OBLIGATED GROUP FINANCIAL STATEMENT (UNAUDITED)

Transcription

1 OBLIGATED GROUP FINANCIAL STATEMENT (UNAUDITED) 1 st QUARTER DECEMBER 2015

2 Obligated Group Financial Statements and Other Financial Information (Unaudited) For the Quarter and Three Months Ended December 31, 2015 Contents Obligated Group Financial Statements (Unaudited) Obligated Group Balance Sheet...1 Obligated Group Statement of Operations...2 Obligated Group Statement of Changes in Net Assets...3 Obligated Group Statement of Cash Flows...4 Notes to Obligated Group Financial Statements...5 Other Financial Information Management s Discussion and Analysis...23 Analysis of Obligated Group Financial Statements...27

3 SHARP HEALTHCARE OBLIGATED GROUP BALANCE SHEET (UNAUDITED) December 31, 2015 ($ in 000's) ASSETS LIABILITIES AND NET ASSETS DECEMBER DECEMBER SEPTEMBER DECEMBER DECEMBER SEPTEMBER Current assets: Current liabilities: Cash and cash equivalents $ 241,137 $ 168,085 $ 258,423 Accounts payable and accrued liabilities $ 206,885 $ 173,559 $ 222,726 Short-term investments 43,634 45,293 48,348 Intercompany payables, net Accounts receivable, net 354, , ,773 Accrued compensation and benefits 130, , ,191 Intercompany receivables, net 20,209 20,073 11,620 Current portion of long-term debt 16,132 12,948 15,716 Estimated settlements receivable Accrued interest 9,037 9,032 3,896 from government programs, net (400) 8, Total current liabilities 362, , ,606 Inventories 47,381 42,222 47,084 Prepaid expenses and other 69,414 57,418 61,091 Total current assets 776, , ,529 Long-term liabilities 179, , ,507 Reserves for professional liability (69) 1,386 (69) Long-term investments 217, , ,342 Long-term debt 710, , ,627 Total liabilities 1,252,510 1,139,016 1,247,671 Assets limited as to use: Designated for property 1,513,150 1,325,677 1,445,122 Under bond indentures 56, ,760 63,287 Net Assets: Total assets limited as to use 1,569,248 1,426,437 1,508,409 Unrestricted 2,536,911 2,185,412 2,433,007 Temporarily restricted 57,058 55,166 53,106 Net property, plant and equipment 1,158,291 1,033,030 1,117,055 Permanently restricted 6,438 6,376 6,401 Unamortized financing costs 6,540 7,077 6,671 Other assets 46,227 36,101 44,457 Ending net assets 2,600,407 2,246,954 2,492,514 Beneficial interest in foundations 79,074 75,791 73,722 Total Liabilities and Total Assets $ 3,852,917 $ 3,385,970 $ 3,740,185 Net Assets $ 3,852,917 $ 3,385,970 $ 3,740,185

4 SHARP HEALTHCARE OBLIGATED GROUP STATEMENT OF OPERATIONS (UNAUDITED) FOR THE QUARTER ENDED DECEMBER 31, 2015 AND THREE MONTHS ENDED DECEMBER 31, 2015 ($ in 000's) QUARTER YEAR - TO - DATE Last Year Actual Budget Variance D E S C R I P T I O N Last Year Actual Budget Variance $ 442,915 $ 468,395 $ 459,682 $ 8,713 NET PATIENT SERVICE REVENUE $ 442,915 $ 468,395 $ 459,682 $ 8,713 12,635 35,616 35,616 - PROVIDER TAX REVENUE 12,635 35,616 35, , , ,544 1,266 PREMIUM REVENUE 208, , ,544 1,266 23,991 23,201 26,833 (3,632) OTHER OPERATING REVENUE 23,991 23,201 26,833 (3,632) 688, , ,675 6,347 TOTAL OPERATING REVENUE 688, , ,675 6,347 OPERATING EXPENSES: 329, , ,770 (2,843) Staffing 329, , ,770 (2,843) 85,007 93,930 89,812 (4,118) Supplies 85,007 93,930 89,812 (4,118) 67,065 72,989 73, Medical fees 67,065 72,989 73, ,734 78,987 76,451 (2,536) Purchased services 71,734 78,987 76,451 (2,536) 8,727 24,658 24,658 - Provider tax 8,727 24,658 24,658-29,005 29,987 30, Maint., utilities & rentals 29,005 29,987 30, ,173 2,949 2,851 (98) Business insurance 3,173 2,949 2,851 (98) 6,559 7,007 7, Other 6,559 7,007 7, , , ,228 (7,892) TOTAL OPERATING EXPENSES 600, , ,228 (7,892) 87,409 92,902 94,447 (1,545) EBITDA from Operations 87,409 92,902 94,447 (1,545) 23,803 25,930 25,317 (613) Depreciation & amortization 23,803 25,930 25,317 (613) Taxes ,338 6,197 6, Interest 6,338 6,197 6, ,213 60,752 62,897 (2,145) INCOME FROM OPERATIONS 57,213 60,752 62,897 (2,145) 8.3% 8.0% 8.4% - % OF OPERATING REVENUE 8.3% 8.0% 8.4% - NON-OPERATING INCOME (LOSS) 17,882 29,598 14,958 14,640 Investment income (loss) 17,882 29,598 14,958 14, Mark to market swaps (844) (859) (1,143) 284 Other expense (844) (859) (1,143) ,101 28,832 13,815 15,017 TOTAL NON-OPERATING INCOME (LOSS) 17,101 28,832 13,815 15,017 74,314 89,584 76,712 12,872 EXCESS OF REVENUE OVER EXPENSES 74,314 89,584 76,712 12, % 11.9% 10.2% - % OF OPERATING REVENUE 10.8% 11.9% 10.2% - $ 104,510 $ 121,734 $ 108,262 $ 13,472 EBITDA $ 104,510 $ 121,734 $ 108,262 $ 13,472

