CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION INDIANA UNIVERSITY HEALTH, INC. AND SUBSIDIARIES AS OF MARCH 31, 2017 AND DECEMBER 31, 2016

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1 CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION INDIANA UNIVERSITY HEALTH, INC. AND SUBSIDIARIES AS OF MARCH 31, 2017 AND DECEMBER 31, 2016 AND FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

2 TABLE OF CONTENTS Management s Discussion of Financial Performance 1 Page Consolidated Financial Statements Consolidated Balance Sheets 10 Consolidated Statements of Operations and Changes in Net Assets 12 Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Other Information Special Purpose Combined Balance Sheets Obligated Group and 35 Affiliates Special Purpose Combined Statements of Operations Obligated 37 Group and Affiliates Special Purpose Combined Balance Sheets Obligated Group 38 Special Purpose Combined Statements of Operations Obligated 40 Group Statistical and Other Data

3 MANAGEMENT S DISCUSSION OF FINANCIAL PERFORMANCE As of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016

4 Management s Discussion of Financial Performance As of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 (Dollars in Thousands) The financial statement information and other data as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 are derived from the unaudited consolidated financial statements and other records of Indiana University Health, Inc. (Indiana University Health) and subsidiaries (collectively referred to herein as the Indiana University Health System). The consolidated financial statements include all adjustments, consisting of normal recurring and other accruals, which management of the Indiana University Health System considers necessary for a fair presentation of financial position, results of operations and changes in net assets, and cash flows for these periods in conformity with generally accepted accounting principles (GAAP) in the United States. The financial data relating to the Obligated Group and the Obligated Group and Affiliates, as defined in the Indiana University Health Obligated Group Master Trust Indenture, as amended, is provided as supplementary information. The accompanying financial statement information should be read in conjunction with the audited consolidated financial statements and the notes thereto of Indiana University Health and subsidiaries as of and for the years ended December 31, 2016 and 2015 (not included herein). Nature of Operations The principal operating activities of the Indiana University Health System are conducted at owned facilities or majority-owned or controlled subsidiaries and consist of the following: Downtown Hospitals of the Academic Health Center (Hospital Campuses) Consist of three acute, tertiary, quaternary care, and diagnostic facilities, licensed as a single hospital, which constitutes the principal hospital activities of the academic health center and whose operations are located in the downtown area of Indianapolis, Indiana. These three hospitals, Methodist Hospital, University Hospital, and Riley Hospital, are located on or near the campus of Indiana University-Purdue University Indianapolis and the Indiana University School of Medicine (the School of Medicine). Central Indiana Facilities Consist of three acute care hospitals, a critical access hospital, and an acute care rehabilitation hospital located in the western and northern suburban areas of metropolitan Indianapolis, Indiana. Principal hospital subsidiaries include Indiana University Health North Hospital, Inc. (North), Indiana University Health Tipton Hospital, Inc. (Tipton), Indiana University Health West Hospital, Inc. (West), and Rehabilitation Hospital of Indiana, Inc. (RHI). Indiana University Health Saxony Hospital (Saxony) operates as a division of the academic health center. Statewide Facilities Consist of acute care hospitals and health care systems located in Lafayette, Muncie, Hartford City, Bedford, Bloomington, Paoli, and Monticello, 1

5 Indiana. Principal hospital subsidiaries include Indiana University Health Arnett, Inc. (Arnett), Indiana University Health Ball Memorial Hospital, Inc. and subsidiaries (Ball Memorial) including Indiana University Health Blackford Hospital, Inc. (Blackford), Indiana University Health Bedford, Inc. (Bedford), Indiana University Health Bloomington, Inc. and subsidiaries (Bloomington) including Indiana University Health Paoli, Inc. (Paoli), and Indiana University Health White Memorial Hospital, Inc. (White). As of March 1, 2016, Indiana University Health La Porte Hospital and subsidiaries (La Porte) including Indiana University Health Starke Hospital, LLC (Starke) was deconsolidated and as of December 31, 2016, Indiana University Health Goshen Hospital (Goshen) was deconsolidated. Physician Operations Consist of physician offices and physician-group practices and clinics. Principal subsidiaries or divisions include Indiana University Health Physicians (IUHP), a nonprofit organization with locations primarily in Indianapolis, Indiana, Indiana University Health Arnett Physicians, Indiana University Health Ball Memorial Physicians, Inc., and Indiana University Health Southern Indiana Physicians, Inc. Ambulatory Care Consists of personal and home health care services, occupational health services, outpatient oncology services, outpatient surgery centers, and urgent care centers that are located throughout the state of Indiana. Principal divisions or subsidiaries include Indiana University Health Home Care, Indiana University Health Occupational Health Centers, Workplace Health Services, Indiana University Health Central Indiana Cancer Centers, Indiana University Health Morgan, eight surgery center joint ventures, and one urgent care center joint venture. Medical Risk Consists of the medical management of health care services of members whose health care coverage is provided by the managed care networks of the Indiana University Health System. Includes health maintenance organizations and other insurance-related organizations that provide health plan services to insured and self-insured members predominantly residing in Indiana. Insurance offerings include commercial group products (self-funded and insured), products on the Health Insurance Marketplace (Exchange), Medicare Advantage products, and Medicaid management services. Foundations Indiana University Health is the sole corporate member of Methodist Health Foundation, Inc. (Methodist Health Foundation), which aids and supports Methodist Hospital and other programs and areas of Indiana University Health. Tipton is the sole corporate member of Tipton County Health Care Foundation, Inc. (Tipton Foundation), which aids in carrying out the mission of Tipton. Ball Memorial is the sole corporate member of Indiana University Health Ball Memorial Hospital Foundation, Inc. (BMH Foundation), which aids in carrying out the mission of Ball Memorial. Arnett controls the Indiana University Health Arnett Foundation, Inc. (Arnett Foundation), which aids and supports Arnett. RHI is the sole corporate member of RHI Foundation, Inc. (RHI Foundation), which aids and supports RHI. The corporate members of Indiana University Health Paoli Hospital Foundation, Inc. (Paoli Foundation), which aids and supports Paoli, are Paoli, Bloomington, and the Board of 2

