BETH ISRAEL DEACONESS MEDICAL CENTER, INC. AND AFFILIATES. Consolidated Financial Statements and Other Financial Information

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1 Consolidated Financial Statements and Other Financial Information (With Independent Auditors Report Thereon)

2 Consolidated Financial Statements and Other Financial Information Table of Contents Page(s) Independent Auditors Report 1 Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Changes in Net Assets 4 Consolidated Statements of Cash Flows Other Financial Information Independent Auditors Report on Other Financial Information 32 Consolidating Balance Sheets Consolidating Statements of Operations 37 38

3 KPMG LLP Telephone High Street Fax Boston, MA Internet Independent Auditors Report Board of Directors Beth Israel Deaconess Medical Center, Inc. and Affiliates: We have audited the accompanying consolidated balance sheets of Beth Israel Deaconess Medical Center, Inc. and Affiliates (the Medical Center) as of and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Medical Center s management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Medical Center s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Beth Israel Deaconess Medical Center, Inc. and Affiliates as of and the results of their operations, changes in their net assets, and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. January 15, 2010 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative, a Swiss entity.

4 Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents $ 156, ,688 Investments 383, ,312 Patient accounts receivable, net of allowance for doubtful accounts of $23,761 in 2009 and $26,816 in , ,241 Other current assets 67,472 60,692 Total current assets 781, ,933 Assets limited or restricted as to use: Held by trustees under debt and other agreements 34,155 83,824 Held for specific purposes and endowments 165, , , ,566 Property and equipment, net 574, ,713 Prepaid pension costs 22,744 Debt issuance costs, net 4,486 4,812 Other assets 1,686 3,439 Total assets $ 1,562,215 1,558,207 Liabilities and Net Assets Current liabilities: Current portion of long-term debt $ 19,713 18,373 Accounts payable and accrued expenses 184, ,255 Estimated settlements with third-party payors 27,077 33,516 Total current liabilities 231, ,144 Long-term debt, net of current portion 466, ,086 Professional liability 16,346 14,562 Employee benefit plans liabilities 105,961 9,004 Deferred gains on sale of real estate 20,916 21,625 Other liabilities 19,563 20,500 Total liabilities 860, ,921 Net assets: Unrestricted 535, ,544 Temporarily restricted 119, ,262 Permanently restricted 46,395 43,480 Total net assets 701, ,286 Total liabilities and net assets $ 1,562,215 1,558,207 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statements of Operations Years ended Operating revenue: Net patient service revenue $ 1,363,855 1,290,535 Research revenue 193, ,044 Contributions and investment income 10,580 16,522 Other revenue 95,108 87,166 1,662,958 1,582,267 Operating expenses: Salaries and benefits 968, ,890 Supplies and other expenses 525, ,739 Uncompensated care 48,353 48,420 Depreciation 75,900 69,581 Interest 22,576 24,969 1,640,669 1,538,599 Income from operations 22,289 43,668 Nonoperating gains (losses): Net realized (losses) gains on sales of investment securities (3,333) 8,454 Unrealized change in equity interests in limited partnerships 11,045 (14,597) Gain on sale of real estate 14,624 Loss on early extinguishment of debt (15,713) Nonoperating gains (losses), net 7,712 (7,232) Excess of revenue over expenses 30,001 36,436 Change in net unrealized gains on investments 8,954 (27,789) Net assets released from restrictions used for purchase of property and equipment 5,777 4,686 Change in fair value of interest rate swaps 2,369 Change in funded status of employee benefit plans, other than net periodic benefit cost (116,613) (10,835) (Decrease) increase in unrestricted net assets $ (71,881) 4,867 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Changes in Net Assets Years ended Temporarily Permanently Unrestricted restricted restricted Total Net assets at September 30, 2007 $ 602, ,995 42, ,202 Excess of revenue over expenses 36,436 36,436 Restricted contributions, net 15, ,668 Restricted investment income and gains (11,941) (11,941) Change in net unrealized gains on unrestricted investments (27,789) (27,789) Net assets released from restrictions used for operations (10,824) (10,824) Net assets released from restrictions used for purchase of property and equipment 4,686 (4,686) Change in fair value of interest rate swaps 2,369 2,369 Change in funded status of employee benefit plans, other than net periodic benefit cost (10,835) (10,835) 4,867 (11,733) 950 (5,916) Net assets at September 30, , ,262 43, ,286 Excess of revenue over expenses 30,001 30,001 Restricted contributions, net (361) 2,915 2,554 Restricted investment income and gains 8,507 8,507 Change in net unrealized gains on unrestricted investments 8,954 8,954 Net assets released from restrictions used for operations (11,220) (11,220) Net assets released from restrictions used for purchase of property and equipment 5,777 (5,777) Change in funded status of employee benefit plans, other than net periodic benefit cost (116,613) (116,613) (71,881) (8,851) 2,915 (77,817) Net assets at September 30, 2009 $ 535, ,411 46, ,469 See accompanying notes to consolidated financial statements. 4

