Continuing Disclosure Annual Report

Transcription

1 PINNACLE HEALTH SYSTEM and PINNACLE HEALTH OBLIGATED GROUP Continuing Disclosure Annual Report June 30, 2013

2 PINNACLE HEALTH SYSTEM CONTINUING DISCLOSURE ANNUAL REPORT AS OF JUNE 30, 2013 INDEX Management Discussion and Analysis Obligated Group Financial Statement Package Obligated Group Summary of Revenues and Expenses Obligated Group Patient Service Revenue by Payor Source Pinnacle Health Hospitals Medical Staff Summary Pinnacle Health Hospitals Top Ten Admitting Physicians by Specialty Pinnacle Health Hospitals Utilization Statistics Debt Service Requirements Report of Independent Auditors Appendix Audited Financial Statements

3 PINNACLE HEALTH SYSTEM (CONSOLIDATED) MANAGEMENT DISCUSSION AND ANALYSIS Fiscal Year Ended June 30, 2013 OVERVffiW AND BACKGROUND (the "System") is located in Harrisburg, Pennsylvania and was created on December 30, 1995, as a result of the consolidation of Capital Health System and Polyclinic Health System. Effective August 1, 1998, Community General Osteopathic Hospital was merged into Pinnacle Health Hospitals. The System is the leading healthcare provider in its primaty service area with over 5,000 full time equivalent employees, over 1,300 physicians and allied health professionals on its combined medical staff. The System currently operates 590 total licensed beds, plus 31 nursery beds, in two hospital complexes. Over the past year the System has engaged in several major construction projects including a tln ee-story expansion at the Community General Osteopathic Hospital site which transitioned the facility from semi-private to mostly private rooms opening in September Construction at the Harrisburg Hospital will also allow for a conversion to private rooms in most areas as well as modernization of the Cath Lab, ICU and cardiovascular unit. Construction at the Harrisburg Hospital site is being completed in phases with the opening of the Cardiothoracic ICU in October Construction of a new 108 bed, all private room West Shore Hospital is underway on the Cumberland Campus with a projected opening date of May From savings generated through construction/equipment contracts coming in under budget, and fi om re-prioritizing the prior year's capital budget, the decision was made to construct a fi ee-standing Cancer Center located on the Cumberland Campus near the new West Shore Hospital with a scheduled completion date in early Fiscal All projects are proceeding as planned, on time and within budget. MEMBERS OF THE OBLIGATED GROUP The Obligated Group consists of the System (Parent), the Pinnacle Health Hospitals and Pinnacle Health Medical Services. The System, the Hospital and Services are Pe1msylvania not-for-profit corporations which are exempt from Federal income taxes by virtue of being organizations described in Section 501(c)(3) of the Internal Revenue Code. The System, the Hospital and Services are governed by separate voluntary boards of directors whose members are community leaders committed to improving the quality of health in central Pennsylvania. System entities (1 00% owned) not included in the obligated group include Pinnacle Health Medical Group, Pim1acle Health Emergency Department Physicians, Pinnacle Health Foundation, Community LifeTeam, Pim1acle Health Cardiovascular Institute, Pinnacle Health Imaging, Pinnacle Health Ventures, h1c., United Health Risk, Ltd., United Central Pennsylvania Risk Retention Group and River Health ACO. The following discussion by management of the actual, audited financial and statistical results includes information that may be the result of estimates or assumptions prepared by management. The following is not intended to replace information contained in any "Official Statement" or bond offering documents related to the issuance of securities. All of the financial infmmation that follows is for the consolidated system unless otherwise noted. At June 30, 2013, the Obligated Group accounted for 93.7% of the total assets of the System, 89.5% of total revenue and103.7% of the System's revenue and gains over expenses and losses. 1

4 UTILIZATION AND FINANCIAL INFORMATION Management Discussion of Fiscal Year Ended June 30, 2013 Compared to June 30, 2012 (Consolidated ) Summaries of significant utilization and financial data for the System for the five fiscal years ended June 30, 2013 are contained in the schedules that follow this discussion. Hospital Utilization For the fiscal year ended June 30, 2013 as compared to June 30, 2012 discharges increased by 1,646 or 4.9% and observation cases increased by 446 or 5.8%. Hospital Outpatient visits increased by 16.0%. Discharges adjusted for a factor that adds an estimated amount to account for outpatient services increased 6,703 or 11.5% over the same periocl in the prior year. The table below shows an historical trend of discharge and observation cases. After several years of minimal to negative growth in Hospital inpatient volumes, fiscal year 2012 saw an increase in both discharges and observation cases of 459 and 366, respectively. This trend continued into fiscal year 2013 with a total year-over-year increase in discharges and observation cases of 5.1 %. FY2009 FY 2010 FY2011 FY2012 FY2013 Total Discharges 35,989 34,308 33,189 33,648 35,294 Total Observation Cases 5,675 6,309 7,356 7,722 8,168 Total Discharges & Observation Cases 41,664 40,617 40,545 41,370 43,462 Percent Change Year over Year 0.2% -2.5% -0.2% 2.0% 5.1% Consolidated Swm1101J' of Operations. I For the fiscal year 2013, the System had income from operations of $53.1million vs. a budget of $46.8 million and prior year income of $42.7 million. Year-over-year discharges in the Hospital increased by 4.9%, ED visits were up 11.3% and outpatient visits within the Hospital increased 99,234 or 16.0% over the prior year. The physician practice entities within Pinnacle Health Medical Services and Pinnacle Health Medical Group added 180,83 5 visits in fiscal 2013 compared to fiscal The majority of the increase in the visits was in Pinnacle Health Medical Group and was due to the acquisition of Heritage Medical Group in April This accounted for 168,404 of the year-over-year increase. Management continues to focus on a more efficient workforce and on reducing supply costs to improve overall fmancial performance. For fiscal year 2013, PTE's per Adjusted Occupied Bed for the System were 5.17, down 5.7% from the previous year. Supply costs per adjusted discharge for the Hospital for the fiscal year were $1,851 vs. $1,961 in the prim year. As a result, the cost per adjusted discharge in the Hospital of $9,836 continues to show improvement and ended fiscal year % below the prior year. 1 Pinnacle Health's Management adopted FASB ASU which requires the presentation of bad debt expense to be shown as a deduction of patient service revenues; therefore, all current and prior year comparisons throughout our discussion conform to this presentation. 2

5 Finally, non-operating income for the fiscal year 2013 was $23.6 million, a significant improvement over the gain of $7.8 million experienced in the prior year. The improved perfonnance was primarily due to favorable mark-to-market adjustments within the investment portfolio totaling $7.5 million and a gain of $1.4 million on the Interest Rate SWAP contract. During fiscal year 2012, the System adopted Accounting Standards Update No , Testing Goodwill for Impairment, as a result of the ammal impairment test completed in March 2013, a loss on goodwill impainnent of$1.6 million was recorded in fiscal year Consolidated Balm1ce Sheets Total assets of the System increased to $1.18 billion at June 30, 2013 from $987.0 million at June 30, 2012, an increase of 19.9%. For the same period, unrestricted cash and investments increased by $42.8 million to $446.8 million and um estricted days cash on hand increased by 3 days. Unrestricted Cash and Investments ($ in thousands) FY2012 FY 2013 Cash and Cash Equivalents 31,875 34,446 Short-term Investments 201, ,373 Funded Depreciation Investments 122, ,380 Board Designated Investments 47,909 54, , ,801 Days Cash on Hand (1) (1) Days cash on Hand for the System is calculated as follows: Total umestricted cash and investments/total operating expenses less depreciation and amortization divided by the number of days in the period. Net property, plant and equipment increased to $399.8 million at June 30, 2013 from $355.2 million at June 30, Additions to property, plant and equipment, including capital leases, for fiscal year 2013 were $102.3 million. Expenditures include the construction of the two floors to the Medical Sciences Building, cohstruction at the Community General Osteopathic Hospital, Harrisburg Hospital and the new West Shore Hospital, all part of Vision 2017, as well as site work and design for the new West Shore Cancer Center. Long-Term Debt Total long-term debt as of June 30, 2013 was $411.8 million, an increase of $104.5 million over June 30, On August 7, 2012, the Obligated Group issued $128.2 million face value of taxexempt bonds, with a $7.0 million premium, totaling $135.2 of new debt due in 2042 with an average coupon of 4.91%. On March 1, 2013 the balance of the taxable bank loan of $21.7 million was paid fi om operating cash. 3

6 Eamings before Interest, Depreciation, and Amortization Based on the net patient service revenue growth of 10.8% and operating cost increases of 9.3%, total operating eamings before interest, depreciation, and amortization (EBIDA) for the period ended June 30, 2013 was $122.0 million compared to $102.7 million for the prior fiscal year. Ratios The System's profitability ratios exceeded expectations for 2013 as well as the prior fiscal year results. The following table presents some of the key financial ratios: Actual* Actual* Actual F 2011 FY2012 FY 2013 Operating Margin 0.9% 5.7% 6.4% Operating EBIDA 9.2% 13.6% 14.7% Unrestricted Days Cash on Hand - System Unrestricted Days Cash on Hand - Obligated Group MADS -Obligated Group Plan* F % 13.8% 216 N/A N/A *All plan and prior year numbers have been restated with bad debt recorded as a deduction fi 01n net patient revenue In summwy, continues to focus on the jitlure and is positioning the organization to continue to improve not only its financial position but also to advance the quality of patient care being delivered through a clinically integrated health system. The System's goal is to become best in class for patient satisfaction, quality care, leadership accountability and employee engagement as it prepares for PPACA, altemative payment models and increased public transparcmcy and accountability. 4