6 Commissioners of Orange County, Indiana. Revenue. Total operating revenue of $1,480,863 for the three months ended March 31, 2017 decreased 3.6% (or $54,624) as compared to the prior year $1,535,487. Adjusting for the deconsolidation of La Porte and Goshen, total operating revenue increased $49,221 (or 3.4%). Net patient service revenue, when excluding state disproportionate share revenue (DSH), upper payment limit reimbursement (UPL), and increased reimbursement related to the Medicaid Assessment Fee program, decreased by $34,774 (or 2.7%) for the three months ended March 31, 2017 over the prior year. Adjusting for the deconsolidation of La Porte and Goshen, net patient service revenue increased $63,042 (or 5.4%). The increase reflects increased surgery volumes (see below), partially offset by unfavorable changes in payer mix. The table below shows discharges and surgery cases by division, excluding La Porte and Goshen. Year over Year 3/31/2017 3/31/2016 Variance Percentage Inpatient Discharges Consolidated (1) 27,329 28,549 (1,220) -4.3% Downtown 11,847 12,359 (512) -4.1% Statewide (2) 10,602 11,285 (683) -6.1% Central 4,880 4,905 (25) -0.5% Total Surgery Cases Consolidated (3) 26,453 25, % Downtown 8,218 7, % Statewide (4) 6,152 6,315 (163) -2.6% Central 3,485 3, % Ambulatory 8,598 8, % (1) Including La Porte and Goshen, the variance would have been (-13.1%) (2) Including La Porte and Goshen, the variance would have been (-25.2%) (3) Including La Porte and Goshen, the variance would have been (-8.0%) (4) Including La Porte and Goshen, the variance would have been (-35.2%) During 2012, the Indiana General Assembly approved a hospital assessment fee program (Medicaid Assessment Fee). Under this program, the Office of Medicaid Policy and Planning (OMPP) collects a fee from eligible hospitals. The fee is used in part to increase reimbursement to eligible hospitals for services provided in both fee-for-service and managed care programs, and as the state share of DSH payments. The program was effective retroactively from July 1, 2011, and continued through June 30, 2013, and was subsequently extended through June 30, The 2017 budget bill extending the program through June 30, 2019 signed into law on April 27, For the three months ended March 31, 2017, increased reimbursement related to the Medicaid Assessment Fee program totaled $63,556. For the three months ended March 31, 3

7 2016, increased reimbursement related to the Medicaid Assessment Fee program totaled $55,720. Adjusting for the deconsolidation of La Porte and Goshen, increased reimbursement related to the Medicaid Assessment Fee program totaled $52,596 for the three months ended March 31, As of March 31, 2017, ($1,928) of DSH and UPL revenue was recognized compared to $4,941 for the prior year. In 2017, $30,346 of DSH revenue was received. Based upon final rule by the Centers for Medicare and Medicaid Services, net of reserves totaling ($18,346) and ($15,095), related to the state fiscal years ended June 30, 2017 and 2016, respectively, were recognized against the DSH revenue received, netting ($3,095) of DSH revenue recognized. Revenue recognized in 2017 related to UPL totaled $1,167. The amount of state DSH and UPL funds vary by year and the amount to be received in future periods cannot be guaranteed. The provision for uncollectible patient accounts amounted to $73,393 for the three months ended March 31, 2017 and $72,756 in the same period of the prior year. Adjusting for the deconsolidation of La Porte and Goshen, the provision for uncollectible accounts amounted to $61,911 for the three months ended March 31, As a percentage of gross patient revenue, the provision for uncollectible patient accounts was 1.7% in both 2017 and Member premium revenue aggregated $150,016 for the three months ended March 31, 2017 and $157,122 for the prior year. The decrease mainly relates to a change in products offered on the health exchange introduced under the Affordable Care Act and lower premium rates for certain Medicaid products, partially offset by changes in membership in the Medicaid and commercial products. Other operating revenue of $28,812 for the three months ended March 31, 2017 decreased $13,711 (or 32.2%) compared to the three months ended March 31, Adjusting for the deconsolidation of La Porte and Goshen, the decrease in other operating revenue was $10,643 (or 27.0%). The decrease was primarily due to a decrease in related entity operations accounted for using the equity method. Expenses. Total operating expenses of $1,365,759 decreased by 1.4% (or $19,626) compared to the three months of March 31, 2016 ($1,385,385). Adjusting for the deconsolidation of La Porte and Goshen, total operating expenses increased $82,556 (or 6.4%). Salaries, wages, and benefits decreased 2.0% (or $14,451) to $701,145 compared to the same period in the prior year. Adjusting for the deconsolidation of La Porte and Goshen, salaries, wages, and benefits increased $41,292 (or 6.3%). The increase is primarily a result of base pay increases effective in mid-2016, as well as an increase in full time equivalent employees (FTEs) driven in part by increased surgical volumes. Adjusting for the deconsolidation of La Porte and Goshen, the average number of FTEs was 28,078 and 26,707 for the three months ended March 31, 2017 and 2016, respectively. Supplies, drugs, purchased services, and other expenses of $446,633 decreased 3.1% (or $14,381) compared to the same period in the prior year ($461,014). Adjusting for the deconsolidation of La Porte and Goshen, supplies, drugs, purchased services, and other 4