7 Consolidated Statements of Cash Flows Years ended Cash flows from operating activities: Change in net assets $ (77,817) (5,916) Adjustments to reconcile change in net assets to net cash provided by operating activities: Change in funded status of employee benefit plans, other than net periodic benefit cost 119,701 11,101 Depreciation 75,900 69,581 Amortization (1,570) (20,479) Net (gains) losses on investments (25,116) 46,840 Change in fair value of interest rate swaps (2,369) Restricted contributions (2,554) (16,668) Loss on early extinguishment of debt 15,713 Increase (decrease) in cash resulting from changes in: Patient accounts receivable (6,277) (18,865) Other current assets (6,780) 610 Accounts payable and accrued expenses 4,809 9,506 Estimated settlements with third-party payors (6,439) (95) Other assets and liabilities 2, Net cash provided by operating activities 76,457 89,133 Cash flows from investing activities: Purchase of property and equipment (113,686) (112,749) Net sales (purchases) of investments and assets whose use is limited or restricted 80,399 (9,399) Net cash used in investing activities (33,287) (122,148) Cash flows from financing activities: Payments on long-term debt (18,373) (234,126) Proceeds from new borrowings 282,063 Payment on swap termination (9,645) Debt issuance costs (3,281) Restricted contributions 2,554 16,668 Net cash (used) provided by financing activities (15,819) 51,679 Net increase in cash and cash equivalents 27,351 18,664 Cash and cash equivalents at beginning of year 128, ,024 Cash and cash equivalents at end of year $ 156, ,688 See accompanying notes to consolidated financial statements. 5

8 (1) Organization and Mission The accompanying consolidated financial statements include the accounts of Beth Israel Deaconess Medical Center, Inc. and its subsidiaries, Medical Care of Boston Management Corporation, d/b/a The Affiliated Physicians Group of Beth Israel Deaconess Medical Center (APG), Beth Israel Deaconess Hospital Needham, Inc. (Needham), and its controlled affiliates, Harvard Medical Faculty Physicians at Beth Israel Deaconess Medical Center, Inc. (HMFP), and Cardiovascular Management Associates, Inc. (CVMA), (collectively, the Medical Center). Intercompany balances and transactions are eliminated in consolidation. Beth Israel Deaconess Medical Center, Inc. (BIDMC) is an affiliate of CareGroup, Inc. (CareGroup), its sole corporate member. CareGroup is a regional healthcare delivery system comprised of teaching and community hospitals, physician groups, and other caregivers. It is committed to personalized, patient-centered care, and excellence in medical education and research. CareGroup serves the health needs of patients and communities extending from north and south of Boston to the western suburbs beyond the Route 495 belt, and is comprised of: Four hospitals BIDMC, Needham, Mount Auburn Hospital, and New England Baptist Hospital; A committed medical staff offering community-based primary care and a wide range of specialty services; and A broad spectrum of comprehensive health services ranging from wellness programs to home care. The CareGroup Obligated Group consists of CareGroup and certain of its subsidiaries and affiliates as follows: BIDMC and its subsidiaries (Medical Care of Boston Management Corporation and Beth Israel Deaconess-Needham Campus), Mount Auburn Hospital and its subsidiary (Mount Auburn Professional Services) and New England Baptist Hospital. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of the Medical Center and its affiliates. Intercompany balances and transactions are eliminated in consolidation. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Medical Center considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. These consolidated financial statements were issued on January 15, 2010 and subsequent events have been evaluated through that date. 6 (Continued)