7 PINNACLE HEALTH SYSTEM OBLIGATED GROUP FINANCIAL STATEMENTS JUNE 30, 2013

8 PINNACLEHEALT (Obligated Group) Consolidated Balance Sheet as of ( $ in thousands ) June 2013 June 2012 ASSETS Current Assets: Cash and cash equivalents ShorHerm investments Accounts receivable, net Inventories Prepaid expenses Current portion of funds held by trustee Current portion of self-insurance trust funds Due from related third-party payers Due from related parties Total current assets Assets whose use is limited: Self-insurance trust funds, net of current Board-designated funds Funded depreciation Funds held by trust'?e, net of current Temporarily restricted funds Investments permanently restricted as to use Properly, plant and equipment, net Notes Receivable and advances to related party Investments in and advances to partnerships Deferred financing cost, net Other assets T a tal other assets Total assets 29, ,195 86,483 11,726 12,041 89,285 1,227 49, ,542 3,450 15, ,380 14,588 12,154 19, ,729 36,672 4,149 6, ,276 1,108,818 25, ,997 80,026 11,822 9,550 2,161 1,048 27, ,161 3,610 13, ,586 14,588 8,801 18, ,148 64,408 2,810 5, , ,465 LIABILITIES AND NET ASSETS Current Liabilities: current portion, long~term debt Accounts payable and accrued expenses Accrued salaries, wages and fees Accrued vacation Accrued insurance costs Due to related parties Advance from thlrd~party payors Due to third~party payors Total current liabilities Long~Term Liabilities: Accrued insurance costs, net of current Accrued retirement costs Interest rate swap agreement Long-term debt, net of current Total long-term liabilities Unrestricted Temporarily restricted Permanently restricted Total net assets Total Liabilities and Net Assets 10,854 47,341 22,614 16,790 11,427 3,809 1, ,674 5,597 51,095 5, , , ,272 12,154 19, ,050 1,108,818 16,255 34,153 19,957 16,602 9,775 3,809 5, ,446 7,003 90,757 8, , , ,942 8,801 18, , ,465 5

9 PINNACLE HEALTH SYSTEM (OBLIGATED GROUP) STATEMENT OF REVENUES AND EXPENSES FOR THE TWELVE MONTHS ENDED JUNE 30, 2013 AND 2012 ~ Current Quarter ~ Year-to-Date This Year P.riorYear This Year PriorY ear PATIENT REVENUE lip- Routine 61,339 58, , ,240 lip -Ancillary 161, , , ,278 Convalescent Unit Outpatient 209, , , ,613 Total Patient Revenue 431, ,710 1,722,311 1,487,131 DEDUCTIONS FROM REVENUE Contractual Allowances 231, , , ,161 Hil! Burton/Charity Care 6,229 6,547 21,294 15,379 Bad Debt 7,349 6,367 34,145 30,445 Total Deductions 244, , , ,985 Net Patient Revenue 186, , , ,146 Olher Operating Revenue (1,204) (2,022) (1,40B) 3,847 Net Assets Released from Restrictions 1,123 1,088 3,170 3,112 Net Operating Revenue 186, , , ,105 OPERATING EXPENSES Salaries and Wages 70,540 65, , ,507 Benefits 15,210 17,145 71,702 74,723 Professional Fees 6,196 5,434 22,424 19,472 Insurance 1,856 2,327 7,635 7,5B6 Utilities 3,125 2,996 12,509 12,254 Interest 4,299 3,210 17,526 12,748 Purchased Services and Other 25,939 24,110 98,388 91,597 Supplies 30,504 28, , ,542 Depreciation/Amortization 11,637 11,364 46,601 44,473 Management and Support 2,164 9,050 Total Operating Expenses 171, , , ,882 Income (Loss) from Operations 15,054 21,384 60,100 50,223 Non-Operating Gains (Loss) {2,586) {1,899) 19,478 6,302 Net Income (Loss) 12,468 19,485 79,578 56,525 6

10 PINNACLE HEALTH SYSTEM (OBLIGATED GROUP) STATEMENT OF CHANGES IN NET ASSETS FOR THE TWELVE MONTHS ENDED JUNE 30, 2013 and 2012 ($ IN THOUSANDS) CURRENT QUARTER YEAR TO-DATE This Year PriorY ear This Year PriorY ear Unrestricted net assets Revenues and gains Is excess of expenses and losses 12,468 19,485 79,578 56,525 Change in unrealized gains and losses on investments Change In <:J.Ccrued pension liability 34,440 (48,690) 34,440 (48,690) Donated Capital Equipment Capital Contribution (7,060) (5,678) (7,060) (5,678) Net assets released from restrictions for purchases of property, plant, and equipment 2, ,373 6,684 lncrease/(decrease) In unrestricted net assets 42,205 (34,613) 109,331 8,841 Temporarily restricted net assets Contributions received ,895 2,204 Net realized and unrealized gains on Investments (97) (117) Transfer (to)/from Foundation Net assets released from restrictions (2,908) (636) (4,388) (8,228) Transfer to Pinnacle Health Hqme Care and Medical Services (605) (461) (1,186) (961) Increase (decrease) in temporarily restricted net assets (3,190) (892) 3,352 (6,439) Permanently restricted net assets Contributions received Net realized and unrealized gains on Investments 285 (28) 1,937 (358) Transfer (to)/from Temporarily restricted net assets Income Distributions (128) (121) (511) (473) Increase (decrease) in permanently restricted net assets 157 (60) 1,427 (741) Increase (decrease) In net assets 39,172 (35,565) 114,110 1,661 Net assets, beginning of month/year 480, , , ,279 Net assets, end of period 520, , , ,940 7

11 PINNACLE HEALTH SYSTEM (OBLIGATED GROUP) STATEMENTS OF CASH FLOWS OF GENERAL FUNDS FOR THE TWELVE MONTHS ENDED JUNE 30, 2013 and 2012 ($IN THOUSANDS) CURRENT QUARTER- YEAR-TO-DATE This Year PriorY ear This Year Prior Year Cash flows from operating activities and gains and losses: Change in net assets 39,172 (35,565) 114,110 1,661 Adjustments to reconcile change in net assets to net cash provided by operating acuvities: Net realized and unrealized loss (gain) on investments 3,107 4,825 (14,969) (155) Provision for bad debts 7,349 6,367 34,145 30,445 Depreciation and amortization 11,637 11,364 46,601 44,473 (Gain)Loss on disposal of assets (77) (1,107) 14 (2,383) Amortization of deferred financing costs Change In additional minimum pension liability (34,440) 48,690 (34,440) 48,690 Loss on extinquishment of debt Equity in earnings of partnerships 5,781 1,701 19,054 13,087 Restricted investment income received 157 (149) 1,426 (831) Change in assets and liabilities: (Increase) decrease in accounts receivable (7,504) (5,886) (40,602) (44,777) (Increase) decrease in inventories and other assets 1, (1,340) (333) {Increase} decrease in prepaid expenses 574 6,662 (2,492) (2,092) Increase (decrease) in accounts payable and accrued expenses 8,445 1,996 13,190 2,589 Increase {decrease) in accrued salaries and vacation 4,168 5,866 2,845 7,312 Increase (decrease) in accrued insurance (2,278) (684) 245 2,620 Increase (decrease) in advances from and amounts due to third-party payers (7, 125) 2,231 (4,058) 2,808 (Increase) decrease in notes receivable and advances to related parties 6,175 (2,065) (22, 126) (19,556) Increase (decrease) in accrued retirement costs (1,353) (1,542) (5,221) (14,662) Increase (decrease) in interest rate swap agreement (1,714) 1,305 (2,844) 3,964 Net cash provided by operating activities 33,860 44, ,974 Cash flows from investing activities: Purchase of property and equipment (42,515) (16,900) (97, 181) (42,920) Sale (purchase) of investments 10,812 2,857 (113,884) (7,327) Proceeds from sale of assets Cash {invested in) and distributions from partnerships, net 161 (5,670) 8,682 (42,439) Net cash used in investing activities (31,291) (19,523) (202,107) (92,493) Cash flows from financing activities: Repayment of long-term debt (5,342) (2,974) (30,014) (7,752) Proceeds from long-term debt 135,250 26,000 Capitalization of deferred financing costs (1,501) Restricted investment income received (157) 149 (1,426) 831 Net cash provided by (used in) financing activities (5,499) (2,825) 102,309 19,079 Net Increase (decrease) in cash and cash equivalents (2,930) 21,749 3,901 (440) Cash and cash equivalents at beginning of month/year 32,232 3,652 25,401 25,841 Cash and cash equivalents at end of period 29,302 25,401 29,302 25,401 8

12 PinnacleHealth System Obligated Group Summary of Revenues and Expenses (in thousands of dollars) Net Patient Service Revenue Before Provision for Bad Debt Provision for Bad Debt Net Patient Service Revenue After Provision for Bad Debt $ 546,135 $ 563,209 $621,882 (29,094) (25,703) (27,596) $ 517,041 $ 537,506 $ 594, $707,591 $775,571 (30,445) $ (34,145) $ 677,146 $741,426 Other Operating Revenue Total Operating Revenue 17,330 16,510 14, , , ,762 6,959 1, , ,188 Total Operating Expenses 527, , , , ,088 lncome/(loss) from Operations 6,575 (4,252) 10,127 50,223 60,100 Nonoperating Gains, net (30,887) 25,059 33,085 6,302 19,479 Revenues and Gains in Excess of Expenses and Losses $ (24,312) $ 20,807 $ 43,212 $ 56,525 $ 79,579 9

13 Pill1lacleHealth System Obligated Group Gross Patient Service Revenue by Payor Source Fiscal Years Ended June 30, Payor Grouping 2008 Blue Cross/Blue Shield 24.0% Medical Assistance 11.8% Medicare. 44.3% Self Pay 2.1% Conunercial and Other Insurance 17.8% Grand Totals 100.0% % 24.6% 23.9% 25.9% 11.8% 12.3% 12.7% 12.7% 44.8% 44.7% 45.1% 44.5% 1.9% 2.0% 2.4% 2.8% 17.3% 16.5% 15.9% 14.1% 100.0% 100.0% 100.0% 100.0% # % 12.0% 45.7% 2.7% 12.6% 100.0% 10

14 Pinnacle Health Hospitals Medical Staff Category Active Staff Affiliate Honorary Allied Health Staff Size ,329 *Note: Includes 110 Active Community Physicians Active Staff MEDICINE DEPARTMENTS: Cardiology Gastroenterology General Medicine Hematology & Oncology Infectious Disease Nephrology Neurology Pediatrics Physical Medicine and Rehab Pulmonary Diseases SURGERY: Anesthesiology Cardiovascular Surgery General Surgery Neurosurgery Obstetrics/Gynecology Opthamology Oral Surgery Orthopedic Surgery otolaryngology Plastic and Maxillofacial Surg Podiatry Rheumatology Urology Percent Number of Board Average Admissions Physicians Certified Age FY 2013, Jul- June % , % % , % % % % % , % , % % % % , % % , % % % , % % % % % Admissions as %of Total Admissions 5.74% 0.17% 37.17% 0.27% 0.03% o,15% 0.08% 13.38% 3.41% 1.64% 0.02% 2.28% 7.90% 0.98% 14.07% 0.00% 0.03% 11.62% 0.22% 0.09% 0.01% 0.00% 0.68% OTHER: Emergency Medicine Pathology Psychiatry Radiology % % % % % 0.00% 0.00% 0.05% Total/Average % , % 1 1

