TRINITY HEALTH UNAUDITED QUARTERLY REPORT. For the nine months ended March 31, 2015 and 2014

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1 TRINITY HEALTH UNAUDITED QUARTERLY REPORT For the nine months ended March 31, 2015 and 2014

2 TRINITY HEALTH TABLE OF CONTENTS Page UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2015 AND JUNE 30, 2014 AND FOR THE NINE MONTHS ENDED MARCH 31, 2015 AND 2014: Consolidated Balance Sheets (unaudited) 34 Consolidated Statements of Operations and Changes in Net Assets (unaudited) Summarized Consolidated Statements of Cash Flows (unaudited) 57 8 Notes to Consolidated Financial Statements (unaudited) 923 MANAGEMENT DISCUSSION AND ANALYSIS (unaudited) LIQUIDITY REPORT (unaudited) FINANCIAL RATIOS AND STATISTICS (unaudited)

3 TRINITY HEALTH CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In Thousands) As of March 31, June 30, ASSETS CURRENT ASSETS: Cash and cash equivalents $ 923,342 $ 901,282 Investments 3,462,368 3,231,318 Security lending collateral 283, ,882 Assets limited or restricted as to use current portion 242, ,202 Patient accounts receivable net of allowance for doubtful accounts of $529.7 million and $545.3 million at March 31, 2015 and June 30, 2014, respectively 1,635,376 1,475,579 Estimated receivables from thirdparty payors 194, ,527 Other receivables 298, ,026 Inventories 215, ,494 Assets held for sale 178, ,201 Prepaid expenses and other current assets 193, ,206 Total current assets 7,627,647 7,079,717 ASSETS LIMITED OR RESTRICTED AS TO USE Noncurrent Portion: Held by trustees under bond indenture agreements 13,351 53,652 Selfinsurance, benefit plans and other 755, ,537 By Board 3,260,091 2,891,790 By donors 309, ,281 Total assets limited or restricted as to use noncurrent portion 4,339,431 3,925,260 PROPERTY AND EQUIPMENT NET 6,630,013 6,566,958 INVESTMENTS IN UNCONSOLIDATED AFFILIATES 2,311,135 2,254,558 GOODWILL 297, ,773 OTHER ASSETS 434, ,923 TOTAL ASSETS $ 21,640,232 $ 20,433,189 The accompanying notes are an integral part of the consolidated financial statements. (Continued) 3

4 TRINITY HEALTH CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In Thousands) LIABILITIES AND NET ASSETS As of March 31, June 30, CURRENT LIABILITIES: Commercial paper $ 99,993 $ 239,961 Shortterm borrowings 1,104,010 1,123,620 Current portion of longterm debt 97,910 95,952 Accounts payable 628, ,748 Accrued expenses 258, ,736 Salary, wages, and related liabilities 675, ,425 Current portion of selfinsurance reserves 196, ,040 Payable under security lending agreements 283, ,882 Liabilities held for sale 267, ,993 Estimated payables to thirdparty payors 409, ,546 Total current liabilities 4,020,675 4,044,903 LONGTERM DEBT Net of Current Portion 4,463,767 3,619,004 SELFINSURANCE RESERVES Net of Current Portion 969, ,799 ACCRUED PENSION AND RETIREE HEALTH COSTS 589, ,873 OTHER LONGTERM LIABILITIES 612, ,148 Total liabilities 10,656,163 9,889,727 NET ASSETS: Unrestricted net assets 10,452,030 10,125,003 Noncontrolling ownership interest in subsidiaries 150,873 38,090 Total unrestricted net assets 10,602,903 10,163,093 Temporarily restricted net assets 290, ,306 Permanently restricted net assets 90,669 87,063 Total net assets 10,984,069 10,543,462 TOTAL LIABILITIES AND NET ASSETS $ 21,640,232 $ 20,433,189 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) 4

5 TRINITY HEALTH CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (UNAUDITED) (In Thousands) Nine Months Ended March 31, March 31, UNRESTRICTED REVENUE: Patient service revenue net of contractual and other allowances $ 9,673,745 $ 9,195,117 Provision for bad debts (399,001) (507,131) Net patient service revenue less provision for bad debts 9,274,744 8,687,986 Capitation and premium revenue 591, ,469 Net assets released from restrictions 14,693 16,161 Other revenue 784, ,820 Total unrestricted revenue 10,665,179 10,037,436 EXPENSES: Salaries and wages 4,577,078 4,362,268 Employee benefits 908, ,696 Contract labor 82,526 73,315 Total labor expenses 5,568,586 5,327,279 Supplies 1,717,573 1,595,429 Purchased services 1,208,973 1,103,702 Depreciation and amortization 554, ,337 Occupancy 448, ,668 Medical claims 273, ,880 Interest 120, ,027 Other 483, ,949 Total expenses 10,375,118 9,767,271 OPERATING INCOME BEFORE OTHER ITEMS 290, ,165 Consolidation costs (24,930) Impairment charge (32,700) OPERATING INCOME 290, ,535 NONOPERATING ITEMS: Investment (loss) income 56, ,789 Equity in earnings of unconsolidated affiliates 130, ,008 Change in market value and cash payments of interest rate swaps (48,050) (9,098) Loss from extinguishment of debt (95,848) (1,411) Other, including income taxes 37,277 (1,847) Total nonoperating items 80, ,441 EXCESS OF REVENUE OVER EXPENSES 370, ,976 EXCESS OF REVENUE OVER EXPENSES ATTRIBUTABLE TO NONCONTROLLING INTEREST (24,727) (10,912) EXCESS OF REVENUE OVER EXPENSES Net of noncontrolling interest $ 345,868 $ 866,064 The accompanying notes are an integral part of the consolidated financial statements. 5