9 (b) (c) (d) (e) Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid debt instruments with a maturity of three months or less when purchased, excluding amounts whose use is limited by internal designation or other arrangements under trust agreements or by donors. Inventories Inventories, consisting primarily of drugs and supplies, are stated at the lower of cost (first in-first out) or market. Internally Designated Investments and Assets Limited or Restricted as to Use Internally designated investments and assets limited or restricted as to use primarily include assets restricted by donors, assets set aside by the board and assets held by trustees under long-term debt and other agreements. Internally designated assets may, at the board s discretion, subsequently be used for other purposes. Internally designated assets are classified as current assets because such amounts are available to meet the Medical Center s cash requirements. Investments and Investment Income Investments are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See note 4 for a discussion of fair value measurements. Investment income or loss (including realized gains and losses on investments, interest, and dividends) and unrealized changes in equity interests in limited partnerships are included in the excess of revenue over expenses unless the income is restricted by donor or law. Unrealized gains and losses on marketable investments are excluded from the excess of revenue over expenses. Periodically, the Medical Center reviews investments where the market value is substantially below cost, and in cases where the decline is considered to be other than temporary, an adjustment is recorded as a realized loss and a new cost basis is established. Certain investments are included in investment pools managed by CareGroup. Pooled investment income and gains and losses are allocated to participating funds based upon their respective shares of the pool. (f) Uncompensated Care and Provision for Bad Debts The Medical Center provides care without charge or at amounts less than its established rates to patients who meet certain criteria under its charity care policy. The Medical Center grants credit without collateral to patients, most of whom are local residents and are insured under third-party arrangements. Additions to the allowance for doubtful accounts are made by means of the provision for bad debts. Accounts written off as uncollectible are deducted from the allowance and subsequent recoveries are added. The amount of the provision for bad debts 7 (Continued)

10 is based upon management s assessment of historical and expected net collections, business and economic conditions, trends in Federal and State governmental health care coverage and other collection indicators. (g) Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of depreciable assets, which range from three to forty years. Equipment under capitalized leases is stated at the present value of minimum lease payments and is amortized using the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included with depreciation expense. 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) and are excluded from the excess of revenue over expenses. 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 these long-lived assets must be maintained, expiration of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. (h) (i) Asset Retirement Obligations The fair value of a liability for legal obligations associated with asset retirements is recognized in the period in which it is incurred if a reasonable estimate of the fair value of the obligation can be made. When a liability is initially recorded, the cost of the asset retirement obligation is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost associated with the retirement is depreciated over the useful life of the related asset. Upon settlement of the obligation, any difference between the actual cost to settle the asset retirement obligation and the liability recorded is recognized as a gain or loss in the consolidated statements of operations. Long-Lived Assets Long-lived assets such as property plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be treated for possible impairment, the Medical Center first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. 8 (Continued)

11 (j) (k) Self-Insurance The Medical Center is self-insured for certain health insurance and workers compensation benefit programs. Estimated losses and claims are accrued as incurred. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Medical Center has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Medical Center in perpetuity. The Medical Center has interpreted state law as requiring realized and unrealized gains of permanently restricted net assets to be retained in a temporarily restricted net asset classification until appropriated by the board and expended. State law allows the board to appropriate so much of the net appreciation of permanently restricted net assets as is prudent considering the Medical Center s long-and short-term needs, present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions. Annually, the board appropriates an amount based upon a 5% spending policy. (l) Excess of Revenue over Expenses The consolidated statements of operations include the excess of revenue over expenses from operating and nonoperating activities. Operating revenues consist of those items attributable to the care of patients, including contributions and investment income on unrestricted investments, which are utilized to provide charity and other operational support. Peripheral activities, including realized gains or losses on sales of securities and unrealized changes in equity interests in limited partnerships, are reported as nonoperating gains. Changes in unrestricted net assets, which are excluded from the excess of revenue over expenses, consistent with industry practice, include changes in unrealized gains or losses on marketable investments, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets), transfers to or from affiliates, and changes in the funded status of employee benefit plans, other than net periodic benefit cost. (m) Revenue Recognition The Medical Center has entered into payment agreements with Medicare, Blue Cross, Medicaid, and various commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment under these agreements varies, and includes prospectively determined rates per discharge or per visit, discounts from established charges, capitated rates, cost (subject to limits), fee screens and prospectively determined daily rates. 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. Under the terms of various agreements, 9 (Continued)