15 Pinnacle Health Hospitals Top Ten Admitting Physicians By Specialty June Specialty Age Admissions Pediatrics 54 1,889 Physical Medicine & Rehab Orthopedic Surge1y General Medicine Physical Medicine & Rehab General Medicine General Medicine General Medicine General Medicine General Medicine Total/Average ,603 Admissions as %of Total 5.35% 1.87% 1.72% 1.68% 1.50% 1.37% 1.35% 1.34% 1.34% 1.19% 18.71% 12

16 Series 2012A, 2009A Pinnacle Health Hospitals Utilization Statistics Fiscal Years Ended June 30, Set-Up and Staffed Beds: Acute Rehabilitation Psychiatric-> 17 yrs Long Term Care Obstetrics Newborn Nursery Total Discharges: Acute 26, ,083 24,429 24,866 26,493 Rehabilitation 1,183 1,128 1,142 1,184 1,196 Psychiatric-> 17 yro Long Term Care Obstetrics 4,197 4,270 4,015 3,997 3,987 Newborn Nursery 3,842 3,827 3,603 3,601 3,618 Total 35,989 34,308 33,189 33,648 35,294 Patient Days: Acute 120, , , , ,516 Rehabilitation 12,951 12,830 13,201 13,926 14,291 Psychiatric-> 17 yrs Long Term Care Obstetrics 11,935 12,140 11,619 11,703 11,391 Newborn Nursery 9,002 8,888 8,394 8,385 8,353 Total 154, , , , ,551 Average Length of Stay: Acute Rehabilitation Psychiatric-> 17 yrs. na na na na na Long Term Care na na na na na Obstetrics Newborn Nursery Average Average without Long-Term Care Percent of Occupancy: Acute 65.44% 66.93% 66.49% 68.56% 72.00% Rehabilitation 64.34% 63,91% 65.76% 69.18% 71.19% Psychiatric-> 17 yrs. 0.00% 0.00% 0.00% 0.00% 0.00% Long Term Care 0.00% 0.00% 0.00% 0.00% 0.00% Obstetrics 83.61% 85.28% 81.62% 80.76% 67.84% Newborn Nursery 79.34% 78.55% 74.18% 73.90% 73.82% Average 62.17% 68.45% 67.81% 69.15% 71.71% Surgeries: Inpatient Surgeries 11,889 11,525 11,086 10,786 10,943 Open Heart Surgery Total inpatient Surgeries 12,530 12,105 11,699 11,436 11,475 Outpatient Statistics: Emergency Visits 97,402 98, , , ,775 Clinic Vlsits 520, , , , ,974 Ambulatory Surgery 16,519 16,169 16,771 16,737 16,947 Medicare Case Mix Index:

17 Annual Debt Service Requirements as of June 30, Total Debt Fiscal Year Principal Se!Vice for the Ending June 30, Payments Interest System ,273, ,456, ,729, ,083, ,435, ,519, ,437, ,015, ,452, , 761, ,626, ,388, ,475, ,239, ,715, ,736, ,814, ,550, , 165, ,365, ,531, ,547, ,891, ,438, ,853, ,381, ,235, ,423, ,850, ,273, ,972, ,289, ,261, ,547, ,694, ,241, ' 175, ,064, ,240, ,837, ,400, ,238, ,529, ,706, ,236, ,256, ,967, ,224, ,811, ,185, ,997, ,607, ,358, ,965, ,452, ,482, ,934, ,350, ,555, ,906, ,297, ,571, ,868, ,306, ,531, ,837, ,022, ,429, ,451 ' ,929, ,387, ,317, ,062, ,299, ,362, ,253, ,155, ,409, ,500, ,952, ,452, ,815, ,686, ,502, ,588, ,355, ,943, Total 423,075, ,151, ,226,

18 pwc Independent Auditor's Report To Board of Directors of : We have audited, in accordance with auditing standards generally accepted in the United States of Ammica, the consolidated financial statements of and its subsidiaries, which comprise the consolidated balance sheet as of June 30, 2013 and the related consolidated statement of operations, consolidated statement of changes in net assets, and consolidated statement of cash flows for the year then ended, and have issued our repmt thereon dated September 6, In connection with our audit, nothing came to our attention that caused us to believe Pinnacle Health System failed to comply with the terms; covenants, provisions, or conditions of Alticle V of the Indenture dated October 1, 2007 with Manufacturers and Traders Trust Company insofar as they relate to accounting matters. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. This report is intended solely for the information and use of the board of directors and management of and Manufacturers and Traders TlUst Company and is not intended to be and should not be used by anyone other than these specified patties. Baltimore, MD September 9, 2013!''''''"""'"'"'""''"''"'"""'""''""'"'''""'''"'"'"'''''"''""""'"""'""'''"'""''''''"'''""'''""''""'"'"'"''"''""""'""'""""'"'"'"'''"''"''""'''''"'''''''"""'"'''''"'''''"'"'" ' PricewaterhouseCoopers LLP, 100 East Pratt Street, Suite 1900, Baltimore, MD T: (410) , F: (410) , 15

19 (and controlled entities and subsidiaries) Consolidated Financial Statements and Supplemental Data APPENDIX 1 6

20 (And controlled entities and subsidiaries) Consolidated Financial Statements and Supplemental Data

21 (And controlled entities and subsidiaries) Index Page(s) Report of Independent Auditors... 1 Consolidated Financial Statements Statements of Financial Position Statements of Operations... 4 Statements of Changes in Net Assets... 5 Statements of Cash Flows... 6 Notes to Financial Statements Consolidating Supplemental Data Report of Independent Auditors Schedule 1: Statement of Financial Position Schedule II: Statement of Operations Schedule Ill: Statement of Changes in Net Assets... 38

22 _L pwc Independent Auditor's Report To the Board of Directors of : We have audited the accompanying consolidated financial statements of and its subsidiaries, which comprise the consolidated balance sheets as of June 30, 2013 and June 30, 2012, and the related consolidated statements of operations, statements of changes in net assets, and statements of cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility Is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, Including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements In order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's Internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of and Its subsidiaries at June 30, 2013 and June 30, 2012, and the results of their operations and their cash flows for the years then ended in g~ce with accounting principles generally ac~:;e United States of America. Baltimore, MD September 9, 2013!'''"'""'"'''''""""'""""""""''""''""'"'"''""'"'"''''"''"""'''"'"'''"'"'""'"'""'"'"""''""'"""""'"'"""''';.... ; PricewaterhouseCoopers LLP, 100 East Pratt Street, Suite 1900, Baltimore, MD T: (410) , F: (410) Bo,

23 (And controlled entities and subsidiaries) Consolidated Statements of Financial Position (in thousands of dollars) Assets Current Cash and cash equivalents $ 34,446 $ 31,875 Accounts receivable - Patient, less allowance for doubtful accounts of approximately $28,378 in 2013 and $25,207 In ,476 78,595 Accounts receivable -Other 12,646 11,010 Investments 203, ,676 Inventories 12,282 12,191 Prepaid expenses 13,440 11,155 Trustee held funds for capital projects 89,285 2,161 Current portion of self-insurance trust funds 1,227 1,048 Total current assets 451, ,711 Assets limited as to use Self-insurance trust funds, net of current portion 3,450 3,610 Board-designated funds 54,602 47,909 Board-designated funds for capital acquisition 154, ,586 Funds held by trustee, net of current portion ,588 Total assets limited as to use 227, ,693 Investments temporarily restricted as to use 13,474 11,362 Investments permanently restricted as to use 19,624 18,197 Property, plant and equipment, net 399, ,223 Pledges receivable 6,927 2,447 Goodwill 43,891 42,425 Other assets 21, Total assets $ 1,182,984 $ 986,915 The accompanying notes are an integral part of these financial statements. 2

24 (And controlled entities and subsidiaries) Consolidated Statements of Financial Position June 30,2013 and 2012 (in thousands of dollars) Liabilities and Net Assets Current Current portion of long-term debt $ 11,273 $ 17,201 Accounts payable and accrued expenses 51,605 38,101 Accrued salaries, wages and fees 27,772 23,785 Accrued vacation 19,671 18,533 Accrued insurance costs 26,705 20,177 Accrued retirement costs Due to third-party payors 1,837 5,895 Advances from third-party payors 3,809 3,809 Total current liabilities 143, ,951 Long-term liabilities Accrued insurance costs, net of current portion 5,597 7,003 Accrued retirement costs, net of current portion 51,095 90,757 Interest rate swap agreement 5,741 8,585 Long-term debt, net of current portion 411, ,329 Total long-term liabilities 474, ,674 Net assets Unrestricted net assets Unrestricted net assets 524, ,809 Noncontrolling interests in consolidated subsidiary company 1,512 1,475 Total unrestricted net assets 525, ,284 Temporarily restricted net assets 20,401 13,809 Permanently restricted net assets 19,624 18,197 Total net assets 565, Total liabilities and net assets $ 1,182,984 $ 986,915 The accompanying notes are an integral part of these financial statements. 3

25 (And controlled entities and subsidiaries) Consolidated Statements of Operations Years Ended (in thousands of dollars) Unrestricted revenues Net patient service revenues (net of contractual allowances and discounts) $ 849,717 $ 766,391 Provision for bad debts (42,625) (37,784) Net patient service revenue Jess provision for bad debts 807, ,607 Other revenues 20,066 21,661 Net assets released from restrictions used for operations 3, Total unrestricted revenues 830, ,743 Expenses Salaries and wages 333, ,483 Fringe benefits 83,397 85,060 Professional fees 24,204 21,274 Supplies 128, ,203 Purchased services 138, ,043 Interest 17,582 12,885 Depreciation and amortization 51,287 47,111 Total expenses 777, ,059 Income from operations 53,100 42,664 Nonoperating gains (losses) Investment Income 23,500 10,098 Gain on disposal of assets 336 3,034 Contributed net assets in acquisition 133 Loss on goodwill impairment (1,584) Realized and unrealized gains (losses) on interest rate swap 1,375 (5,450) Nonoperating gain, net 23,627 7,815 Revenues and gains over expenses and losses $ 76,727 $ 50,499 The accompanying notes are an integral part of these financial statements. 4