6 TRINITY HEALTH CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED) NINE MONTHS ENDED MARCH 31, 2015 (In Thousands) Controlling Interest Noncontrolling Interest Total UNRESTRICTED NET ASSETS: Excess of revenue over expenses Net assets released from restrictions for capital acquisitions Net change in retirement plan related items consolidated organizations Net change in retirement plan related items unconsolidated organizations Acquisition of a controlling interest in Siouxland Surgical Center ("Siouxland") Other Increase in unrestricted net assets before discontinued operations $ 345,868 30,919 18,398 (40,463) (3,358) 351,364 $ 24,727 99,008 (10,952) 112,783 $ 370,595 30,919 18,398 (40,463) 99,008 (14,310) 464,147 Discontinued operations: Loss from operations Loss on disposal of healthcare operations located in Cadillac, Michigan and Grayling, Michigan ("North") Increase in unrestricted net assets (18,088) (6,249) 327, ,783 (18,088) (6,249) 439,810 TEMPORARILY RESTRICTED NET ASSETS: Contributions Net investment income Net assets released from restrictions Other Increase in temporarily restricted net assets 45, (45,612) (2,565) (2,809) 45, (45,612) (2,565) (2,809) PERMANENTLY RESTRICTED NET ASSETS: Contributions for endowment funds Net investment income Other Decrease in permanently restricted net assets 1,999 1, ,606 1,999 1, ,606 INCREASE IN NET ASSETS 327, , ,607 NET ASSETS JUNE 30, ,505,372 38,090 10,543,462 NET ASSETS MARCH 31, 2015 $ 10,833,196 $ 150,873 $ 10,984,069 The accompanying notes are an integral part of the consolidated financial statements. (Continued) 6

7 TRINITY HEALTH CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED) NINE MONTHS ENDED MARCH 31, 2014 (In Thousands) Controlling Interest Noncontrolling Interest Total UNRESTRICTED NET ASSETS: Excess of revenue over expenses Net assets released from restrictions for capital acquisitions Net change in retirement plan related items consolidated organizations Net change in retirement plan related items unconsolidated organizations Other Increase in unrestricted net assets before discontinued operations $ 866,064 20,035 52,533 46,838 2, ,309 $ 10,912 (8,242) 2,670 $ 876,976 20,035 52,533 46,838 (5,403) 990,979 Discontinued operations: Loss from operations Loss on substitution of membership interest Increase in unrestricted net assets (30,996) (80,695) 876,618 2,670 (30,996) (80,695) 879,288 TEMPORARILY RESTRICTED NET ASSETS: Contributions Net investment income Net assets released from restrictions Other Increase in temporarily restricted net assets 48,134 11,067 (36,196) (6,771) 16,234 48,134 11,067 (36,196) (6,771) 16,234 PERMANENTLY RESTRICTED NET ASSETS: Contributions for endowment funds Net investment income Other Decrease in permanently restricted net assets 3,165 2,067 (8,867) (3,635) 3,165 2,067 (8,867) (3,635) INCREASE IN NET ASSETS 889,217 2, ,887 NET ASSETS JUNE 30, ,562,921 31,034 9,593,955 NET ASSETS MARCH 31, 2014 $ 10,452,138 $ 33,704 $ 10,485,842 The accompanying notes are an integral part of the consolidated financial statements. (Continued) 7

8 TRINITY HEALTH SUMMARIZED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In Thousands) Nine Months Ended March 31, March 31, OPERATING ACTIVITIES: Increase in net assets $ 440,607 $ 891,887 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 554, ,337 Provision for bad debts 399, ,131 Asset impairment charge 32,700 Loss on disposals and substitution of membership interest 6,249 80,695 Gain on controlling interest and increase in noncontrolling interest related to acquisition of Siouxland (139,326) Equity in earnings of unconsolidated affiliates (122,114) (255,545) Deferred retirement items unconsolidated organizations 40,463 (46,838) Change in net unrealized and realized gains and losses on investments (39,757) (412,809) Change in market values of interest rate swaps 35,156 (1,961) Restricted contributions and investment income received (11,851) (6,102) Loss on extinguishment of debt 95,848 Other adjustments (8,074) (1,376) Changes in: Patient accounts receivable (549,926) (624,782) Other assets (111,587) (17,186) Accounts payable and accrued expenses (10,087) (102,595) Estimated receivables from thirdparty payors (38,784) 1,142 Estimated payables to thirdparty payors 85,758 (43,226) Accrued pension and retiree health costs (141,968) (106,134) Selfinsurance and other liabilities 64,755 32,942 Net cash provided by operating activities of discontinued operations 23,815 12,569 Total adjustments 131,634 (430,038) Net cash provided by operating activities 572, ,849 INVESTING ACTIVITIES: Net purchases of investments (574,845) (258,268) Net purchases of property and equipment (633,827) (648,026) Proceeds from the sale of North 44,854 Acquisitions, net of cash (4,296) (3,631) Proceeds from disposal of property and equipment 5,223 14,162 Net dividends/proceeds from unconsolidated affiliates 20,482 13,032 Net increase in assets limited as to use and other changes (3,141) (4,032) Net cash used in investing activities of discontinued operations (7,188) (11,132) Net cash used in investing activities (1,152,738) (897,895) FINANCING ACTIVITIES: Proceeds from issuance of debt 1,494, ,507 Repayments of debt (765,247) (281,844) Net change in commercial paper (139,969) (228,942) Proceeds from restricted contributions and restricted investment income 11,851 6,102 Financing costs and other (5,025) (3,711) Net cash used in financing activities of discontinued operations 6,071 (4,348) Net cash provided by financing activities 602, ,764 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,060 (291,282) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 901, ,369 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 923,342 $ 707,087 The accompanying notes are an integral part of the consolidated financial statements. 8

