Children s Hospital of Wisconsin, Inc. and Children s Hospital and Health System Foundation, Inc.

Transcription

1 Children s Hospital of Wisconsin, Inc. and Children s Hospital and Health System Foundation, Inc. Combined Financial Statements as of and for the Years Ended December 31, 2011 and 2010, Combining Information as of and for the Year Ended December 31, 2011, Supplemental Schedules Required by the Master Trust Indenture as of and for the Year Ended December 31, 2011, and Independent Auditors Reports

2 CHILDREN S HOSPITAL OF WISCONSIN, INC. AND CHILDREN S HOSPITAL AND HEALTH SYSTEM FOUNDATION, INC. TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT 1 COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010: Statements of Financial Position 2 Statements of Operations and Changes in Net Assets 3 4 Statements of Cash Flows 5 6 Notes to Combined Financial Statements 7 25 COMBINING INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2011: 26 Independent Auditors Report on Combining Information 27 Page Statement of Financial Position Information Statement of Operations and Changes in Unrestricted Net Assets Information 30 SUPPLEMENTAL SCHEDULES REQUIRED BY THE MASTER TRUST INDENTURE AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2011: 31 Independent Auditors Report on Supplemental Schedules 32 Historical Debt Service Coverage Ratio Schedule 33 Adjusted Debt to Capitalization Schedule 34 Days Unrestricted Cash on Hand Schedule 35

3 INDEPENDENT AUDITORS REPORT To the Board of Directors of Children s Hospital of Wisconsin, Inc. and Children s Hospital and Health System Foundation, Inc.: We have audited the accompanying combined statements of financial position of Children s Hospital of Wisconsin, Inc. and Children s Hospital and Health System Foundation, Inc. (collectively, the Organization ) as of December 31, 2011 and 2010, and the related combined statements of operations and changes in net assets, and of cash flows for the years then ended. These financial statements are the responsibility of the Organization s management. Our responsibility is to express an opinion on these 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 Organization 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, such combined financial statements present fairly, in all material respects, the combined financial position of Children s Hospital of Wisconsin, Inc. and Children s Hospital and Health System Foundation, Inc. as of December 31, 2011 and 2010, and the combined results of their operations, changes in net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. April 20, 2012

4 CHILDREN S HOSPITAL OF WISCONSIN, INC. AND CHILDREN S HOSPITAL AND HEALTH SYSTEM FOUNDATION, INC. COMBINED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2011 AND 2010 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 22,642,496 $ 61,220,516 Patient accounts receivable less allowance for uncollectible accounts of approximately $4,700,000 and $3,900,000, respectively 65,243,249 52,805,489 Other receivables 18,691,287 10,967,218 Inventory of supplies 3,821,990 3,260,083 Prepaid expenses 2,888,243 2,888,481 Total current assets 113,287, ,141,787 INVESTMENTS 529,392, ,703,761 ASSETS LIMITED AS TO USE: Interest rate swap collateral 32,881,195 11,167,513 Temporarily restricted by donors 38,368,946 40,628,553 Permanently restricted by donors 117,033, ,512,743 Total assets limited as to use 188,284, ,308,809 PROPERTY AND EQUIPMENT Net 416,963, ,923,411 DEFERRED EXPENSES Net 2,518,111 2,711,960 OTHER ASSETS 536, ,104 TOTAL $ 1,250,980,677 $ 1,188,220,832 See notes to combined financial statements.

5 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable $ 23,006,977 $ 16,649,113 Accrued expenses: Salaries and benefits 25,529,828 22,140,085 Personal leave benefits 13,185,942 13,903,168 Interest 7,397,050 7,477,990 Estimated third-party payor settlements 1,939,723 1,780,199 Current installments of long-term debt 3,991,907 3,783,844 Other current liabilities 664, ,270 Total current liabilities 75,715,858 66,359,669 OTHER LONG-TERM LIABILITIES 45,435,811 23,630,681 ACCRUED PENSION 76,608,101 40,116,067 LONG-TERM DEBT Less current installments 270,496, ,334,643 Total liabilities 468,256, ,441,060 COMMITMENTS AND CONTINGENCIES (Notes 2 and 8) NET ASSETS: Unrestricted 627,321, ,638,276 Temporarily restricted 38,368,946 40,628,553 Permanently restricted 117,033, ,512,743 Total net assets 782,724, ,779,572 TOTAL $ 1,250,980,677 $ 1,188,220,

6 CHILDREN S HOSPITAL OF WISCONSIN, INC. AND CHILDREN S HOSPITAL AND HEALTH SYSTEM FOUNDATION, INC. COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2011 AND NET PATIENT SERVICE REVENUE $ 529,589,121 $ 517,028,418 OTHER OPERATING REVENUE 41,137,431 36,442,354 Total operating revenue 570,726, ,470,772 OPERATING EXPENSES: Salaries 160,237, ,744,862 Employee benefits 48,899,350 47,158,726 Supplies and other 66,717,285 70,503,714 Hospital assessment tax 13,289,760 12,593,303 Purchased services 120,128, ,646,064 Medical College of Wisconsin and other professional services 36,003,901 33,198,565 Depreciation and amortization 36,793,887 37,280,864 Provision for uncollectible accounts 3,989,959 4,218,627 Interest 14,545,935 14,804,570 Total operating expenses 500,606, ,149,295 INCOME FROM OPERATIONS 70,119,812 51,321,477 NONOPERATING (LOSSES) GAINS: Investment income 22,228,199 18,128,769 Change in net unrealized gains and losses on investments (2,491,276) 28,323,649 Change in fair value of interest rate swap agreements (21,479,685) (6,718,250) Other (6,030,727) (5,678,071) Net nonoperating (losses) gains (7,773,489) 34,056,097 EXCESS OF REVENUE OVER EXPENSES 62,346,323 85,377,574 (Continued) - 3 -