12 regulations, and statutes, certain elements of third-party reimbursement are subject to negotiation, audit, and/or final determination by the third-party payors. As a result, there is at least a reasonable possibility that the recorded estimates will change by a material amount in the near term. Variances between preliminary estimates of net patient service revenue and final third-party settlements are included in net patient service revenue in the year in which the settlement or change in estimate occurs. Changes in prior year estimated settlements with third party payors increased the excess of revenue over expenses by approximately $1,075 in 2009 and $7,110 in (n) Donations Unconditional promises to give cash and other assets to the Medical Center are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received or the conditional promise 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 recorded as net assets released from restrictions (which are included with other revenue or as direct additions to net assets if for capital). (o) (p) (q) Debt Issuance Costs Debt issuance costs and original issue discounts are amortized over the period the related obligation is outstanding, generally using the interest method. Research Grants and Contracts Revenue related to research grants and contracts is recognized as the related costs are incurred. Indirect costs relating to certain government grants and contracts are reimbursed at fixed rates negotiated with the government agencies. Amounts received in advance of incurring the related expenditures are recorded as unexpended research grants and are included with accounts payable and accrued expenses. Professional Liability The Medical Center insures its professional liability risks on a claims-made basis in cooperation with several other Harvard-affiliated healthcare organizations through a captive insurance company, of which CareGroup holds a 10% ownership interest. The Medical Center maintains a program of self-insurance to cover professional liability claims incurred but not reported to the captive insurance company at year end. The estimated amount of accrued unasserted claims has been determined by consulting actuaries on a discounted basis using an interest rate of 3% in 2009 and 4% in (Continued)

13 (r) Income Tax Status BIDMC, APG, Needham, CVMA and HMFP have been determined by the Internal Revenue Service to be organizations described in Internal Revenue Code (the Code) Section 501(c)(3) and, therefore, are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. The Medical Center recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount of benefit that is greater than fifty percent likely to be realized upon settlement. Changes in recognition in measurement are reflected in the period in which the change in judgment occurs. The Medical Center did not recognize the effect of any income tax positions in either 2009 or (s) Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, patient accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments. Long-term debt instruments are carried at cost, which approximates fair value. Fair values are estimated based on quoted market prices for the same or similar issues. Utilizing available market pricing information provided by a third party, the Medical Center s estimated fair value of long-term debt as of September 30, 2009 is approximately $489,190. (t) Accounting Pronouncements Adopted in 2009 On October 1, 2008, the Medical Center adopted the provisions of FASB ASC Subtopic (ASC ). ASC establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. FASB ASC paragraph A defers the effective date of ASC for one year for non-financial assets and liabilities that are not disclosed at fair value in the financial statements on a recurring basis. See note 4 for disclosures of fair value required by ASC On October 1, 2008, the Medical Center adopted the provisions of FASB ASC Topic 825 (ASC 825) which permits entities to choose to measure certain financial assets and liabilities at fair value. The adoption of ASC 825 had no impact on the consolidated financial statements since management did not elect to measure any additional eligible financial assets or liabilities at fair value as a result of adopting ASC 825. Effective September 30, 2009, the Medical Center adopted the provisions of FASB ASC Subtopic , Classification of Donor Restricted Endowment Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, (ASC ). ASC provides guidance on the net asset classification of donor restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and also requires disclosures about endowment funds, both donor-restricted endowment funds and board-designated endowment funds. There was no impact to amounts reported in the consolidated financial statements resulting from the adoption of ASC See note 16 for disclosures of endowment funds required by ASC (Continued)

14 Effective September 30, 2009, the Medical Center adopted the provisions of FASB ASC , Subsequent Events (ASC ). ASC defines subsequent events and transaction periods, those circumstances under which the events or transactions should be recognized, and disclosures regarding subsequent events or transactions. ASC is effective for annual periods ending after June 15, Although the adoption of ASC did not materially affect the Medical Center s consolidated financial statements, additional disclosures are now included under Basis of Presentation above. In June 2009, the FASB issued ASU (Codification). The Codification does not change U.S. generally accepted accounting principles, but combines all authoritative standards issued by organizations that are in levels A through D of the generally accepted accounting principles hierarchy, such as the FASB, American Institute of Certified Public Accountants, and Emerging Issues Task Force, into a comprehensive, topically organized online database. No accounting impact is expected since this is an accumulation of existing guidance. The Codification became effective for reporting periods that end on or after September 15, (u) (v) Accounting Pronouncements Not Yet Adopted In December 2008, the FASB issued FASB ASC Sections and , which require additional disclosures for employers pension and other postretirement benefit plan assets. The guidance requires employers to disclose information about fair value measurements of plan assets similar to the disclosures required under FASB ASC Subtopic Those disclosures will include the investment policies and strategies for the major categories of plan assets, and significant concentrations of risk within plan assets. The Medical Center does not believe the adoption of FASB ASC Sections and will have a material impact on its consolidated financial position, results of operations or cash flows since its requirements are limited to additional disclosures. Reclassifications Certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation. (3) Community Service and Uncompensated Care (a) Community Benefits The Medical Center works in collaboration with residents of its service areas and with community-based organizations to identify the healthcare needs of the community and to develop strategies to improve the health status of community members. The Medical Center s community benefits program is focused particularly on underserved populations, and is designed to ensure that the Medical Center is a welcoming and culturally competent organization for all patients and employees. 12 (Continued)