9 TRINITY HEALTH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED MARCH 31, 2015 AND ORGANIZATION AND MISSION Trinity Health Corporation ( Trinity Health or the Corporation ), an Indiana nonprofit corporation, controls one of the largest health care systems in the United States. It is the result of the consolidation of Catholic health systems over the last fifteen years, most recently the merger of the Corporation and Catholic Health East ( CHE ) effective May 1, The Corporation incurred approximately $24.9 million of expenses for the nine months ended March 31, 2014, as a result of the transaction, which are included in consolidation costs in the statement of operations and changes in net assets. The Corporation is headquartered in Livonia, Michigan. The Corporation is sponsored by Catholic Health Ministries, a Public Juridic Person of the Holy Roman Catholic Church. The Corporation operates a comprehensive integrated network of health services including inpatient and outpatient services, physician services, managed care coverage, home health care, longterm care, assisted living care and rehabilitation services located in twentyone states. The operations are organized into Regional Health Ministries, National Health Ministries and Mission Health Ministries ("Health Ministries"). The mission statement for the Corporation is as follows: We, Trinity Health, serve together in the spirit of the Gospel as a compassionate and transforming healing presence within our communities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Statements of America ("GAAP") for interim financial reporting 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 nine months ended March 31, 2015 are not necessarily indicative of the results to be expected for the year ending June 30, Principles of Consolidation The consolidated financial statements include the accounts of the Corporation, and all whollyowned, majorityowned and controlled organizations. Investments where the Corporation holds less than 20% of the ownership interest are accounted for using the cost method. All other investments that are not controlled by the Corporation are accounted for using the equity method of accounting. The equity share of income or losses from investments in unconsolidated affiliates is recorded in other revenue if the unconsolidated affiliate is operational and projected to make routine and regular cash distributions; otherwise, the equity share of income or losses from investments in unconsolidated affiliates is recorded in nonoperating items in the consolidated statements of operations and changes in net assets. All material intercompany transactions and account balances have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Corporation to make assumptions, estimates and judgments that affect the amounts reported in the consolidated financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. The Corporation considers critical accounting policies to be those that require more significant judgments and estimates in the preparation of its consolidated financial statements, including the following: recognition of net patient service revenue, which includes contractual allowances; provisions for bad debts and charity care; recorded values of investments, derivatives and goodwill; reserves for losses and expenses related to health care professional and 9

10 general liabilities; and risks and assumptions for measurement of pension and retiree medical liabilities. Management relies on historical experience and other assumptions believed to be reasonable in making its judgment and estimates. Actual results could differ materially from those estimates. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. Investments Investments, inclusive of assets limited or restricted as to use, include marketable debt and equity securities. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value and are classified as trading securities. Investments also include investments in commingled funds, hedge funds and other investments structured as limited liability corporations or partnerships. Commingled funds and hedge funds that hold securities directly are stated at the fair value of the underlying securities, as determined by the administrator, based on readily determinable market values or based on net asset value, which is calculated using the most recent fund financial statements. Limited liability corporations and partnerships are accounted for under the equity method. Investment Earnings Investment earnings include interest, dividends, realized gains and losses on investments, holding gains and losses, and equity earnings. Investment earnings on assets held by trustees under bond indenture agreements, assets designated by the Board for debt redemption, assets held for borrowings under the intercompany loan program, assets held by grant making foundations and assets deposited in trust funds by a captive insurance company for selfinsurance purposes in accordance with industry practices are included in other revenue in the consolidated statements of operations and changes in net assets. Investment earnings from all other investments and board designated funds are included in nonoperating investment (loss) income, unless the income or loss is restricted by donor or law. Derivative Financial Instruments The Corporation periodically utilizes various financial instruments (e.g. options and swaps) to hedge interest rate, equity downside risk and other exposures. The Corporation s policies prohibit trading in derivative financial instruments on a speculative basis. The Corporation recognizes all derivative instruments in the balance sheets at fair value. Securities Lending The Corporation participates in securities lending transactions whereby a portion of its investments are loaned, through its agent, to various parties in return for cash and securities from the parties as collateral for the securities loaned. Each business day the Corporation, through its agent, and the borrower determine the market value of the collateral and the borrowed securities. If on any business day the market value of the collateral is less than the required value, additional collateral is obtained as appropriate. The amount of cash collateral received under securities lending is reported as an asset and a corresponding payable in the consolidated balance sheets and is up to 105% of the market value of securities loaned. At March 31, 2015 and June 30, 2014, the Corporation had securities loaned of $287.1 million and $207.1 million, respectively, and received collateral (cash and noncash) totaling $295.9 million and $212.7 million, respectively, relating to the securities loaned. The fees received for these transactions are recorded in investment (loss) income on the consolidated statements of operations and changes in net assets. Assets Limited as to Use Assets set aside by the Board for future capital improvements, future funding of retirement programs and insurance claims, retirement of debt, held for borrowings under the intercompany loan program, and other purposes over which the Board retains control and may at its discretion subsequently use for other purposes and selfinsurance trust and benefit plan arrangements are included in assets limited as to use. DonorRestricted Gifts Unconditional promises to give cash and other assets to the Corporation are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of operations and changes in net assets as net assets released from restrictions. Donor 10