7 CHILDREN S HOSPITAL OF WISCONSIN, INC. AND CHILDREN S HOSPITAL AND HEALTH SYSTEM FOUNDATION, INC. COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2011 AND UNRESTRICTED NET ASSETS: Excess of revenue over expenses $ 62,346,323 $ 85,377,574 Transfers to affiliated organizations (13,473,293) (17,070,336) Net assets released from restrictions capital acquisitions 2,822,117 3,322,457 Pension-related changes other than net periodic pension cost (52,011,948) (14,173,716) (Decrease) increase in unrestricted net assets (316,801) 57,455,979 TEMPORARILY RESTRICTED NET ASSETS: Contributions 6,198,873 8,914,218 Investment income 2,830,509 1,149,304 Net assets released from restrictions capital acquisitions (2,822,117) (3,322,457) Net assets released from restrictions operations (8,757,494) (7,788,431) Change in net unrealized gains and losses on restricted investments (2,454,672) 2,904,166 Endowment fund annual allocation 2,745,294 2,325,840 (Decrease) increase in temporarily restricted net assets (2,259,607) 4,182,640 PERMANENTLY RESTRICTED NET ASSETS: Contributions 4,089,756 6,772,042 Investment income 1,331,044 2,851,425 Change in net unrealized gains and losses on restricted investments (1,154,307) 7,205,239 Endowment fund annual allocation (2,745,294) (2,325,840) Increase in permanently restricted net assets 1,521,199 14,502,866 (DECREASE) INCREASE IN NET ASSETS (1,055,209) 76,141,485 NET ASSETS Beginning of year 783,779, ,638,087 NET ASSETS End of year $ 782,724,363 $ 783,779,572 See notes to combined financial statements. (Concluded) - 4 -

8 CHILDREN S HOSPITAL OF WISCONSIN, INC. AND CHILDREN S HOSPITAL AND HEALTH SYSTEM FOUNDATION, INC. COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND OPERATING ACTIVITIES: (Decrease) increase in net assets $ (1,055,209) $ 76,141,485 Adjustments to reconcile change in net assets to net cash provided by operating activities: Restricted contributions and investment income for capital projects and permanently restricted endowments (5,543,404) (10,412,699) Transfers to affiliated organizations 13,473,293 17,070,336 Pension-related changes other than net periodic pension cost 52,011,948 14,173,716 Change in net unrealized gains and losses on investments 6,100,255 (38,433,054) Change in fair value of interest rate swap agreements 21,479,685 6,718,250 Realized gain on sale of investments (7,956,189) (6,569,106) Depreciation and amortization of property and equipment 36,650,039 37,128,216 Amortization and other 1,210, ,548 Provision for uncollectible accounts 3,989,959 4,218,627 Changes in operating assets and liabilities: Patient accounts receivable (16,427,719) 2,246,773 Other receivables (7,724,069) (4,856,799) Inventory, prepaid and deferred expenses, and other assets 639,516 (1,124,088) Accounts payable 3,593,036 50,870 Estimated third-party payor settlements 159,524 (109,704) Other accrued expenses and liabilities 2,955,983 7,763,192 Accrued pension (15,519,914) (7,684,849) Net cash provided by operating activities 88,037,660 97,095,714 INVESTING ACTIVITIES: Capital expenditures (46,840,450) (22,023,140) (Payment) return of swap collateral (20,801,536) 4,200,000 Purchases of investments (279,174,351) (263,501,464) Proceeds from sales of investments 228,222, ,729,548 Net cash used in investing activities (118,593,629) (104,595,056) FINANCING ACTIVITIES: Payments on long-term borrowings (3,300,000) (4,045,000) Payments on capital lease obligations (481,614) (469,491) Proceeds from contributions and investment income for capital projects and permanently restricted endowments 9,232,856 11,028,717 Transfers to affiliated organizations (13,473,293) (17,070,336) Net cash used in financing activities (8,022,051) (10,556,110) (Continued) - 5 -

9 CHILDREN S HOSPITAL OF WISCONSIN, INC. AND CHILDREN S HOSPITAL AND HEALTH SYSTEM FOUNDATION, INC. COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND DECREASE IN CASH AND CASH EQUIVALENTS $ (38,578,020) $ (18,055,452) CASH AND CASH EQUIVALENTS: Beginning of year 61,220,516 79,275,968 End of year $ 22,642,496 $ 61,220,516 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 14,462,419 $ 14,619,423 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITY: Capital acquisitions funded through accounts payable $ 3,088,672 $ 323,844 See notes to combined financial statements. (Concluded) - 6 -

10 CHILDREN S HOSPITAL OF WISCONSIN, INC. AND CHILDREN S HOSPITAL AND HEALTH SYSTEM FOUNDATION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2011 AND ORGANIZATION AND COMBINATION Children s Hospital of Wisconsin, Inc. (the Hospital ) is a not-for-profit acute care pediatric hospital, which provides inpatient, outpatient, and emergency care services. The Hospital was incorporated in Wisconsin in The Hospital s Articles of Incorporation provide that Children s Hospital and Health System, Inc. (CHHS) is the sole corporate member of the Hospital. Pursuant to the Hospital by-laws, CHHS as the sole corporate member must approve Hospital Board of Director nominees. The Hospital consists of the following: Children s Hospital of Wisconsin Main campus operates a 296-bed, independent, pediatric hospital. Children s Hospital of Wisconsin Fox Valley operates a 42-bed, independent, pediatric hospital which includes a 22-bed Neonatal Intensive Care Unit, located on the campus of Theda Clark Medical Center. Organizationally, these independently licensed hospitals are operated under the Children s Hospital of Wisconsin, Inc. corporate entity and Federal Tax Identification number. Children s Hospital and Health System Foundation, Inc. (the Foundation ) is a not-for-profit foundation that solicits funds for the maintenance and benefit of the Hospital and CHHS, their programs and activities, and other not-for-profit healthcare organizations and/or hospitals within the state of Wisconsin. The sole corporate member of the Foundation is CHHS. The combined financial statements include the accounts of the Hospital and the Foundation. Pursuant to an Amended and Restated Master Trust Indenture dated May 1, 2004, the Hospital and Foundation are members of an Obligated Group which jointly and severally guarantee certain debt issued by a member of the Obligated Group through the Wisconsin Health and Educational Facilities Authority (see Note 7). The Hospital and the Foundation are under common management. Intercompany transactions have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments purchased with an original maturity of three months or less