15 The Medical Center works most closely with its seven affiliated community health centers to conduct community health needs assessments and to develop appropriate interventions. The priorities of the Medical Center s community benefits program are to increase access to community-based primary care and specialty services, to increase access to Medical Center specialty services, and to reduce racial and ethnic disparities in the health status of underserved populations. The Medical Center provides an annual report describing its community benefit activities to the Massachusetts Attorney General s office. The report summarizes progress made during the past year as well as objectives and initiatives for the upcoming year. The Medical Center s most recent report for 2008 includes descriptions of community services and programs provided by the Medical Center at a cost of approximately $11,500 (in addition to the cost of charity care provided). The Medical Center is in the process of compiling its annual report for (b) Charity Care The Medical Center provides care without charge or at amounts less than its established rates to patients who meet certain criteria under its charity care policy. Because the Medical Center does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue except to the extent reimbursed by the Massachusetts Health Safety Net Trust (Health Safety Net Trust). The Medical Center also makes payments to the Health Safety Net Trust to support the delivery of charity care to patients throughout Massachusetts. These payments are reported as a component of uncompensated care expense in the consolidated statements of operations. The Medical Center s net cost of charity care, including care for emergent services provided to non-paying patients and including payments to and receipts from the Health Safety Net Trust, was $14,806 in 2009 and $14,995 in 2008 as follows: Charity care, at cost $ 16,306 18,110 Payments to Health Safety Net Trust 11,542 10,503 Payments from Health Safety Net Trust (13,042) (13,618) Net charity care $ 14,806 14,995 (c) Other Uncompensated Care The Medical Center also provides care to patients who participate in other programs designed to support low-income families, including particularly the Medicaid program, which is jointly funded by federal and state governments. The Massachusetts Health Reform Law provided an initiative for expansion of Medicaid coverage to greater populations and for enrollment of uninsured patients in other insurance programs. 13 (Continued)

16 Payments from Medicaid and other programs, which insure low-income populations, do not cover the cost of services provided. In aggregate, the cost of care provided by the Medical Center for such services exceeded reimbursement by $28,798 and $15,498 in 2009 and 2008, respectively. The Medical Center also provides care to patients who participate in the Medicare program, the federally sponsored health insurance program for elderly or disabled patients. Because payments to hospitals have not kept pace with inflation in recent years, payments to the Medical Center for those services also do not cover the costs of services provided. In aggregate, the cost of care provided by the Medical Center for such services exceeded reimbursement by $23,179 and $17,818 in 2009 and 2008, respectively. (d) Bad Debts In addition to charity care and shortfalls in providing services to patients insured under state and federal programs, the Medical Center also incurs losses related to self-pay patients who fail to make payments for services or insured patients who fail to pay coinsurance or deductibles for which they are responsible under insurance contracts. Bad debt expense is included in uncompensated care expense in the consolidated financial statements, and includes the provision for accounts anticipated to be uncollectible. The estimated cost of providing such services was approximately $4,691 and $4,628 in 2009 and 2008, respectively. (4) Investments and Assets Limited or Restricted as to Use Investments and assets limited or restricted as to use are reported in the consolidated balance sheets as follows: September 30 Market Cost Market Cost Current assets: Investments $ 383, , , ,661 Assets limited or restricted as to use: Held by trustees under debt and other agreements 34,155 34,155 83,824 83,824 Held for specific purposes and endowments 165, , , , , , , ,262 $ 583, , , , (Continued)