8 expenses increased $24,880 (or 5.9%). The increase was driven by increased surgery volumes and continued repairs and maintenance for aging facilities. Fees related to the Medicaid Assessment Fee program were $30,614 for the three months ended March 31, 2017, compared to $27,360 in the same period in the prior year. Adjusting for the deconsolidation of La Porte and Goshen, fees related to the Medicaid Assessment Fee program were $25,669 for the three months ended March 31, Health claims to providers expenses of $122,091 increased 14.4% (or $15,389) over that for the same period in the prior year ($106,702), which relates to change in membership and increased claims utilization for the Medicaid and commercial products. Depreciation and amortization expense of $57,060 decreased 10.4% (or $6,637) from that for the same period in the prior year ($63,697). Adjusting for the deconsolidation of La Porte and Goshen, the decrease in depreciation and amortization was $1,443 (or 2.5%). Interest expense of $8,216 was 25.4% (or $2,800) less than the same period in the prior year ($11,016). Adjusting for the deconsolidation of La Porte and Goshen, the decrease was $2,507 (or 23.4%). Other. For the three months ended March 31, 2017 and 2016, Indiana University Health expensed $4,375 related to educational and research support provided to the School of Medicine. Investment income amounted to $143,292 for the three months ended March 31, 2017, including $12,142 of interest and dividend income and $114,143 of unrealized gains on investments, and $17,007 of realized gains on investments, net of fees. For the three months ended March 31, 2016, investment income aggregated to $12,999, which included $10,813 of interest and dividend income and $11,598 of unrealized gains on investments, partially offset by $9,412 of realized losses on investments, including fees. Adjusting for the deconsolidation of La Porte and Goshen, investment income (losses) amounted to $143,292 and $13,519 for the three months ended March 31, 2017 and 2016, respectively. Losses on interest rate swaps aggregated ($421) and ($15,997) for the three months ended March 31, 2017, and 2016, respectively. Consolidated Balance Sheet (Compared to year ended December 31, 2016) Consolidated Financial Position. Total cash and investments (which principally consist of cash and cash equivalents, short-term investments, board-designated funds and other investments, and donor-restricted funds) amounted to $4,894,853 at March 31, 2017 ($4,700,251 at December 31, 2016). The number of days cash and investments on hand, excluding donor-restricted funds, trustee-held funds and funds held by insurance captives, was 324 days at March 31, 2017 (306 days as of December 31, 2016). The number of days revenue in receivables was 58 days at March 31, 2017 (excluding the increased reimbursement under the Medicaid Assessment Fee program and related receivable), and 54 days at December 31, The number of days expenses in accounts payable, accrued expenses, and certain other current liabilities (excluding fees associated with the Medicaid Assessment Fee program and related liability) was 58 days at March 31, 2017, and 56 days 5

