INFORMATION Unaudited Consolidating Statements of Operations and Changes in Net Assets ($ in thousands) Operations Six Months Ended June 30, 2013 Six Months Ended June 30, 2012 Consolidating Consolidating Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments & Group Group Eliminations Consolidated Group Group Eliminations Consolidated Unrestricted revenues Net patient service revenue $ 3,113,512 $ 130,466 $ (93,352) $ 3,150,626 $ 2,946,587 $ 149,690 $ (89,522) $ 3,006,755 Provision for uncollectible accounts (206,064) (7,841) - (213,905) (193,680) (9,643) - (203,323) Net patient service revenue less provision for uncollectible accounts 2,907, ,625 (93,352) 2,936,721 2,752, ,047 (89,522) 2,803,432 Other 243, ,012 (41,889) 310, , ,309 (43,468) 290,989 Total unrestricted revenues 3,151, ,637 (135,241) 3,247,480 2,982, ,356 (132,990) 3,094,421 Expenses Salaries, wages, and benefits 1,832, ,413 (90,657) 1,848,090 1,712, ,837 (85,938) 1,742,138 Supplies 301,890 21,427 (414) 322, ,362 21,670 (494) 313,538 Pharmaceuticals 229,206 7, , ,982 8, ,658 Purchased services 183,258 14,421 (6,149) 191, ,055 12,424 (6,119) 191,360 Administrative services 50,930 30,363 (11,133) 70,160 59,174 29,137 (11,649) 76,662 Facilities 138,976 14,657 (2,697) 150, ,522 15,780 (2,625) 150,677 Insurance 28,546 26,504 (24,191) 30,859 29,421 29,183 (26,165) 32,439 2,765, ,512 (135,241) 2,851,411 2,623, ,707 (132,990) 2,723,472 Operating income before interest, depreciation, and amortization expenses 385,944 10, , ,300 12, ,949 Interest 52,567 1,040-53,607 49,103 1,170-50,273 Depreciation and amortization 181,198 10, , ,818 10, ,417 Operating income (loss) before special charges 152,179 (1,238) - 150, , ,259 Special charges , ,403 Operating income (loss) 152,179 (1,238) - 150, , ,856 Nonoperating gains and losses Investment return 142,634 7, , ,735 10, ,529 Derivative gains (losses) 47,269 (1,570) - 45,699 (25,490) (1,608) - (27,098) Other, net 24 (50) - (26) (6,801) (25) - (6,826) Net nonoperating gains and losses 189,927 5, , ,444 9, ,605 Excess of revenues over expenses 342,106 4, , ,420 10, ,461 8/29/2013 Page 21

24 OTHER INFORMATION Unaudited Consolidating Statements of Operations and Changes in Net Assets (continued) ($ in thousands) Changes in Net Assets Consolidating Obligated Non-Obligated Adjustments & Group Group Eliminations Consolidated Total net assets at January 1, 2012 $ 3,868,489 $ 494,868 $ (2,770) $ 4,360,587 Excess of revenues over expenses 267,420 10, ,461 Donated capital, excluding assets released from restrictions for capital purposes Restricted gifts and bequests 18,328 1,692-20,020 Restricted net investment income 10, ,089 Net assets released from restrictions used for operations included in other unrestricted revenues (9,879) (1,056) - (10,935) Retirement benefits adjustment 22, ,193 Change in restricted net assets related to interest in foundations - 2,858-2,858 Change in restricted net assets related to value of perpetual trusts 4,678 1,795-6,473 Net change in unrealized losses on nontrading investments (1,471) - - (1,471) Other (678) 34 Increase (decrease) in total net assets 312,195 16,555 (678) 328,072 Total net assets at June 30, 2012 $ 4,180,684 $ 511,423 $ (3,448) $ 4,688,659 Total net assets at January 1, 2013 $ 4,493,222 $ 512,604 $ (3,446) $ 5,002,380 Excess of revenues over expenses 342,106 4, ,617 Donated capital, excluding assets released from restrictions for capital purposes Restricted gifts and bequests 34,020 1,446-35,466 Restricted net investment income 8, ,350 Net assets released from restrictions used for operations included in other unrestricted revenues (18,358) (1,080) - (19,438) Retirement benefits adjustment 13, ,139 Change in restricted net assets related to interests in foundations Change in restricted net assets related to value of perpetual trusts ,107 Net change in unrealized gains on nontrading investments Other 206 1,822 (2) 2,026 Increase (decrease) in total net assets 381,643 7,688 (2) 389,329 Total net assets at June 30, 2013 $ 4,874,865 $ 520,292 $ (3,448) $ 5,391,709 See notes to unaudited consolidated financial statements. Please refer to Management s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Weston Hospital, which became a member of the Obligated Group in May 2013, is reported in the Obligated Group for all periods presented. 8/29/2013 Page 22

25 OTHER INFORMATION Unaudited Consolidating Statements of Cash Flows ($ in thousands) Six Months Ended June 30, 2013 Six Months Ended June 30, 2012 Consolidating Consolidating Obligated Non-Obligated Adjustments & Obligated Non-ObligatedAdjustments & Group Group Eliminations Consolidated Group Group Eliminations Consolidated Operating activities and net nonoperating gains and losses Increase (decrease) in total net assets $ 381,643 $ 7,688 $ (2) $ 389,329 $ 312,195 $ 16,555 $ (678) $ 328,072 Adjustments to reconcile increase (decrease) in net assets to net cash provided by (used in) operating activities and net nonoperating gains and losses: (Gain) loss on extinguishment of debt (383) - - (383) 6, ,742 Retirement benefits adjustment (13,139) - - (13,139) (22,193) - - (22,193) Net realized and unrealized gains on investments (132,919) (6,871) - (139,790) (152,446) (10,177) - (162,623) Depreciation and amortization 181,198 10, , ,818 10, ,417 Provision for uncollectible accounts 206,064 7, , ,680 9, ,323 Donated capital (412) - - (412) (350) - - (350) Restricted gifts, bequests, investment income, and other (43,751) (2,435) - (46,186) (33,554) (6,886) - (40,440) Accreted interest and amortization of bond premiums (1,269) (86) - (1,355) (707) (86) - (793) Net (gain) loss in value of derivatives (58,723) - - (58,723) 14, ,277 Changes in operating assets and liabilities: Patient receivables (277,876) (6,907) (2,907) (287,690) (295,546) (8,750) 2,540 (301,756) Other current assets 62,911 (35,116) 26,316 54,111 58,152 (42,113) (20,788) (4,749) Other noncurrent assets (2,892) (260) 1,815 (1,337) (2,911) (1,271) Accounts payable and other current liabilities (36,070) (13,562) 2,349 (47,283) (1,874) (69,467) 46,173 (25,168) Other liabilities (24,374) 36,789 (25,756) (13,341) (88,482) 35,121 (27,925) (81,286) Net cash provided by (used in) operating activities and net nonoperating gains and losses 240,008 (2,596) 1, , ,801 (64,599) - 94,202 Financing activities Proceeds from long-term borrowings 309,435 1,815 (1,815) 309, , ,383 Payments for advance refunding of long-term debt (287,306) - - (287,306) (104,259) - - (104,259) Principal payments on long-term debt (45,118) (4,640) - (49,758) (48,466) (2,749) - (51,215) Debt issuance costs (2,129) - - (2,129) (3,826) - - (3,826) Change in pledges receivable, trusts and interests in foundations 10,147 (540) - 9,607 3,743 (4,802) - (1,059) Restricted gifts, bequests, investment income, and other 43,751 2,435-46,186 33,554 6,886-40,440 Net cash provided by (used in) financing activities 28,780 (930) (1,815) 26, ,129 (665) - 399,464 Investing activities Expenditures for property and equipment (143,601) (1,702) - (145,303) (203,336) (9,547) - (212,883) Net change in cash equivalents reported in long-term investments 64,570 10,755-75,325 (135,008) 49,140 - (85,868) Purchases of investments (891,776) (53,860) - (945,636) (827,237) (49,734) - (876,971) Sales of investments 743,016 56, , ,063 58, ,598 Net cash (used in) provided by investing activities (227,791) 11,418 - (216,373) (466,518) 48,394 - (418,124) Increase (decrease) in cash and cash equivalents 40,997 7,892-48,889 92,412 (16,870) - 75,542 Cash and cash equivalents at beginning of year 6,757 76,036-82,793 5,809 81,550-87,359 Cash and cash equivalents at end of period $ 47,754 $ 83,928 $ - $ 131,682 $ 98,221 $ 64,680 $ - $ 162,901 See notes to unaudited consolidated financial statements. Please refer to Management s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Weston Hospital, which became a member of the Obligated Group in May 2013, is reported in the Obligated Group for all periods presented. 8/29/2013 Page 23

