For the Period Ended December 31, 2015 Unaudited Quarterly Disclosure. For the Period Ended March 31, 2016 Unaudited Quarterly Disclosure

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1 For the Period Ended December 31, 2015 Unaudited Quarterly Disclosure For the Period Ended March 31, 2016 Unaudited Quarterly Disclosure

2 Quarterly Disclosure Report for March 31, 2016 Bond Cusips The following discussion and analysis provides a narrative explanation of the results of operations and financial position of Health System Inc. and its subsidiaries (collectively, ) for the quarter ended March 31, The analysis should be read in conjunction with s Health System and Healthcare Obligated group s financial statements for the three month period ended March 31, 2016 and Beginning with the disclosure information presented for the First Quarter of 2016, the discussion and analysis is made with respect to consolidated Health System and does not include a separate discussion or presentation of the results of operations and financial position for the members of the Obligated Group alone except in those instances where management of believes that discussion of the results of the members of the Obligated Group is relevant to understanding the discussion and analysis. The Obligated Group accounted for approximately 55% of total operating revenues for the three months ended March 31, Bond Series CUSIP 2008D 2011B VE TV PBB VF TW PBC VG PBD VH0 2011A 52601PBE VJ TZ VK UA6 2011D UB UN8 2011E UC UP PBF UD UQ PBG UE UR PBH UF US PBJ UG UT PBK UH UU PBL UJ UV PBM UK UW PBN UL UX PBP UM UY PBQ UZ PBR VA PBS VB VC1 2015B VD VlL1

3 TABLE OF CONTENTS PROMEDICA OVERVIEW... 1 Who is... 1 Service Area... 3 Awards... 4 Community Benefit... 4 Organizational Overview... 5 Structure... 5 Obligated Group Members... 6 Clinical Service Lines... 7 Non-Obligated Group Members... 8 Executive Leadership & Governance Strategy RECENT SIGNIFICANT DEVELOPMENTS Expansion Activities University of Toledo Affiliation Epic Implementation St. Luke s Divestiture Other Leadership Changes MANAGEMENT DISCUSSION AND ANALYSIS Operational Performance Income Statement Net Operating income Revenue & Payor Mix Sources of Patient Revenue Quarterly Disclosure

4 Non-Operating Income Balance Sheet Balance Sheet and Cash Flow Debt Interest Rate Swaps: Recent Debt Activity Ratings Investments Liquidity Pension Plans Financial Indicators Profitability Liquidity/Leverage UTILIZATION STATISTICS SYSTEM FINANCIAL STATEMENTS COVENANT CALCULATIONS Quarterly Disclosure

5 PROMEDICA OVERVIEW Who is Formed in 1986, is a mission driven, community-based, notfor-profit health system serving Northwest Ohio and Southeastern Michigan. operates acute care hospital facilities, integrated continuing care facilities and services, health insurance companies and health plans and a physician organization. also has numerous joint ventures, co-management and other affiliations, including a long term academic affiliation. has maintained a steadfast commitment to operating as a fully integrated health system. Toledo Hospital, established in 1874, is the legacy hospital, and s tertiary facility. The development of the health system began in 1986, with the inception of Health System, followed by the formation of Paramount (health plan) in 1988 and Physicians in Toledo Children s Hospital was established in 1993, and thereafter, s expansion began, transforming into the largest health system in the region, with 14 owned, managed or affiliated hospitals. is Mission Our Mission is to improve your health and well-being. Values Compassion We treat our patients and each other with respect, integrity and dignity. Innovation We continually search to find a better way forward. Teamwork We partner with others because we are better together than apart. Excellence We strive to be the best in all we do. 17,000+ Employees 14 Hospitals 330+ Continuum Services Beds 1,800+ Active medical staff 2,100+ Acute Care Beds 333,000+ lives covered by Paramount insurance 900+ (2015) Inpatient Hospice days 1.5 million (2015) Physicians annual patient visits 760+ Physicians and providers 200+ Residents/Fellows on rotation 20 Different specialties 226,000 (2015) Home care visits Quarterly Disclosure 1