9 at December 31, Net current assets, or working capital, increased 12.1% to $466,263 at March 31, 2017 ($415,936 at December 31, 2016). Net property and equipment of $2,333,487 decreased $47,899 from December 31, Firm commitments for construction-inprogress totaled $42,864 at March 31, The Indiana University Health Obligated Group has executed direct-pay letter-ofcredit agreements, in support of all of its publicly remarketed variable-rate bond series, which require the credit provider to purchase bonds in the event the bonds are not remarketed. In addition, it has executed direct purchase agreements, whereby the credit provider purchases bonds for a predetermined period of time, after which the agreement must be extended or the bonds must be remarketed or reissued. In each of these two instances, the bonds have a longer nominal maturity than the agreement, but the existence and terms of these agreements allow for the long-term classification of the associated variable-rate bond series. When these agreements have expiration dates within the succeeding 12-month period, a greater portion of the associated debt is classified as current, because if not otherwise extended, these agreements would require the principal balance of the related bonds to be repaid over a shortened time frame. Accordingly, $7,605 and $6,263 were reclassified to current portion of long-term debt as of March 31, 2017 and December 31, 2016, respectively, to reflect the associated amount for the succeeding 12- month periods. On June 29, 2016, Indiana University Health provided notice of intent to exercise its one-time contractual option to prepay, without penalty, the remaining debt balance relating to a capital lease obligation. The transaction closed on January 3, 2017 and resulted in the acquisition of the leased building and termination of the lease. Accordingly, $92,278 was reclassified from long-term debt to the current portion of long-term debt as of December 31, As of March 31, 2017 and December 31, 2016, the Indiana University Health System maintained several lines of credit totaling $105,000. As of March 31, 2017 and December 31, 2016, the total balance drawn of the lines of credit was $50,000 and $0 respectively, included in long-term debt. Unrestricted net assets, or equity, amounted to $5,815,951 at March 31, 2017 ($5,593,567 at December 31, 2016) and includes the net unrealized losses on swaps of $89,666 and $92,240 at March 31, 2017 and December 31, 2016, respectively. Strategic Initiatives As part of its commitment to being a leader in both the treatment of patients with complex illnesses as well as in the transition from payment models that reward volume to those that reward value, the Indiana University Health System continuously evaluates its operations with goals to achieve superior clinical outcomes and to treat patients in the most beneficial and least resource-intensive settings possible as it works to effectively manage the health of populations. 6

10 As part of this continual evaluation, management engages in discussions at times with unaffiliated third parties regarding potential affiliations, acquisitions, dispositions, divestitures, joint ventures and other transactions. In addition, management considers the potential to change the services offered at a given facility or consolidate and/or eliminate redundant services. Such changes could be material, impacting the future composition of the system. In order to remain at the forefront of the shifting health care environment, the Indiana University Health Board of Directors adopted a five year strategic plan, which is currently in the implementation stage. Some key decisions embedded within the strategic plan include further expansion of Indiana University Health Plans; increasing capabilities to manage the health of populations; simplification and focused realignment of organizational and governance structures; various strategies centered on employment and alignment of physicians; expansion of the Riley brand for pediatric care; and improving primary care capabilities. In line with the strategic plan, on December 6, 2016, a Separation Agreement was executed, effective on December 31, 2016, between Indiana University Health and Goshen. As of the effective date, Indiana University Health withdrew as the sole corporate member of Goshen. Under the agreement, Goshen agreed to pay Indiana University Health a separation payment of $20,000 payable over a ten-year period, with the first installment of $2,000 due at closing. The Indiana University Health System recognized a nonoperating loss, net of the separation payment of $20,000, of $295,214 related to the transaction for the year ended December 31, Just prior to the closing of this transaction, Indiana University Health, acting as Obligated Group Agent, effectuated the removal of Goshen from the Obligated Group and Affiliates. For the three months ended March 31, 2016, Goshen represented approximately 4.3% of the total operating revenues of the Indiana University Health System. On December 24, 2015, a Contribution and Sale Agreement was executed by and among Indiana University Health, La Porte, Frankfort Health Partner, Inc. and Community Health Systems, Inc. (CHS) and other affiliated entities. In anticipation of the agreement, Indiana University Health and La Porte formed a limited liability company with Indiana University Health holding a 20% interest and La Porte holding 80%. Upon closing of the agreement, La Porte and certain of its affiliated entities contributed assets to the limited liability company and certain of its affiliated entities. Also upon the closing, Frankfort Health Partner, Inc., a subsidiary of CHS, purchased La Porte s 80% interest in the limited liability company for $96,489, plus the net working capital minus any long-term debt or capital leases. Pursuant to the limited liability company agreement, 20% of the assets contributed to the limited liability company are deemed to have been contributed on behalf of Indiana University Health. The proceeds of the sale, net of the settlement of La Porte s liabilities existing on the date of sale and a portion to be retained by Indiana University Health under the agreement, were contributed to a foundation in support of the La Porte community. This transaction closed on March 1, The Indiana University Health System recognized a nonoperating loss, net of the value of Indiana University Health s investment in the new limited liability company, of $156,809 related to the transaction of which $139,279 was recognized in the first quarter of In anticipation of the closing of this transaction, during 2015, Indiana University Health, acting as Obligated Group 7