26 (And controlled entities and subsidiaries) Consolidated Statements of Changes in Net Assets Years Ended (in thousands of dollars) Unrestricted net assets Revenues and gains over expenses and losses $ 76,727 $ 50,499 Change in post-retirement liability 34,440 (48,690) Other 461 Net assets released from restrictions for purchases of property, plant and equipment 2,413 6,797 Income attributable to and other changes In noncontrolllng interests (1,272) (972) Increase in unrestricted net assets 112,308 8,095 Temporarily restricted net assets Contributions 8,165 3,613 Net realized and unrealized gains on investments 4,156 1,016 Net assets released from restrictions (5,729) (10,272) Increase (decrease) in temporarily restricted net assets 6,592 (5,643) Permanently restricted net assets Contributions 1 4 Net realized and unrealized (loss) gains on investments and changes in interests In beneficial trusts 1,937 (358) Appropriation of endowment assets for spending (511) (473) Increase (decrease) In permanently restricted net assets 1,427 (827) Increase in net assets 120,327 1,625 Net assets Beginning of year 445, ,665 End of year $ 565,617 $ 445,290 The accompanying notes are an integral part of these financial statements. 5

27 (And controlled entitles and subsidiaries) Consolidated Statements of Cash Flows Years Ended (in thousands of dollars) Cash flows from operating activities Change in net assets $ 120,327 $ 1,625 Adjustments to reconcile change in net assets to net cash provided by operating activities Net realized and unrealized gains on investments (19,273) (729) Provision for bad debts 42,625 37,784 Depreciation and amortization 51,287 47,111 Gain on disposal of assets (336) (3,036) Change in pension liability (34,440) 48,690 Equity in losses of joint ventures and affiliates {1,823) (420) Changes In noncontrolling interest in consolidated subsidiary company 1,308 1,163 Loss on goodwill impairment 1,584 Restricted contributions and investment gain income Change in current assets and liabilities Increase In accounts receivable (50,143) (51' 154) (Increase) decrease in pledges receivable (6,381) 287 Increase in inventories, goodwill, and other assets (2,719) (553) Increase in prepaid expenses {2,285) (2,871) Increase in accounts payable and accrued expenses 10,660 2,916 Increase in accrued salaries, wages and fees and accrued vacation 5,125 8,935 Decrease In accrued insurance and retirement costs (90) (11,621) (Decrease) increase In advances from and amounts due to third-party payors (4,058) 2,808 Net cash provided by operating activities 112,175 81,047 Cash flows from Investing activities Purchase of property, plant and equipment (102,287) (46,695) Acquisitions, net of cash received (36,692) Net distributions (contributions) to joint ventures and affiliates 689 (5,615) Purchase of Investments, including assets limited as to use, net (111,593) (11,567) Proceeds from sale of assets Net cash used in Investing activities (212,915) (100,092) Cash flows from financing activities Cash paid for financing costs (1,501) Repayments of long-term debt (30,224) (10,530) Proceeds from long-term debt 135,250 26,000 Cash receipts from pledges 1,901 1,265 Contribution to noncontrolling interests in consolidated subsidiary (1,308) (1,163) Restricted contributions and Investment income!807) (112) Net cash provided by financing activities 103,311 15,460 Net increase (decrease) in cash and cash equivalents 2,571 {3,585) Cash and cash equivalents Beginning of year 31,875 35,460 End of year $ 34,446 $ 31,875 The accompanying notes are an integral part of these financial statements. 6

28 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements 1. Description of Organization ('Parent""), located in Harrisburg, Pennsylvania, consists of the following controlled entities and subsidiaries (collectively the "System"). Pinnacle Health Foundation ("Foundation"), is a tax-exempt, nonprofit corporation, engaged In fund raising activities for the benefit of the controlled entitles of the System. Pinnacle Health Hospital ("Hospital'), is a tax-exempt, nonprofit, multi-facility acute care hospital. Pinnacle Health Emergency Department Services, LLC ('PHEDS'), is a tax-exempt, nonprofit corporation engaged in providing professional services in the Pinnacle Health Emergency Department. Community Life Team ('CL T"), is a tax-exempt, nonprofit entity that provides both emergency and nonemergency ambulance services to citizens in the Harrisburg, PA area and surrounding counties. Pinnacle Health Home Care and Hospice ('PHHCH'), was a tax-exempt, nonprofit entity engaged in providing home nursing and hospice services. Pinnacle Health Home Care was merged Into VNA Community Care Services, Inc. on December 31, 2011 with Pinnacle Health Hospitals acquiring an 11.8% ownership interest. Pinnacle Health Hospice operations were transferred to Hospice of Central Pennsylvania on January 9, The Hospital did not receive any membership interest as a result of this transaction. Pinnacle Health Medical Services ('PHMS"), is a tax-exempt, nonprofit entity engaged in the operation of both primary care and specialty physician practices and providing mental health services. Pinnacle Health Cardiovascular Institute ('PHCVI") and its wholly-owned subsidiary, Cardiology Practice Inc ('CPI"), are 1 00% owned for profit corporations engaged in providing comprehensive cardiac care. Pinnacle Health Medical Group ("PHMG') is a wholly-owned, for profit corporation engaged in the operation of primary care physician practices. Pinnacle Health Ventures Inc. (PHVI) and Pinnacle Health Imaging Inc. (PHI) were formed as a result of the acquisition of 100% of the stock of Tristan Associates on March 1, PHVt is the stock holding company and sole shareholder of PHI. PHI owns andfor leases radiology and imaging equipment and services at four office locations. PHI leases equipment and services to Hospital. River Health AGO, LLC ("RHACO') was formed on April15, 2013 and recently applied to CMS to become recognized as an Accountable Care Organization (AGO) dedicated to improving the cost, quality, access and patient experience to care for residents of Central Pennsylvania. The AGO is comprised of two founding partners: and Susquehanna Health System, Inc., and two independent primary care practice partners, Family Practice Centers, P.C. and Anville Family Medicine, P.C. 7

29 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements Pinnacle Health Cumberland Condominium Association Is an association wholly owned by Pinnacle Health Hospital established to oversee the operation of the Condominium located on the campus of the Frederickson Outpatient Facility. The Condominium Association agreement was terminated on January 18, United Health Risk, Ltd. ('UHR') Is a wholly-owned, for profit, offshore captive insurance company. United Central Pennsylvania Reciprocal Risk Retention Group ('RRG') is a wholly-owned, for profit, Vermont captive insurance company. West Shore Surgery Center, LLP ("WSSC') is a limited liability partnership owned 2% by PHMS, the general partner, 49% by the Hospital and 49% by physicians. Obligated Group ("Obligated Group'), consists of the Parent, Hospital, and PHMS. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Parent and Its controlled entities and subsidiaries. The accounts of the controlled entitles have been Included In the consolidated financial statements to rehect the results of operations of entitles under common control. All significant intercompany transactions have been eliminated. Basis of Financial Reporting The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These significant estimates include the accounts receivable allowance for doubtful accounts, contractual allowances, due to third party payors, accrued pension liabilities, accrued retirement costs and accrued insurance costs. Actual results could differ from those estimates as they are prepared based on certain assumptions which are subject to change. Reclassification of Prior Year Balances Certain 2012 balances have been reclassified to conform to the 2013 presentation. Net Patient Service Revenues The hospital has agreements with third party payors that provide for payments to the hospital at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods for tentative and final settlements. Allowance for Doubtful Accounts Accounts receivable are recorded at their estimated net realizable value. The allowance for doubtful accounts is estimated based upon historical collection rates. 8

30 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements Revenues and Gains over Expenses and Losses The consolidated statements of operations include revenues and gains over expenses and losses. Changes in unrestricted net assets which are excluded from revenues and gains over expenses and losses, consistent with industry practice, include changes In the post-retirement liability, noncontrolling interests and net assets released from donor restrictions to be used for purchases of property, plant and equipment. Cash and Cash Equivalents Cash and cash equivalents Include cash management funds with original maturities of three months or less, excluding amounts whose use is limited by Board-designation or other arrangements under trust agreements. The System maintains cash and cash equivalents in local banks. Investments The System follows standards Issued by the Financial Accounting Standards Board ('FASB") related to fair value accounting. The standards define fair value, establish a framework for measuring fair value and expand disclosures about fair value measurements. The standards also provide an option to report selected financial assets and liabilities at fair value and establish presentation and disclosure requirements. The fair value option permits the System to elect to measure eligible items at fair value on an instrument-by-instrument basis and then report the unrealized gains and losses for those items in the System's revenues and gains over expenses and losses. The System has chosen to record all of Its Investments under the fair value option permitted under these standards. Under these fair value standards, the System is required to categorize and disclose certain assets and liabilities, including investments, at fair value, according to three levels of inputs that may be used to measure fair value: Level1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other Inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Fair value Is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following is a description of the System's valuation methodologies for Investments carried at fair value. These methods may produce a fair value calculation that may not be reflective of future fair values. Furthermore, while the System believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of investments could result in a different estimate of fair value at the reporting date. Where quoted prices are available in an active market, Investments are classified in Level1 of the valuation hierarchy. Investments in Level 1 are cash management funds, fixed income Investments, exchange-trade equity securities and debt securities. If quoted prices are not 9

31 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements available the investments are considered to be Level 2 or Level 3 and other accepted valuation methodologies, such as quotes for similar securities are used. These valuation services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of the System's overall valuation process, management evaluates these third-party methodologies to ensure that they are representative of exit prices in the System's principal markets. Investments in Level 2 include cash management funds, corporate obligations, fixed Income investments, other domestic equity investments, foreign equity investments and funds held in trust by others. See Note 6 for additional details related to the System's investments. Investment partnerships include limited partnerships and limited liability corporations that do not price shares on a daily basis or require notice to redeem shares. The partnerships Invest in securities traded in foreign and domestic markets and are carried in the balance sheet at a net asset value as determined by the general partner which approximates fair value. There are no unfunded commitments for these investments. Derivative Instruments The System accounts for derivative financial instruments in accordance with standards issued by the FASB. These standards require that all derivative instruments be recorded on the balance sheet at fair value as either assets or liabilities. Since the derivatives entered into by the System do not qualify for hedge accounting, changes In fair value of the derivative are recognized in nonoperating gains/(losses). The use of derivative instruments by the System Is currently limited to interest rate swaps. Inventories Inventories are stated at lower of cost (first-in, first-out method) or market. Assets Limited as to Use Assets limited as to use include Board-designated funds, Board-designated funds for capital acquisition and the portion of self-insurance funds and funds held by trustee that have not been reflected as current assets to meet the current portion of self-insured liabilities and long-term debt. Insurance collateral funds represent monies that are designated as collateral for a letter of credit that Is designated to fund current and future liabilities for payment of professional liability and workers' compensation claims. Board-designated funds and Board-designated funds for capital acquisition represent funds designated by the Board of Directors for capital acquisition and replacement and to support System Initiatives. Property, Plant and Equipment Property, plant and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Gains and losses resulting from the sale or disposal of property, plant and equipment are included in nonoperating gains (losses). Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the financial statements. Investments in and Advances to Joint Ventures and Affiliates The System, through its controlled entities and subsidiaries, maintains an ownership interest in several joint ventures which provide various clinical and nonclinlcal services. These investments, with the exception of VNA Community Care Services, Inc., are accounted for by the equity method 10