26 OTHER INFORMATION Utilization The following table provides selected utilization statistics for The Cleveland Clinic Health System: CLEVELAND CLINIC HEALTH SYSTEM Year Ended December 31 YTD June Total Staffed Beds (1) 3,658 3,403 3,572 3,526 3,550 Percent Occupancy (1) 69.0% 68.7% 68.7% 70.1% 69.6% Inpatient Admissions (1) Acute 153, , ,536 72,006 73,114 Post-acute 13,627 13,330 12,938 6,515 6,273 Total 167, , ,474 78,521 79,387 Patient Days (1) Acute 791, , , , ,445 Post-acute 118, , ,372 54,687 51,411 Total 909, , , , ,856 Average Length of Stay Acute Post-acute Surgical Facility Cases Inpatient 61,706 58,930 56,376 28,527 28,866 Outpatient 131, , ,432 71,206 71,645 Total 193, , ,808 99, ,511 Emergency Room Visits 435, , , , ,401 Outpatient Evaluation and Management Visits (2) 2,067,919 2,367,974 2,577,598 1,342,058 1,433,972 Acute Medicare Case Mix Index - Health System Acute Medicare Case Mix Index - Cleveland Clinic Total Acute Patient Case Mix Index - Health System Total Acute Patient Case Mix Index - Cleveland Clinic (1) (2) Acute and post-acute, including rehabilitative and psychiatric services within post-acute, but excluding newborns and bassinets. Statistic is calculated based on Cleveland Clinic only. 8/29/2013 Page 24

27 OTHER INFORMATION Utilization (continued) The following table provides selected utilization statistics for the obligated group: TOTAL OBLIGATED GROUP Year Ended December 31 YTD June Total Staffed Beds (1) 3,412 3,130 3,297 3,251 3,275 Percent Occupancy (1) 70.8% 69.7% 69.9% 73.3% 72.0% Inpatient Admissions (1) Acute 145, , ,952 68,883 69,784 Post-acute 11,854 11,192 10,643 5,354 5,176 Total 157, , ,595 74,237 74,960 Patient Days (1) Acute 759, , , , ,741 Post-acute 94,377 86,603 79,782 40,032 37,657 Total 853, , , , ,398 Surgical Facility Cases Inpatient 59,288 56,585 54,245 27,454 27,876 Outpatient 128, , ,211 69,485 70,085 Total 187, , ,456 96,939 97,961 Emergency Room Visits 402, , , , ,651 Outpatient Evaluation and Management Visits (2) 2,067,919 2,367,974 2,577,598 1,342,058 1,433,972 Acute Medicare Case Mix Index Total Acute Patient Case Mix Index (1) (2) Acute and post-acute, including rehabilitative and psychiatric services within post-acute, but excluding newborns and bassinets. Statistic is calculated based on Cleveland Clinic only. Please refer to Management s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Weston Hospital, which became a member of the Obligated Group in May 2013, is reported in the Obligated Group for all periods presented. 8/29/2013 Page 25

28 OTHER INFORMATION Payor Mix The following table shows payor mix as a percentage of gross patient service revenue for the health system and obligated group as a whole: CLEVELAND CLINIC HEALTH SYSTEM Based on Gross Patient Service Revenue Payor Year Ended December 31 YTD June Managed Care and Commerical 44% 44% 43% 43% 43% Medicare 42% 42% 43% 43% 43% Medicaid 8% 8% 8% 8% 8% Self-Pay & Other 6% 6% 6% 6% 6% Total 100% 100% 100% 100% 100% OBLIGATED GROUP Based on Gross Patient Service Revenue Payor Year Ended December 31 YTD June Managed Care and Commerical 44% 44% 43% 43% 43% Medicare 42% 42% 43% 43% 43% Medicaid 8% 8% 8% 8% 8% Self-Pay & Other 6% 6% 6% 6% 6% Total 100% 100% 100% 100% 100% Please refer to Management s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Weston Hospital, which became a member of the Obligated Group in May 2013, is reported in the Obligated Group for all periods presented. 8/29/2013 Page 26

29 OTHER INFORMATION Research Support ($ in thousands) The Clinic funds the annual cost of research from external sources, such as federal grants and contracts and contributions restricted for research, and internal sources such as contributions, endowment earnings and revenue from operations. The following table summarizes the sources of research support for the Clinic: Year Ended December 31 YTD June External Grants Earned Federal Sources $104,947 $111,404 $107,284 $55,160 $55,589 Non-Federal Sources 81,349 73,619 71,587 37,097 36,248 Total 186, , ,871 92,257 91,837 Internal Support 61,374 70,137 72,554 34,668 32,584 Total Sources of Support $247,670 $255,160 $251,425 $126,925 $124,421 8/29/2013 Page 27

30 OTHER INFORMATION Key Ratios The following table provides selected key ratios for the System as a whole: Year Ended December 31 YTD June Liquidity ratios Days of cash on hand Days of revenue in accounts receivable Coverage ratios Cash to debt (%) Maximum annual debt service coverage (x) Interest expense coverage (x) Debt to cash flow (x) Leverage ratio Debt to capitalization (%) Profitability ratios Operating margin (%) Operating cash flow margin (%) Excess margin (%) Return on assets (%) NOTES: Coverage and liquidity ratios are calculated using a 12-month rolling income statement. Certain prior period ratios have been restated to conform to the current presentation. 8/29/2013 Page 28

31 OVERVIEW The Cleveland Clinic Health System (System) is a world-renowned provider of healthcare services, which attracted patients from across the United States and from 132 other countries in The System is the leading provider of healthcare services in northeast Ohio. The System operates eleven hospitals with approximately 3,500 staffed beds. Ten of the hospitals are operated in the Cleveland metropolitan area, anchored by The Cleveland Clinic Foundation (Clinic). The System operates eighteen outpatient Family Health Centers, including ten ambulatory surgery centers, as well as numerous physician offices located throughout a seven-county area of northeast Ohio. In addition, the System operates a hospital and a clinic in Weston, Florida, health and wellness centers in West Palm Beach, Florida and Toronto, Canada, a specialized neurological clinical center in Las Vegas, Nevada, and a specialized cancer center in Sandusky, Ohio. Pursuant to agreements, the System also provides management services for Ashtabula County Medical Center, located in Ashtabula, Ohio, with approximately 180 staffed beds, and in cooperation with Abu Dhabi Health Services Company, the Sheikh Khalifa Medical City, a network of healthcare facilities in Abu Dhabi, United Arab Emirates with approximately 760 staffed beds. CLEVELAND CLINIC HEALTH SYSTEM NORTHEAST OHIO SERVICE AREA AND FACILITIES Cleveland Clinic Foundation Main Campus Hospitals Family Health Centers 8/29/2013 Page 29

32 The following table sets forth the number of staffed beds for the hospitals currently operated by the obligated group as well as the other entities in the System as of June 30, 2013: Staffed Beds OBLIGATED Cleveland Clinic 1,274 Euclid Hospital 231 Fairview Hospital 413 Hillcrest Hospital 410 Lutheran Hospital 198 Marymount Hospital 284 Medina Hospital 136 South Pointe Hospital 173 Weston Hospital 156 3,275 NON-OBLIGATED Children s Hospital, Shaker 25 Lakewood Hospital HEALTH SYSTEM 3,550 AWARDS & RECOGNITION The Clinic was ranked as the fourth best hospital in the United States by U.S. News and World Report in its edition of America s Best Hospitals. This is the twentythird consecutive year the Clinic was ranked sixth or better. The Clinic s Heart and Vascular Institute, located on the Clinic s main campus, was recognized as the best cardiology and heart surgery program in the United States, an honor the Clinic has received annually for nineteen consecutive years. The report ranked thirteen other Clinic medical specialties among the nation s Top 10: diabetes & endocrinology (2), gastroenterology (2), nephrology (2), rheumatology (2), urology (2), gynecology (3), orthopedics (3), pulmonology (3), ear, nose & throat (6), neurology and neurosurgery (6), geriatrics (7), ophthalmology (7) and cancer (9). Cleveland Clinic Children s Hospital located on the Clinic s main campus ranked as one of the top pediatric hospitals in the country. The Children s Hospital earned national recognition in seven of the ten medical specialties ranked by U.S. News and World Report, including cancer, cardiology & heart surgery, diabetes & endocrinology, gastroenterology, neurology & neurosurgery, pulmonology, and urology. Two of the specialties were ranked in the nation s Top 10: pediatric neurology & neurosurgery program (8) and pediatric gastroenterology (10). The publication also evaluated hospitals by metropolitan area with a methodology similar to that used to determine the national rankings. The Clinic was ranked as the best hospital in both the state of Ohio and the Cleveland metropolitan area, which includes the City of 8/29/2013 Page 30