5 SHARP HEALTHCARE OBLIGATED GROUP STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED) FOR THE QUARTER ENDED DECEMBER 31, 2015 AND THREE MONTHS ENDED DECEMBER 31, 2015 ($ in 000's) Quarter YTD Prior YTD Unrestricted net assets: Excess of revenues over expenses $ 89,584 $ 89,584 $ 74,314 Net assets released from restrictions used for the purchase of property, plant and equipment 12,872 12,872 11,482 Beneficial Interest in Foundations 1,448 1,448 2,287 Increase in unrestricted net assets 103, ,904 88,083 Temporarily restricted net assets: Beneficial Interest in Foundations 3,952 3, Increase in temporarily restricted net assets 3,952 3, Permanently restricted net assets: Beneficial Interest in Foundations Increase in permanently restricted net assets Increase in net assets 107, ,893 88,856 Net assets, beginning 2,492,514 2,492,514 2,158,098 Net assets, ending $ 2,600,407 $ 2,600,407 $ 2,246,954 3

6 SHARP HEALTHCARE OBLIGATED GROUP STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE QUARTER ENDED DECEMBER 31, 2015 AND THREE MONTHS ENDED DECEMBER 31, 2015 ($ in 000's) Quarter YTD Prior YTD CASH FLOWS FROM OPERATING ACTIVITIES AND OTHER INCOME: Increase in net assets $ 107,893 $ 107,893 $ 88,856 Adjustments to reconcile increase in net assets to net cash provided by (used in) operating activities: Net assets transferred from related party (12,437) (12,437) (9,983) Depreciation of operating and nonoperating facilities 25,930 25,930 23,803 Amortization, including deferred financing costs (28) (28) (24) Other non-operating (gains) losses, net (72) (72) (65) Change in net unrealized (gains) losses on investments (19,437) (19,437) (2,966) Change in net unrealized (gains) losses on swap activity (93) (93) (63) Changes in operating assets and liabilities: (Increase) decrease in: Short-term investments 4,714 4,714 (3,328) Accounts receivable, net (9,112) (9,112) (2,423) Intercompany receivable (8,609) (8,609) (1,887) Est. settlements receivable from govt programs, net ,677 Inventories (297) (297) (1,069) Prepaid expenses (8,323) (8,323) (6,381) Long-term investments ,543 Assets Limited as to use (41,402) (41,402) (93,793) (Decrease) increase in: Accounts payable and accrued liabilities (15,841) (15,841) (18,509) Accrued compensation and benefits (22,752) (22,752) (23,098) Accrued interest 5,141 5,141 4,977 Other long-term liabilities 6,243 6,243 6,811 Cash provided by (used in) operating activites 12,173 12,173 (15,922) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment, net of retirements (21,350) (21,350) (13,967) Change in other assets (7,212) (7,212) (3,434) Investments in joint ventures Distributions from joint ventures (40) Cash used in investing activities (28,472) (28,472) (17,363) CASH FLOWS FROM FINANCING ACTIVITIES: Current maturities and payments on long-term debt (261) (261) (246) Current payments under capital lease obligations (726) (726) (496) Cash used in financing activities (987) (987) (742) NET DECREASE IN CASH AND CASH EQUIVALENTS (17,286) (17,286) (34,027) BEGINNING CASH AND CASH EQUIVALENTS BALANCE 258, , ,112 ENDING CASH AND CASH EQUIVALENTS BALANCE $ 241,137 $ 241,137 $ 168,085 SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations for building and equipment $ 33,307 $ 33,307 $ 222 Net assets transferred from a related party $ 12,437 $ 12,437 $ 9,983 4