17 The Medical Center invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the consolidated financial statements. The Medical Center estimates fair value based on a valuation framework hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Financial assets recorded at fair value by the Medical Center on a recurring basis include investments, internally designated investments, and assets limited or restricted as to use. The three levels of fair value hierarchy are described below: Level 1 quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. Level 1 includes debt and equity securities that trade in an active exchange market, as well as U.S. Treasury securities; Level 2 observable prices that are based on inputs not quoted in active markets, but corroborated by market data. This category generally includes certain U.S. governmental and agency mortgage-backed debt securities, corporate debt securities, and some alternative investments; and Level 3 unobservable inputs are used when little or no market data is available. This category includes financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Investments that are included in this category generally include limited partnerships, private equity, real estate funds, and funds of hedge funds. Following is a description of the valuation methodologies used for assets at fair value: Cash and cash equivalents: Money market funds are valued at the net asset value (NAV) reported by the financial institution. Equities: Valued at the closing price reported on an active market on which the individual securities are traded. Private equities and hedge funds and real assets: The estimation of fair value of investments in investment companies for which investment does not have a readily determinable value is made using the NAV per share or its equivalent as a practical expedient. The Medical Center owns interests in alternative investment funds rather than in the securities underlying each fund and, therefore, it is generally required to consider such investments as Level 2 or 3 for purposes of applying ASC , even though the underlying securities may not be difficult to value or may be readily marketable. The Medical Center has applied the accounting provisions of Accounting Standards Update , Investments in Certain Entities that Calculate Net Asset Value per Share (or its 15 (Continued)

18 Equivalent), for its alternative investments. This standard allows for the estimation of the fair value of investments in investment companies for which the investment does not have a readily determinable value using NAV per share or its equivalent as a practical expedient. The Medical Center has utilized the NAV reported by each of the underlying funds as a practical expedient to estimate the value of the investment. Also, because the Medical Center uses NAV as a practical expedient to estimate fair value, the level in the fair value hierarchy in which each fund s fair value measurement is classified is based primarily on the Medical Center s ability to redeem its interest in the fund at or near the date of the consolidated balance sheet. Accordingly, the inputs or methodology used for valuing or classifying investments for financial reporting purposes are not necessarily an indication of the risk associated with investing in those investments or a reflection on the liquidity of each fund s underlying assets and liabilities. Fixed income: The accounts invest principally in fixed income instruments and debt instruments. Account investments are primarily valued using market quotations or prices obtained from independent pricing sources which may employ various pricing methods to value the investments including matrix pricing. The preceding methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Medical Center believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following table sets forth the Medical Center s consolidated financial assets that were accounted for at fair value on a recurring basis as of. Investments are classified in their entirety based on the lowest level of input that is significant to the fair value measurement: Markets for Other Significant identical observable unobservable assets inputs input Level 1 Level 2 Level 3 Cash and cash equivalents $ 91,368 91,368 21,610 Equities 13, ,088 2, , ,721 Private equities and hedge funds 30, , , ,231 Real assets 14,366 14,366 12,510 Fixed income 44,211 38,829 19, , ,033 Total $ 148, , , , , (Continued)

19 The following table presents additional information about the changes in Level 3 assets measured at fair value for the year ended September 30, 2009: Fair value measurements using significant unobservable inputs Net Changes in Beginning purchases Net realized net unrealized Ending balance (sales) gains( losses) gains( losses) balance Equities $ 11,546 (9,806) 708 2,448 Private equities and hedge funds 148,684 26, , ,139 Real assets 14,215 3,703 (1,060) (2,492) 14,366 Fixed income , ,320 19,040 Total $ 174,887 37,086 (856) 15, ,993 Investment income and gains (losses) on unrestricted investments and assets limited or restricted as to use, consisted of the following: Year ended September 30 Unrestricted: Excess of revenue over expenses: Dividends and income $ 2,279 11,780 Net realized (losses) gains on sales of investment securities (3,333) 8,454 Unrealized change in equity interests in limited partnerships 11,045 (14,597) 9,991 5,637 Change in net unrealized gains (losses) on investments 8,954 (27,789) 18,945 (22,152) Temporarily restricted: Dividends and income Net gains (losses) on investments (realized and unrealized) 8,450 (12,911) 8,507 (11,941) $ 27,452 (34,093) 17 (Continued)