11 Other Receivables Other receivables include intercompany, grants, and other miscellaneous receivables. Intercompany receivables are periodically settled with affiliates. Inventory of Supplies Inventory of supplies is stated at the lower of cost or market, determined using the first-in, first-out method. Investments Investments are reported at fair value based primarily upon quoted market prices in active markets or other observable inputs. Gains and losses, including unrealized gains and losses, are included in the statements of operations and changes in net assets, and the change in net unrealized gains or losses on unrestricted investments is included within the excess of revenue over expenses. Investment income on commingled funds is allocated between unrestricted and restricted net assets based on amounts invested and donor restrictions. The Hospital and Foundation continue to elect the fair value option for all fixed income, equity, and mutual fund purchases. Assets Limited as to Use Assets limited as to use include cash and marketable securities held by the swap counterparty as collateral and assets restricted by donors. Amounts required to meet current liabilities are classified as current assets. Pledges Pledges are recorded based on written instructions from donors. Pledges less allowances for estimated uncollectible amounts are recorded as receivables in the year received. Unrestricted pledges are recorded as contributions within other operating revenue and restricted pledges are recorded as increases in temporarily or permanently restricted net assets depending on the donor restrictions received with the pledge. Pledges receivable in excess of one year are discounted at rates ranging from 0.7% to 4.5%. Such discounts amounted to approximately $554,000 and $1,132,000 at December 31, 2011 and 2010, respectively. Allowances for uncollectible pledges totaled approximately $444,000 and $630,000 at December 31, 2011 and 2010, respectively. The maturities of the pledges receivable at December 31, 2011, are as follows: Pledges less than one year $ 5,194,335 Pledges one to five years 6,454,965 Pledges over five years 241,511 Property and Equipment Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, ranging from 3 40 years, using American Hospital Association guidelines. Amortization of capital leases is provided using the straight-line method over the shorter of the term of the lease or the economic useful lives of the assets. Interest costs incurred on borrowed funds during the period of construction are capitalized as a component of the costs of acquiring these assets. Costs of computer software developed or obtained for internal use, including external direct costs of materials and services, payroll, and payroll-related costs for employees directly associated with internal use software development projects incurred during the development period are expensed or capitalized depending on whether the costs are incurred in the preliminary project stage, development stage, or operational stage. Capitalized costs of internal use computer software are included in property and equipment in the accompanying consolidated balance sheets. The Hospital and Foundation periodically evaluate the carrying value of property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no impairment charges recorded in 2011 or Deferred Expenses Financing expenses incurred on the issuance of debt are deferred and amortized over the term of the debt using the effective interest method. Prepaid rent is deferred and amortized over the lease term

12 Pledges less allowances for estimated uncollectible amounts are recorded as receivables in the year received. Unrestricted pledges are recorded as contributions within other operating revenue and restricted pledges are recorded as increases in temporarily or permanently restricted net assets depending on the donor restrictions received with the pledge. Other Liabilities Other liabilities include amounts received in advance for rentals which are being amortized over the term of the rental agreement, amounts payable for lease agreements that are being expensed on a straight-line basis over the life of the agreements, reserves for Department of Health and Human Services medical education grant settlements, other employee benefit plan liabilities, and the fair value of interest rate swap agreements. Liabilities that are expected to be amortized or recognized within the coming year are classified as current liabilities. Derivative Instruments The Hospital entered into interest rate swaps to manage its interest cost and exposure to interest rate movements related to its long-term debt. The program sought to achieve the lowest interest rate cost consistent with an acceptable level of risk given the varying interest rate environments. On September 1, 2009, the Hospital converted its outstanding variable rate debt to a fixed rate mode, but did not terminate the outstanding interest rate swaps. The fair value of interest rate swaps is recorded as an other long-term liability. The change in the fair value of the interest rate swaps is reported separately within nonoperating gains (losses). Collateral is reported as a separate asset limited as to use rather than as an offset to the fair value of the interest rate swaps. The net settlement associated with the interest rate swaps is included within nonoperating gains (losses) other. Temporarily and Permanently Restricted Net Assets Donor restrictions on the use of temporarily restricted net assets are for various health-related services, capital projects, child welfare services, research, and for time-restricted Remainderman Trusts and Estates. Donor restrictions on permanently restricted net assets restrict the use of funds released for expenditure to various health-related services, child welfare services, and research. When a donor restriction expires, such as 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 combined statements of operations and changes in net assets as other operating revenue (if used for operating purposes) or as net assets released from restrictions capital acquisitions. Unrestricted contributions are reported as other operating revenue. Excess of Revenue over Expenses The combined statements of operations and changes in net assets include excess of revenue over expenses. Changes in unrestricted net assets which are excluded from excess of revenue over expenses include transfers of assets to and from affiliates for other than goods and services, 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), pension-related changes other than net periodic pension cost, and other items in accordance with industry practice. The excess of revenue over expenses includes all unrestricted net asset activity of the Foundation except for transfers of assets to and from affiliates for other than goods and services. Net Patient Service Revenue The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, indexed amounts per visit, 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

13 Hospital Assessment During 2009, the State of Wisconsin enacted legislation that created a tax assessment on hospital revenue. Funds collected under the tax are used to increase federal funding for the Wisconsin Medicaid Program. The Hospital recognized $59,995,287 and $56,190,792 of Medicaid and Medicaid HMO reimbursement, which is included in net patient service revenue, and $13,289,760 and $12,593,303 of tax expense as a result of the law for the years ended December 31, 2011 and 2010, respectively. See Note 9 regarding the Hospital s charity and unreimbursed care. Other Operating Revenue Other operating revenue is comprised of grants, net assets released from restrictions for operations, unrestricted contributions, cafeteria revenue, rental income, and other revenue. This includes awards from the Department of Health and Human Services for medical education net of estimated retroactive adjustments, and Electronic Health Record Meaningful Use incentive payments from the State of Wisconsin. Under certain provisions of the American Recovery and Reinvestment Act of 2009 ( ARRA ), federal incentive payments are available to hospitals, physicians, and certain other professionals ( Providers ) when they adopt, implement, or upgrade ( AIU ) certified electronic health record ( EHR ) technology or become meaningful users, as defined under ARRA, of EHR technology in ways that demonstrate improved quality, safety, and effectiveness of care. The Hospital recognizes EHR incentive payments as revenue when compliance with all AIU criteria and payment is reasonably assured. During the year ended December 31, 2011, certain hospitals and physicians satisfied the CMS AIU criteria, and as a result, the Hospital recognized approximately $5,400,000 of Medicaid EHR incentive payments as other operating revenue. Donated Goods and Services The Foundation has recorded the estimated fair market value of donated goods and services as revenue and expenses in the combined statements of operations and changes in net assets. The amount recorded was $694,000 and $704,000 for the years ended December 31, 2011 and 2010, respectively. Included in the value of donated goods and services are items such as raffle items, auction items, food and beverages, printing, and videotaping services. The Foundation also receives various donated goods and services for which no comparable fair market value was readily determinable. Accordingly, these items are not recorded in the accompanying combined financial statements. Professional Liability Insurance The Hospital, along with substantially all Wisconsin healthcare providers, has professional liability insurance through the Injured Patients and Families Compensation Fund (the Fund ). The Hospital maintains an occurrence-basis policy that covers professional liability claims occurring during the policy term with insurance coverage limits of $1,000,000 for each occurrence and $3,000,000 for all occurrences in any policy year. The Fund is responsible for paying claims in excess of these limits. The Hospital is required to pay an annual assessment to the Fund for the purpose of providing the Fund with monies for payment of claims. Laws and Regulations The Hospital and Foundation are subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations, specifically those relating to the Medicare and Medicaid programs, can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Management believes that the Hospital and Foundation are in substantial compliance with current laws and regulations. Litigation The Hospital is involved in litigation arising in the normal course of business. After consultation with legal counsel, it is management s opinion that these matters will be resolved without material adverse effect on the combined financial position or combined results from operations