7 Notes to Obligated Group Financial Statements (Unaudited) Quarter Ended December 31, Summary of Significant Accounting Policies Organization Sharp HealthCare (SHC) is a California nonprofit public benefit corporation with corporate offices in San Diego, California. SHC, together with its affiliated entities (collectively Sharp), constitute a regional integrated health care delivery system which does business as Sharp HealthCare, primarily serving the residents of San Diego County and includes the following: Sharp Memorial Hospital (SMH), including Stephen Birch Healthcare Center, Sharp Mary Birch Hospital for Women & Newborns, Sharp Outpatient Pavilion, Sharp Mesa Vista Hospital, and Sharp McDonald Center (formerly Sharp Vista Pacifica) Sharp Chula Vista Medical Center (SCVMC) Sharp Grossmont Hospital (SGH) Sharp Coronado Hospital and HealthCare Center (SCHHC) Sharp Health Plan (SHP) Continuous Quality Insurance SPC (CQI SPC) Sharp HealthCare Foundation (SHF) Grossmont Hospital Foundation (GHF) SHC, SMH, SCVMC and SGH are collectively the Obligated Group under certain bond indentures. The obligated group records beneficial interest in SHF and GHF, which are not members of the obligated group. SHC has certain contractual obligations with its affiliates that govern its operations and the use of certain assets. All significant transactions among Sharp s obligated group entities have been eliminated in the accompanying obligated group financial statements. Use of Estimates The preparation of Sharp s obligated group financial statements in conformity with accounting principles generally accepted in the United States (GAAP) 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 obligated group financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 5

8 1. Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid debt instruments with original maturities of three months or less. Sharp routinely invests its surplus operating funds in money market mutual funds. These funds generally invest in highly liquid U.S. government and agency obligations. Inventories Inventories, consisting principally of supplies, are stated at the lower of cost or market value. Short-Term Investments Short-term investments are classified as trading and include corporate and government obligation securities, which are included in professionally managed portfolios, and are measured at fair value in the balance sheet. The maturities of these securities do not exceed one year. Investment income or loss (including unrealized and realized gains and losses) is included in the obligated group excess of revenues over expenses. Long-Term Investments Long-term investments are classified as trading, which are included in professionally managed portfolios, and are measured at fair value in the balance sheet. The maturities of these securities are in excess of one year or are investments in equities which are not expected to be liquidated over the next year. Investment income or loss (including unrealized and realized gains and losses) is included in the obligated group excess of revenues over expenses. Assets Limited as to Use Assets limited as to use invested in debt and equity securities with readily determined fair values are measured at fair value in the balance sheet and are classified as trading. Investment income or loss (including unrealized and realized gains and losses) is included in the obligated group excess of revenues over expenses unless the income or loss is restricted by donor or law. 6

9 1. Summary of Significant Accounting Policies (continued) Assets limited as to use primarily include assets set aside by Sharp s Board of Directors (the Board) for future capital improvements, over which the Board retains control and may at its discretion subsequently use for other purposes, and amounts held by trustees under indenture agreements. Assets limited as to use consist of the following: Designated for property Cash resources not required for operations have been designated as funded depreciation to be used for future capital improvements. This designation may be changed and such funds used for other purposes $26.5 million at December 31, 2015, and $28.5 million at December 31, 2014, of such assets are pledged as collateral for notes payable and other liabilities. Under bond indentures In accordance with the terms of Sharp s various bond indentures, certain bond proceeds and principal and interest payments have been deposited with a trustee and are limited as to use in accordance with the related indentures. Derivative and Hedging Instruments Sharp recognizes all derivatives on its obligated group balance sheets at fair value. Derivatives that are not effective hedges are adjusted to fair value through the obligated group statements of operations. At December 31, 2015 and 2014, the outstanding hedging instruments were not considered effective hedges. Property and Equipment Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset from 3 to 40 years and is computed using the straight-line method. Property and equipment under capital lease obligations is amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the obligated group financial statements. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired longlived assets are placed in service. 7

10 1. Summary of Significant Accounting Policies (continued) Unamortized Financing Costs Costs incurred in obtaining long-term financing are amortized over the terms of the related obligations using the effective interest method. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by Sharp has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by Sharp in perpetuity. Impairment or Disposal of Long-Lived Assets Sharp accounts for the impairment or disposal of long-lived assets using a future cash flow model to determine whether assets have been impaired. Sharp regularly reviews long-lived assets for circumstances which could indicate carrying values may not be recoverable. No impairments were recorded in fiscal years 2016 or Income from Operations Sharp s primary purpose is to provide diversified health care services to the community served by its affiliates. Only those activities directly associated with the furtherance of this purpose are considered operating activities and classified as operating revenues and expenses. Items excluded from income from operations consist of investment income, gains and losses on disposition of property and equipment, changes in the fair value of interest rate swaps, and fundraising expense. Excess of Revenues over Expenses The accompanying obligated group statements of operations include excess of revenues over expenses and other changes in unrestricted net assets. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include permanent transfers of assets to and from affiliates for other than goods and services, long-lived assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets, pension-related changes other than net periodic pension cost, and beneficial interest in the foundations. 8