11 restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the consolidated statements of operations and changes in net assets. Inventories Inventories are stated at the lower of cost or market. The cost of inventories is determined principally by the weighted average cost method. Assets and Liabilities Held for Sale The Corporation has classified certain longlived assets as assets held for sale in the consolidated balance sheets when the assets have met applicable criteria for this classification. The Corporation has also classified as held for sale those liabilities related to assets held for sale. Property and Equipment Property and equipment, including internaluse software, are recorded at cost, if purchased, or at fair value at the date of donation, if donated. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using either the straightline or an accelerated method and includes capital lease and internaluse software amortization. The useful lives of these assets range from 2 to 50 years. Interest costs incurred during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets. Gifts of longlived assets such as land, buildings, or equipment are reported as unrestricted support and are excluded from the excess of revenue over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of longlived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire longlived assets are reported as restricted support. Goodwill Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Asset Impairment: Property and Equipment The Corporation evaluates longlived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future undiscounted cash flows. If the estimated future undiscounted cash flows are less than the carrying value of the assets, the impairment recognized is calculated as the carrying value of the longlived assets in excess of the fair value of the assets. The fair value of the assets is estimated based on appraisals, established market values of comparable assets or internal estimates of future net cash flows expected to result from the use and ultimate disposition of the asset. Goodwill Goodwill is tested for impairment annually or when an event or a change in circumstance indicates the value of a reporting unit may have changed. Testing is conducted at the reporting unit level. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Estimates of fair value are based on appraisals, established market prices for comparable assets or internal estimates of future net cash flows and presume stable, improving or, in some cases, declining results at our hospitals, depending on their circumstances. As of March 31, 2015, goodwill increased $144.0 million related primarily to the acquisition of Siouxland Surgery Center, LLP as further described in Note 3. Other Assets Other assets includes longterm notes receivable, reinsurance recovery receivables, definite and indefinitelived intangible assets, deferred financing costs, and prepaid pension and retiree health costs. The majority of the net balances of definitelived intangible assets include noncompete agreements and physician guarantees with finite lives amortized using the straightline method over their estimated useful lives, which generally range from 5 to 22 years and 2 to 12 years, respectively. Indefinitelived intangible assets primarily include trade names. 11

12 Shortterm borrowings Shortterm borrowings include puttable variable rate demand bonds supported by selfliquidity or liquidity facilities considered shortterm in nature. Other LongTerm Liabilities Other longterm liabilities include deferred compensation, asset retirement obligations, interest rate swaps and deferred revenue from entrance fees. Deferred revenue from entrance fees are fees paid by residents of facilities for the elderly upon entering into continuing care contracts (net of the portion that is refundable to the resident) which are recorded as deferred revenue and amortized to income using the straightline method over the estimated remaining life expectancy of the resident. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Corporation has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Corporation in perpetuity. Patient Accounts Receivable, Estimated Receivables from and Payables to ThirdParty Payors and Net Patient Service Revenue The Corporation has agreements with thirdparty payors that provide for payments to the Corporation s Health Ministries at amounts different from established rates. Patient accounts receivable and net patient service revenue are reported at the estimated net realizable amounts from patients, thirdparty payors, and others for services rendered. Estimated retroactive adjustments under reimbursement agreements with thirdparty payors are included in net patient service revenue and estimated receivables from and payables to thirdparty payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods, as final settlements are determined. Estimated receivables from thirdparty payors include amounts receivable from Medicare and state Medicaid meaningful use programs. SelfInsured Employee Health Benefits The Corporation administers selfinsured employee health benefit plans for employees. The majority of the Corporation s employees participate in the programs. The provisions of the plans permit employees and their dependents to elect to receive medical care at either the Corporation s Health Ministries or other health care providers. Gross patient service revenue has been reduced by an allowance for selfinsured employee health benefits which represents revenue attributable to medical services provided by the Corporation to its employees and dependents in such years. Allowance for Doubtful Accounts The Corporation recognizes a significant amount of patient service revenue at the time the services are rendered even though the Corporation does not assess the patient's ability to pay at that time. As a result, the provision for bad debts is presented as a deduction from patient service revenue (net of contractual provisions and discounts). For uninsured and under insured patients that do not qualify for charity care, the Corporation establishes an allowance to reduce the carrying value of such receivables to their estimated net realizable value. This allowance is established based on the aging of accounts receivable and the historical collection experience by RHM and for each type of payor. A significant portion of the Corporation's provision for doubtful accounts relates to selfpay patients, as well as copayments and deductibles owed to the Corporation by patients with insurance. Premium and Capitation Revenue The Corporation has certain Health Ministries that arrange for the delivery of health care services to enrollees through various contracts with providers and common provider entities. Enrollee contracts are negotiated on a yearly basis. Premiums are due monthly and are recognized as revenue during the period in which the Corporation is obligated to provide services to enrollees. Premiums received prior to the period of coverage are recorded as deferred revenue and included in accrued expenses in the consolidated balance sheet. Certain of the Corporation s Health Ministries have entered into capitation arrangements whereby they accept the risk for the provision of certain health care services to health plan members. Under these agreements, the Corporation s Health Ministries are financially responsible for services provided to the health plan members by other institutional health care providers. Capitation revenue is recognized during the period for which the RHM is obligated to provide services to health plan enrollees under capitation contracts. Capitation receivables are included in other receivables in the consolidated balance sheets. 12