14 Income Taxes The Hospital and Foundation are not-for-profit corporations under Section 501(c)(3) of the Internal Revenue Code (the Code ) and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. The Hospital and Foundation evaluate their uncertain tax positions on an annual basis, and there have been no uncertain tax positions recorded in 2011 or Subsequent Events The Hospital and Foundation have evaluated subsequent events through April 20, the date the financial statements were issued. New Accounting Pronouncements In 2010, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Improving Disclosures about Fair Value Measurements ( ASU No ). ASU No amends ASC Subtopic to provide additional disclosure requirements for transfers in and out of Levels 1 and 2 and for activity in Level 3, and to clarify certain other existing disclosure requirements. The Hospital and Foundation adopted ASU No in 2010, except for the separate disclosures about Level 3 activities, which were adopted in 2011, and it had no material impact on the Hospital and Foundation s combined financial statements. In 2010, the FASB issued ASU No , Measuring Charity Care for Disclosure ( ASU No ). ASU No amends ASC Subtopic to require the Hospital and Foundation to use cost as the measurement basis for charity care disclosure requirements. The Hospital and Foundation adopted ASU No in 2011, and it had no impact on the Hospital and Foundation s combined financial statements as the charity care disclosed in Note 9 has historically been reported at cost. In 2010, the FASB issued ASU No , Presentation of Insurance Claims and Related Insurance Recoveries ( ASU No ). ASU No amends current accounting for insurance claims and related insurance recoveries for healthcare entities. The amendment clarifies that healthcare entities should not net insurance recoveries against a related claim liability. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. The Hospital and Foundation adopted ASU No in 2011, and it had no material impact on the Hospital and Foundation s combined financial statements. In 2011, the FASB issued ASU No , Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs ( ASU No ). ASU No expands existing disclosure requirements for fair value measurements and makes other amendments in order to develop a single, converged fair value framework. It is effective for the Hospital and Foundation for the year ending December 31, The adoption of this ASU will not have a material impact on the Hospital and Foundation s combined financial statements. In 2011, the FASB issued ASU No , Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Healthcare Entities ( ASU No ). ASU No amends the presentation and disclosure of patient service revenue, provision for bad debts, and the allowance for doubtful accounts. It requires certain healthcare entities to record the provision for bad debts associated with patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) and is effective for the year ending December 31, The adoption of this ASU will not have a material impact on the Hospital and Foundation s combined financial statements, but will result in a change in presentation of the provision for uncollectible accounts in the combined statement of operations and changes in net assets and in additional disclosures

15 3. CASH, CASH EQUIVALENTS AND INVESTMENTS As of December 31, 2011 and 2010, cash, cash equivalents, investments, and assets limited as to use consisted of the following: Cash $ 28,525,321 $ 16,740,788 Investments at fair value: Money market funds 15,443,550 44,906,344 Accrued investment income 6,364,986 5,091,485 U.S. government securities 106,323, ,124,653 U.S. government agency mortgage backed securities 134,140, ,961,614 Corporate fixed income securities 153,448, ,594,033 International fixed income securities 27,715,776 17,958,447 Municipal fixed income securities 5,477,837 3,642,378 Pooled fixed income mutual funds 5,514,936 17,364,528 Equity securities and mutual funds 189,878, ,150,624 International equity securities and mutual funds 52,972,915 60,141,914 Total $ 725,806,125 $ 690,676,808 These assets are allocated to the respective accounts of the Hospital and Foundation on the combined statements of financial position as of December 31, 2011 and 2010, respectively, as follows: Cash and cash equivalents $ 22,642,496 $ 61,220,516 Investments 529,392, ,703,761 Assets limited as to use: Interest rate swap collateral 32,881,195 11,167,513 Temporarily restricted by donors 29,245,212 28,414,647 Permanently restricted by donors 111,645, ,170,371 Total $ 725,806,125 $ 690,676,

16 Unrestricted and restricted return on investments for the years ended December 31, 2011 and 2010, is comprised of the following: Interest income and dividends $ 18,433,563 $ 15,560,392 Realized gain on investments 7,956,189 6,569,106 Change in net unrealized gains and losses on investments (6,100,255) 38,433,054 Total return on investments $ 20,289,497 $ 60,562,552 Reported as: Nonoperating gains investment income $ 22,228,199 $ 18,128,769 Temporarily restricted investment income 2,830,509 1,149,304 Permanently restricted investment income 1,331,044 2,851,425 26,389,752 22,129,498 Change in net unrealized gains and losses on investments: Nonoperating (losses) gains (2,491,276) 28,323,649 Temporarily restricted net assets (2,454,672) 2,904,166 Permanently restricted net assets (1,154,307) 7,205,239 Total $ 20,289,497 $ 60,562,552 The terms of the Hospital s interest rate swap agreements require the Hospital to transfer collateral to the swap counterparty. The amount of collateral is based on numerous factors that include the valuation of the interest rate swaps, the type of collateral transferred, and the Hospital s credit rating. As of December 31, 2011 and 2010, the required collateral was $32,881,195 and $11,167,513, respectively, and consisted of U.S. government securities and cash in 2011 and U.S. government securities in ASSETS LIMITED AS TO USE RESTRICTED BY DONOR The Hospital and Foundation have assets which are temporarily or permanently restricted by donors. Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose, and represent amounts that are to be used for capital acquisitions or operating purposes. Permanently restricted net assets are maintained in accordance with the donor s wishes, and accordingly, may be maintained in perpetuity or may allow for the annual release of funds for expenditure. At December 31, 2011 and 2010, restricted net assets are held for the following purposes: Temporarily Restricted Permanently Restricted Health care and other hospital services $ 30,444,125 $ 28,121,839 $ 116,163,920 $ 114,438,316 Capital projects 592,970 4,158,192 Children s health education 1,776,104 1,490, , ,175 Children s social services 5,555,747 6,858, , ,252 Total $ 38,368,946 $ 40,628,553 $ 117,033,942 $ 115,512,