11 1. Summary of Significant Accounting Policies (continued) Net Patient Service Revenues Sharp has agreements with third-party payors that provide for payments to Sharp 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 revenue is 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, as final settlements are determined. In the opinion of management, adequate provision has been made for such adjustments. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, Sharp analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, Sharp analyzes contractually due amounts and provides an allowance for doubtful accounts, if necessary. For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), Sharp records a provision for doubtful accounts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. Sharp s allowance for doubtful accounts for self-pay patients was 82.9% and 90.2% of self-pay accounts receivable at December 31, 2015 and 2014, respectively. In addition, Sharp s self-pay write-offs increased $4,603,000 from $4,407,000 for the quarter ended December 31, 2014 to $9,010,000 for the quarter ended December 31, The increase was the result of patients choosing health insurance plans with higher deductibles and share of cost. Sharp has not changed its charity care or uninsured discount policies during the quarter ended December 31, 2014 or Sharp does not maintain a material allowance for doubtful accounts from third-party payors, nor did it have significant write-offs from third-party payors. 9

12 1. Summary of Significant Accounting Policies (continued) Net Patient Service Revenues (continued) The mix of hospital net patient service revenues, net of contractual allowances, discounts and provision for doubtful accounts was as follows: Three Months Ended December 31, Government 43% 43% Contracted Self-pay and Other 1 - Premium Revenues Sharp has agreements with various employers and health maintenance organizations to provide medical services to subscribing participants. Under these agreements, Sharp receives monthly capitation payments based on the number of participants who have selected Sharp, regardless of services actually performed by Sharp. Other Revenues Other revenues include unrestricted donations, retail pharmacy gross profits, management services and joint venture income. Health Care Service Costs Sharp contracts with certain health care providers for the provision of medical services to eligible members. These services include primary care and specialty physician services, inpatient and outpatient facility services, pharmacy, and other medical services. Providers are paid on capitated, per diem, and structured fee-for-service bases. Health care service costs (included in medical fees and purchased services in the accompanying obligated group statements of operations) are accrued in the period in which the services are provided to enrollees, based in part on estimates, including estimates of medical services provided but not yet reported to Sharp. 10

13 1. Summary of Significant Accounting Policies (continued) Charity Care Sharp s policy is to accept all patients regardless of their ability to pay. In assessing a patient s ability to pay, Sharp utilizes financial eligibility requirements or criteria. Sharp provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because Sharp does not pursue collection of amounts determined to qualify as charity care, such amounts are not reported as revenue. Charity care costs are calculated using a ratio of cost to gross charge methodology by department. Direct revenues and costs of each department were included in the calculation, in addition to a step down of overhead costs. Donor-Restricted Gifts Unconditional promises to give cash and other assets to Sharp are reported at fair value at the date the promise is received. Conditional promises to give and indications or intentions to give are reported at fair value at the date the gift becomes unconditional. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the obligated group statements of operations as other operating revenues. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the obligated group financial statements. Income Taxes The principal operations of Sharp are exempt from taxation pursuant to Section 501(c)(3) of the Internal Revenue Code and related California provisions. Sharp recognizes tax benefits from any uncertain tax positions only if it is more likely than not the tax position will be sustained, based solely on its technical merits, with the taxing authority having full knowledge of all relevant information. Sharp records a liability for unrecognized tax benefits from uncertain tax positions as discrete tax adjustments in the first interim period that the more likely than not threshold is not met. Sharp recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryovers only for tax positions that meet the more likely than not recognition criteria. At December 31, 2015 and 2014, no such assets or liabilities were recorded. 11

14 1. Summary of Significant Accounting Policies (continued) Adoption of New Accounting Pronouncements In April 2013, the FASB issued ASU , Services Received from Personnel of an Affiliate, which requires a recipient not-for-profit entity to recognize all contributed services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Sharp adopted ASU as of October 1, 2014, which did not have a material impact of Sharp s obligated group financial statements. In April 2014, the FASB issued ASU , Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which requires that a disposal of a component of an entity or a group of components of an entity be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity s operations and financial results when it meets the criteria to be classified as held for sale, or is disposed of by sale or other than by sale. It also requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. Sharp adopted ASU on October 1, 2015, which did not have an impact on Sharp s obligated group financial statements. In June 2014, the FASB issued ASU , Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which requires a repurchase to maturity transaction to be accounted for as secured borrowing and certain repurchase agreements to follow secured borrowing accounting. Sharp adopted ASU on October 1, 2015, which did not have an impact on Sharp s obligated group financial statements. Recent Accounting Pronouncements In May 2014, the FASB issued ASU , Revenue from Contracts with Customers, which created Accounting Standards Codification (ASC) 606, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The adoption of ASU is required for Sharp on October 1, 2017, and management is currently evaluating the effect of this guidance, if any, on Sharp s obligated group financial statements. 12