33 Cleveland and many of the surrounding suburbs. The report also ranked all eight of the System s community hospitals in the top 10 of Cleveland-area hospitals: South Pointe Hospital (4), Fairview Hospital and Hillcrest Hospital (tied for 5), Marymount Hospital (8), and Euclid Hospital, Lakewood Hospital, Lutheran Hospital and Medina Hospital (tied for 9). Weston Hospital was ranked fifth in the Miami-Fort Lauderdale metro area and fourteenth in the state. The Clinic has been named one of the World s Most Ethical Companies by the Ethisphere Institute for the third time in five years. The 2013 award winners are companies that promote ethical business practices, exceed minimum legal requirements, and shape future industry standards. Companies were evaluated in five categories: ethics and compliance programs; reputation, leadership and innovation; governance; corporate citizenship and responsibility; and culture of ethics. The Clinic was one of only four healthcare providers named on Forbes Magazine s 21 Most Admired Companies Making IT A Competitive Advantage for The single most admired trait common to all 21 recognized organizations was customer-driven IT, which includes the ability to effectively manage commerce systems and platforms, support multi-channel management, and innovate quickly and continuously. The results were based on a survey conducted by Garter, a global technology research and advisory firm. The Clinic achieved Magnet status recognition from the American Nurses Credentialing Center. Magnet status is the highest national credential for nursing excellence and serves as the gold standard for nursing practice. The Clinic achieved Magnet status previously in both 2003 and Currently, less than 1% of U.S. healthcare organizations have achieved Magnet status. Organizations that have achieved Magnet status are recognized for quality in patient care, nursing excellence and innovations in professional nursing practice. To earn the current Magnet recognition, the Clinic had to complete a rigorous and lengthy process that provided documented evidence of how Magnet concepts, performance and quality have been sustained and improved over a four-year period. Euclid Hospital was awarded the American Nurses Credentialing Center s Pathway to Excellence designation. Euclid Hospital is one of only four Ohio facilities to earn the award. The award recognizes hospitals that foster a positive environment in which nurses can make the most of their skills and provide top-notch patient care. Award recipients must meet twelve standards essential to an ideal nursing environment, an accomplishment only one hundred hospitals nationwide have achieved since the program began in The Clinic s CEO and President, Delos M. Cosgrove, M.D., was the recipient of the inaugural Maltz Heritage Award. This award is presented to a person or organization that demonstrates leadership in the Northeast Ohio community and whose values align with the Maltz Museum of Jewish Heritage s mission to build bridges of tolerance and understanding with those of other religions, races, cultures, and ethnic backgrounds. The award acknowledges Dr. Cosgrove s leadership in creating an environment of inclusion, compassion, and understanding in patient care and workplace priorities. The Clinic was chosen to be a Hereditary Hemorrhagic Telangiectasia (HHT) Center of Excellence by the HHT Foundation. The Clinic is the fifteenth HHT Center for Excellence. A Clinic pulmonologist, Dr. Joseph Parambil, was named director of the center, which will be part of the Clinic s Respiratory Institute. 8/29/2013 Page 31

34 The Clinic was honored by the Gallup Organization as one of only thirty-two organizations to receive the Gallup Great Workplace Award. The award recognizes companies that have shown a quantifiable impact as a result of having a more engaged workforce by integrating engagement into key areas of the organization. The award is based on multiple criteria, including overall engagement levels and evidence of engagement impact on key business metrics. The System was ranked 48 th out of the top 150 workplaces in the country by Workplace Dynamics, a research firm that conducts top workplace surveys with 30 leading regional newspapers across the country. The 2013 National Top Workplaces list was determined solely by feedback gathered through an employee survey conducted in The survey polled over one million employees from 872 organizations having more than 1,000 employees. The survey data showed employees prefer to work at companies that set a clear direction for its future, execute well, and create a strong connection between employees and the company by showing appreciation. Locally, Workplace Dynamics ranked the System 13 th on a list of Top Workplaces of large employers in Northeast Ohio. Hillcrest Hospital received the Get With The Guidelines Stroke Silver Plus Quality Achievement award from the American Heart Association. This award recognizes Hillcrest for its compliance with national guidelines in providing high-quality care and treatment to patients who suffer strokes. The Clinic placed third on DiversityInc s list of top 10 hospital systems recognized for diversity and inclusion. Hospital systems were ranked on a number of factors, including CEO commitment, cultural competency training, talent pipelines, mentoring programs, employee resource groups, diversity councils, and supplier diversity initiatives. The Clinic was recognized for having employee resource groups that work to raise awareness of the healthcare needs of patients and for having diversity councils that work to integrate diversity goals with the System s mission and cornerstone values. Hillcrest Hospital Mayfield Heights, Ohio 8/29/2013 Page 32

35 FOR THE PERIOD ENDEDD JUNE 30, 2013 CORPORATE GOVERNANCE The Board of Directors of the Clinic is responsible for all of its operations and affairs and controls its property. The Board of Directors is also responsible for ensuring that the Clinic is organized, and at all times operated, consistentt with its charitable mission and its status as an Ohio nonprofit corporation and tax-exemptt charitable organization. The Board of Directors generally meets eight times per year, including an annual meeting during which the Clinic s officers are elected and standing committees are appointed. The size of the Board of Directors can range between 15 to 25 Directors (currently there are 23 Directors). The Board of Trustees servess as an advisor to the Board of Directors. The Trustees actively serve on the committees of the Board of Directors. At present, there are 47 active Trusteess and 15 Emeritus Trustees (not including Directors). Directors and Trustees each serve four-year terms and are selected on the basiss of their expertise and experience in a variety of areas beneficial to the Clinic. Directors and Trustees are not compensated for their service. The Board of Directors annually appoints certain committees to perform duties thatt it delegates to them from time to time, subject to ratification of such action by thee Board of Directors. The current committees are as follows: Audit Committee Board Policy Committee Compensation Committee Conflict of Interest and Managing Innovations Committee Development Committee Finance Committeee Governance Committee Government and Community Relations Committee Medical Staff Appointment Committee Research and Education Committee Safety, Quality and Patient Experiencee Committee Members of the Committees are chosen based on interest of the Board members, the skill sets of the Board members and the needs of the particularr Committee. Most Committees meet three or four times per year, though a few (such as the Audit Committee) meet five or six times per year. 8/29/2013 Page 33

36 APPOINTMENTS Kristen D.W. Morris has been appointed Chief Government and Community Relations Officer. Ms. Morris previously served as the Divisional Vice President of Government Affairs at Abbott Laboratories and had been the company s principal representative in Washington D.C. She replaced Oliver C. Pudge Henkel Jr., who is retiring after seven years of service at the Clinic. The System announced leadership changes in several of its community hospitals, its Regional Executive Leadership team and its Regional Operations that will become effective in the third quarter of The changes are part of a natural leadership transition process that will position the System to better meet the needs of a growing organization and to manage the new model of care resulting from healthcare reform. New presidents have been appointed at Fairview Hospital, Hillcrest Hospital, Lutheran Hospital and South Pointe Hospital. In addition, the Clinic s Regional Operations, which includes 27 ambulatory locations and 12 family health centers located outside of Lorain County, will become part of Regional Executive Administration under the leadership of David L. Bronson, MD, President of Cleveland Clinic Community Hospitals and Family Health Centers. Additional information regarding the System s recent leadership changes is available on the Clinic s website at FINANCING DEVELOPMENTS In May 2013, pursuant to certain agreements between the System and the State of Ohio (State) acting by and through the Ohio Higher Education Facility Commission, the State issued $105.4 million of Hospital Revenue Bonds (the Series 2013A Bonds), comprised of $62.6 million of fixed-rate bonds and $42.8 million of index-rate bonds, and $201.2 million of variablerate Hospital Revenue Bonds (the Series 2013B Bonds) for the benefit of the System. Proceeds from the sale of the Series 2013A Bonds were used to refund all of the outstanding fixed-rate Series 2003A Bonds, and proceeds from the sale of the Series 2013B Bonds were used to refund all of the outstanding variable-rate Series 2004B Bonds. The balance of the proceeds has been or will be used to finance certain capital expenditures of the System and pay the costs of issuance. The Series 2013A Bonds and Series 2013B Bonds were assigned ratings of Aa2 and AA- by Moody s Investor Services (Moody s) and Standard & Poor s (S&P), respectively. At the time the Series 2013A Bonds and Series 2013B Bonds were rated, Moody s affirmed the Aa2 rating on the System s obligated group outstanding debt and maintained their stable outlook. Moody s cites various factors to support this rating and outlook, including a national and international clinical reputation, a leading market position in northeast Ohio, a strong management team with a focus on strategic development, exceptional fundraising abilities, good operating margins, and continued significant growth in unrestricted investments. In its report, Moody s indicates that these strengths compensate challenges such as relatively high debt levels for the rating category, competition in the Cleveland area, and a weak local economy. S&P affirmed its AA- rating on the System s obligated group outstanding debt and changed their outlook to positive from stable. The positive outlook reflects S&P s view that the System s worldwide reputation for clinical excellence and high patient satisfaction, coupled with ongoing initiatives to expand the System brand 8/29/2013 Page 34