20 (5) Contributions Receivable Contributions receivable, which are included within assets limited or restricted as to use in the consolidated balance sheets, consisted of the following: September 30 Due in less than one year $ 4,412 5,858 Due in one to five years 18,283 18,476 Due in more than five years 600 6,530 23,295 30,864 Less: Discount to present value at rates ranging from 0.75% to 5.00% (2,627) (3,591) Allowance for uncollectible amounts (8,400) (7,500) $ 12,268 19,773 (6) Property and Equipment Property and equipment consisted of the following: September 30 Land $ 25,520 25,520 Buildings and improvements 790, ,819 Equipment 1,019, ,732 Construction in progress 41,613 18,784 1,877,235 1,757,855 Less accumulated depreciation, net of disposals (1,302,816) (1,227,142) $ 574, ,713 In June 2005, the Medical Center sold a parcel of land to a developer who constructed a biomedical research facility with an underground garage. Construction of the facility was completed during In July 2008 the Medical Center began leasing approximately 362,000 square feet of research space in the facility under the terms of a fifteen year lease. In connection with that lease, the Medical Center has secured an irrevocable letter of credit in an amount equal to six months of the base rent, or $9,314. In addition, the Medical Center committed to purchase 450 condominium parking spaces in the garage for $28,800 as replacement for 450 spaces lost in the sale of the above mentioned parcel of land. The purchase of these condominium spaces occurred in 2009 (see note 8). 18 (Continued)

21 The sale of the property resulted in total gains of $63,059, which the Medical Center is amortizing in two pieces. The first piece of amortization, which totals $41,778 and represents the gain on property related to the second facility, commenced in November 2006 subsequent to the liquidation of the Medical Center s carried interest, and was fully recognized in 2007 and The second piece of the gain, which totaled $21,625, is amortized over 30 years beginning in 2009 and reduces the rent expense associated with the Medical Center s lease of the facility. Capitalized interest on construction in progress amounted to $1,643 and $511 in 2009 and 2008, respectively. (7) Long-Term Debt Long-term debt consisted of the following: September 30 Fixed-rate debt: Massachusetts Health and Educational Facilities Authority (MHEFA) Revenue Bonds: CareGroup Issue, Series A $ 168, ,881 CareGroup Issue, Series B 43,258 43,258 CareGroup Issue, Series E 262, ,465 Beth Israel Hospital Issue, Series H 6,905 7,935 Net unamortized original issue premiums 4,733 5, , ,459 Less current portion (19,713) (18,373) $ 466, ,086 As defined in note 1, the Medical Center is a member of the CareGroup Obligated Group. Members of the Obligated Group are jointly and severally liable for amounts outstanding under the CareGroup Series Revenue Bonds, which aggregated $673,905 at September 30, The Obligated Group is required to maintain a minimum number of days cash on hand, a minimum debt service coverage ratio, a maximum debt capitalization ratio and comply with certain other covenants as specified in the Master Trust Indenture. In addition, the MHEFA Revenue Bonds are collateralized by a lien on gross receipts from each member of the Obligated Group and a mortgage on certain property of each hospital in the Obligated Group. The Medical Center is also obligated under MHEFA Series H Revenue Bonds. In 2008, the members of the Obligated Group issued $149,455 of Series E-1 Bonds and $223,650 of Series E-2 Bonds. The Medical Center utilized $49,815 of Series E-1 Bonds and $223,650 of the Series E-2 Bonds to finance various capital additions and projects and to refinance certain MHEFA Revenue Bonds, totaling $201,976. Also in 2008, the Obligated Group completed a remarketing of its Series B Bonds, of which $43,258 was held by the Medical Center, and the Medical Center completed a 19 (Continued)

22 remarketing of its Series H Bonds in the amount of $8,865; in both cases the Bonds were converted to conventional fixed rate Bonds. As a result of the refinancing, the Medical Center recorded a loss on the early extinguishment of debt of $15,713. Under the terms of the CareGroup Series B Bonds, the Medical Center has the option of recycling each annual principal payment into a new loan with a separate payment schedule, but with terms identical to the original debt. The Medical Center has historically elected to recycle these principal payments on an annual basis. The Medical Center intends to continue to recycle its principal payments and, therefore, has classified all of its Series B debt as long-term. The Medical Center s revenue bonds bear interest, mature and are redeemable prior to maturity as follows: Issue Interest rate Maturity Redemption terms CareGroup: Series A Fixed 4.5% to 5.0% 2025 Currently at 101% and decreasing to 100% in in 2010 and thereafter Series B Fixed 4.5% to 5.4% 2028 Beginning in 2018 at 100% Series E Fixed 4.0% to 5.4% 2038 Beginning in 2018 at 100% Beth Israel Hospital: Series H Fixed 4.0% to 4.5% 2015 Not optionally redeemable Scheduled principal repayments and sinking fund requirements on long-term debt for the next five years are as follows: Year ending September 30: 2010 $ 19, , , , ,888 Interest paid on all outstanding debt amounted to $26,093 and $18,009 for 2009 and 2008, respectively. 20 (Continued)