17 At December 31, 2011 and 2010, the assets of the Hospital and Foundation designated for restricted purposes include the following: Temporarily Restricted Permanently Restricted Investments $ 28,720,373 $ 27,988,032 $ 111,645,205 $ 108,170,371 Pledges receivable net 7,791,172 10,871,619 4,019,252 5,804,651 Charitable trusts and bequests 1,332,562 1,342,287 1,369,485 1,537,721 Cash 524, ,615 Total $ 38,368,946 $ 40,628,553 $ 117,033,942 $ 115,512,743 Assets Limited as to Use Investments The Foundation manages one investment portfolio and allocates a portion of the investments to assets limited as to use based on the amount of temporarily and permanently restricted net assets, less outstanding pledges and trusts. The Foundation follows the direction set forth by the donor to determine the preservation of the historic value of endowment funds. Restricted investments are adjusted for fair value changes or investment returns when specifically required by the donor s wishes. From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or the law requires the Foundation to retain as a fund of perpetual duration. There were no deficiencies of this nature in 2011 or The Foundation does not limit its spending of purpose-restricted donations based on its investment portfolio and return objectives. Purpose-restricted funds become available for expenditure once cash is received from the donor and the circumstances requested by the donor occur. In order to preserve Foundation assets and plan annual grants in support of pediatric activities in accordance with the Articles of Incorporation, expenditures of unrestricted Foundation assets are limited to 5% of the trailing three-year fair market value of unrestricted cash and investments. This policy can be adjusted with Board of Directors approval. The Foundation s primary objective for endowment funds is to realize a rate of return of 3 5 percentage points in excess of the Consumer Price Index. The Investment Committee of the CHHS Board of Directors evaluates investment managers performance in achieving this objective using a measurement period of the lesser of a market cycle or five years. It is understood that achieving this objective requires the assumption of some principal risk. If, at any time, an investment manager s returns fall short of the benchmark in three consecutive quarters, the Investment Committee will perform a thorough evaluation of that manager. The Foundation targets a long-term asset allocation mix of approximately 65% equities with the balance in fixed income securities. The Investment Committee monitors and controls the distribution of investments among its selected investment managers to maintain a maximum-minimum range of 70% to 30% for equity and fixed income securities. The complete portfolio is invested in marketable securities and money market instruments. Private placement securities, restricted or letter stock, etc., are not permitted without the prior approval of the Investment Committee. The diversification of securities held in the investment manager s portfolio, among sectors and issuers, is the responsibility of the investment managers, consistent with the market objectives identified at the time of the initial investment. The investment manager is expected to diversify the portfolio sufficiently to minimize the risk of a large loss from a single security or from the securities of a single issuer

18 Information regarding the composition of the Foundation endowment investments and activity as of and for the years ended December 31, 2011 and 2010, is as follows: Board- Designated Donor-Restricted Donor-Restricted Total Unrestricted Temporarily Permanently Balances December 31, 2009 $ 290,713,355 $ 173,000,000 $ 23,261,138 $ 94,452,217 Investment return: Investment income 4,000,729 1,149,304 2,851,425 Change in net unrealized gains and losses 10,109,405 2,904,166 7,205,239 Total investment return 14,110,134 4,053,470 10,056,664 Restricted contributions 15,232,862 9,245,532 5,987,330 Annual endowment allocation 2,325,840 (2,325,840) Net assets released from restrictions (10,897,948) (10,897,948) Balances December 31, ,158, ,000,000 27,988, ,170,371 Investment return: Investment income 4,161,553 2,830,509 1,331,044 Change in net unrealized gains and losses (3,608,979) (2,454,672) (1,154,307) Total investment return 552, , ,737 Restricted contributions 15,234,212 9,190,821 6,043,391 Annual endowment allocation 2,745,294 (2,745,294) Net assets released from restrictions (11,579,611) (11,579,611) Balances December 31, 2011 $ 313,365,578 $ 173,000,000 $ 28,720,373 $ 111,645,205 The information above reflects the activity of the Foundation s endowment investable funds and excludes pledges receivables and charitable trusts and bequests. In November 2009, the Foundation s Board of Directors approved a new Endowment Fund Policy, subject to donor approval, that changed the allocation of investment income to endowment funds, the appropriation of amounts from endowment funds for expenditures, and the donor s direction for preservation of historic value of endowment funds. The policy was effective January 1, 2010 for donors who elected to adopt the new policy. Prior to January 1, 2010, most endowment funds were maintained in perpetuity while the related investment income was released for spending based on the donor s wishes. Donor-restricted funds adopting the new Endowment Fund Policy retain their related investment returns and release an annual allocation for spending based on the fund s historical value. In addition to the board-designated quasi endowment fund held in the Foundation, in 2009 the Hospital s Board of Directors determined that the net proceeds from the Hospital Assessment Program, which were $142,167,017 and $95,461,489 as of December 31, 2011 and 2010, will be held in a separate boarddesignated fund for which the investment income earned will be used for the benefit of certain CHHS programs. The fund invests in domestic fixed income securities based on criteria outlined by the Investment Committee. For the years ended December 31, 2011 and 2010, the fund earned $5,717,200 and $3,380,338 of investment income and had a change in net unrealized gains and losses on investments of $4,327,864 and $472,686, respectively