37 domestically and internationally, will enable the System to grow its revenue base and produce favorable operating results. S&P cites a unique national and global business position, very strong operational management and adequate financial profile as additional factors that contributed to the assigned rating and outlook. Challenges to the current rating include rising uncollectible accounts and uncompensated care, operations in a region with weak demographic trends, and the prospect of a more constrained reimbursement environment resulting from health care reform. In May 2013, concurrently with the issuance of the Series 2013A Bonds and Series 2013B Bonds, Weston Hospital became a member of the obligated group. Weston Hospital represents approximately 3% of the total unrestricted revenues of the obligated group and 1% of the total assets of the obligated group. EXPANSION AND IMPROVEMENT PROJECTS Due to the anticipated long-term growth in the demand for services and the desire to continually upgrade medical technology, the System is investing in facilities and equipment to better serve its patients. The System has the following expansion projects recently completed or in progress: Radiology Master Plan - This multi-year, multi-phase renovation and construction plan is aimed at fulfilling the growth needs of the Department of Radiology within the Imaging Institute. The project will consolidate and centralize magnetic resonance (MR) services for the Clinic in the Glickman Tower located on the Clinic s main campus. The project also includes the renovation of vacated molecular functional imaging space into a patient preparation and recovery department. Additionally, the plan allows for a new outpatient entrance to the Department of Radiology and enhanced patient waiting and changing areas. Phase 1A of the project, the Interventional MR Surgical Suite, began in 2009 and was completed in The Suite combines high-field MR imaging with a surgical suite, which allows surgeons to take advantage of MR imaging in real time during surgical procedures. Phase 1B, the consolidation of MR services in the Glickman Tower, began in the fourth quarter 2010 and was completed in July Phase 2, the consolidation of CT services, was completed in the third quarter of Construction began on Phase 3, the relocation and upgrade of the Interventional Radiology Department, in the third quarter of The entire project is scheduled to have a total of five phases and is expected to be completed in The total cost of the project, including the purchase and upgrade of equipment, is approximately $80 million. Fairview Hospital Renovation & Expansion In the first quarter of 2011, Fairview Hospital broke ground on an $80 million construction project that includes replacement, renovation and expansion of Fairview s emergency department (ED) and intensive care unit (ICU). The project includes 135,000 square feet of new building space on a site currently used for parking plus 25,000 square feet of renovated space. The new unit will ultimately include 55 ED beds, including 16 ED beds used exclusively for pediatric patients, 38 ICU beds in private rooms, two Level II trauma rooms, a new circular 8/29/2013 Page 35

38 entrance to the hospital, and new parking areas. The project is designed to provide improved access to emergency and critical care services and a welcoming experience for patients and visitors. The first phase of the project, a parking deck adding 200 parking spaces, was completed in April The ED and ICU renovation and expansion construction was opened to patients in the second quarter of The final phase of the project, the new circular entrance to the hospital, is expected to be completed by the end of Marymount Hospital Surgical Replacement & Expansion In the fourth quarter of 2010, Marymount Hospital began a $45 million construction project that includes replacement and expansion of Marymount s surgical suites and perioperative facilities, a new main entrance to the hospital, and an enhanced surgical waiting area. The project includes 43,000 square feet of new building space and 29,000 square feet of renovated space and is being delivered in four phases: Phase 1, new building addition housing surgical suites; Phase 2, renovation of existing space providing new staff locker rooms; Phase 3, renovation of existing space providing new pre- and post-operative bays and postanesthesia care unit; and Phase 4, renovation of existing space providing for a new Endoscopy Suite. Marymount completed Phases 1 and 2 in Phase 3 of the project was completed in the first quarter of 2013, and Phase 4 was completed in the second quarter of Lutheran Hospital Emergency Department Renovation In the fourth quarter of 2012, Lutheran Hospital began the design of a $17 million construction project that includes replacement, renovation, and expansion of Lutheran s emergency department (ED). The project includes 1,800 square feet of new building space, a 3,800 square foot canopy, and 19,700 square feet of renovated space. The renovation will include an upgrade to the Hospital s main lobby area and a more prominent entrance providing better access to emergency services. The new ED unit will include 21 ED beds, including 6 beds specifically designed for patients with behavioral health needs, a resuscitation room, and 3 intake chairs. The project will include eight phases to allow the ED to remain in operation during the renovation process. Construction started in the second quarter of 2013, and is expected to be completed in Brunswick Family Health Center Emergency Department Expansion In the first quarter of 2013, the Clinic began the design of a $20 million construction project to establish an emergency department at the Brunswick Family Health Center. The project includes construction of a 40,000 square foot two-story facility adjacent to the existing family health center. The first floor will house the emergency department, and the second floor will be reserved for future expansion. The new facility is expected to be completed by the third quarter of In the second quarter of 2013, the Clinic and Case Western Reserve University (CWRU) School of Medicine reached an agreement to build a medical education building that will contain the university s medical school program and the Cleveland Clinic Lerner College of Medicine. The building will be located on the Clinic s main campus and will serve as home for the seminar, lecture, and laboratory 8/29/2013 Page 36

39 learning that typically takes place during the first two years of medical school. Students clinical training will continue to take place at area hospitals. This initiative is aligned with the future plans of the Clinic s main campus and supports the Clinic s mission and strategic direction. Groundbreaking on the new 165,000 square-foot building is expected to begin in 2014, and construction is expected to be completed in 2016 at a total cost of approximately $80 million. CWRU and the Clinic will share in the construction and ongoing operational costs of the facility, with a portion of the construction cost expected to be raised through fundraising efforts and donations. INNOVATIONS Cleveland Clinic Innovations promotes scientific, clinical and administrative creativity throughout the Clinic and seeks commercial application of that creativity. Specifically, it helps to grow the Clinic s innovative capacity, mentors inventors, creates spin-off companies, licenses technology, secures resources, and establishes strategic collaborations with corporate partners. Since 2000, 64 companies, of which more than 45 are currently active and employing over 1,100 people, have been spun-off from the Clinic (including two initial public offerings and three commercial exits), with Cleveland Clinic Innovations entering into more than 500 technology licenses, filing 2,000 patent applications with over 500 issued patents, and acting on approximately 2,100 new inventions. In 2010, Cleveland Clinic Innovations opened a new 50,000 square foot Global Cardiovascular Innovation Center on the Clinic s main campus, which is home to its operations as well as an incubator facility for approximately 20 other companies. Also, Cleveland Clinic Innovations annually produces the widely noted Cleveland Clinic Top 10 Medical Innovations and recently launched a project to profile the innovation and commercialization functions at the top 100 health care institutions. Its efforts have attracted international recognition, including being ranked in the Top 4 in the world in Healthcare Corporate Venturing by Global Corporate Venturing. In the first quarter of 2013, the Clinic formed an Innovation Alliance with the Innovations Institute, a newly launched for-profit company based in Orange County, California that is owned by a group of nonprofit health systems. The founding member of the Institute, St. Joseph Health, is a $5 billion Catholic health system operating in California, west Texas and eastern New Mexico. The primary goal of the Innovation Alliance is to establish a collaborative effort designed to lead to the commercialization of medical technologies. In the second quarter of 2013, the Clinic formed an Innovation Alliance with Marshfield Clinic, a health care system with more than 50 locations in Wisconsin. Marshfield Clinic is the seventh organization to join the Innovation Alliance network. The alliance supports the acceleration of developing technologies that extend and improve life. As a member of the Innovation Alliance, Marshfield Clinic will have access to Cleveland Clinic Innovations technology development and commercialization capabilities and expertise. 8/29/2013 Page 37

40 CLINICAL AFFILIATIONS The Clinic has entered into various affiliations with national and regional partners that are seeking to improve clinical quality, patient care, medical education and research. The goal of clinical affiliations is to provide value-added, high quality clinical care to patients through the support, expansion and development of Institute-driven integrated care strategies. In addition, the Clinic has partnered with educational institutions with the goal of improving medical education and research. A few recent affiliations are described below. In January 2013, the Clinic formed an alliance with MedStar Health, a ten-hospital health system that serves the Maryland and Washington, DC areas. The primary goal of the alliance is to improve patient care and advance research for doctors. Under the alliance, doctors at both the Clinic and MedStar Health Institute will collaborate on research efforts and techniques to enhance the effectiveness of heart surgery and other cardiac treatments. Cleveland Clinic Florida expanded its affiliation with Ross University School of Medicine (RUSM) to allow RUSM students the option of completing internal medicine and surgery training at the System s teaching hospital in Weston. The addition of these programs results in RUSM students having the option of approximately 30 clinical clerkships at Cleveland Clinic Florida, including anesthesiology, infectious disease, neurology, plastic surgery and pulmonary medicine. Ohio University Heritage College of Osteopathic Medicine (OU-HCOM) has received approval from the Commission on Osteopathic College Accreditation, the accrediting agency for osteopathic medical schools, for its northeast Ohio extension campus located at South Pointe Hospital. The Clinic entered into the affiliation agreement with OU-HCOM in July 2012 to develop a Northeast Ohio regional extension campus of the medical school. The South Pointe hospital location will include 60,000 square feet of academic and administrative space. Medical student rotations will take place at South Pointe Hospital as well as other hospitals in the System and throughout the Northeast Ohio area. The inaugural class of 32 medical students will begin classes in July Cleveland, Ohio Skyline 8/29/2013 Page 38