23 (8) Assets Held by Trustees Assets held by trustees include amounts held in trust under the requirements of various debt and other agreements. The terms of MHEFA Revenue Bonds require the establishment of certain reserve funds which are held by trustees. These funds, principally comprised of cash, cash equivalents, and government securities, are carried at fair market value and are as follows: September 30 Debt agreements: Construction fund $ 6,766 24,499 Debt service reserve funds 20,994 20,444 Debt service funds 6,395 8,557 34,155 53,500 Held in trust for purchase of garage (see note 6) 28,807 Other 1,517 $ 34,155 83,824 (9) Leases The Medical Center leases office space under various operating leases. Minimum lease payments under these noncancelable operating leases at September 30, 2009 were as follows: Year ending September 30: 2010 $ 41, , , , ,060 Thereafter 228,588 $ 409,030 The Medical Center has entered into agreements to sublease portions of its leased space, which will provide income of approximately $5,800 per year from 2010 through Rent expense amounted to approximately $45,549 and $32,811 for the years ended, respectively. (10) Employee Benefit Plans (a) Pension Benefits The Medical Center participates in a noncontributory defined benefit pension plan and defined contribution plans covering substantially all of its employees. 21 (Continued)

24 Defined Benefit Plan The CareGroup, Inc. Pension Plan (the Plan) covers employees of the Medical Center, CareGroup, and certain other of its subsidiaries. The Medical Center recognizes the funded status, the difference between the fair value of the plan assets and the projected benefit obligation, of its defined benefit pension plan as an asset or liability in its consolidated balance sheet and recognizes the change in that funded status in the year in which the change occurred through changes in unrestricted net assets. The measurement date used to determine pension assets and obligations was September 30, 2009 and June 30, 2008, respectively. The following table sets forth the Plan s funded status and amounts recognized in the consolidated balance sheets: September 30 Change in benefit obligation: Benefit obligation at beginning of year $ 317, ,871 Service cost 11,639 11,676 Interest cost 21,466 19,586 Elimination of early measurement date 8,276 Benefits paid (20,855) (13,857) Actuarial loss (gain) 61,740 (20,313) Benefit obligation at end of year $ 400, ,963 September 30 Change in plan assets: Fair value of plan assets at beginning of year $ 340, ,585 Actual return on plan assets (15,883) (21) Benefits paid (20,855) (13,857) Fair value of plan assets at end of year $ 303, ,707 Funded status: Net pension (liability) asset at end of year $ (96,260) 22,744 The accumulated benefit obligation for the defined benefit pension plan was $352,233 and $282,086 at, respectively. 22 (Continued)

25 Amounts not yet reflected in net periodic pension expense and included in the change in unrestricted net assets are as follows: September 30 Net actuarial (loss) gain $ (106,741) 5,650 Prior service credit 5,000 7,391 $ (101,741) 13,041 The estimated amount that will be amortized from unrestricted net assets into net periodic pension expense in 2010 is $1,913. Net periodic pension expense is comprised of the components listed below: Year ended September 30 Service cost for benefits earned during the year $ 11,639 11,676 Interest cost on projected benefit obligation 21,466 19,586 Expected return on plan assets (27,814) (29,083) Net amortization (1,914) (1,913) Net periodic pension expense $ 3, The following assumptions were used to determine net periodic pension expense and benefit obligation: Weighted average discount rate (pension cost) 7.05% 6.35% Weighted average discount rate (benefit obligation) Rate of increase in future compensation Expected long-term rate of return on plan assets The methodology for selecting the discount rate for the Plan is to match the plan s cash flow to that of a yield curve that provides the equivalent yield on zero-coupon corporate bonds for each maturity based on the expected duration of the benefit payments for the Plan as of the annual measurement date, subject to change each year. The Plan s overall investment objective is to provide a long-term return that is expected to meet future benefit payment requirements. A long-term horizon has been adopted in establishing investment policy such that the likelihood and duration of investment losses are carefully weighed against the long-term potential for appreciation of assets. The Plan s investment policy requires 23 (Continued)