32 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements since the ownership interest is between 20.0% and 50.0% and control is not exercised. The System maintains an 11.8% ownership interest in VNA Community Care Services, Inc. and accounts for it on the cost method. Under the terms of the agreements, the System may be required from time to time to make additional cash contributions and provide working capital advances to the joint ventures. Pledges Receivable The System records its pledges receivable at the estimated net realizable value, discounted at a rate of 4% at. Pledges receivable In the amounts of $4,070, $1,707, $1,237, $1,235, and $111 are due in fiscal years 2014,2015,2016, 2017 and 2018, respectively. Deferred Financing Costs Deferred financing costs are amortized over the life of the bonds using the effective interest method. During 2013, the System capitalized financing costs of $1,501, incurred as a result of the issuance of the Series 2012A Health System Revenue Bond. Amortization expense was $161 and $115 for the years ended, respectively. Accrued Insurance Costs Accrued insurance costs consist of estimated liabilities for reported and Incurred but not reported claims related to professional liability, workers' compensation and employee health care. The System discounts Its liabilities for professional liability and workers' compensation claims. As of, the discount rate was 3.50%. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the System has been limited by donors to a specific lime period or purpose. Permanently restricted net assets, excluding interest and dividend income earned on such assets which is unrestricted, have been restricted by donors to be maintained by the System or outside beneficial trusts in perpetuity. Donor Restricted Gifts Unconditional promises to give cash and other assets to the System are reported at estimated fair value at the date the promise is received. Conditional promises to give and indications of Intentions to give are reported at estimated fair value at the date the gilt 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 or restriction Is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met wllhln the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. Income Taxes The majority of the System is exempt from federal income tax under Section 501 (c)(3) of the Internal Revenue Code. On such basis, the exempt entitles will not incur any liability for federal income taxes, except for possible unrelated business income. 11

33 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements The System evaluates uncertain tax positions using a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in an unrelated business activity tax return and disclosures regarding uncertainties in tax positions. No adjustments to the consolidated financial statements were required as a result of this evaluation. The following entities are not exempt from federal income tax: PHCVI, PHMG, PHVI, RRG and wssc, and therefore, may incur liabilities for federal and state income taxes. Fair Value of Financial instruments Financial instruments include cash and cash equivalents, accounts receivable, investments, and interest rate swap agreement. The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, investments, and interest rate swap agreement equals fair value as of. The undiscounted carrying value of the System's 2009A, 2011A, and 2012A revenue bonds was $403,825 and $275,615 at June 30,2013 and 2012, respectively. The undiscounted fair value of the System's 2009A, 2011A, and 2012A revenue bonds was $415,968 and $299,970 at June 30, 2013 and 2012, respectively. The fair value of the System's revenue bonds was based on quoted market prices. The System considers the inputs in the valuation process of Its long-term debt to be Level2 in the fair value hierarchy. Supplemental Disclosure of Cash Flow Information Interest paid for the years ended was $18,800 and $14,639, respectively. There were no income taxes paid in fiscal 2013 and During 2013 and 2012, capital lease obligations of $0 and $5,388 were incurred when the System entered into lease agreements to provide surgical and imaging equipment. These obligations are considered to be a noncash financing activity. During 2013 and 2012, property, plant and equipment of $14,240 and $2,681 were Included In accounts payable and accrued expenses. Accounting for Defined Benefit and Other Postretirement Benefits The System follows FASB standards over employer's accounting for defined benefit pension and other postretirement plans. Included in these standards is a requirement for an entity to recognize in its balance sheet, the overfunded or underfunded status of its defined benefit postretirement plans measured as the difference between the fair value of the plan assets and the benefit obligation. For a pension plan, this would be the projected benefit obligation; for any other postretirement plan, the benefit obligation would be the accumulated postretirement benefit obligation. These standards also require measurement dates for the pension plan obligation to be measured as of the date of the entity's balance sheet. Recently Issued Aceounting Pronouncements The System adopted Accounting Standards Update No ("ASU "), Testing Goodwill for Impairment, effective September 30, The System performs its annual goodwill impairment test as of March 31. Under ASU , the Company assessed certain qualitative factors to determine if it was more likely than not that the fair value of certain segments within Pinnacle Health Medical Services, Pinnacle Health Hospitals, and Pinnacle Health Cardiovascular 12

34 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements June 30, 2013 imd 2012 lnslitute were less than their carrying amount. As a result of this assessment, it was determined that it was more likely than not that the fair value of two segments were less than their carrying amounts; therefore, a reduclion of $1,584 was recorded against the value of goodwill. 3. Acquisitions During fiscal year ended June 30, 2013 acquired the building and assets of Greater Harrisburg Cancer Center for a total cost of $4,600 which Included goodwill totaling $3,050. The building was located on land owned by adjacent to the Cancer Center and will be used to accommodate the Increased demand in the area for cancer treatment services. In fiscal year ended June 30, 2012, recorded acquisilions totaling $38,945 and goodwill of $34,893. On March 1, 2012, acquired all of the outstanding stock of an outpatient imaging organization with four locations throughout the Harrisburg area, purchased all of the assets of a professional medical group with eleven primary care offices and an imaging center on April1, 2012, and purchased the assets of a large cardiovascular practice with two locations each including ancillary services on August 1, The purchase transactions were accounted for using the acquisition method of accounting, which required all assets and liabilities to be measured at their fair value. The fair values at the acquisition date were determined using various fair value techniques from outside third parties. All of the praclices are located in and around the Harrisburg area. These acquisitions were performed to expand and diversify the services offers to its patients. 4. Net Patient Service Revenues The System has arrangements with third-party payors that provide for payments to the System at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: Medicare: Inpatient acute care and rehabilitation services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Medical education and transplant costs related to Medicare beneficiaries are paid based on a cost reimbursement methodology. Outpatient services are paid based on the ambulatory payment classification. The System is paid for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the System and audits thereof by the Medicare fiscal intermediary. Medicaid: Inpatient services are rendered to Medicaid program beneficiaries based an a patient classification system similar to Medicare. Outpatient services are paid on a predetermined fee schedule. Capital Blue Cross and Hlghmark Blue Shield: Inpatient acute care services and certain outpatient procedures rendered to Blue Cross and Blue Shield program beneficiaries are paid at prospectively determined rates per discharge or per procedure. Other outpatient services are paid at a discount from established rates. 13

35 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements Other Payers; The System has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the System under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. In accordance with ASU , the following schedule represents the System's estimated net patient service revenue, before provision for bad debt expense, aggregated between self-pay and all other third-party payers for the fiscal years ended. Patient service revenue (net of contractual allowances and discounts) Third-Party Payors $ 802,228 June 30, 2013 Total Self-Pay All Payers $ 47,489 $ 849,717 Patient service revenue (net of contractual allowances and discounts) Third-Party Payors $ 729,152 June 30, 2012 Total Self-Pay All Payers $ 37,239 $ 766,391 Revenue received under agreements with several third-party payers is subject to audit and retroactive adjustment. Adjustments related to settlements with third-party payers are included in the determination of revenues and gains over expenses and losses In the year in which such adjustments become known. Such adjustments resulted in an Increase in revenue of approximately $2,730 and $11,242 in 2013 and 2012, respectively, due to the receipt of tobacco settlement payments, Medicare budget neutrality appeal payment and changes in general reserve estimates and other miscellaneous estimates. 5. Charity Care and Community Service The System provides services to patients who meet the criteria of its charity care policy without charge or at amounts less than the established rates. Criteria for charity care consider family income levels, household size and ability to pay. Federal poverty guidelines are used as a means to determine the patient's ability to pay. Individuals who qualify for charity care are either uninsured or are extremely indigent and cannot afford their deductibles or coinsurance amounts. The System maintains records to Identify and monitor the level of charity care and community service it provides. These records include the amount of charges foregone based on established rates for services and the estimated cost of those services furnished under Its charity care policy. The System provides community service programs to the community at large. A report is issued annually to inventory community benefits in furtherance of its exempt purpose. Charges foregone associated with charity care service to individuals were approximately $26,597 and $20,976 for 2013 and 2012, respectively. The charity care amounts have been excluded from net patient service revenues. The cost Incurred to provide such care was approximately $8,498 and $7,371 for 2013 and 2012, respectively. 14

36 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements 6. Investments Investments at, consist of: Investments Cash management funds $ 24,807 $ 29,789 U.S. Government obligations 9,770 10,077 U.S. Treasuries 22,693 18,821 Corporate obligations 88,147 89,292 Fixed income investments 12,451 12,110 Domestic common stock 17,260 14,571 Other domestic equity investments and pooled trusts 15,543 17,364 Foreign equity Investments 11,735 8,628 Accrued income 967 1,024 $ 203,373 $ 201,676 Investments designated for capital projects Cash management funds $ 89,285 $ 2,161 $ 89,285 $ 2,161 Assets whose use Is limited Insurance Collateral Funds Cash management funds $ 140 $ 481 U.S. Government obligations U.S. Treasuries 2,356 1,646 Corporate obligations 1,956 2,000 Accrued income ,677 4,658 Less: Current portion 1,227 1,048 $ 3,450 $ 3,610 Board-designated funds Cash management funds $ 176 $ 408 Fixed Income investments 17,075 14,907 Domestic common stock 15,264 14,047 Other domestic equity investments and pooled trusts 13,165 12,482 Foreign equity investments 8,909 6,043 Accrued income $ 54,602 $ 47,909 15