41 STRATEGIC ALLIANCES Community Health Systems In March 2013, the Clinic announced the formation of a strategic alliance with Community Health Systems (CHS), one of the nation s largest publicly-traded hospital companies. Headquartered in Franklin, Tennessee, CHS operates 135 hospitals in non-urban and midsize markets in 29 states and also provides consulting, management and education services to approximately 150 hospitals and health systems across the U.S. through its whollyowned subsidiary, Quorum Health Resources. The focus of this alliance is to enhance the quality of patient care, improve access to healthcare services, reduce costs and drive operational excellence. The Clinic and CHS will draw on each other s extensive resources and expertise, maximizing strengths in areas such as clinical services, physician alignment and integration, supply chain processes and other aspects of operations. The alliance initially will focus on three specific areas of collaboration: Quality Alliance The Clinic will assist CHS in establishing clinical integration programs at its affiliated hospitals. The Quality Alliance model creates a framework in which physicians can share best practices and capture, report and compare data in a standardized format. For additional information regarding the Clinic s Quality Alliance, see Strategic Initiatives. Cardiovascular Services: The Clinic s Heart and Vascular Institute will assess selected CHS-affiliated hospitals for the opportunity to apply expertise in cardiovascular services to enhance the quality and data infrastructure of programs within CHSaffiliated hospitals. Clinical and Operational Services: The organizations will explore a broad array of other engagements to share best practices and best synergies, including telemedicine initiatives, second opinion services for physicians and patients, complex care coordination, and other practices in care and cost containment. Under the terms of the five-year agreement, both organizations will remain independent entities. Akron General Health System In August 2013, the Clinic and CHS signed a letter of intent to enter into exclusive negotiations with Akron General Health System (AGHS) for a joint venture acquisition of AGHS. CHS will be making a significant capital investment in AGHS, and the Clinic s primary role will be to support clinical program and service development. ProMedica In August 2013, the Clinic signed a memorandum of understanding with ProMedica of Toledo, Ohio to develop a health system affiliation. ProMedica is a not-for-profit healthcare organization with 11 hospitals and more than 300 facilities. In 2012, ProMedica and the Clinic entered into an Innovation Alliance as part of the Clinic s Innovation Alliance network. The relationship with ProMedica is designed to create a network of caregivers who provide safe, high-quality, technologically advanced care. Initial 8/29/2013 Page 39

42 opportunities for collaboration include the Quality Alliance, shared services, clinical and operational standardization, supply chain efficiencies and greater patient access to care through more effective clinical and service integration. An affiliation steering committee will have equal representation from both organizations and will be responsible for oversight, guidance and development of the relationship. STRATEGY Unsustainable economic trends, an aging population, dramatic increases in chronic disease, dissatisfaction with access, technological transparency to cost and quality information and legislative efforts have all contributed to the need for new models of healthcare delivery and payment. The focus of the System s business model has shifted from providing care and billing for services (volume-based) to improving outcomes and managing cost (value-based). While the System has long been committed to providing the highest quality of care with a relentless focus on patients first, the formula for success in a value-based world requires equal focus on cost and adherence to prescriptive measurement and comparative reporting. Transitioning to a value-based care model, while managing reimbursement pressures and investment requirements, is a challenge requiring creativity and commitment. Through integrated facilities and engaged caregivers and leaders, the System is innovating its care and business model to be even more patientcentered, evidence-based, efficient and uniform. Targeted areas of effort include: Care Paths across the continuum to reduce practice variation, improve quality outcomes, lower costs and improve efficiency o Care guides are the first step towards imbedding protocols into the electronic medical record. Twenty-five care guides have been developed to date with further development planned through the end of 2013 and beyond. Shared savings agreements with payers to incentivize improved outcomes o Collaborative discussions are underway with major health plans as the System transitions from a fee-based to a value-based payment structure. Agreements with major payers are expected by the second quarter of Quality alliances to further integrate care protocols and measurements beyond the Clinic s physician group o The System s Quality Alliance currently has over 1,100 independent practitioners enrolled in the program. Advanced technology infrastructure to enhance predictive capabilities and knowledge management o A new technology master plan is currently being developed for the System. Cost reduction and resource rationalization to drive efficiency o A system-wide cost repositioning initiative has been launched to assess resource utilization and optimize assets. 8/29/2013 Page 40

43 To continually operate in a lower cost structure while maintaining or improving performance, the System is compelled to grow in non-traditional ways. Clinical provider roles are blurring as industry participants converge and diverge. Through both owned and affiliated relationships, the System will continue to pursue growth opportunities that optimize its regional assets, increase its national/international presence and maximize efficiency. The recent affiliations with CHS and ProMedica are examples of such opportunities. Other growth considerations include contracting with large employers, ACOs, payers and other delivery systems to provide clinical products of proven value. As strategic priorities are adjusted in response to the changing healthcare environment, the System is uniquely positioned to not only succeed but to lead. Over past years, organizational changes and investments have laid the groundwork for this new, integrated care model. Adopting an aligned institute structure, strengthening measurement and reporting capabilities, piloting population management programs and continuing to build an integrated health system are all being leveraged and incorporated into the System s new strategy. STRATEGIC INITIATIVES The following describes a few of the System s strategic initiatives: Physician Integration Since the Clinic s beginnings in 1921, physicians have held the central role in the Clinic s multidisciplinary healthcare delivery model. In 2010, the System focused on expanding this model to its community hospitals through three component programs: Institute Staff Model; Community Physician Partnership; and Cleveland Clinic Quality Alliance. The programs are designed to create a practice environment aligned around physician collaboration and common quality and practice standards. The Institute Staff Model focuses on fully integrating Clinic-employed physicians who practice in one or more of the System s community hospitals into the Institute related to their specialty area. In addition, the model invites independent physicians to become employed as staff physicians. Staff physicians participate in the Institute-based processes designed to promote consistent and constantly improving healthcare. The Cleveland Clinic Community Physician Partnership (CPP) is the largest physician led organization in Northeast Ohio. It was established over twelve years ago to support independent physicians in their efforts to provide efficient, high quality patient care in a private practice setting. The CPP enables community physicians to decide whether to participate in certain managed care contracts that may also include the Clinic and its physicians, while still maintaining their private practices. The CPP expedites contract participation through a messenger model and provides administrative support with enrollment and credentialing processes for managed care health plans. The CPP also provides access to vendor-sponsored discounts for physician practice-associated goods and services, including office supplies, financial services and group professional liability coverage. The Quality Alliance is a program offered to both Clinic employed physicians and independent physicians that participate in CPP. It was launched in 2010, to provide a mechanism through which Clinic employed 8/29/2013 Page 41

44 physicians and independent physicians can collaborate around quality and value. The Quality Alliance currently has enrolled over 1,100 independent practitioners. The goals of the Quality Alliance are to develop a network, led by its physician members, that will improve quality and consistency of care, reduce costs and increase efficiency. By practicing in accordance with evidence-based clinical protocols and gaining performance feedback, physicians in the Quality Alliance will document and provide higher-quality and more efficient care. Recognizing this value, Medical Mutual of Ohio (MMO) signed an innovative agreement with CPP in June 2011 to implement evidencebased protocols and report quality outcomes. The Clinic s employee health plan also has contracted to participate in the Quality Alliance s efforts to report, measure and improve quality standards across a large population. MMO and the Clinic s employee health plan provide incentives to physicians who participate in the Quality Alliance. Additionally, the Buffalo Medical Group (BMG) affiliated with the Quality Alliance in September of BMG is the first physician s group outside of Northeast Ohio to participate in the program. Other hospitals outside of Northeast Ohio are expected to join the Quality Alliance as a result of the strategic alliances with CHS and ProMedica. Effective January 1, 2013, the Clinic is requiring physicians who are classified as Tier 1 primary care, family practice, internal medicine, and OB/GYN practitioners in the Clinic s employee health plan to be members of its Quality Alliance. The goal of this new requirement is to improve the delivery of quality care across the System. In addition, as of September 1, 2013, all specialists and pediatricians will need to participate in the Quality Alliance in order to maintain Tier 1 status in the Clinic s employee health plan. System Integration The System Integration Initiative involves coordinated efforts among clinical, operational, and administrative teams to allow the System to work as a single, integrated enterprise. The initiative includes aligning services across System facilities to provide an integrated system of care. The System is currently in the midst of a multiyear project to align revenue cycle support services and processes to support patients as they progress through their continuum of care. The Enterprise Administrative Patient Management (EAPM) project will consolidate thirteen different technology systems used for scheduling appointments, admissions, the electronic medical record, billing and collections into one technology platform with the goal of improving patient experience. Reducing the number of systems will improve patient service and employee efficiency. Implementation of EAPM began in the first quarter of 2012 at the Weston facilities and will continue in phases for the other System facilities over the next several years. EAPM will cost approximately $134 million over the implementation period. In 2009, the Clinic created the Cleveland Clinic Appointment Center, a dedicated facility designed to standardize access for patients to schedule appointments with Clinic staff physicians. The process will be identical across Clinic institutes and will create an integrated work environment that will allow patients to schedule appointments in multiple departments and institutes at different locations within the Clinic s integrated system. The Appointment Center is currently scheduling for sixteen institutes and is expected to be fully operational by the end of /29/2013 Page 42