15 1. Summary of Significant Accounting Policies (continued) Recent Accounting Pronouncements (continued) In August 2014, the FASB issued ASU , Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern, which requires an entity s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). The adoption of ASU is required for Sharp on October 1, 2017, and management is currently evaluating the effect of this guidance, if any, on Sharp s obligated group financial statements. In January 2015, the FASB issued ASU , Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates the concept of extraordinary items in the presentation of the financial statements, while broadening the separate disclosure of transactions which are unusual in nature, infrequent in occurrence, or both. The adoption of ASU is required for Sharp on October 1, 2016, and management is currently evaluating the effect of this guidance, if any, impact on Sharp s obligated group financial statements. In April 2015, the FASB issued ASU , Simplifying the Presentation of Debt Issuance Costs, which simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The adoption of ASU is required for Sharp on October 1, 2016, and will have the impact of reducing the amount of long-term debt by the amount of debt issue costs included in the accompanying balance sheets. 13

16 2. Fair Value Measurements FASB ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, FASB ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Pricing is based on observable inputs such as quoted prices in active markets. Financial assets and liabilities in Level 1 include U.S. Treasury securities and listed equities. Level 2: Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial assets and liabilities in this category generally include corporate bonds, U.S. government agency securities, commercial paper, fixed income funds, mortgage-backed securities, interest rate swaps, and commingled plan trust funds. Level 3: Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including not but limited to private and public comparables, third party appraisals, discounted cash flow models, and fund manager estimates. The obligated group does not hold any financial assets that would be included in this category. 14

17 2. Fair Value Measurements (continued) Assets and liabilities measured at fair value are based on one or more of three valuation techniques noted in FASB ASC 820 as identified below. The valuation techniques are as follows: (a) (b) (c) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. This technique was utilized for all Level 1 investments. Cost approach. Amount that would be required to replace the service capacity of an asset (replacement cost). This technique was utilized for all Level 2 investments except for the interest rate swaps. Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings model). This technique was utilized for the interest rate swaps. The obligated group s investments in partnerships, limited liability companies, and similarly structured entities amounting to approximately $11,542,000 and $10,027,000 as of December 31, 2015 and December 31, 2014, respectively, are accounted for using the equity method of accounting, which is not a fair value measurement. 15

18 2. Fair Value Measurements (continued) The following table provides the composition of certain investment assets as of December 31, Only assets and liabilities measured at fair value on a recurring basis are shown in the three-tier fair value hierarchy. December 31, 2015 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Short-term investments: U.S. Treasury obligations $ 14,230 $ 14,230 $ - $ - Corporate bonds 19,327-19,327 - U.S. government agencies 3,258-3,258 - Commercial paper 6,620-6,620 - Interest receivable $ 43,634 $ 14,230 $ 29,404 $ - Long-term investments: U.S. Treasury obligations $ 75,810 $ 75,810 $ - $ - Corporate bonds 66,148-66,148 - U.S. government agencies 52,380-52,380 - Asset-backed securities 19,181-19,181 - Supranational 2,956-2,956 - Interest receivable $ 217,277 $ 75,810 $ 141,467 $ - Assets limited as to use: Designated for property: Cash and cash equivalents $ 4,485 $ 4,485 $ - $ - Equities 743, , U.S. Treasury obligations 306, , Corporate bonds 250, ,080 - U.S. government agencies 104, ,161 - Mortgaged backed securities and collateralized mortgage obligations 43,116-43,116 - Commercial paper 15,849-15,849 - Asset-backed securities 41,889-41,889 - Interest receivable 3,851-3,851 - $ 1,513,150 $ 1,054,204 $ 458,946 $ - 16

19 2. Fair Value Measurements (continued) December 31, 2015 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Under bond indentures: Cash and cash equivalents $ 6,138 $ 6,138 $ - $ - U.S. Treasury obligations 13,248 13, Corporate bonds 16,823-16,823 - U.S. government agencies 18,693-18,693 - Commercial Paper Interest receivable $ 56,098 $ 19,386 $ 36,712 $ - Interest rate swap receivables $ 144 $ - $ 144 $ - $ 144 $ - $ 144 $ - The following table provides the composition of certain investment assets as of December 31, Only assets and liabilities measured at fair value on a recurring basis are shown in the three-tier fair value hierarchy. December 31, 2014 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Short-term investments: U.S. Treasury obligations $ 10,370 $ 10,370 $ - $ - Corporate bonds 21,493-21,493 - U.S. government agencies 3,683-3,683 - Commercial paper 9,584-9,584 - Interest receivable $ 45,293 $ 10,370 $ 34,923 $ - 17