13 Reserves for incurred but not reported claims have been established to cover the unpaid costs of health care services covered under the premium and capitation arrangements. The premium and capitation arrangement reserves are classified with accrued expenses in the consolidated balance sheets. The liability is estimated based on actuarial studies, historical reporting, and payment trends. Subsequent actual claim experience will differ from the estimated liability due to variances in estimated and actual utilization of health care services, the amount of charges, and other factors. As settlements are made and estimates are revised, the differences are reflected in current operations. Charity Care The Corporation provides services to all patients regardless of ability to pay. In accordance with the Corporation's policy, a patient is classified as a charity patient based on income eligibility criteria as established by the Federal Poverty Guidelines. Charges for services to patients who meet the Corporation's guidelines for charity care are not reflected in the accompanying consolidated financial statements. Income Taxes The Corporation and substantially all of its subsidiaries have been recognized as taxexempt pursuant to Section 501(a) of the Internal Revenue Code. The Corporation also has taxable subsidiaries, which are included in the consolidated financial statements. Certain of the taxable subsidiaries have entered into tax sharing agreements and file consolidated federal income tax returns with other corporate taxable subsidiaries. The Corporation includes penalties and interest, if any, with its provision for income taxes in other nonoperating items in the consolidated statements of operations and changes in net assets. Excess of Revenue Over Expenses The consolidated statement of operations and changes in net assets includes excess of revenue over expenses. Changes in unrestricted net assets which are excluded from excess of revenue over expenses, consistent with industry practice, include the effective portion of the change in market value of derivatives that meet hedge accounting requirements, permanent transfers of assets to and from affiliates for other than goods and services, contributions of longlived assets received or gifted (including assets acquired using contributions, which by donor restriction were to be used for the purposes of acquiring such assets), net change in retirement plan related items, discontinued operations, extraordinary items and cumulative effects of changes in accounting principles. Adopted Accounting Pronouncements On July 1, 2014, the Corporation adopted Accounting Standard Update ("ASU") , Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. This guidance requires entities to measure obligations resulting from the joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The adoption of this guidance had no impact on the Corporation's consolidated financial statements. On July 1, 2014, the Corporation adopted ASU , "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This guidance requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit, with some exceptions. The adoption of this guidance had no impact on the Corporation's consolidated financial statements. On May 1, 2015, the Corporation adopted ASU , "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." This guidance removes the requirement to categorize within the fair value hierarchy all investments for which the fair value is measured using the net asset value per share practical expedient. This guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The adoption of this guidance will impact the disclosures made in the annual year end financial statements. Forthcoming Accounting Pronouncements 13