45 In March 2013, Fairview and Lakewood hospitals consolidated cardiac and pulmonary rehab programs. All phase II and phase III acute cardiac and pulmonary services will be provided at Fairview Hospital facilities located at or near the hospital campus. In April 2013, the Clinic began offering urology services at its facilities in Las Vegas, Nevada. These services joined the Clinic s Glickman Urological & Kidney Institute, which currently has 15 locations in Northeast Ohio. The institute also manages a kidney transplant program in Charleston, West Virginia and a kidney and pancreas transplant program in Indianapolis. Program for Advanced Medical Care In 2010, the Clinic developed the Program for Advanced Medical Care (PAMC), which works with self-insured companies to develop innovative solutions that provide their employees with high-quality healthcare while also managing costs. The program uses a bundled-payment agreement for specialized services, which provides for a fixed-price arrangement that combines all of the costs for a given procedure in a single payment. Employees and their dependents enrolled in the company s medical plans receive access to high-quality health care and consultations at the Clinic with little or no out-of-pocket expenses. The company generally covers the cost of travel, lodging and food for both the patient and a companion. The Clinic pioneered a PAMC agreement in 2010 with Lowe s Cos. Inc. The agreement allows full-time Lowe s employees and their dependents enrolled in the company s selffunded medical plan to elect to schedule qualifying heart surgery procedures at the Clinic at no out-of-pocket cost. Subsequently, the System has established PAMC agreements with six other organizations, which include Wal-Mart Stores Inc. Under the Wal-Mart agreement, the Clinic is one of four hospitals chosen to provide specialized heart care for its employees. Enterprise Risk Management In 2010 the System began a multi-phase enterprise risk management (ERM) initiative to develop a more formal systematic approach to the identification, assessment, prioritization, and reporting of risks. The process is closely linked with the System s strategic and annual planning. The ultimate objective is to create an enterprisewide risk management model that contains sustainable reporting and monitoring processes and embeds risk management into the System culture, in order to more effectively mitigate risks. The System established an ERM Steering Committee and engaged a consulting firm to begin this process. The ERM Steering Committee has completed the risk identification phase and created a System risk profile that categorizes individual risks based on their level of impact on the System s ability to meet its strategic objectives. In this phase, certain risks were identified as top risks, which have then been further separated into sub-risks and individual risk components. A formal governance structure was established with work teams formed to perform extensive risk assessments and mitigation analysis. The various work teams have completed the assessment process evaluating the risk components according to their likelihood of occurring and potential impact should they occur. Risk mitigation activities, including the risk response effectiveness, are being examined 8/29/2013 Page 43

46 as part of this evaluation. ERM is an on-going program with regular reporting to and oversight by the Board of Directors and its Audit Committee. Group Purchasing Organization In December 2012, the Clinic and VHA formed Excelerate Strategic Health Sourcing (Excelerate), a joint venture that owns and operates a healthcare group purchasing organization. VHA is a national network of notfor-profit healthcare organizations that work together to achieve savings and efficiencies in supply chain management. Excelerate will leverage the Clinic s strategic approach of physician integration, clinical excellence and proven clinical sourcing with VHA s best-in-class analytics, ability to foster strong member networks and contracting expertise to create an innovative offering for value-based sourcing. Initial service offerings are clinically committed contract portfolios that focus on physician preference items and clinical preference items, as well as an enhanced portfolio of commodity driven products. Expected benefits of Excelerate include lower supply costs, reduced operating expenses, enhanced product standardization, improved visibility into supply chain costs, and greater integration with physicians yielding physician preference opportunities. Excelerate began operations on May 1, Financial Reporting In 2007, the System began an initiative to evaluate its internal control environment and to create efficiencies in the System s financial reporting processes. The initiative is based upon concepts established in the Sarbanes- Oxley Act of 2002 (SOX), even though the System is not subject to the provisions of SOX. The goals of the initiative are to ensure the integrity and reliability of financial information, strengthen internal control in the reporting process, reduce the risk of fraud and improve efficiencies in the financial reporting process. The initiative reviews all aspects of the financial reporting process, identifies potential risks and ensures that they have been mitigated utilizing a management self-assessment process. As a result of this initiative, management completed a certification of its internal controls over financial reporting as part of the issuance of its consolidated financial results for 2012, which is the fourth year the certification process was completed. More than 130 members of management, including top leadership, were involved in this certification. The System is one of the first not-for-profit hospitals to issue a management report on the effectiveness of internal controls over financial reporting, a move that further increases the transparency of the organization. Management updates the certification on a quarterly basis. There were no changes in the internal control over financial reporting during the six months ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting for the System. 8/29/2013 Page 44

47 FOR THE PERIOD ENDEDD JUNE 30, 2013 COMMUNITY BENEFIT AND ECONOMIC IMPACT Community Benefit As a charitable, tax-exempt healthcaree organization, the System s mission includes addressing health service needs and providing benefits to the communities it serves. The System must satisfy a community benefit standard to maintain its tax-exempt status. To measure the cost of the benefits the System provides to the community, the System uses the Catholic Health Association (CHA) community benefit model. The CHA model is the national standard for community benefit reporting and is the basis for the standard adopted by the IRS for use in its Form 990, the information return required to be filed with the IRS by exempt organizations. In 2012, the System provided $7544 million in benefits to the communities it serves. Cleveland Clinic Health System* Breakdown of Total Community Benefit (2012) $754 Million Research*** $206.4 M Financial Assistance $154.6 M Medicaid Shortfall** $105.5 M Subsidized Health Services $13.7 M Education*** $224.0 M Outreach Programs $50.0 M * Includes all health system operations in Ohio, Florida and Nevada ** Net of HCAP benefit of $16.6 million *** Research and Education are supported by externally sponsored funding of $143.6 million. Financial Assistance: Financial Assistance epresents the cost of providing free or discounted medically necessary care to patients unable to pay some or all of their medical bills. The System s financial assistance policy provides free or discounted care to patients whose incomes are up to 400 percent of the federal poverty level. This policy applies to both hospital care and services providedd by the System s employed physicians. 8/29/2013 Page 45

48 Medicaid Shortfall: The System is a leading provider of Medicaid services in Ohio. The Medicaid program provides healthcare coverage for low-income families and individuals and is funded by both the state and federal governments. Medicaid shortfall represents the difference between the costs of providing care to Medicaid beneficiaries and the reimbursement received by the System. Subsidized Health Services: Subsidized health services yield low or negative margins but these programs are needed in the community. Subsidized health services within the System include trauma services, pediatric programs, psychiatric/behavioral health programs, obstetrical services, chronic disease management and outpatient clinics. Outreach Programs: The System is actively engaged in a broad array of community outreach programs, including numerous initiatives designed to serve vulnerable and atrisk populations in the community. Outreach programs typically fall into three categories: community health services; cash; and in-kind donations and community building. The System s outreach programs include wellness initiatives, chronic disease management, clinical services, free health screenings, and enrollment assistance for government funded health programs. A few of the System s community outreach initiatives are highlighted below: Health fairs provide thousands of people with free screenings for diabetes, cholesterol, heart disease, and prostate and other cancers. The Minority Men s Health Fair, Speaking of Women s Health and dozens of community health fairs highlight the efforts of preventative care. The System provides no-cost clinical care to under- and uninsured families at community sites. A Fairfax neighborhood site, the Langston Hughes Health and Education Center, provides multi-generational prevention and wellness services. Wellness initiatives and health lectures are provided to schools, faith-based organizations and community centers in areas of prevention and behavioral change, including smoking cessation, weight management, teen parenting, family violence and child safety. The department of Public Health and Research offers 5 to go!, the Clinic s childhood obesity prevention program, to thousands of local elementary and middle school students. Community farmers markets, urban gardens and nutrition seminars are offered to promote disease prevention and healthy lifestyles. Community education classes are offered across the enterprise, providing education on chronic disease issues such as heart disease, stroke, diabetes and brain health. The Clinic s Pathology & Laboratory Medicine Institute donate services to Cleveland area safety-net providers The Free Clinic and Care Alliance. The Clinic s Office of Civic Education Initiatives promotes K-12 education throughout Northeast Ohio in partnership with area schools, local businesses and fellow nonprofit organizations. The Office creates innovative programs designed to enhance education in the areas of math, science, health and wellness, the arts and innovation. Education: The System provides a wide range of high-quality medical education, including 8/29/2013 Page 46