11 Agent, effectuated the removal of La Porte from the Obligated Group. Also, during 2016 Indiana University Health approved the termination of the La Porte defined benefit pension plan, effective December 31, Accordingly, the outstanding net actuarial loss of $17,933 was accelerated and was reflected as of December 31, 2016 in the consolidated statement of operations and changes in net assets as part of the nonoperating loss on deconsolidation of subsidiaries, net and change in pension obligation. For the three months ended March 31, 2016, La Porte represented approximately 2.5% of the total operating revenues of the Indiana University Health System. On November 10, 2016, Indiana University Health entered into a lease agreement with Clinton County to lease the hospital building and other related property and equipment and to assume the operations of Frankfort Hospital, the Clinton County-owned hospital, effective June 1, Under the agreement, Indiana University Health agreed to a five-year lease with renewal options for the 25-bed county-owned critical access hospital and affiliated medical offices. The annual minimum rental rate is $1,000. Additional rent can be triggered if the hospital reaches certain net income targets, which is not expected to occur in On January 9, 2017, OptumCare, a division of UnitedHealth Group, announced that it agreed to acquire Surgical Care Affiliates (SCA). Indiana University Health owns a controlling interest (51%) in holding companies that hold and control interests in eight ambulatory surgery centers, and SCA holds the non-controlling interests (49%) in these holding companies. The closing of the transaction between OptumCare and SCA in the first quarter of 2017 triggered a call under which Indiana University Health can purchase, at fair market value, all or a portion of SCA s ownership interests in the holding companies. Indiana University Health has elected not to exercise this right. In support of the newly designed model of care of Indiana University Health, in April 2015, the Indiana University Health Board approved a plan to consolidate downtown Indianapolis adult services to one medical campus centered on Capitol Avenue and 16 th Street (current site of Methodist Hospital), with women s services consolidated at or near the existing Riley Hospital campus. As Indiana University Health is committed to improving the health of its patients and communities, the plan also includes the development of an array of ambulatory care services for residents of the neighborhoods around the downtown Indianapolis campus. The adult service medical campus is expected to include a medical education building and faculty offices on-site to enhance ongoing collaboration with the School of Medicine and support the tripartite mission of clinical care, research, and education. The Board has not yet approved the total capital expenditures related to the plan. In response to this plan, the useful lives of assets currently in place were evaluated, resulting in accelerated depreciation of $1,200 reflected in both the March 31, 2017 and March 31, 2016, consolidated financial statements, respectively. The Indiana University Health Board recently approved a plan to build a regional health campus in Bloomington, Indiana, which will increase Bloomington s ability to improve patient care by providing more opportunities for collaboration among clinical, research, and medical staff and faculty. This plan will allow the School of Medicine to expand its medical education programs and research opportunities on the Indiana University Bloomington campus. As part of this plan, Bloomington will build a 8

12 replacement hospital, which will further its mission of providing cutting-edge health services to the region. The site of the new hospital will be located on the campus of Indiana University. The Board has not yet approved the total capital expenditures related to the plan. In response to this plan, the useful lives of assets currently in place were evaluated, resulting in accelerated depreciation of $1,784 reflected in both the March 31, 2017 and March 31, 2016, consolidated financial statements, respectively. Adjusted Operating Income The following table adjusts operating income for significant one-time transactions or significant items that relate to prior years. Management uses these measures internally for planning, forecasting, and evaluating the performance of the Indiana University Health System. The table also removes operating income attributable to noncontrolling interests, which primarily relates to ambulatory surgery centers in which third parties hold significant noncontrolling interests. Internally, management reviews operating results after allocation to noncontrolling interests, in part, because a significant portion of the operating results of these entities is distributed to the noncontrolling interest holders each period. Non-GAAP measures should be considered in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. For additional information on the programs that resulted in these adjustments and on noncontrolling interests refer to the consolidated financial statements and the notes thereto of Indiana University Health and subsidiaries for the three months ended March 31, 2017 and Three Months Ended March Operating income as reported $ 110,729 $ 145,727 Noncontrolling interests in subsidiaries (28,003) (26,395) La Porte & Goshen operating loss (income) - 1,633 DSH 15,095 - Operating income adjusted $ 97,821 $ 120, % 8.9% During 2016, La Porte and Goshen were both deconsolidated. During 2017, reserves were recorded on DSH revenue related to state fiscal year

13 CONSOLIDATED FINANCIAL STATEMENTS As of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016

14 Consolidated Balance Sheets (Thousands of Dollars) March 31 December Assets (Unaudited) (Audited) Current assets: Cash and cash equivalents $ 440,003 $ 415,860 Short-term investments 5,036 15,502 Current portion of assets limited as to use 36,505 56,958 Patient accounts receivable, less allowance for uncollectible accounts of $206,633 and $187,876 at 2017 and 2016, respectively 818, ,180 Other receivables 138, ,207 Prepaid expenses 37,905 25,658 Inventories 76,852 77,975 Total current assets 1,552,940 1,525,340 Assets limited as to use: Board-designated investment funds and other investments 4,342,962 4,142,004 Donor-restricted investment funds 70,347 69,927 Total assets limited as to use, less current portion 4,413,309 4,211,931 Property and equipment: Cost of property and equipment in service 5,489,087 5,531,399 Less accumulated depreciation (3,186,254) (3,190,606) 2,302,833 2,340,793 Construction-in-progress 30,654 40,593 Total property and equipment, net 2,333,487 2,381,386 Other assets: Equity interest in unconsolidated subsidiaries 101, ,175 Interest in net assets of foundations 13,767 13,775 Goodwill, intangibles, and other assets 311, ,066 Total other assets 426, ,016 Total assets $ 8,726,649 $ 8,544,673 Continued on next page. 10