37 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements Board designated for capital acquisition Cash management funds $ 1,493 $ 1,885 U.S. Government obligations 7,900 6,128 U.S. Treasuries 14,414 9,004 Corporate obligations 69,887 56,212 Fixed income investments 9,031 5,683 Domestic common stock 21,676 18,860 Other domestic equity investments and pooled trusts 17,684 16,068 Foreign equity investments 11,555 8,126 Accrued Income $ 154,380 $ 122,586 Funds held by trustee Cash management funds $ 14,588 $ $ 14,588 $ 14,588 Investments temporarily restricted as to use Cash management funds $ 1,191 $ 1,093 U.S. Government obligations U.S. Treasuries 16 7 Corporate obligations Fixed income investments 3,977 3,817 Domestic common stock 2,846 2,333 Other domestic equity investments and pooled trusts 3,184 2,829 Foreign equity investments 1,994 1,159 Accrued income 4 3 $ 13,474 $ 11,362 Investments permanently restricted as to use Cash management funds $ 35 $ 101 Fixed income investments 3,568 3,177 Domestic common stock 3,656 3,413 Other domestic equity investments and pooled trusts 2,563 2,477 Foreign equity investments 1,900 1,479 Funds held in trust by others 7,898 7,543 Accrued income 4 7 $ 19,624 $ 18,197 Investment partnerships, which are non-readily marketable investments, included in cash management funds, fixed income investments, other domestic equity and pooled trusts and foreign equity investments in the above totalled $107,088 and $67,655, respectively, at June 30,2013 and Investments designated for capital projects represent unspent proceeds from the 2012A Revenue Bonds for June 30, 2013 and June 30, 2012, respectively, which are required to be expended on capital projects. 16

38 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements Assets whose use 1s 11m1ted Include mvestments pledged as collateral for a letter of credit to satisfy the requirements of the State of Pennsylvama to fund current and future payments of professional liability and worker's compensation clmms At the t1me of Issuance of the 2009A bonds, the System was required to depos1t an amount equal to $14,584 mto a Debt Serv1ce Reserve Fund These funds are mvested 1n cash management funds and are class1f1ed as "Funds held by trustee, net of current port1on" on the System's balance sheet There was no Debt Serv1ce Fund requirement associated w1lh the 1ssuance ofthe 2012A bonds Investment mcome, mcludmg mterest and dividend mcome, realized gams or losses on sales of secunt1es, unrealized gams and losses from certain wholly owned msurance captives, mvestment partnerships, and unrestncted mcome from temporanly restncted funds and mvestments permanently restncted as to use, IS compnsed of the following for the years ended June 30, 2013 and Investment Income Interest and d1v1dend mcome Realized and unrealized mcome, net $ $ 10,322 $ 10,031 13, ,500.:;$_...;1.:;0 :.:.09;.:8;,.. The System's mvestments are managed by mvestment managers and bank trust departments Because the System's mvestments mclude a van ely of f1nanc1almstruments, the related values as presented m the consolidated!man mal statements are subject to vanous market fluctuations which mclude changes 1n the equity markets, Interest rate environment and general economic conditions The followmg table represents the!a1r value measurement levels for all assets and hablht1es, which the System has recorded at!air value Fair Value Measurement Uslns Quoted Prices In Activo Markets for Slgnlftcant Other Significant Other Identical Assets Observable Inputs Unobservable Inputs June 30, 2013 (Level11 (Level2) (Level3) Assets Cash management funds (1) $ 131,943 $ 131,677 $ 66 $ U S Government obllgabons {2} 17,522 17,522 Us Treasunes (2) 39,626 39,626 Corporate obhgahons (3) 160, ,223 FIXed mcome mvestments {3) 46,103 22,114 23,989 Domes~c rommon stock (4} 60,702 60,702 Other domesltc equtly mvestments 52,140 1,939 50,202 and pooled trusts (5} Foreign equrty mvestments (5) 36, ,631 Funds held 1n trust by others {6) ,698 Accrued tnoome 1, $ $ 276,794 $ 275,209 $ Liabilities Interest rate swap $ 5741 $ $ 5,741 $ 17

39 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements Fair Value Measurement Uslns Quoted Prices In Active Markets for Significant Other Significant Other ldenllcal Assets Observabla Inputs Unobservable Inputs June (Levei1) 1Levei2) 1Levei3) Assets Cash management funds (1) $ 50,506 $ 50,406 $ 100 $ U S Government ob\lgatmns (2) 16,720 16,720 U S Treasunes (2) 29,478 29,478 Corporate ob~gat1ons (3) 147, ,614 FlXed mcome mvestments (3) 39,694 14,769 24,925 Domest1c common stock (4) 53,224 53,224 Other domestic equity Investments and pooled trusts (5} 51,220 28,078 23,142 Formgn equity mvestments {5) 25,435 5,947 19,468 Funds held m trust by others (6} 7,543 7,543 Accrued mcome 1,703 1,703 $ 423,137 $ 200,325 s 222,812 s Llab111tios Interest rate swap $ 8,685 $ $ 8,585 $ (1) Cash management funds include investments with original maturities of three months or less, including cash, money market funds, overnight investments and commercial paper. CommerCial paper and money market funds are carried at market value. (2) U.S. Government Agencies and Treasuries, are individually owned and held through the System's investment portfolio and are readily marketable securities, therefore, they are considered Level1. (3) Corporate obligations and fixed Income secunties are investments in mutual funds and investment partnerships whose underlying investments include corporate bonds, mortgage backed securities, collateralized mortgage obligations and other fixed income securities. The mutual funds investments are considered Level 1. The investment partnership holdings are valued each month using NAY per unit and are considered Level 2. (4) Domestic common stock includes individual equities held. All individual equities are considered Level1 (5) Other domestic equity investments and foreign equity investments are investments in mutual funds and investment partnerships whose underlying Investments are Individual equity securities. Mutual funds are considered Level1. The investment partnership holdings are valued each month using NAY per unit and are considered Level 2. (6) Funds held in trust are investments held in trust Instruments that have been either donated or received as a testamentary trust from the grantors will where the System is the beneficiary of the trust mstrument. The underlying securities in each trust are typically individually owned fixed income or equity securities or mutual funds which are invested in fixed income or equity securities. The trustee of each trust is responsible for managing and Investing the assets in accordance with the trust arrangement. The funds held m trust are classified as Level 2. 18

40 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements As of, cash management funds of $66 and $100, fixed Income securities of $23,989 and $24,925, respectively, other domestic equity Investments and pooled trusts of $50,202 and $23,142, respectively and foreign equity investments of $32,831 and $19,488, respectively are considered Level 2 due to being included in investment partnerships where the partners determine the fair value of the investment. The System adopted the updated GAAP valuation standard related to investment funds that do not have a readily determinable fair value effective July 1, The guidance allows the fair value measurements for these funds to be based on reported NAV if certain criteria are met, and establishes additional disclosures related to these investment funds. Accordingly, the fair values of the following investment funds have been estimated using reported NAV: Category of Investment Fair Value 2013 Redemption Frequency (if Currently Eligible) Redemption Notice Period Equity - Global Equity - Domestic Fixed income Cash Management $ $ 32,831 50,202 23, ,088 Monthly Dally Daily/Weekly Dally 15 days 3to 5 days 3to 5 days 1to 2 days Category of Investment Fair Value 2012 Redemption Frequency (if Currently Eligible) Redemption Notice Period Equity - Global Equity - Domestic Fixed income Cash Management $ 19,488 23,142 24, ,655 Weekly/Monthly Dally Daily/Weekly Daily 1 to 15 days 3 to 5 days 1to 5 days 1 to 2 days $ 7. Goodwill Goodwill is reported in other assets in the Consolidated Balance Sheets. Accounting standards do not allow goodwill to be amortized but requires that it be tested for impairment annually or more frequently when events or circumstances indicates that the carrying value of a reporting unit more likely than not either exceeds or Is less than its fair value. The System's annual goodwill impairment testing date Is March 31 of each year. As a result of the goodwill impairment testing at March 31, 2013 and 2012, it was determined that an impairment loss of $1,584 and $0, respectively, was needed to be recognized. The factors that management considered in determining that it was not more likely than not that the fair value of the segments containing goodwill was less than its carrying amount included industry and market conditions, overall financial performance compared to projected results, and volume growth. 19

41 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements Goodwill recorded on the Consolidated Balance Sheets at amounted to $43,891 and $42,425, respectively. The changes in the carrying amount of goodwill for the System for the years ended June 30, 2013 and 2012 are as follows: Pinnacle Health System Balance as of July 1, 2011 $ 7,536 Goodwill acquired during the year 34,893 Goodwill impaired during the year Balance as of June 30, ,425 Goodwill acquired during the year 3,050 Goodwill impaired during the year (1,584) Balance as of June 30, 2013 $ 43, Net Assets A summary of changes in consolidated unrestricted net assets attributable to Pinnacle Health System and transfers (to) from the noncontrolling interest in West Shore Surgery Center for the years ended are as follows: Noncontrolling Pinnacle Interest Health in West Shore Total System Surgery Center Balance June 30, 2011 $ 406,189 $ 403,905 $ 1,284 Revenues and gains over expenses and losses 50,499 49,336 1,163 Change in post-retirement liability (48,690) (48,690) Net assets released from restrictions for purchase of property, plant, and equipment 6,797 6,797 Change in equity accounting - Horizon Gain on disposal of assets (219) (219) Distributions to noncontrolllng interests (972) (972) Change in net assets 8, Balance June 30, , ,809 1,475 Revenues and gains over expenses and losses 76,727 75,420 1,307 Change in post-retirement liability 34,440 34,440 Net assets released from restrictions for purchase of property, plant, and equipment 2,411 2,411 Distributions to noncontrolling interests (1,270) (1,270) Change in net assets Balance June 30, 2013 $ 525,592 $ 524,080 $ 1,512 20