49 accredited training programs for residents, physicians, nurses and other allied health professionals. The System maintains one of the largest graduate medical education programs in the nation. At the postgraduate level, the System s Center of Continuing Education has developed one of the largest and most diverse continuing medical education programs in the world. The System also operates Cleveland Clinic Lerner College of Medicine of Case Western Reserve University, dedicated to the teaching of physician-scientists. Allied health professionals are also recognized as important members of the healthcare team. Research: From a community benefit perspective, medical research includes basic, clinical and community health research, as well as studies on healthcare delivery. Community benefits include research activities supported by government and foundation sources; corporate and other grants are excluded from community benefits. The System uses internal funding to cover shortfalls in outside resources for research. Additional information regarding the System s community benefits is available on the Clinic s website at clevelandclinic.org/communitybenefit. Economic Impact According to a 2010 Economic and Fiscal Impact Report released in 2011, the System is the largest employer in Northeast Ohio and the second largest employer in the State of Ohio with more than 41,000 employees. In 2009 the System generated $10.5 billion of the total economic activity in Ohio ($10.4 billion on a regional level), and has directly and indirectly supported more than 81,000 jobs generating approximately $4.0 billion in wages and earnings. The System s economic activity was accountable for $663 million in total state and local taxes. System-supported households spent $2.3 billion on goods and services. Locally, the System s economic activity within an eight-county region accounts for approximately eight percent of the total gross regional product. As a major part of the region s growing healthcare industry, the System has contributed to the strengthening of Ohio s economy for the past 90 years by sustaining and growing a strong workforce. The System s 2010 Economic and Fiscal Impact Report is the result of an economic analysis completed by the Cleveland-based Silverlode Consulting Corp. The report was commissioned in 2010 and uses 2009 data, the most current data available at that time. The report was completed in part using the IMPLAN economic impact model, which is used by more than 1,000 public and private institutions to estimate economic and fiscal impacts. SUSTAINABILITY The System supports healthy environments for healthy communities. Through its operations and community leadership, the System takes a precautionary approach to environmental stewardship with the understanding that environmental health and human health are closely linked. In 2007, the System created the Office for a Healthy Environment (OHE). The OHE s purpose is to create a healthcare system that is ecologically, socially, and economically sustainable and avoids harm to human health and the environment. OHE goals are aligned with the mission and values of the System, and sustainability policies are embedded in the construction, maintenance and operation of facilities across the System. 8/29/2013 Page 47

50 The System is committed to principles as presented in the United Nations Global Compact, a strategic policy initiative for businesses that are committed to aligning their operations and strategies with universally accepted principles in the areas of human rights, labor, environment and anti-corruption. The Compact provides a practical framework for the development, implementation and disclosure of sustainability policies and practices and is the world s largest voluntary corporate citizenship initiative with more than 10,000 corporate participants and other stakeholders from more than 130 countries. In 2008, the System became the first healthcare provider in the United States to become a signatory to the United Nations Global Compact. The System s 2013 UN Global Compact report, Serving Our Present, Caring for our Future: Progress in Community and Global Citizenship 2013, is available on the Clinic s website at: clevelandclinic.org/unglobalcompact. The 2013 report is the second year that the System s UN Global Compact report utilized guidelines developed by the Global Reporting Initiative (GRI). GRI guidelines provide a reporting framework that is used by more than 3,000 organizations in 60 nations and is recommended for use by the UN Global Compact. The System is the second U.S. healthcare provider to formally adopt and report using this internationally accepted reporting process. GRI guidelines correspond to the same principles as the UN Global Compact and are designed to promote better economic, environmental and social conditions. The Clinic is a member of Practice Greenhealth (PGH), a national membership organization for healthcare facilities committed to environmentally responsible operations. The Clinic is a recipient of the Environmental Leadership Circle, PGH s most prestigious and competitive award, recognizing healthcare facilities that set high standards for environmental practices and sustainability in healthcare. The System also received the System for Change Award, which recognizes health systems that are working cohesively to set goals, track data, benchmark and share successes in environmental performance. The System garnered 25 additional honors for its main campus, family health centers and community hospitals in The Clinic joined the Department of Energy s (DOE) Better Buildings Challenge as a challenge partner in 2011, committing the System to a 20 percent reduction in energy usage by Participation in the Better Buildings Challenge allows the System to track, manage and save energy as well as providing forums for the System to share its initiatives and to learn from other partners. In 2013, the Clinic earned designation as a 2013 ENERGY STAR Partner of the Year Sustained Excellence Award by the U.S. Environmental Protection Agency for continued leadership in protecting the environment through superior energy efficiency. This award is the ENERGY STAR s highest honor, recognizing organizations that have been awarded Partner of the Year for several years and that continue to surpass the achievements of the previous year. These organizations exhibit outstanding leadership by reducing greenhouse gas emissions through setting and achieving aggressive goals and employing innovative energy efficiency approaches. The Clinic has been an ENERGY STAR partner since A central component of the Systems ongoing commitment to responsible energy management is to construct buildings that conform to the U.S. Green Building Council s Leadership in Energy and Environmental Design (LEED). LEED is a third-party certification program and the 8/29/2013 Page 48

51 nationally accepted benchmark for design, construction and operation of environmentally responsible and energy-efficient buildings. All new major construction projects for the System follow LEED standards, with a goal of achieving silver certification. Construction projects also emphasize recycling of debris, with current diversion rates of up to 98% in recent years. The System currently has thirteen LEEDcertified buildings, with additional buildings pending certification. The System has four buildings that are certified LEED-Gold, including the recently constructed Marymount Hospital Surgical Expansion, Twinsburg Health and Family Surgery Center and the Robert J. Tomsich Pathology and Laboratory Medicine Institute building. Additionally, the System has seven buildings that are certified LEED-Silver. HEALTH INFORMATION TECHNOLOGY The Clinic has been a national leader in the innovative application of health information technology (HIT) systems. Through the development and application of HIT systems, the System is focusing on providing more cost effective healthcare and improving patient safety. HIT systems have received particular attention due to the Health Information Technology for Economic and Clinical Health Act, enacted as part of the American Recovery and Reinvestment Act of 2009 (Recovery Act). In 2011, the Centers for Medicare & Medicaid Services (CMS) implemented provisions of the Recovery Act that provide annual incentive payments for the meaningful use of certified electronic health record (EHR) technology. CMS has defined meaningful use as meeting certain objectives and clinical quality measures based on current and updated technology capabilities over predetermined reporting periods as established by CMS. The definition expands and becomes more robust in future years based on anticipated technologies and capabilities development. The Medicare EHR incentive program provides annual incentive payments to eligible professionals, eligible hospitals, and critical access hospitals, as defined, that are meaningful users of certified EHR technology. In order to qualify for an incentive payment, eligible hospitals and providers need to demonstrate meaningful use of the certified EHR by entering certain objectives and clinical quality measures and attesting that they have successfully demonstrated meaningful use via the CMS web-based Medicare EHR Incentive Program System. The Medicaid EHR incentive program provides annual incentive payments to eligible professionals and hospitals for efforts to adopt, implement, and meaningfully use certified EHR technology in the first year of participation and successfully demonstrating meaningful use of certified EHR technology in subsequent participation years. Hospitals and providers are required to attest to the EHR requirements on the state s Medicaid Provider Incentive Program. Annual incentive payments for Medicare and Medicaid are reduced for hospitals and providers in each subsequent year of attestation, and are completely phasedout within four to six years of the initial attestation year. Currently, all of the System s acute care hospitals meet the meaningful use standards for attestation for Medicare. Additionally, all of the System s acute care hospitals meet the meaningful use standards for attestation for Medicaid except for Weston Hospital, which currently does not qualify to participate in the Medicaid program. Cleveland Clinic Children s Hospital for Rehabilitation, a non-acute hospital located near the main campus, also meets the 8/29/2013 Page 49

52 meaningful use standards for attestation for Medicaid. The System utilizes a grant accounting model to recognize EHR incentive revenues. Under this model, the System records EHR incentive revenue ratably throughout the incentive reporting period when it is reasonably assured that it will meet the meaningful use objectives for the required reporting period and that the grants will be received. The EHR reporting period for hospitals is based on the federal fiscal year, which runs from October 1 through September 30. The System believes that the hospitals that met meaningful use objectives for the federal fiscal year ended September 30, 2012 will continue to meet these objectives for the federal fiscal year ending September 30, 2013 and therefore has accrued a portion of EHR revenues related to the federal fiscal year ending September 30, The System recorded EHR incentive revenues of $14.6 million in the first six months of Throughout the program, the System is expected to receive approximately $134 million in EHR incentive payments. The System continues to implement improvements to its HIT systems, including several components that can be accessed through the Clinic s website. These components include: clinically integrated with the System to treat their patients. The System participates in the Care Everywhere network, a module offered through Epic Systems Corp. that allows health systems to safely and directly share electronic medical records (EMRs) through proper patient authorization. Through this program, the System has access to a network of over 160 healthcare organizations nationwide. In the past year, after proper patient authorization, the System has exchanged patient information with more than 90 external healthcare organizations in approximately 80,000 cases to assist with treating its patients. This is believed to have improved patient care by immediately providing more complete medical histories, eliminating the need for unnecessary diagnostic tests and allowing for faster and more accurate diagnosis. The System collaborates locally with MetroHealth System, a public health system located in Cuyahoga County, Ohio and with Kaiser Permanente, to link EMRs via Epic. In the third quarter of 2012, Care Everywhere became available at all System locations. In 2013, the System committed to join ClinicSync, Ohio s statewide electronic medical records exchange. Participation in CliniSync will link the System to a significant number of hospitals across Ohio. An electronic medical record system composed of an integrated suite of software modules that virtually align physical locations, physician expertise and nursing and care team skills into a single, coordinated group practice. A secure, on-line health management tool that connects patients to portions of their personalized health information. A secure, on-line system that allows physicians in private practice to become Cleveland Clinic Strongsville Strongsville, Ohio 8/29/2013 Page 50