14 In April 2014, the FASB issued ASU 20148, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." This guidance amends the definition of a discontinued operation and requires additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. This guidance is effective for the Corporation beginning July 1, 2015, with early adoption permitted. The Corporation expects that the adoption of this guidance will have an impact on classification and disclosures related to prospective disposals. In May 2014, the FASB issued ASU , "Revenue From Contracts With Customers." This guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This guidance is effective for the Corporation beginning July 1, The Corporation is still evaluating the impact this guidance may have on its consolidated financial statements. In June 2014, the FASB issued ASU , "Transfers and Servicing: RepurchasetoMaturity Transactions, Repurchase Financings, and Disclosures." This guidance requires entities to account for repurchasetomaturity transactions as secured borrowings (rather than sales with forward repurchase agreements), eliminates accounting guidance on linked repurchase financing transactions, and expands disclosure requirements related to certain transfers (specifically repurchase agreements, securities lending transactions, and repurchasetomaturity transactions) accounted for as secured borrowings. This guidance is effective for the Corporation beginning July 1, The Corporation does not expect this guidance to have a material impact on its consolidated financial statements. In January 2015, the FASB issued ASU , "Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items." This guidance eliminates the concept for an extraordinary item. This guidance is effective for the Corporation beginning July 1, The Corporation does not expect this guidance to have an impact on its consolidated financial statements. In February 2015, the FASB issued ASU , "Amendments to the Consolidation Analysis." This guidance significantly changes the consolidation analysis required under U.S. GAAP. This guidance is effective for the Corporation beginning July 1, The Corporation has not yet evaluated the impact this guidance may have on its consolidated financial statements. In April 2015, the FASB issued ASU , "Simplifying the Presentation of Debt Issuance Costs." This guidance requires debt issuance costs to be presented as a direct deduction from the related debt rather than as an asset. This guidance is effective for the Corporation beginning July The Corporation expects that the adoption of this guidance will result in a reduction to total assets and total liabilities of approximately $33 million in the consolidated balance sheets. 3. INVESTMENTS IN UNCONSOLIDATED AFFILIATES, BUSINESS ACQUISITIONS AND DIVESTITURES Investments in Unconsolidated Affiliates The Corporation and certain of its Health Ministries have investments in entities that are recorded under the cost and equity methods of accounting. The Corporation s share of equity earnings (losses) from entities accounted for under the equity method was $122.1 million and $255.5 million for the nine months ended March 31, 2015 and 2014, respectively, of which ($8.3) million and $45.5 million, respectively, is included in other revenue and $130.4 million and $210.0 million, respectively, is included in nonoperating items in the consolidated statements of operations and changes in net assets. The most significant of these investments include the following: BayCare Health System The Corporation has a 50.4% interest in BayCare Health System Inc. and Affiliates ("BayCare"), a Florida notforprofit corporation exempt from state and federal income taxes. BayCare was formed in 1997 pursuant to a Joint Operating Agreement ("JOA") among the notforprofit, taxexempt members of the Catholic Health East BayCare Participants, Morton Plant Mease Health Care, Inc., and South Florida Baptist Hospital, Inc. (collectively, the "Members"). BayCare consists of three community health alliances located in the Tampa Bay area of Florida including St. Joseph'sBaptist Healthcare Hospital, St. Anthony's Health Care, and Morton Plant Mease Health Care. The Corporation has the right to appoint nine of the twenty 14

15 one voting members of the Board of Directors of BayCare, therefore the Corporation accounts for BayCare under the equity method of accounting. At March 31, 2015 and June 30, 2014, the Corporation's investment in BayCare totaled $1,883.4 million and $1,770.9 million, respectively. Gateway Health Plan The Corporation has a 50.0% interest in Gateway Health Plan, L.P. and Subsidiaries ("GHP"), a Pennsylvania limited partnership. GHP has two general partners, Highmark Ventures Inc. formerly known as Alliance Ventures, Inc., and Mercy Health Plan, each owning 1%. In addition to the general partners, there are two limited partners, Highmark Inc. and Mercy Health Plan, each owning 49%. At March 31, 2015 and June 30, 2014, the Corporation's investment in GHP totaled $140.9 million and $178.9 million, respectively. Catholic Health System, Inc. The Corporation has a onethird interest in Catholic Health System, Inc. and Subsidiaries ("CHS"). CHS, formed in 1998, is a notforprofit integrated delivery healthcare system in western New York jointly sponsored by the Sisters of Mercy, Ascension Health System, the Franciscan Sisters of St. Joseph, and the Diocese of Buffalo. The Corporation, Ascension Health System, and the Diocese of Buffalo are the corporate members of CHS. CHS operates several organizations, the largest of which are four acute care hospitals located in Buffalo, New York, Mercy Hospital of Buffalo, Kenmore Mercy Hospital, Sisters of Charity Hospital, and St. Joseph Hospital. At March 31, 2015 and June 30, 2014, the Corporation's investment in CHS totaled $47.8 million and $68.0 million, respectively. Emory Healthcare/St. Joseph's Health System The Corporation has a 49% interest in Emory Healthcare/St. Joseph's Health System ("EH/SJHS"). EH/SJHS operates several organizations, including two acute care hospitals, St. Joseph's Hospital of Atlanta and John's Creek Hospital. At March 31, 2015 and June 30, 2014, the Corporation's investment in EH/SJHS totaled $72.1 million and $60.3 million, respectively. Condensed consolidated balance sheets of BayCare, GHP, CHS and EH/SJHS as of March 31 and June 30 are as follows (in thousands): Baycare GHP CHS EH/SJHS March 31, June 30, March 31, June 30, March 31, June 30, March 31, June 30, Total assets $5,767,546 $5,390,589 $677,862 $643,593 $976,000 $872,106 $449,413 $430,434 Total liabilities $1,832,532 $1,676,157 $395,590 $285,835 $825,327 $662,833 $295,032 $289,101 Condensed consolidated statements of operations of BayCare, GHP, CHS and EH/SJHS for the nine month periods ended March 31 are as follows (in thousands): Baycare GHP CHS EH/S JHS Revenue, net $2,139,945 $1,933,903 $1,467,372 $1,395,938 $730,800 $694,610 $358,167 $319,288 Excess (deficiency) of revenue over expenses $241,860 $576,348 ($60,211) $36,874 $27,166 $32,570 $436 ($45,036) T he following amounts have been recognized in the accompanying consolidated statements of operations and changes in net assets related to the investments in BayCare, GHP, CHS and EH/SJHS for the nine month periods ended March 31 (in thousands): Other Revenue Equity in earnings of unconsolidated organizations Other changes in unrestricted net assets Baycare GHP CHS EH/SJHS $ $ $ (33,940) $ 19,777 $ $ $ $ 121, ,462 7,464 10,644 (80) (22,394) (9,351) 564 (7,854) 2,272 (27,708) 36,696 36,130 18,814 $ 112,537 $ 223,026 $ (41,794) $ 22,049 $ (20,244) $ 47,340 $ 36,050 $ (3,580) Acquisitions: 15