15 Consolidated Balance Sheets (continued) (Thousands of Dollars) March 31 December Liabilities and net assets (Unaudited) (Audited) Current liabilities: Accounts payable and accrued expenses $ 548,179 $ 567,486 Accrued salaries, wages, and related liabilities 277, ,516 Accrued health claims 109,729 94,793 Estimated third-party payer allowances 96,676 61,219 Current portion of long-term debt 54, ,389 Total current liabilities 1,086,677 1,109,403 Noncurrent liabilities: Long-term debt, less current portion 1,418,968 1,402,807 Interest rate swaps 89,666 92,240 Accrued pension obligations 55, ,122 Accrued medical malpractice claims 62,572 61,436 Other 108,006 95,861 Total noncurrent liabilities 1,734,359 1,752,466 Total liabilities 2,821,036 2,861,869 Net assets: Indiana University Health 5,608,848 5,384,110 Noncontrolling interest in subsidiaries 207, ,457 Total unrestricted 5,815,951 5,593,567 Temporarily restricted 22,551 22,191 Permanently restricted 67,111 67,046 Total net assets 5,905,613 5,682,804 Total liabilities and net assets $ 8,726,649 $ 8,544,673 11

16 Three Months Ended March (Unaudited) Revenues: Patient service revenue (net of contractuals and discounts) $ 1,375,428 $ 1,408,598 Provision for uncollectible accounts (73,393) (72,756) Net patient service revenue 1,302,035 1,335,842 Member premium revenue 150, ,122 Other revenue 28,812 42,523 Total operating revenues 1,480,863 1,535,487 Expenses: Salaries, wages, and benefits 701, ,596 Supplies, drugs, purchased services, and other 446, ,014 Hospital assessment fee 30,614 27,360 Health claims to providers 122, ,702 Depreciation and amortization 57,060 63,697 Interest 8,216 11,016 Total operating expenses 1,365,759 1,385,385 Operating income before educational and research support 115, ,102 Educational and research support to Indiana University (4,375) (4,375) Total operating income 110, ,727 Nonoperating income (loss): Investment income, net 143,292 12,999 Losses on interest rate swaps, net (421) (15,997) Loss on sale of subsidiary, net - (139,279) Debt extinguishment and other 5 5,531 Total nonoperating income (loss) 142,876 (136,746) Consolidated excess of revenues over expenses 253,605 8,981 Less amounts attributable to noncontrolling interest in subsidiaries 28,003 26,395 Excess (deficiency) of revenues over expenses attributable to Indiana University Health and subsidiaries 225,602 (17,414) Continued on next page. Indiana University Health, Inc. and subsidiaries Consolidated Statements of Operations and Changes in Net Assets (Thousands of Dollars) 12

17 Consolidated Statements of Operations and Changes in Net Assets (continued) (Thousands of Dollars) Three Months Ended Three Months Ended March 31 March (Unaudited) (Unaudited) Unrestricted net assets: Total Controlling Noncontrolling Total Controlling Noncontrolling Excess of revenues over expenses $ 253,605 $ 225,602 $ 28,003 $ 8,981 $ (17,414) $ 26,395 Contributions for capital expenditures 1,412 1,412 Distributions to noncontrolling interests (30,591) (30,591) (30,428) (30,428) Contributions from noncontrolling interests 1,470 1,470 Restriction reclassification Other (2,042) (2,276) 234 (84) (781) , ,738 (2,354) (20,043) (18,177) (1,866) Temporarily restricted net assets: Change in beneficial interest in net assets of foundations (385) (385) Contributions ,732 1,732 Investment return (loss) (566) (566) Net assets released from restrictions (499) (499) (910) (910) Restriction reclassification (18) (18) Beneficial interest reclassification Other (81) (81) Permanently restricted net assets: Change in beneficial interest in net assets of foundations Contributions and other Beneficial interest reclassification (799) (799) (638) (638) Increase (decrease) in net assets 222, ,163 (2,354) (20,029) (18,163) (1,866) Net assets at beginning of period 5,682,804 5,473, ,457 5,393,160 5,181, ,784 Net assets at end of period $ 5,905,613 $ 5,698,510 $ 207,103 $ 5,373,131 $ 5,163,213 $ 209,918 13

18 Consolidated Statements of Cash Flows (Thousands of Dollars) Three Months Ended March (Unaudited) Operating activities Increase in net assets $ 222,809 (20,029) Adjustments to reconcile increase in net assets to net cash provided by (used in) operating activities: Change in fair value of interest rate swaps (2,574) 12,543 Loss in unconsolidated subsidiaries 20,457 2,007 Provision for uncollected patient accounts 73,393 72,756 Contributions from noncontrolling interests (1,470) Depreciation and amortization 57,060 63,697 Amortization of deferred gain on sale of medical office buildings (222) (290) Loss (gain) on extinguishment of debt 43 (5,532) Restricted contributions and investment return (887) (143) Distributions to noncontrolling interests 30,591 30,428 Trading securities (170,459) (214,586) Net changes in operating assets and liabilities: Patient accounts receivable (115,810) (85,068) Other assets (13,314) (25,016) Accounts payable, accrued liabilities, and other liabilities (35,842) (37,943) Salaries, wages, and related liabilities 36,333 45,683 Estimated third-party payer allowances 35,457 (3,094) Net cash provided by (used in) operating activities 137,035 (166,057) Investing activities Purchase of property and equipment, net of disposals (9,161) (31,051) Sale of subsidiary, net of cash - 74,412 Net cash (used in) provided by investing activities (9,161) 43,361 Financing activities Increase in restricted net assets Repayments on long-term debt (124,072) (327,897) Proceeds from issuance of long-term debt 50, ,646 Contributions from noncontrolling interests 1,470 Distributions to noncontrolling interests (30,591) (30,428) Net cash used in financing activities (103,731) (92,066) Increase (decrease) in cash and cash equivalents 24,143 (214,762) Cash and cash equivalents at beginning of period 415, ,702 Cash and cash equivalents at end of period $ 440,003 $ 301,940 14