20 2. Fair Value Measurements (continued) December 31, 2014 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Long-term investments: U.S. Treasury obligations $ 75,583 $ 75,583 $ - $ - Corporate bonds 64,931-64,931 - U.S. government agencies 46,896-46,896 - Asset-back securities 15,082-15,082 - Interest receivable $ 203,355 $ 75,583 $ 127,772 $ - Assets limited as to use: Designated for property: Cash and cash equivalents $ 3,858 $ 3,858 $ - $ - Equities 660, , U.S. Treasury obligations 249, , Corporate bonds 213, ,955 - U.S. government agencies 84,451-84,451 - Commercial Paper 30,793 30,793 Mortgaged backed securities and collateralized mortgage obligations 49,905-49,905 - Asset-backed securities 29,482-29,482 - Interest receivable 3,297-3,297 - $ 1,325,677 $ 913,794 $ 411,883 $ - 18

21 2. Fair Value Measurements (continued) December 31, 2014 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Under bond indentures: Cash and cash equivalents $ 1,553 $ 1,553 $ - $ - U.S. Treasury obligations 15,482 15, Corporate bonds 39,609-39,609 - U.S. government agencies 35,779-35,779 - Commercial paper 7,990-7,990 - Interest receivable $ 100,760 $ 17,035 $ 83,725 $ - Long-term debt: Interest rate swap liabilities $ 1,819 $ - $ 1,819 $ - $ 1,819 $ - $ 1,819 $ - 3. Investment Income Investment income for assets limited as to use, long-term investments, short-term investments and cash equivalents are comprised of the following: Three Months Ended December 31, (In Thousands) Interest income $ 9,775 $ 8,318 Unrealized gains, net 19,437 2,966 Realized gains, net 386 6,598 Investment income $ 29,598 $ 17,882 19

22 4. Endowments Sharp s endowments consist of 52 separate endowment funds included in assets limited as to use established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Directors of Sharp s affiliated foundations to function as endowments. As required by GAAP, net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. On September 30, 2008, California Senate Bill No was signed into law which enacted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) for California. California also adopted one of the optional provisions of the act, creating a rebuttable presumption of imprudence for spending more than 7% of the value of an endowment fund in one year (based on a three-year rolling average). The Board has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, Sharp classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by Sharp in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, Sharp considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) the duration and preservation of the fund, (2) the purposes of Sharp and the donor-restricted endowment fund, (3) general economic conditions, (4) the possible effect of inflation and deflation, (5) the expected total return from income and the appreciation of investments, (6) other resources of Sharp, and (7) the investment policies of Sharp. The endowment net asset composition as of December 31, 2015, by fund type was as follows: Unrestricted Temporarily Permanently Restricted Restricted (In Thousands) Total Board-designated endowment funds $ 2,881 $ 2,840 $ $ 5,721 Donor-restricted endowment funds 4,352 6,438 10,790 Total funds $ 2,881 $ 7,192 $ 6,438 $ 16,511 20

23 4. Endowments (continued) The endowment net asset composition as of September 30, 2015, by fund type was as follows: Unrestricted Temporarily Permanently Restricted Restricted (In Thousands) Total Board-designated endowment funds $ 2,447 $ 2,840 $ $ 5,287 Donor-restricted endowment funds 4,111 6,401 10,512 Total funds $ 2,447 $ 6,951 $ 6,401 $ 15,799 Sharp has adopted investment and spending policies for endowment assets that attempt to provide a stream of funding to programs supported by its endowment while balancing the risk of investment loss with long-term preservation of purchasing power. Endowment assets include those assets of donor-restricted funds that Sharp must hold in perpetuity or for a donor-specified period as well as board-designated funds. Sharp targets a diversified asset allocation that places greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Sharp s spending policy is to annually appropriate for distribution no more than 4% per year of each endowment fund s average fair value (based on a two-year rolling average). 21

24 4. Endowments (continued) Changes in endowment net assets for the periods presented were as follows: Temporarily Permanently Unrestricted Restricted Restricted (In Thousands) Total Endowment net assets, October 1, 2014 $ 2,438 $ 7,181 $ 6,253 $ 15,872 Investment return: Investment income 558 1,136 1,694 Net depreciation (realized and unrealized) (585) (1,327) (1,912) Total investment return (27) (191) (218) Contributions Other (61) (61) Appropriation of endowment assets for expenditure (102) (70) (172) Endowment net assets, September 30, ,447 6,951 6,401 15,799 Investment return: Investment income Net appreciation (realized and unrealized) Total investment return Contributions Appropriation of endowment assets for expenditure (6) (6) Endowment net assets, December 31, 2015 $ 2,881 $ 7,192 $ 6,438 $ 16, Subsequent Events In preparing these obligated group financial statements, management has evaluated and disclosed all material subsequent events up to February 19, 2016 which is the date that the obligated group financial statements were available to be issued. 22