16 Consolidation of Siouxland Surgery Center, LLP ("Siouxland") Effective July 1, 2014, a venture was created between Mercy Health Services Iowa, Corp. ("Mercy") and USP Health Ventures, LLC ("USP"), (collectively, "Mercy/USP"). Mercy owns a controlling interest of 55.71% and USP owns the remaining 44.29% interest of the venture. Mercy/USP then entered into a Securities Purchase Agreement with SSC Physician Investors, LLC ("Physician Investors"), whereby Mercy contributed 30.9% of their preexisting ownership of Siouxland and USP contributed their newly acquired 24.6% ownership of Siouxland, resulting in Mercy/USP owning a controlling interest of 55.54% of Siouxland with the remaining 44.46% interest owned by Physician Investors. As a result of the transaction, Mercy reported a gain of $40.3 million in other operating items in the consolidated statement of operations and changes in net assets in July, 2014 and recognized goodwill of $137.3 million on the consolidated balance sheet. Siouxland operates a surgical specialty hospital and medical facility in Dakota Dunes, South Dakota. Summarized consolidated opening balance sheet information for Mercy/USP is shown below and includes the acquisition of $13.1 million of longterm debt including current portion (in thousands): Cash $ 4,178 Accounts payable and accrued expenses $ 7,449 Patient accounts receivable 8,374 Current portion of longterm debt 1,031 Other current assets 3,283 Longterm debt, net of current portion 12,154 Property and equipment 24,312 Total liabilities acquired $ 20,634 Goodwill 138,032 Other assets 800 Unrestricted net assets $ 57,265 Total assets acquired $ 178,979 Unrestricted noncontrolling interest $ 99,008 Total net assets $ 156,273 The operating results for Siouxland for the nine months ended March 31, 2015, include unrestricted revenue of $55.7 million and excess of revenue over expense, prior to the adjustment for noncontrolling interest, of $22.1 million. Trinity Health Partners ("THP") Effective December 24, 2014, the Corporation and Heritage Provider Network, a physician network management company, entered into a Definitive Agreement, subject to regulatory and other closing conditions, which provides a framework to form a venture known as THP to provide advanced population health management in select markets throughout the country. The Corporation owns an 80% interest in this venture which is consolidated in these financial statements. During the third quarter, $30 million of cash was contributed in proportion to ownership percentages of the partners. As of March 31, 2015, the venture had startup costs of $200 thousand, prior to the provision for noncontrolling interest. Saint Francis Care ("SFC") On December 17, 2014, the Corporation entered into a Definitive Agreement to become the sole corporate member of SFC, an integrated healthcare delivery system located in Hartford, Connecticut and the largest Catholic healthcare provider in New England with $785 million of revenue reported for the fiscal year ended September 30, As part of the transaction, an investment of $275 million in capital has been committed over a five year period by the Corporation. The transaction is subject to approval by the State of Connecticut. Divestitures: Mercy Health System of Maine ("Mercy Maine") Effective October 1, 2013, membership of Mercy Maine was assumed by Eastern Maine Health System ("EMHS") via a membership substitution. Substantially all assets and liabilities transferred to EMHS on that date. As a result of the transfer, a loss on disposal of $80.7 million was recorded in unrestricted net assets. The consolidated financial statements for the nine months ended March 31, 2014 present the operations of Mercy Maine as a discontinued operation. For the nine month period ended March 31, 2014, the Mercy Maine reported revenue of $55.6 million and deficiency of revenue over expense of $4.2 million in discontinued operations in the consolidated statement of changes in net assets. 16