19 Notes to Consolidated Financial Statements (Unaudited) As of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 (thousands of dollars) 1. Basis of Presentation Indiana University Health, Inc. (Indiana University Health), an Indiana private, nonprofit organization (exempt from federal income taxes as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986), as amended (the Code), and classified as a public charity under Section 509(a) of the Code, is a health care delivery system that provides services throughout the State of Indiana (the State). Indiana University Health s mission is to improve the health of its patients and the communities it serves through innovation and excellence in care, education, research, and service. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete, annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, For further information, refer to the audited consolidated financial statements and notes thereto for the years ended December 31, 2016 and 2015 (not included herein). The accompanying unaudited consolidated financial statements include the accounts of Indiana University Health and all majority-owned or controlled subsidiaries (collectively referred to herein as the Indiana University Health System). The equity method of accounting is used for investments in joint ventures, partnerships, and companies where control is participatory with others or where ownership is 50% or less. All significant intercompany balances and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Accounts Receivable and Allowance for Uncollectible Accounts The provision for uncollected patient accounts, for all payers, is recognized when services are provided based upon management s assessment of historical and expected net collections, taking into consideration business and economic conditions, changes and trends in health care coverage, and other collection indicators. Periodically, management assesses the adequacy of the allowance for uncollectible accounts based upon accounts receivable payer composition and aging, the significance of individual payers to outstanding accounts receivable balances, and historical write-off experience by payer category, as adjusted for collection indicators. The results of this review are then used to make any modifications to the provision for uncollected patient accounts and the allowance for uncollectible accounts. In addition, the Indiana University Health System follows established guidelines for placing certain past due patient balances with collection agencies. Patient accounts that are uncollected, including those placed with collection agencies, are initially charged against the allowance for uncollectible accounts 15

20 Notes to Consolidated Financial Statements (Unaudited) As of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 (thousands of dollars) 2. Summary of Significant Accounting Policies (continued) in accordance with collection policies of the Indiana University Health System and, in certain cases, are reclassified to charity care if deemed to otherwise meet financial assistance policies of the Indiana University Health System. The allowance for uncollectible accounts for self-pay patients, including self-pay discounts and charity care, was 76% and 81% of self-pay accounts receivable as of March 31, 2017 and December 31, 2016, respectively. Overall, the net of self-pay discounts and write-offs has not changed significantly for the three months ended March 31, The Indiana University Health System has not experienced significant changes in write-off trends and has not changed its financial assistance policy for the three months ended March 31, The Indiana University Health System serves certain patients whose medical care costs are not paid at established rates. These patients include those under government programs, such as Medicare and Medicaid, and those that cannot afford health insurance because of inadequate resources or those who are uninsured or underinsured. Patient service revenue is reported at estimated net realizable amounts for services rendered. The Indiana University Health System recognizes patient service revenue associated with patients who have third-party payer coverage on the basis of contractual rates for the services rendered. For uninsured patients who do not qualify for charity care, revenue is recognized on the basis of discounted rates in accordance with the financial assistance policy. Patient service revenue, net of contractual allowances and discounts and before the provision for bad debts, recognized in the period from major payer sources is as follows: Three Months Ended March Third-party payers $ 1,338,692 $ 1,364,865 Self-pay patients 36,736 43,733 Total payers $ 1,375,428 $ 1,408,598 Hospital Assessment Fee Program During 2012, the Indiana General Assembly approved a hospital assessment fee program (Medicaid Assessment Fee). Under this program, the Office of Medicaid Policy and Planning (OMPP) collects a fee from eligible hospitals. The fee is used in part to increase reimbursement to eligible hospitals for services provided in both fee-for-service and managed care programs, and as the state share of DSH payments. The program was effective retroactively from July 1, 2011, and continued through June 30, 2013, and was 16