19 Assets Limited as to Use Charitable Trusts and Bequests As of December 31, 2011 and 2010, approximately $2,702,000 and $2,880,000, respectively, of charitable trusts and bequests have been recorded where the Foundation is an irrevocable beneficiary. Such assets are recorded as temporarily or permanently restricted net assets until the stipulations of the donors have been satisfied. These charitable trusts and bequests are recorded at estimated fair value. Assumptions used to determine the fair values as of December 31, 2011 and 2010, include an investment rate of return of 7.75% and a discount rate using the federally published rate in effect at the time the gift is received. The Foundation has a policy whereby charitable trusts are recorded when the trust is irrevocable and the current value of the trust assets is available. The Foundation is aware of certain trusts for which it may be the beneficiary, which do not meet these criteria. Estimates of the value of such trusts are not recorded in the financial statements. 5. PROPERTY AND EQUIPMENT As of December 31, 2011 and 2010, property and equipment consisted of the following: Cost: Buildings and improvements $ 480,341,712 $ 468,178,417 Major movable equipment 146,090, ,575,214 Projects in progress 31,703,146 10,518,360 Total cost of property and equipment 658,135, ,271,991 Less accumulated depreciation and amortization (241,172,140) (219,348,580) Property and equipment net $ 416,963,151 $ 404,923,411 Projects in progress at December 31, 2011 relate primarily to implementation costs of an electronic health record and various other renovation projects at the Hospital. Contractually committed costs for the electronic health record totaled approximately $29,453,000 at December 31, EMPLOYEE BENEFIT PLANS Pension Plan CHHS maintains a multiple employer noncontributory, defined benefit pension plan (the pension plan ). In 2009, the CHHS Board of Directors approved the curtailment of the pension plan effective December 31, CHHS s policy is to fund the amount necessary to meet ERISA requirements. The pension plan included only certain employees of CHHS, and substantially all plan participants were employees of the Hospital. The Hospital makes all employer contributions, records the accrued pension liability and pension-related changes other than net periodic pension cost, and allocates the annual net periodic pension cost to the participating CHHS affiliates

20 Information regarding the benefit obligations and assets of the pension plan, for all CHHS participants, as of and for the years ended December 31, 2011 and 2010, is as follows: Change in benefit obligation: Benefit obligation beginning of year $ 193,235,814 $ 164,227,144 Interest cost 10,733,565 9,938,618 Actuarial loss 40,704,070 21,464,479 Benefit payments (3,173,925) (2,394,427) Benefit obligation end of year 241,499, ,235,814 Reconciliation of fair value of plan assets: Fair value of plan assets beginning of year 153,119, ,599,944 Actual return on plan assets 766,601 18,914,230 Employer contributions 14,179,000 6,000,000 Benefit payments (3,173,925) (2,394,427) Fair value of plan assets end of year 164,891, ,119,747 Unfunded status end of year $ 76,608,101 $ 40,116,067 Change in net amount recognized: Accrued pension prior year $ 40,116,067 $ 33,627,200 Net periodic pension cost (1,340,914) (1,684,849) Employer contributions (14,179,000) (6,000,000) Pension-related changes other than net periodic pension cost 52,011,948 14,173,716 Accrued pension current year $ 76,608,101 $ 40,116,067 Discount rate January % 6.10 % Discount rate December Expected return on plan assets As a result of the curtailment, the projected benefit obligation equals the accumulated benefit obligation. To develop the expected long-term rate of return on assets assumptions, CHHS considered the historical returns and future expectations for returns in each asset class, as well as targeted asset allocation percentages within the pension portfolio. Pension investments are managed in accordance with the Pension Plan Document and the Statement of Investment Objectives and Policy Guidelines as established and maintained by the Investment Committee of the Board of Directors. The Investment Committee selects investment managers based on the investment objectives and regularly evaluates each manager s performance based on industry benchmarks. The investment policy guidelines establish asset allocation, quality targets, and performance expectations as well as regular reporting requirements. The Investment Committee has established a target asset allocation of 60% equity securities and 40% fixed income securities, diversifying each class with multiple managers and differing styles of management

21 The fair value of pension plan assets measured using quoted prices in active markets for identical assets (Level 1) and significant other observable inputs (Level 2), using techniques consistent with those listed in Note 13, at December 31, 2011 and 2010, are as follows: Fair Value Measurements Using Total (Level 1) (Level 2) Pension plan assets: Money market funds $ 2,422,558 $ 5,284,427 $ 2,422,558 $ 5,284,427 $ - $ - Accrued investment income 436, ,947 3,167 6, , ,585 Fixed income securities: U.S. government 16,211,400 14,336,519 16,211,400 14,336,519 U.S. government agency mortgage backed 15,636,212 12,968,439 15,636,212 12,968,439 Corporate 20,367,775 14,236,683 20,367,775 14,236,683 International 4,394,280 2,606,270 4,394,280 2,606,270 Municipal 695, , , ,201 Equity securities and funds: Large Cap 62,394,964 59,711,045 62,394,964 59,711,045 Mid Cap 11,671,996 10,024,484 6,178,821 4,916,237 5,493,175 5,108,247 Small Cap 8,932,714 8,634,849 8,932,714 8,634,849 International 14,588,914 18,462,577 14,588,914 18,462,577 Emerging markets 7,139,110 5,509,306 7,139,110 5,509,306 Total $ 164,891,423 $ 153,119,747 $ 101,660,248 $ 102,524,803 $ 63,231,175 $ 50,594,944 Transfers between Level 1 and Level 2 are recognized at the end of the reporting period. There were no significant transfers for the year ended December 31, In 2010, a mid cap equity mutual fund with a fair value of $5,108,247 at December 31, 2010, was transferred from a Level 1 to a Level 2 measurement because the net asset value at December 31, 2010 was determined using a source other than a quoted market price. The components of net periodic pension cost which are included in employee benefits expense and pension-related changes other than net periodic pension cost which are included as a change in unrestricted net assets in the statements of operations and changes in net assets for the years ended December 31, 2011 and 2010, are as follows: Components of net periodic pension cost: Interest cost $ 10,733,565 $ 9,938,618 Expected return on plan assets (12,305,809) (11,623,467) Amortization of net loss 231,330 Net periodic pension cost $ (1,340,914) $ (1,684,849) Pension-related changes other than net periodic pension cost: Accumulated loss $ 52,243,278 $ 14,173,716 Amortization of net loss (231,330) Total recognized as changes in unrestricted net assets $ 52,011,948 $ 14,173,