17 Saint Michael's Medical Center ("St. Michael's") On February 8, 2013, Saint Michael's entered into an asset purchase agreement under which the hospital would be acquired by Prime Healthcare Services. The majority of assets and liabilities of Saint Michael's have been classified as held for sale on the consolidated balance sheets. The transaction is pending subject to approval by the state of New Jersey. The consolidated financial statements for all periods present the operations of Saint Michael's as a discontinued operation. For the nine month periods ended March 31, 2015 and 2014, St. Michael's reported revenue of $144.2 million and $137.0 million, respectively, and deficiency of revenue over expense of $17.8 million and $20.0 million, respectively, in discontinued operations in the consolidated statement of changes in net assets. As of March 31, 2015 and June 30, 2014, assets held for sale were $117.0 million and $127.9 million, respectively, and liabilities held for sale were $263.5 million and $257.9 million, respectively. The assets and liabilities held for sale consisted of (in thousands): March 31, June 30, March 31, June 30, Patient accounts receivable 21,663 21,475 Current portion of longterm debt 4,900 4,490 Other current assets 8,944 9,418 Accounts payable & accrued expenses 25,306 17,085 Property and equipment 81,383 81,465 Other current liabilities 10,323 8,546 Other assets 4,978 15,559 Longtermdebt, net of current portion 222, ,799 Total assets $ 116,968 $ 127,917 Total liabilities $ 263,458 $ 257,920 Saint James Mercy Hospital ("SJMH") During December 2013, the Corporation approved a plan to sell or transfer substantially all of the operations of SJMH pending state of New York approval. Certain assets and liabilities of SJMH have been classified as held for sale on the consolidated balance sheets. The consolidated financial statements for all periods present the operations of SJMH as a discontinued operation. For the nine month periods ended March 31, 2015 and 2014, SJMH reported revenue of $30.3 million and $35.8 million, respectively, and deficiency of revenue over expense of $4.9 million and $3.1 million, respectively, in discontinued operations in the consolidated statement of changes in net assets. As of March 31, 2015 and June 30, 2014, assets held for sale were $12.3 million and $12.1 million, respectively. Mercy Health Partners, North ("North") Effective February 1, 2015, the Corporation sold substantially all of the Corporation's healthcare operations located in Cadillac, Michigan and Grayling, Michigan to Munson Healthcare. Certain assets and liabilities of North were classified as held for sale on the consolidated balance sheet as of June 30, The consolidated financial statements present the hospital operations of North as a discontinued operation. For the nine month periods ended March 31, 2015 and 2014, North reported revenue of $93.8 million and $108.7 million, respectively, and deficiency of revenue over expense of $2.4 million and $0.6 million, respectively, in discontinued operations in the consolidated statement of changes in net assets. As of June 30, 2014, assets held for sale of $44.7 million, respectively, consisted of (in thousands): Inventories $ 3,369 Assets limited or restricted as to use 2,313 Property and equipment 36,710 Investments in unconsoldiated affiliates 2,314 Total assets $ 44,706 As a result of the divestiture, a loss on disposal of $6.2 million was recorded in discontinued operations in the consolidated statements of changes in net assets. St. Joseph Mercy Port Huron ("Port Huron") On November 19, 2014, the Corporation entered into a Definitive Agreement with Prime Healthcare Services ("Prime"), a hospital system based in Ontario, California, under which substantially all of the healthcare operations and certain assets located in Port Huron, Michigan would be acquired by Prime Healthcare Services. Certain assets and liabilities of Port Huron have been classified as held for sale on the consolidated balance sheets. The consolidated 17

18 financial statements for all periods present the operations of Port Huron as a discontinued operation. For the nine month period ended March 31, 2015 and 2014, Port Huron reported revenue of $56.8 million and $56.9 million, respectively, and deficiency of revenue over expenses of $2.5 million and $1.6 million, respectively, in discontinued operations in the consolidated statement of changes in net assets. As of March 31, 2015 and June 30, 2014, assets held for sale of $31.3 million and $32.2 million, respectively, and liabilities held for sale of $3.6 million and $2.0 million, respectively. The assets and liabilities held for sale consisted of (in thousands): March 31, June 30, March 31, June 30, Inventories 1,742 1,732 Current portion of longterm debt Other current assets Accrued expenses 1, Assets limited or restricted as to use 1,364 1,291 Salaries, wages & related liabilities 1,023 1,042 Property and equipment 24,752 25,955 Longtermdebt, net of current portion Investments in unconsolidated affiliates 2,983 2,997 Other longtermliabilities Total assets $ 31,270 $ 32,212 Total liabilities $ 3,635 $ 2,001 Mercy Suburban and East Norriton Physician Services ("Mercy Suburban") On February 26, 2015, the Corporation entered into a Definitive Agreement with Prime under which substantially all of the healthcare operations and certain assets of Mercy Suburban would be acquired by Prime. Mercy Suburban reported total unrestricted revenue of $84.1 million and $79.7 million and deficiency of revenue over expenses of $8.3 million and $44.5 million, which includes a $32.7 million asset impairment charge, for the nine month periods ended March 31, 2015 and 2014, respectively, that is consolidated in the Corporation's statements of operations. As of March 31, 2015 and June 30, 2014, the consolidated balance sheets include approximately $17.6 million and $18.1 million, respectively, of Mercy Suburban assets expected to be sold pursuant to this transaction. 4. PROPERTY AND EQUIPMENT A summary of property and equipment is as follows (in thousands): March 31, June 30, Land $ 321,648 $ 311,311 Buildings and improvements 7,823,067 7,597,586 Equipment 5,259,772 5,143,382 Capital leased assets 195, ,387 Total 13,600,314 13,244,666 Accumulated depreciation and amortization (7,696,348) (7,237,761) Construction in progress 726, ,053 Property and equipment, net $ 6,630,013 $ 6,566,958 As part of the acquisition of LUHS that occurred in fiscal year 2012, the Corporation has committed to spend at least $300 million on capital projects for LUHS through fiscal year ending June 30, This amount may be increased to $400 million if certain operating thresholds are met. Through March 31, 2015, approximately $186 million of capital expenditures have been incurred on capital projects for LUHS. In addition, as part of the acquisition of Mercy Health System of Chicago ("MHSC") that occurred in fiscal year 2012, the Corporation has committed to spend at least $140 million for capital, information systems and equipment needs to support the operations of MHSC through the fiscal year ending June 30, This amount may be increased to $150 million if certain operating thresholds are met. Through March 31, 2015 approximately $77 million of capital expenditures have been incurred on such MHSC projects. 18