21 Notes to Consolidated Financial Statements (Unaudited) As of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 (thousands of dollars) 2. Summary of Significant Accounting Policies (continued) subsequently extended through June 30, The 2017 budget bill extending the program through June 30, 2019 signed into law on April 27, As of March 31, 2017, increased reimbursement related to the Medicaid Assessment Fee program totaled $63,556. As of March 31, 2016, increased reimbursement related to the Medicaid Assessment Fee program totaled $55,720. As of March 31, 2017, an assessment fee was recognized of $30,614. As of March 31, 2016, an assessment fee was recognized of $27,360. Short-term Investments Effective April 1, 2016, Indiana University Health adopted a policy to invest in shortterm investments by transitioning from money market funds and financial instruments with targeted durations of one to three years to investments with targeted durations of one day to three years. Fair Values of Financial Instruments In May 2015, the FASB issued guidance related to fair value disclosures of certain investments. Investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient provisions of the fair value measurement guidance are no longer required to be included within the fair value hierarchy leveling tables. This new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. Indiana University Health has adopted effective January 1, No changes to fair value measurements resulted from adopting this guidance, only changes to amounts disclosed within the consolidated footnotes (see Note 7). Subsequent Events For the consolidated financial statements as of and for the three months ended March 31, 2017, management has evaluated subsequent events through April 28, 2017, the date that these financial statements were issued. New Accounting Guidance Not Yet Applicable In August 2016, the FASB issued guidance to clarify the classification of eight types of transactions in the statement of cash flows to reduce diversity in practices. Indiana University Health is required to adopt this new guidance for the fiscal year 2019, and is currently evaluating the impact this guidance will have on its consolidated financial statements. 17

22 Notes to Consolidated Financial Statements (Unaudited) As of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 (thousands of dollars) 2. Summary of Significant Accounting Policies (continued) In August 2016, the FASB issued guidance related to improving the usefulness of information provided to donors, grantors, creditors and other users of the financial statements by eliminating the distinction between resources with permanent restrictions and temporary restrictions from the face of the financial statements, as well as enhancing or providing additional information in the financial statements and notes related to liquidity, expense classifications, allocation methodology, underwater endowment funds and investment returns. The amendments in this update are effective for fiscal years beginning after December 15, 2017 and should be applied retrospectively. Early adoption of these amendments is permitted. As of March 31, 2017, Indiana University Health has not adopted these amendments. Upon adoption, changes reflected in the consolidated financial statements will be presentation only. In March 2016, the FASB issued guidance related to derivatives and hedging. This new guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This amendment is effective for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, Indiana University Health is evaluating the effect this guidance will have on its consolidated financial statements. In February 2016, the FASB issued guidance related to leases. One of the primary changes brought about by the new standard is the reporting of operating leases on the balance sheet. This new guidance dictates that the implementation of the new standard would recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, Indiana University Health is evaluating the effect this guidance will have on its consolidated financial statements. In May 2014, the FASB issued guidance related to recognizing revenue from contracts with customers. This new guidance dictates that the standard be applied either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the revenue recognition standard recognized at the date of initial application. Subsequently, the FASB issued updates to this guidance to provide clarification to the aspects of collectability criterion, identifying performance obligations and the licensing implementation guidance and recognizing revenue when another party is involved in providing goods or services to a customer. This new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, Indiana University Health is evaluating the effect this guidance will have on its consolidated financial statements. 18

23 Notes to Consolidated Financial Statements (Unaudited) As of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 (thousands of dollars) 3. Significant Transactions Goshen On December 6, 2016, a Separation Agreement was executed, effective on December 31, 2016 between Indiana University Health and Goshen. As of the effective date, Indiana University Health withdrew as the sole corporate member of Goshen. Under the agreement, Goshen agreed to pay Indiana University Health a separation payment of $20,000 payable over a ten-year period, with the first installment of $2,000 due at closing. The Indiana University Health System recognized a nonoperating loss, net of the separation payment of $20,000, of $295,214 related to the transaction for the year ended December 31, Just prior to the closing of this transaction, Indiana University Health, acting as Obligated Group Agent, effectuated the removal of Goshen from the Obligated Group and Affiliates (see Note 5). For the three months ended March 31, 2016, Goshen represented approximately 4.3% of the total operating revenues of the Indiana University Health System. La Porte On December 24, 2015, a Contribution and Sale Agreement was executed by and among Indiana University Health, La Porte, Frankfort Health Partner, Inc. and Community Health Systems, Inc. (CHS) and other affiliated entities. In anticipation of the agreement, Indiana University Health and La Porte formed a limited liability company with Indiana University Health holding a 20% interest and La Porte holding 80%. Upon closing of the agreement, La Porte and certain of its affiliated entities contributed assets to the limited liability company and certain of its affiliated entities. Also upon the closing, Frankfort Health Partner, Inc., a subsidiary of CHS, purchased La Porte s 80% interest in the limited liability company for $96,489, plus the net working capital minus any long-term debt or capital leases. Pursuant to the limited liability company agreement, 20% of the assets contributed to the limited liability company are deemed to have been contributed on behalf of Indiana University Health, the value of which has been credited to Indiana University Health s capital account. The proceeds of the sale, net of the settlement of La Porte s liabilities existing on the date of sale and a portion to be retained by Indiana University Health under the agreement, were contributed to a foundation in support of the La Porte community. This transaction closed on March 1, The Indiana University Health System recognized a nonoperating loss, net of the value of Indiana University Health s investment in the new limited liability company, of $156,809 related to the transaction of which $139,279 was recognized in the first quarter of In anticipation of the closing of this transaction, during 2015, Indiana University Health, acting as Obligated Group Agent, effectuated the removal of IU Health La Porte from the Obligated Group (see Note 5). 19