22 A summary of the pension-related items recorded in unrestricted net assets and not yet recognized as a component of net periodic pension cost as of December 31, 2011 and 2010, is as follows: Amounts not yet reflected in net periodic pension cost accumulated loss $ (76,396,900) $ (24,384,952) The expected amortization of the net actuarial loss for 2012 is $3,774,332. The expected CHHS contribution in 2012 is $10,000,000. The benefit payments are expected to be paid as follows: Years Ending December $ 4,151, ,767, ,503, ,291, ,196,000 Succeeding five years 50,427,000 Defined Contribution Plan CHHS sponsors the Shared Retirement Savings Plan, a defined contribution plan that includes a discretionary employer match of one-half of employee contributions up to 8.0% of eligible employee compensation and a service-based contribution for eligible employees. During the years ended December 31, 2011 and 2010, the combined Hospital and Foundation matching and service-based contribution was approximately $8,961,000 and $8,957,000, respectively, which is included in employee benefits expense on the combined statements of operations and changes in net assets

23 7. LONG-TERM DEBT As of December 31, 2011 and 2010, long-term debt is as follows: Wisconsin Health and Educational Facilities Authority Revenue Bonds ( Bonds ): Fixed rate Series 2008A net of unamortized discount of $2,378,084 and $2,517,584 in 2011 and 2010, respectively, principal payable in annual installments from 2017 through 2037 in amounts ranging from $2,025,000 to $10,765,000, interest payable semi-annually at rates ranging from 4.5% 5.25% $ 101,261,916 $ 101,122,416 Fixed rate Series 2008B net of unamortized discount of $209,361 and $221,439 in 2011 and 2010, respectively, principal payable in annual installments from 2017 through 2037 in amounts ranging from $3,600,000 to $13,400,000, interest payable semi-annually at rates ranging from 4.0% 5.5% 152,090, ,078,561 Fixed rate Series 1998 principal payable in annual installments from 2012 through 2016 in amounts ranging from $3,495,000 to $4,370,000, interest payable semi-annually at 5.625% 19,590,000 22,890,000 Capital lease obligations (Note 8) 1,545,896 2,027,510 Total long-term debt 274,488, ,118,487 Less current installments (3,991,907) (3,783,844) Long-term debt less current installments $ 270,496,544 $ 274,334,643 The Hospital and Foundation are the only Members of the Obligated Group for purposes of the Bonds. Payment of scheduled principal and interest is secured by a pledge of the Hospital s and Foundation s gross unrestricted receipts. The Series 1998 Bond principal and interest payments are insured pursuant to municipal bond insurance policies. It is management s opinion that as of December 31, 2011, the Hospital and the Foundation were in compliance with the various covenants of the Wisconsin Health and Educational Facilities Authority Loan Agreements and Master Trust Indenture. Scheduled annual principal payments on the Bonds for the next five years and thereafter are as follows: Years Ending December $ 3,495, ,690, ,905, ,130, ,370,000 Thereafter 255,940,

24 In 2009, the Hospital converted its 2008B Bonds from a variable rate mode to a fixed rate mode and reoffered the Bonds. With the conversion of the 2008B Bonds to a fixed rate mode, the Hospital no longer had variable rate debt to link with the swaps, and records the net settlement within nonoperating gains (losses) other on the statement of operations and changes in net assets. The total amount of net settlement recorded within nonoperating gains (losses) other in 2011 and 2010 was $(5,200,072) and $(5,175,462), respectively. A summary of outstanding interest rate swaps, including the fair value, is as follows: Terms of fixed payer interest rate swaps: Initial notional amount $ 60,000,000 $ 43,075,000 $ 49,225,000 Notional at December 31, ,000,000 42,386,000 47,725,000 Effective date August 6, 2008 August 6, 2008 August 6, 2008 Maturity date May 1, 2034 August 15, 2037 August 15, 2028 Interest rate payable 3.69% 3.568% 3.548% Interest rate receivable 68% 1 mo. LIBOR 68% 1 mo. LIBOR 68% 1 mo. LIBOR Total Fair value of interest rate swaps: December 31, 2011 $ (19,091,455) $ (11,483,903) $ (9,348,200) $ (39,923,558) December 31, 2010 (8,347,540) (4,960,716) (5,135,617) (18,443,873) Nonoperating gains (losses) $ (10,743,915) $ (6,523,187) $ (4,212,583) $ (21,479,685) 8. LEASES The Hospital and Foundation lease certain land, building space, and medical and other equipment under operating leases having terms of more than one year. Rent expense was $7,944,853 and $7,694,905 for the years ended December 31, 2011 and 2010, respectively. These amounts are included in purchased services in the statements of operations and changes in net assets. The main campus of the Hospital, located in Wauwatosa, is on approximately seven acres of land leased from Milwaukee County. The lease has a term of 100 years, commencing March 1, 1985, with nominal rent expense for the first 50 years. The Hospital leased an additional 42 acres of adjacent land on Milwaukee County grounds in This 100-year lease with Milwaukee County provides the Hospital with adequate space, utilities, and parking to meet local and regional needs for pediatric healthcare, education, and research. The Hospital leases a portion of its facility to other providers. Rental income was $5,470,233 and $5,429,411 for the years ended December 31, 2011 and 2010, respectively. These amounts are included in other operating revenue in the statements of operations and changes in net assets

25 Aggregate commitments under operating leases that have initial or remaining lease terms in excess of one year, less rental income, and the future minimum lease payments under capital leases are as follows: Years Ending Operating Capital December 31 Leases Leases 2012 $ 5,165,774 $ 547, ,216, , ,245, , ,213,818 60, ,352,743 60,650 Thereafter 29,998, ,300 Total commitments under leases 55,192,041 1,682,072 Less rental income from noncancelable leases (20,647,438) Net commitments under operating leases $ 34,544,603 Less amounts representing interest (136,176) Present value of net minimum capital lease payments $ 1,545, CHARITY AND UNREIMBURSED CARE The Hospital has a policy of providing free healthcare services to those unable to pay all or a portion of their charges and who meet certain eligibility criteria established in the Hospital s charity care policy. The Hospital maintains records and monitors the level of charity and unreimbursed care it provides. The costs of charity and unreimbursed care are estimated using the ratio of total patient care cost to charges, and include both direct and indirect costs. Estimated costs for the years ended December 31, 2011 and 2010, are as follows: Medicaid, Medicaid HMO, and other government $ 47,239,036 $ 57,452,817 Charity care 1,036,135 1,016,584 Total $ 48,275,171 $ 58,469,401 Approximately 47% and 49% of gross charges for patient services were generated from services to Medicaid and Medicaid HMO beneficiaries in 2011 and 2010, respectively