53 CONFLICT OF INTEREST The System maintains policies that require internal reporting of outside financial and fiduciary interests to ensure that potential conflicts of interests do not inappropriately influence research, patient care, education, business or professional decision making. In connection with these policies, the System developed the Innovation Management and Conflict of Interest Program, which is designed to promote innovation while at the same time reducing, eliminating or managing real or perceived bias either due to System personnel consulting with pharmaceutical, medical device and diagnostic companies (industry) or the commercialization efforts undertaken by the System to develop discoveries and make them accessible to patients. The System is committed to a process that maintains integrity in innovation and places the interests of our patients first. An initiative to bring transparency to the System s relationships with industry was implemented in 2008, in which the specific types of interactions that individual physicians and scientists have with industry were disclosed on publicly-accessible web pages on the System s internet site. Information can be accessed by patients that describes the training, type of practice and accomplishments of a specific doctor or scientist, as well as the names of companies with which the doctor has financial or fiduciary relations as an inventor, consultant, speaker or board member. These disclosures are updated regularly. The System was the first academic medical center in the country to have made these interactions public. Many other academic medical centers have followed the System s lead by providing similar disclosures. The Innovation Management and Conflict of Interest Committee of the System has also established processes with cross-membership and seamless interactions and communications with the Board of Directors Conflict of Interest and Managing Innovations Committee. Board members of the Clinic and the community hospitals in the System are required to complete annual disclosure questionnaires each year. These questionnaires are designed to identify possible conflicts of interest that may exist and ensure that any such conflicts do not inappropriately influence the operations of the System. The information obtained from these questionnaires is used to respond to the relatedparty transactions and other disclosures required by the Internal Revenue Service on Form 990. The Forms 990 for the Clinic and the System for the fiscal year ended December 31, 2011 are available on the Clinic s website, as well as additional information regarding the Clinic s Board of Directors and any business relationships the Directors may have with the System. INDUSTRY OUTLOOK In January 2013, Moody s Investor Service (Moody s) maintained its outlook for the U.S. not-for-profit healthcare sector as negative, an outlook Moody s has maintained since Moody s cites three factors to support its negative outlook. The first factor is a reduction in reimbursement from all major payers, both governmental and private, as the healthcare industry remains under pressure to reduce costs. Federal healthcare reform has resulted in cuts in Medicare reimbursement, and additional cuts are likely to be part of any legislation designed to reduce the long-term federal deficit. The second factor is continued slow economic recovery contributing to flat patient volume growth and payer mix shifts to governmental 8/29/2013 Page 51

54 and self-pay payers. This trend has decelerated revenue growth rates and has created challenges for hospitals to carefully manage costs and patient care quality. The third factor is the transition to new payment methodologies, which creates risks in their execution. These risks include underestimating patient care needs under global payments and capitation, overinvestment in vertical integration, managing expectations and achieving patient satisfaction, and managing divergent payment structures simultaneously. Despite the negative factors noted above, Moody s report cited positive credit factors that will continue to allow some hospitals to perform well. One factor noted relates to ongoing trends toward mergers and acquisitions, which offer consolidation of services and economies of scale that reduce operating expenses and improve operating results. Moody s also expects an increase in the demand for healthcare services over the next several years as more people become insured and the baby boomer generation ages. This trend may help to mitigate the challenges posed by declining reimbursement. Finally, hospitals have maintained favorable financial performance largely by controlling expenses, which has resulted in stable operating results. Hospitals have also benefited from a prolonged low interest rate environment and favorable stock market returns of the last several years. In January 2013, Standard & Poor s (S&P) maintained its stable outlook for the U.S. notfor-profit health care sector. S&P cites successful and ongoing cost containment efforts, the benefits of consolidation, and the financial cushion many hospitals have built in the last few years as factors supporting its outlook. Despite the stable outlook, S&P expects hospitals will confront a number of growing challenges, including federal reimbursement reductions, the remaining threat of Medicare cuts in 2013, increased health care reform preparation, and new incentives and penalties for meeting or failing to meet valuebased purchasing standards. S&P also believes the sector will face increased operating pressures in 2013 and a sluggish economic recovery, which will adversely affect the sector s credit quality. Given these challenges, S&P is encouraged by the responsiveness and resilience of hospitals that have improved credit quality through aggressive cost-cutting, mergers and acquisitions, restrained capital spending, a lower cost of capital, and new sources of revenue. The System continues to be impacted by industry challenges that put pressure on the System s financial performance. Management is focused on the recruitment and retention of qualified staff in many clinical areas in order to meet the demands of patient activity, particularly as the health insurance mandates of the Affordable Care Act are implemented in 2014, which is expected to increase the number of insured Americans seeking healthcare services These efforts pressure the System s salary cost structure, as well as employee benefit costs. Pharmaceutical costs and medical supply costs continue to create challenges to the cost structure. Increases in pharmaceutical costs are driven by utilization and price increases. Medical supply costs are primarily driven by utilization and price of implants. For both pharmaceuticals and medical supplies, a sizeable percentage of the cost increase flows through to increases in payments from payors; however, the balance cannot be passed through to payors. Additionally, the healthcare industry is subject to significant regulation by federal, state, and local governmental agencies and independent organizations and accrediting bodies, changes in technology and treatment modes, competition and changes in third-party reimbursement programs. The decline in the population of the Greater Cleveland area as 8/29/2013 Page 52

55 noted in the 2012 census creates challenges among hospitals to attract the fewer available patients. Furthermore, although the System maintains a diversified investment portfolio, the System s investments are subject to the inherent risk and volatility associated with global financial markets. The System continuously monitors the environment in which it operates and is engaged in various strategic initiatives to address its cost structure and reimbursement challenges. PATIENT VOLUMES The following table summarizes patient volumes for the System: Utilization Statistics For the quarter ended For the six months ended June 30 June Variance % Variance % Inpatient admissions Acute admissions 36,890 35,739 1, % 73,114 72,006 1, % Post-acute admissions 3,218 3, % 6,273 6, % 40,108 39,011 1, % 79,387 78, % Patient Days Acute patient days 191, ,439 2, % 386, , % Post-acute patient days 26,168 26, % 51,411 54,687-3, % 217, ,324 1, % 437, ,528-2, % Surgical cases Inpatient 14,455 14, % 28,866 28, % Outpatient 36,316 36, % 71,645 71, % 50,771 50, % 100,511 99, % ER visits 120, ,699 7, % 235, ,433 11, % Observations 9,746 9, % 19,722 18, % Clinic Outpatient Evaluation and Management Visits 725, ,920 54, % 1,433,972 1,342,058 91, % The System experienced increases in acute admissions in the second quarter and the first six months of 2013 compared to the same periods in The increase in 2013 for the System was driven by a 3% increase at the Clinic. Approximately 25% of acute admissions at the Clinic are transfer admissions, which are patients transferred from other hospitals or healthcare providers. Transfer admissions at the Clinic increased 2% in the first six months of 2013, compared to the same period in Transfer admissions have been impacted by capacity constraints at the Clinic, mainly on the critical care floors. Many of the transfer admissions have medical conditions with high acuity that require intensive care services leading to an extended length of stay. In the second quarter of 2013, the Clinic added and quickly utilized capacity for eleven additional intensive care beds to accommodate this trend. 8/29/2013 Page 53

56 The community hospitals collectively experienced a 1% increase in acute admissions, with year over year changes at individual hospitals ranging from -5% to +7%. According to data from the Center for Health Affairs, acute discharges in the Northeast Ohio service area decreased 1% in the first six months of 2013, compared to At the Florida hospital, acute admissions were flat in the first six months of 2013, compared to the same period in Outpatient evaluation and management visits (E&M visits) at the Clinic s main campus and family health centers increased 8% and 7% in the second quarter and the first six months of 2013, respectively, compared to the same period in The growth in E&M visits is partially attributable to physician integration initiatives over the past few years that have increased the number of employed physicians that provide services throughout the System. The Clinic has addressed capacity constraints over the last few years with the opening of the Miller Family Pavilion in late Occupancy at the Clinic has averaged 79% over the last four years, down from 86% in years 2008 and prior. The increased capacity has benefited patients by providing broader access to services and more efficient bed management, which resulted in patients bedded in on-service units and the capacity to allow further growth of the Cleveland Clinic Critical Care Transport Program. Total surgical cases for the System increased 1% in both the second quarter and the first six months of 2013, compared to the same periods in The increase for the first six months of 2013 was driven by a 4% increase at the Clinic s main campus and family health centers and a 6% increase in Florida. The community hospitals collectively experienced a 5% decrease, with substantially all of the individual community hospitals below the prior year. According to data from the Center for Health Affairs, total surgical cases in northeast Ohio increased 1% in the first six months of 2013, compared to the same period in The surgical mix of total surgical cases for the System for the first six months of 2013 was 29% inpatient and 71% outpatient. Cleveland Clinic Independence Independence, Ohio 8/29/2013 Page 54

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