25 Other Financial Information

26 Management s Discussion and Analysis Obligated Group Quarter Ended December 31, 2015 SIGNIFICANT FINANCIAL TRANSACTIONS In December 2014, CMS approved the fee-for-service portion of a 36-month hospital fee program ( the 36-month program ) to provide supplemental Medi-Cal payments and impose a quality assurance fee for facilities that provide service to the Medi-Cal population. The 36-month program covers the period January 1, 2014 through December 31, 2016 and was approved in January As such, fee-for-service amounts for the period October through December 2015 have been recorded in the financial statements. In November 2015, Sharp, through its newly created single member limited liability company, Sharp Otay MOB, LLC, purchased an approximately 67,000 square foot medical office building located in Chula Vista, California. The property has been the site of Sharp Rees-Stealy s Otay Ranch clinic since 1999 and will continue to operate in this capacity. The property was purchased for $22.5 million and included the assumption of a $15.2 million mortgage on the property. The $15.2 million mortgage on the property is payable through November 1, 2036 at a 6.17% interest rate. The total cash outlay for the purchase, net of the mortgage assumption and other miscellaneous costs, was $7.4 million. 23

27 Management s Discussion and Analysis Obligated Group Quarter Ended December 31, 2015 PATIENT ACTIVITY - The obligated group average daily census for the quarter ended December 31, 2015 was 1,201, which was 26 days favorable to budget. Acute average daily census was favorable to budget by 31 days and skilled nursing facility average daily census was unfavorable to budget by 5 days. Other patient statistics for the quarter are as follows: Quarter Ended Last Current Quarter December 31, 2015 Year Budget Actual PY Var Var % Budget Var Var % Combined Hospitals: Adj. discharges 32,186 33, % 31,749 1, % Acute discharges 19,833 20, % 20, % SNF discharges % % Outpatient visits * (1) 219, ,795 5, % 225,363 (568) -0.3% Sharp Rees-Stealy: Capitation rev as % of net patient rev 71.2% 70.6% -0.6% -0.8% 72.5% -1.9% -2.6% Physician visits 341, ,643 19, % 346,756 14, % (1) Includes Home Health. RESULTS OF OPERATIONS - A summary of the obligated group results of operations for the quarter is as follows (in thousands): Quarter Ended December 31, 2015 Current Quarter Prior Year Actual PY Var % Var Budget Budget Var % Var Operating Revenue $ 688,130 $ 755,022 $ 66, % $ 748,675 $ 6, % Operating Expenses 600, ,120 (61,399) -10.2% 654,228 (7,892) -1.2% EBITDA from Operations 87,409 92,902 5, % 94,447 (1,545) -1.6% Deprec, Amort, Taxes & Interest 30,196 32,150 (1,954) -6.5% 31,550 (600) -1.9% Income from Operations 57,213 60,752 3, % 62,897 (2,145) -3.4% Investment Income (Loss) 17,882 29,598 11, % 14,958 14, % Mark to Market Swaps % % Other Income (Loss) (844) (859) (15) 1.8% (1,143) % Non-Operating Income (Loss) 17,101 28,832 11, % 13,815 15, % Excess Revenue over Expense $ 74,314 $ 89,584 $ 15, % $ 76,712 $12, % 24

28 RESULTS OF OPERATIONS (continued): Sharp HealthCare Management s Discussion and Analysis Obligated Group Quarter Ended December 31, 2015 For the quarter, total operating revenue was favorable to budget 0.8%. Net patient service revenue was favorable to budget by 1.9%, premium revenue was favorable to budget by 0.6%, and other operating revenue was unfavorable to budget by 13.5%. Operating expenses for the quarter were unfavorable to budget by $7.9 million, primarily in staffing, supplies, and purchased services. The EBITDA margin for the quarter was 16.1% compared to budget of 14.5%. The EBITDA from operations margin for the quarter was 12.3% compared to budget of 12.6%. KEY FINANCIAL RATIOS - A summary of the obligated group key financial ratios is as follows: Quarter Ended December 31, 2015 FY 2015 Actual* Qtr End 12/31/15 YTD Actual YTD Budget Key Ratios EBITDA From Operations Margin 14.8% 12.3% 12.3% 12.6% EBITDA Margin 14.2% 16.1% 16.1% 14.5% Current Ratio Account Receivable (Days) Debt to Capitalization 24.9% 22.3% 22.3% - *** *** Days Cash on Hand** * FY 2015 amounts represent final year-end ratios. ** Days Cash on Hand is calculated based on total consolidated system information. *** YTD Days Cash on Hand amounts are calculated based on year-end forecast and budget. Any amounts recorded for the Medi-Cal Hospital Fee Program are included in the amounts above. 25