26 10. CONCENTRATIONS OF CREDIT RISK The Hospital grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. This mix of net receivables from patients and third-party payors as of December 31, 2011 and 2010, is as follows: Commercial 63 % 71 % Medicaid, Medicare, and other governmental 13 5 Medicaid HMO HMO 6 4 Patients 1 4 Total 100 % 100 % 11. RELATED-PARTY TRANSACTIONS During 2011 and 2010, the Hospital and Foundation purchased support services totaling to $56,773,476 and $49,460,656, respectively, from CHHS and affiliates. These services included information services, corporate administration, finance, human resources, public relations, planning, and marketing. In addition, other operating revenue includes $1,604,235 and $1,704,551 in 2011 and 2010, respectively, for management and other services the Hospital provided to CHHS and affiliates. During 2011 and 2010, the Hospital and Foundation transferred funds of approximately $13,473,293 and $17,070,336, respectively, to affiliated organizations in support of mission driven initiatives such as research activities, system expansion, and start-up operations. Included in other receivables is $8,129,332 and $1,685,298 due from CHHS and affiliates at December 31, 2011 and 2010, respectively. 12. FUNCTIONAL EXPENSES The Hospital provides acute, emergency, and ambulatory care to children throughout the state of Wisconsin, northern Illinois, and the upper peninsula of Michigan. Other activities include a teaching program and a variety of community programs and services. Foundation activities include fundraising and administration of assets. Expenses related to providing these services for the years ended December 31, 2011 and 2010, are as follows: Inpatient nursing services $ 106,334,696 $ 112,573,561 Ancillary services 175,592, ,408,086 Clinics and emergency room services 80,448,397 81,142,514 Support services and administration 120,328, ,870,537 Hospital assessment expense 13,289,760 12,593,303 Fundraising 4,612,280 3,561,294 Total $ 500,606,740 $ 502,149,

27 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments consist primarily of cash and cash equivalents, investments, derivative instruments, accounts receivable, pledges receivable, accounts payable, and long-term debt. Except for long-term debt, which is recorded at historic cost, the fair values of these instruments approximate their carrying amounts at December 31, 2011 and Based on current rates available for debt of similar institutions and maturities, the bonds outstanding at December 31, 2011 and 2010, are estimated to have a fair value of $302,302,000 and $278,576,000, respectively. The fair values of financial assets and liabilities that are measured on a recurring basis using quoted prices in active markets for identical assets (Level 1) and significant other observable inputs (Level 2) as of December 31, 2011 and 2010, are as follows: Fair Value Measurements Using Total (Level 1) (Level 2) Assets investments at fair value: Money market funds $ 15,443,550 $ 44,906,344 $ 15,443,550 $ 44,906,344 $ - $ - Accrued investment income 6,364,986 5,091,485 3,263,255 2,570,116 3,101,731 2,521,369 Fixed income securities: U.S. government 106,323, ,124, ,323, ,124,653 U.S. government agency mortgage backed 134,140, ,961, ,140, ,961,614 Corporate 153,448, ,594, ,448, ,594,033 International 27,715,776 17,958,447 27,715,776 17,958,447 Municipal 5,477,837 3,642,378 5,477,837 3,642,378 Pooled mutual funds 5,514,936 17,364,528 5,514,936 17,364,528 Equity securities and funds: Large Cap 145,130, ,581, ,130, ,581,209 Mid Cap 27,608,342 29,847,039 16,619,642 18,655,322 10,988,700 11,191,717 Small Cap 17,139,478 22,722,376 17,139,478 21,963, ,252 International 36,928,169 47,221,450 36,928,169 47,221,450 Emerging markets 16,044,746 12,920,464 16,044,746 8,448,711 4,471,753 Total $ 697,280,804 $ 673,936,020 $ 256,084,217 $ 308,710,804 $ 441,196,587 $ 365,225,216 Liabilities interest rate swap agreements $ 39,923,558 $ 18,443,873 $ - $ - $ 39,923,558 $ 18,443,873 Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Transfers between Level 1 and Level 2 are recognized at the end of the reporting period. There were no significant transfers for the years ended December 31, 2011 and Valuation techniques are listed below. There have been no changes in the valuation techniques used at December 31, 2011 and Money Market and Mutual Funds Valued at net asset value (NAV) of shares held at year end. For funds that are publicly traded, quoted market prices are used. For other funds, NAV is determined using other observable inputs such as broker quotes or recent sales. Mutual funds are classified based on the underlying assets and the fund. Equity Securities Valued at the closing price reported on the active markets on which the individual securities are traded. Fixed Income Securities Valued based on a compilation of observable market information or broker quote in a non-active market

28 Interest Rate Swap Agreements Valued using a replacement cost approach, which includes adjustments for non-performance risk, by calculating the present value of the fixed leg and floating leg of the swaps. The value of the fixed leg is the present value of the known fixed coupon payments discounted at the rates implied by the LIBOR-swap curve. The value of the floating leg is the present value of the floating coupon payments, which are derived from the forward LIBOR-swap rates and discounted at rates from the same yield curve. Each series of cash flows is discounted by market rates of interest. ******

29 SUPPLEMENTARY COMBINING INFORMATION

30 INDEPENDENT AUDITORS REPORT ON SUPPLEMENTARY COMBINING INFORMATION To the Board of Directors of Children s Hospital of Wisconsin, Inc. and Children s Hospital and Health System Foundation, Inc.: We have audited the financial statements of Children s Hospital of Wisconsin, Inc. and Children s Hospital and Health System Foundation, Inc. as of and for the years ended December 31, 2011 and 2010, and our report thereon appears on page 1. Our audits were conducted for the purpose of forming an opinion on the combined financial statements. The supplementary combining information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the combined financial statements. This supplementary information is the responsibility of Children s Hospital of Wisconsin, Inc. and Children s Hospital and Health System Foundation, Inc. management and was derived from and relate directly to the underlying accounting and other records used to prepare the combined financial statements. Such information has been subjected to the auditing procedures applied in our audits of the combined financial statements and certain additional procedures, including comparing and reconciling such schedules directly to the underlying accounting and other records used to prepare the combined financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion such information is fairly stated in all material respects in relations to the combined financial statements as a whole. April 20, 2012