42 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements Temporarily restricted net assets are available for the following purposes at June 30, 2013 and 2012: Health care services Purchase of equipment Health education Research and development Indigent care $ $ 12,425 $ 6,171 6,409 5, ,216 1,362 20,401.;:;$_...,:1.:;;3,:;;.80;.;9;_ In August 2008, FASB issued ASC , which requires enhanced disclosure requirements about an organization's endowment funds. Although the state of Pennsylvania did not enact the Uniform Prudent Management of Institutional Funds "UPMIFA" Act, the System has disclosed its changes in net asset composition in accordance with ASC Changes to the reported amount of the System's endowments as of June 30th are as follows: Permanently Restricted Net assets, June 30,2011 Investment return Investment income Net appreciation (realized and unrealized) Total investment return New gilts Appropriation of endowment assets for spending Net assets, June 30, 2012 Investment return Investment income Net appreciation (realized and unrealized) Total investment return New gifts Appropriation of endowment assets for spending Net assets, June 30, 2013 $ $ 10, (18) (473) 10, ,583 1 (511) 11,726 Permanently restricted net assets include investments held in perpetuity by others for the benefit of the Hospital of $7,898 and $7,544 and investments to be held in perpetuity by the Foundation for the benefit of the Hospital of $11,726 and $10,653, respectively, at. The income from these investments is expendable to support health care services and is reported as either a temporary restricted fund balance or as non-operating income in the consolidated statements of operations depending upon the donor instructions. 21

43 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements 9. Property, Plant and Equipment Property, plant and equipment at cons1sts of Land $ Land Improvements Leasehold Improvements Bu1ld1ng and bulldmg Improvements Eqwpment Accumulated deprec1at1on and amort1zat1on Construction m progress $ 12,905 $ 12,904 10,522 10,449 24,947 23, , , , , , ,372 (489,762) (441,538) 64,272 14, ,802 $ 355,223 Depremat1on expense was $50,785 and $46,696 for the years ended, respectively Accumulated amortization for equipment under capital lease obligations was $16,542 and $10,815 at, respectively Construction purchase commitments at have been disclosed m Note Long-Term Debt Long-term debt at cons1sts of Dauphin County General Authonty, Health System Revenue Bonds, Senes 2009A, due at vanous dales through 2036 With a f1xed mterest rate that vanes at mtervals specified m the bond document between 3 00% to 6 00% and an average rate of 5 86% to 5 81% at June 30, 2013 and 2012, respecllvely Dauphm County General Authonty, Health System Revenue Bond, Sones 2011A, due at vanous dates through 2041 With mterest at 70% of a vanable monthly mterest rate plus ao bas1s pmnts The rate was 0 94% and 0 97% at, respectively Dauphin County General Authonty, Health System Revenue Bond, Senes 2012A, due at vanous dates through 2042 w1th a fixed mterest rate that vanes at Intervals specified m the bond document between 3 75% to 5 00% and an average rate of 4 0% at June 30, 2013 PNC Bank, NA taxable bank loan, due March 1, 2017 Wlth mterest equal to a vanable monthly mterest rate plus 58 bas1s pmnts (0 82% at June 30, 2012) Loan was pa1d off durmg FY 2013 Vanous cap1talleases and loans at vanous mterest rates Less Current port1on $ 171,938 $ 175,829 97,330 98, ,250 24, , , ,530 11,273 17,201 $ 411,802 $ 307,329 22

44 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements Lines of Credit At, the System had unused lines of credit of $0 and $3,095, which bear interest at fixed and variable rates. At June 30, 2012, the variable rate line in the amount of $2,960 had a rate of 1.24%. One fixed line was outstanding at June 30, 2012 in the amount of $135, bearing interest at rate between 3.25% and 4. 00%. All lines of credit were closed during fiscal year Letters of Credit The System was contingently liable for outstanding letters of credit in the amounts of approximately $8,158 and $5,449 for the years ended, respectively, to satisfy the requirements of professional liability insurance policies, future worker's compensation claims, current construction site work and security deposits on certain real estate leases. Bank Note On March 1, 2012, the System secured a $26,000 taxable five year term bank loan through PNC Bank, N. A. which was primarily used to finance certain acquisitions. The interest rate was reset monthly and equals the 1 month LIBOR Index plus a margin of 58 basis points. The interest rate will not exceed the maximum rate permitted by law. All transaction related fees were paid directly from operating funds. The loan was paid In full on March 1, During fiscal year 2011, the Series 2011A Bond was Issued to exlinguish $70,000 of the outstanding 2009B Revenue Note as well as to provide an additional $30,000 in order to fund certain capital projects at the Hospital. Revenue Bonds The Series 2009A, 2011A and 2012A Bonds were issued under Master Trust Indentures which contains certain covenants of the Obligated Group, Including, but not limited to, covenants regarding the payment of debt service on all the Master Notes and Master Guarantees issued there under, rates and charges, liquidity, indebtedness, transfers of assets, the incurrence of additional indebtedness and the granting of security Interests in property and a pledge of gross receipts to collateralize such indebtedness. A summary of scheduled principal repayments on long-term debt is as follows: Capital Leases Fiscal Year Debt and Loans 2014 $ 5,590 $ 5, ,860 4, ,170 2, ,500 1, , Thereafter 373,546 4,150 $ 404,516 $ 18,559 Total $ 11,273 10,186 8,508 7,837 7, ,696 $ 423,075 23

45 (Ami controlled entities and subsidiaries) Notes to Consolidated Financial Statements 11. Interest Rate Swaps The System has used derivative instruments, such as interest rate swaps, to manage certain interest rate exposures. Derivative instruments are viewed as risk management tools by the System and are not used for trading and speculative purposes. When quoted market prices are not available, the valuation of derivative instruments is determined using widely accepted valuation techniques, Including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including interest rate curves and implied volatilities. The estimates of fair value are made by an independent third-party valuation service using a standardized methodology based on observable market inputs. As part of the System's overall valuation process, management evaluates this third-party methodology to ensure that it is representative of exit prices In the principal markets. These future net cash flows, however, are susceptible to change primarily due to fluctuations in interest rates. As a result, the estimated values of these derivatives will change over time as cash is received and paid and also as market conditions change. As these changes take place, they may have a positive or negative impact on estimated valuations. Based on the nature and limited purposes of the derivatives that the System employs, fluctuation in interest rates have had only a modest effect on its results of operations. As such, fluctuations are generally expected to be countered by offsetting changes in income, expense, and/or values of assets and liabilities. As of July 14, 2005, in conjunction with the Series 2005 Bond, the Hospital entered into an interest rate swap agreement with an initial notional amount of $55,000. Under the agreement the Hospital paid the counterparty, Citigroup, a fixed rate of 3.36% and In exchange Citigroup pays the Hospital 61.80% of LIBOR plus 0.32%. Due to the redemption of the Series 2005 Bonds, the Interest rate swap agreement was amended and restated on June 24, 2009 In conjunction with the Series 2009A Bond. As of June 30, 2013, the Hospital recorded a liability of $5,741 and a related gain of $1,375, which was recorded in gain on interest rate swaps in the consolidated statement of operations. As of June 30, 2012, the Hospital recorded a liability of $8,585 and a related loss of $5,451, which was recorded in loss on interest rate swaps in the consolidated statement of operations. The System has classified Its interest rate swap in Level 2 of the fair value hierarchy, as the significant inputs to the overall valuations are based on market-observable data or information derived from or corroborated by market-observable data. For over-the-counter derivatives that trade in liquid markets, such as interest rate swaps, model inputs (i.e. contractual terms, market prices, yield curves, credit curves, and measures of volatility) can generally be verified, and model selection does not involve significant management judgment. A summary of the related liabilities and income statement impact of the swaps at June 30, 2013 and 2012 is as follows: Balance Sheets Statements of Operations Interest Rate Swap Series 2005/2009A swap $ $ 8,585 $ 1,375..;:;$,(""5,'-'45;;.:0:;.<.) $ 5,741 $ 8,585 $ 1,375.;;$...;(>.;.5,:..;,4;;,;50;,.,) 24

46 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements 12. Funds Held by Trustee and Other Certain funds are required to be established and controlled by the trustee during the periods certain bonds are outstanding. Proceeds of $135,250 from the 2012A Revenue Bonds received on August 7, 2012 are to be used to undertake a project consisting of equipping, and development of a new approximately 200,000 square foot, 1 08 bed acute care hospital on the Fredricksen Campus located in Cumberland County, Pennsylvania; renovations and improvements to the Harrisburg Hospital facilities located in the City of Harrisburg, Pennsylvania; renovations and improvements to the Community General Hospital facilities located In Dauphin County, Pennsylvania; and payment of the costs of issuing the Bonds. During the fiscal year $46,064 of the proceeds were released to pay for approved invoices, underwriters discount and issuance fees related to the projects. The amount remaining is included in investments designated for capital projects until such time as approved invoices are paid to satisfy the requirements of the Bond agreement. The additional proceeds of $30,000 from the 2011A Revenue Bonds received June 28, 2011 were to be used to fund approved capital projects at both the Harrisburg Hospital and Community General Osteopathic Hospital, plus pay issuance costs. As of June 30,2013, all of the proceeds were expended. Nonoperating gains include $30 and $3 interest earned on the funds held by trustee and other for the years ended, respectively. 13. Retirement Plans The System sponsors defined contribution plans covering substantially all of its employees and employees of certain wholly- and partially-owned subsidiaries. The plans allow participating employees to contribute a percentage of their annual salary subject to current Internal Revenue Service ("IRS') limitations. Employee contributions are matched by the System at various percentages. The System's contributions to the savings plans are $13,062 and $13,943 for 2013 and 2012, respectively. The System sponsors a noncontributory defined benefit pension plan (the "Plan') covering substantially all of its employees and employees of certain wholly owned subsidiaries employed prior to January 1, Effective December 31, 2006, the System amended the Plan by freezing benefits for all participants. Additional retirement benefits are provided through Increased contributions to I he defined contribution plans. The Parent also sponsors a supplemental noncontributory defined benefit pension plan covering certain executives of the controlled entities of the System. The supplemental plan is unfunded and the Hospital has recorded a liability of $3,287 and $3,612 at, respectively. The System sponsors a nonqualified deferred compensation plan covering certain employees of PHCVI. The plan allows participating employees to defer a percentage of their compensation during the plan year as well as allowing company contributions subject to plan limitations. The System's contributions to the plan are $559 and $582 for 2013 and 2012, respectively. 25