29 YEAR TO DATE PATIENT STATISTICS Year to Date December 31, 2015 Combined Hospitals: Sharp HealthCare Management s Discussion and Analysis Obligated Group Quarter Ended December 31, 2015 Last Year Actual Budget Budget Var. Admissions 19,917 20,312 20, % Discharges 20,027 20,395 20, % Outpatient Visits (1) 219, , ,363 (568) -0.3% Outpatient Surgeries 5,990 6,592 6, % Total Surgeries 9,994 10,555 11,101 (546) -4.9% Emergency Room Visits 63,709 65,162 65,451 (289) -0.4% Newborn Admissions 3,868 3,805 4,088 (283) -6.9% (1) Includes Home Health. FINANCIAL POSITION - During the quarter ended December 31, 2015, operations provided cash of $12.2 million. Cash used in investing activities totaled $28.5 million and included $21.4 million used to acquire property, plant and equipment. Cash used in financing activities totaled $987,000 for various debt related activities. % 26

30 Analysis of Obligated Group Financial Statements Quarter Ended December 31, 2015 COMBINED STATEMENT OF OPERATIONS: 1. Net Patient Service Revenue for the quarter ended December 2015 totaled $468.4 million compared to $442.9 million for the quarter ended December Compared to budget, a favorable variance of $8.7 million, or 1.9%, was realized primarily due to favorable inpatient volumes and rates. For the quarter ended December 2015, deductions from revenue as a percentage of gross patient service revenue totaled 81.6%, compared to a budget of 81.5%. 2. Provider Tax Revenue for the quarter ended December 2015 totaled $35.6 million compared to $12.6 million for the quarter ended December Provider tax revenue for the quarter ended December 2015 represents the October to December 2015 fee-for-service portion of the 36- month program, which was approved in December Provider tax revenue for the quarter ended December 2014 represents the July through December 2013 managed care portion of the 30-month hospital fee program, which was approved in November Premium Revenue for the quarter ended December 2015 totaled $227.8 million compared to $208.6 million for the quarter ended December Compared to budget, a favorable variance of $1.3 million, or 0.6%, was realized. 4. Other Operating Revenue includes unrestricted donations, retail pharmacy gross profits, management services income and joint venture income. For the quarter ended December 2015, other operating revenue totaled $23.2 million compared to $24.0 million for the quarter ended December Compared to budget, an unfavorable variance of $3.6 million, or 13.5%, was realized primarily due to the program changes made to contract pharmacy. 5. Operating Expenses - For the quarter ended December 2015, operating expenses (excluding depreciation, amortization, taxes and interest) totaled $662.1 million compared to $600.7 million for the quarter ended December Compared to budget, an unfavorable variance of $7.9 million was realized. Significant quarterly fluctuations were the result of the following as compared to budget: a. An increase in staffing of $2.8 million, or 0.8%, primarily due to increased volumes and the accrual of first quarter management incentives, which are not budgeted. b. An increase in supplies of $4.1 million, or 4.6%, primarily due to increased pharmaceutical expenses and increased volumes. c. An increase in purchased services of $2.5 million, or 3.3%, primarily due to increased out of network claims expense on capitated patients. 27

31 Analysis of Obligated Group Financial Statements Quarter Ended December 31, 2015 COMBINED STATEMENT OF OPERATIONS (continued): 6. Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) from Operations for the quarter ended December 2015 was $92.9 million compared to $87.4 million for the quarter ended December Compared to budget an unfavorable variance of $1.5 million, or 1.6%, was realized. 7. Income from Operations for the quarter ended December 2015 resulted in income of $60.8 million compared to $57.2 million for the quarter ended December Compared to budget, an unfavorable variance of $2.1 million, or 3.4%, was realized. 8. Non-Operating Income (Loss) includes fundraising expenses, gains/losses on disposal of fixed assets, investment income (including realized and unrealized gains and losses), mark to market adjustments on swap investments, and unrealized gains/losses on investments. For the quarter ended December 2015, non-operating income was $28.8 million compared to $17.1 million for the quarter ended December Compared to budget, a favorable variance of $15.0 million was realized due primarily to investment income. Investment income for the quarter was comprised of $10.2 million of realized investment income and $19.4 million of unrealized gains. 9. Excess Revenues over Expenses Excess revenues over expenses for the quarter ended December 2015 resulted in income of $89.6 million compared to $74.3 million for the quarter ended December Compared to budget, a favorable variance of $12.9 million, or 16.8%, was realized. 10. EBITDA EBITDA, including the non-operating items, totaled $121.7 million for the quarter ended December 2015 compared to $104.5 million for the quarter ended December Compared to budget, a favorable variance of $13.5 million, or 12.4%, was realized. BALANCE SHEET: Assets: 1. Cash and cash equivalents decreased $17.3 million year to date due primarily to the timing of accounts payable and payroll payments. 2. Short-term investments decreased $4.7 million year to date due primarily to transfers of shortterm investments to cash due to change in duration until maturity and transfers from short-term investments to assets limited as to use. 28