47 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements Pension costs are funded to the limtls specified by the Employee Retirement Income Security Act of 1974, as amended. From time to Irma, the System may contribute additional amounts to the Plan as it deems appropriate, subject to funding limitations. During frscal year 2014, the System expects to contribute approximately $14,000 to the Plan. Other benefits provided by the System are a defined benefit postretirement health plan and a defined benefit postretirement life plan both covering employees of the former Capital Area Health Foundalton who retired by December 31, The plan is unfunded and the Hospital has recorded a liability of $5,073 and $5,162 at, respectively. The following is the status of the various employee benefit plans as of the measurement dates of. Pension Benefits Other Change In benefit obligations Benefit obhgabon at begrnmng of year $ 319,645 $ 272,816 $ 5,162 $ 4,869 Serv1ce cost Interest cost 13,780 14, Partrcrpant contnbutrons Benefit payments from assets (206) (280) (143) Benefrt payments from plan (17,635) (9,974) Actuanal (gam) loss (13,665) 42,063 (156) 71 Benefrt obhgabon at end of year 302, , ,162 Change in plan assets Farr value of plan assets at begrnnrng of year 233, ,620 Actual return on plan assets 26,620 4,331 Partrcrpant contnbutrons Employer contnbubons 12,930 18, Benefrt payments (17,635) (9,974) (280) (143) Farr value of plan assets at end of year 255, ,727 Funded status $ (46,4831 $ (85,918) $ (5,073) $ (5,162) Amounts recognrzed rn the balance sheet consrst of Current accrued retirement costs $ $ $ (244) $ (450) Long-term accrued retrrement costs (46,481) (85,917) (4,829) (4,712) $ (46,4811 $ (85,917) $ (5,073) $ (5,1621 Amounts recogmzed 1n net assets cons1st of Unrecognrzed net actuanalloss (gam) $ 91,078 $ 125,392 $ (106) $ 51 Net pnor servrce benefit (29) (60) $ 91,049 $ 125,332 $!106) $ 51 The accumulated benefrt obligation for pension benefits at is $302,125 and $319,645, respectively. 26

48 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements The assumptions used in the measurement of the System's net periodic benefit obligations are shown In the following table: (benefit obligations) Pension Benefits Weighted-average assumptions at the years ending June 30 Discount rate Rate of compensation increase 4.63% N/A 4.40% N/A 4.63% 2.50% 4.40% 2.50% The following table provides the components of net periodic benefit cost for the years ended : Other Pension Benefits Postretirement Benefits Net periodic benefit cost Service cost $ $ $ 106 $ 72 Interest cost 13,780 14, Expected return on plan assets (18,586) (17,555) Amortization of prior service cost (30) (31) Amortization of net actuarial loss 12,613 6,658 Net periodic benefit cost $ 7,777 $ 4,018 $ 328 $ 336 Other Changes In Plan Assets and Benefit Obligations recognized In unrestricted net assets Net (gain) loss $ (21,700) $ 55,287 $ (156) $ 70 Amortization of net (gain) loss (12,614) (6,658) Amortization of prior service cost Total (gain) loss recognized In unrestricted net assets (34,284) 48,659 (156) 70 Total recognized in net periodic benefit cost and unrestricted net assets $ (26,507) $ 52,677 $ 172 $ 406 The estimated net (gain) loss and prior service cost that will be amortized from unrestricted net assets into net periodic benefit cost over the next fiscal year are $10,242 and ($29,495), respectively for the Pension Plan and $0 and $0, respectively for the Other Postretirement Benefits Plan. 27

49 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements The assumptions used in the measurement of the System's benefit cost are shown In the following table: Other Pension Benefits Postretirement Benefits (net pertodlc benefit cost) Weighted-average assumptions at the years ending June 30 Discount rate Expected return on plan assets Rate of compensation increase 4.40% 8.00% N/A 5.60% 8.00% N/A 4.40% N/A 2.50% 5.60% N/A 2.50% A 9.00% annual rate of increase in the per capita costs of covered health care benefits was assumed for 2013 gradually decreasing to 5.00% by the year Sensitivity Analysis, Postretirement Benefits Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. At June 30,2013, a one-percentage-point change in assumed health care cost trend rates would have the following effects: One-Percentage-Point Increase Decrease Effect on total of service and interest cost components Effect on postretirement benefit obligation $ 6 $ 121 (5) (107) Expected benefit payments for the years ended June 30 are as follows: Pension Benefits Other Benefits 2014 $ 13,383 $ , , , , ,654 1,304 28

50 (And controlled entitles and subsidiaries) Notes to Consolidated Financial Statements The pension plan's asset allocation at, by asset category, is as follows: Pension plan assets Equity securities 56.40% 53.30% Fixed Income securities Tactical allocation Cash and cash equivalents % % The primary investment objective for the plan assets is to achieve maximum rates of return commensurate with safety of principal. Target asset allocation, credit quality and diversification guidelines and restrictions are approved by the Investment Committee of the Board of Directors of the Parent The plan asset allocation is reviewed quarterly to determine whether the portfolio mix is within an acceptable range of the target allocation. Target asset allocations are based on asset and liability studies. The target asset allocation for the portfolio is 55.00% equity and 35.00% fixed Income securities, 10.00% tactical allocation and 0.00% cash equivalents. The following table represents the fair value measurement levels for all pension assets, which the System has recorded at fair value: Fair Value Measurement Using Quoted Prices in Active Markets for Significant Other Significant Other Identical Assets Observable Inputs Unobservable Inputs Juno 30, 2013 (Levell) (Level2) (Level3) Assets Cash management funds $ 3,784 $ 3,764 $ $ F1xed mcome Investments 107, ,688 Domesbc common stock Olher domesltc equtty mvestments and pooled trusts 104,631 62,604 61,927 Foreign equity mveslments 29,216 18,894 10,322 Accrued mcome $ 246,219 $ 162,970 $ 62,249 $ 29

51 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements Fair Value Measurement Using Quoted Prices m Active Markets for Significant Other Significant Other Identical Assets Observable Inputs Unobservable Inputs June 30, 2012 (levol1) (Levol2) (Lovel3) Assets Cash management funds $ 2,609 $ 2,609 $ $ F1xed mcome mvestmenls 107,912 23,924 83,988 Domestic common stock 55,934 55,934 Other domestic equ1ly mvestments and pooled trusts 40,135 20,706 19,429 Foreign equity mvestments 27, ,916 Accrued mcome $ 233,726 $ 103,393 $ 130,333 $ As of, fixed 1ncome secuntjes of $0 and $63,966, respectively, other domestic equ1ty mvestments and pooled trusts of $51,927 and $19,429, respeclively and fore1gn equity mvestments of $10,322 and $26,916, respectively are considered Level2 due to bemg mcluded m mvestment partnerships where the partners determine the fa1r value of the Investment The System adopted the updated GAAP valuation standard related to mvestment funds that do not have a readily determmable fa1r value effect1ve July 1, 2010 The guidance allows the fa1r value measurements for these funds to be based on reported NAV If certam cntena are met, and establishes additional disclosures related to these Investment funds Accordmgly, the fa1r values of the followmg Investment funds have been estimated us1ng reported NAV 2013 Redemption Frequency (If Redemption Category of Investment Fair Value Currently Eligible) Notice Period EqUity- Global $ 10,322 Dally 1 day Equity- Domestic 51,927 Daily 1 day Fixed mcome Dally 1 day $ 62, Redemption Frequency (if Redemption Category of Investment Fair Value Currently Eligible) Notice Period EqUJty - Global $ 26,916 Monthly 15 days EqUJty - Domestic 19,429 Dally 3 to 5 days F1xed mcome 63,988 Dally 3 to 5 days $ 130,333 30

52 (And controlled entities and subsidiaries) Notes to Consolidated Financial Statements 14. Insurance Coverage The System maintains self-insurance trust funds for professional liability claims that are not insured by captive insurance arrangements. The System's contributions to its self-insurance trust funds and the related self-insured liabilities are based on actuarial assumptions and methodologies, which are reviewed continuously with any adjustments reflected in current operations. Management believes that the accrual for self-insured liabilities is adequate as of June 30, 2013; however, it is reasonably possible the estimated reserve for self-insurance claims could change in the near term due to the inherent variability in determining such estimates. Effective December 31, 2002, primary professional and general liability insurance is provided through the System's wholly owned for profit captive insurance company, RRG. Professional liability is provided on a claims-made basis meeting statutory limit requirements of $500 per claim subject to a $2,500 annual aggregate for the Hospital, and a $1,500 annual aggregate for physician and skilled nursing claims. Additional coverage of $500 per claim and $1,500 In the aggregate is provided by the Mcare Fund (formerly the Medical Professional Liability Catastrophic Fund- "CAT Fund') established under the Medical Care Availability and Reduction of Error Act ('Meara Acf'). Coverage for general liability is on an occurrence basis providing $1,000 per claim subject to a $2,000 aggregate. Prior to December 31, 2002, malpractice coverage was provided by commercial carriers on a claims-made basis with statutory/primary limits of $500 per claim and $2,500 for hospital claims and $1,500 for physician and skilled nursing claims in the aggregate with additional coverage of $700 per claim and $2,1 00 in the aggregate by the Mcare Fund. Coverage for general liability was on an occurrence basis providing $1,000 per claim subject to a $1,000 aggregate. Effective January 1, 2013, the System purchased $30,000 in excess liability limits with separate limits established for professional liability exposure and general liability and other underlying coverage. For the period January 1, 2012 to December 31, 2012, excess limits were $25,000 with separate limits for Professional and General Liability. A $4,000 self-insured retention layer for professional and general liability exposure is underwritten by the System's wholly owned captive, UHR. For period January 1, 2010 to December 31, 2011, excess limits were $20,000 with separate limits for Professional and General Liability. For period January 1, 2007 to December 31, 2009, excess limits were $10,000 with separate limits for Professional and General Liability. At January 1, 2006, coverage included a $2,000 self-insured retention with an $8,000 annual aggregate limit for professional and general liability exposure. Effective January 1, 2004 through December 31, 2005, a shared $8,000 excess layer over a $1,000 self-insured retention layer. Claims in the $8,000 excess layer are shared 50% by a commercial insurance carrier and 50% self-insured. Self insured exposure is re-insured through the Parenfs wholly owned captive, UHR. Effective January 1, 2003 through December 31, 2003, the System maintained excess liability coverage of $4,000 per claim and in the aggregate provided through UHR, with an additional $5,000 per claim and in the aggregate provided by a commercial insurance carrier. Prior to January 1, 2003, the System maintained excess liability coverage with a commercial carrier in the amount of $25,000 over the above limits. At, the System also maintained Directors and Officers liability coverage with limits of $20,000 and Excess Workers' Compensation coverage over a self-insured retention of $