6 Service Area is headquartered in Toledo, Ohio, and serves a 27 county area in northwest Ohio and southeast Michigan. The graph below denotes the location of facilities across the service area: Ohio and Michigan 2STATES Ohio and Michigan LEGEND Hospital Clinical Health Centers Hospice Home Care Rehab/Skilled Nursing Pharmacy Behavioral Health Center Radiology Laboratories Urgent Care Paramount serves members throughout all of Ohio and in the southeastern counties of Michigan, as represented by the light green shading in the map to the right. Paramount is the largest provider-sponsored health plan in Ohio. In 2013, Paramount, through its statewide Paramount Advantage subsidiary, was one of 5 Medicaid insurers in Ohio selected to provide statewide managed care services. Paramount Advantage is now offered in all 88 counties in Ohio. Paramount s workers compensation product (HMS) is also offered throughout Ohio. In addition to these products, Paramount offers commercial (Paramount Care) and Medicare (Paramount Elite) products in various counties in Ohio and Michigan. Quarterly Disclosure 3

7 Awards In 2016 Toledo Hospital was named one of America s 100 Best Hospitals by Healthgrades. This distinction places Toledo Hospital in the top 2% of hospitals in the nation for exhibiting superior patient care in multiple clinical specialty areas for three consecutive years. Becker s Healthcare has named Health System one of its 150 Great Places to Work in Healthcare for The list includes hospitals and health systems throughout the country that have achieved high employee satisfaction and value work-life balance. Selection criteria also included benefit offerings, wellness programs, professional development opportunities and engagement. In 2016 Monroe Regional Hospital received Healthgrades Distinguished Hospital Award for Clinical Excellence, placing it in the top 5% of the nation s hospitals. Additionally in 2016, Bay Park Hospital was a five-star recipient for the treatment of stroke. In 2016, Paramount s Medicare product (Paramount Elite) achieved a four start rating from the Centers for Medicare and Medicaid (CMS). In 2016, for the second consecutive year; the Supply Chain Management Team has earned the Economic Cycle Research Institute s Healthcare Supply Chain Management Award. is one of only 12 healthcare organizations to receive this prestigious award which honors organizations that demonstrate excellence in overall spend management and in adopting best practice solutions. In 2016 The Centers for Medicare and Medicaid Services recognized Home Health Care with a five-star rating for patient satisfaction. Home Health Care is also ranked in the top 25 th percentile of all home care programs in the nation. Community Benefit Health System is dedicated to maintaining a strategic focus to fulfill its mission by providing services benefitting the communities it serves, regardless of income or ability to pay. Care is provided for the well-insured, the underinsured and the uninsured; to men, women and children, regardless of race, creed, national origin, disability or age. seeks to remain a financially strong organization so that it can sustain its caring mission and invest back into our communities. This includes generational investments such as the construction of new bed towers and innovative approaches to providing access to care s total community benefit contribution for the year ended December 31, 2014 was approximately $148 million. s vision is to intentionally build healthy and whole communities through strategic partnerships, focused education, and meaningful relationships. Addressing the social determinates of health such as education, housing and hunger, which have equally impactful implications to both parts of s Mission, will provide meaningful opportunities to improve both health and well-being. Quarterly Disclosure 4

8 Organizational Overview Structure has established an Obligated Group structure, with the entities included in the Obligated Group highlighted in green in the chart below. is the sole member, or excises control over the sole member, of each of the members of the Obligated Group, but is not a member of the Obligated Group. Only those entities defined as Obligated Group members are obligated to make payments under the Master Trust Indenture. Health System, Inc. (1) Bay Park Community Hospital Defiance Regional Hospital St. Luke s Hospital (2) Physicians & Continuum Services Insurance Corporation Flower Hospital Fostoria Hospital Association Foundation Indemnity Corporation Herrick Hospital Memorial Hospital Toledo Hospital Mercy Memorial Hospital Continuing Care Services Emma L. Bixby Medical Center Lenawee Long Term Care LEGEND = Obligated Group Member = Non-Obligated Group (1) Some of the Obligated Group Members and Non-Obligated Group Members included in the chart above control one or more subsidiary organizations. Those subsidiary organizations, none of which is an Obligated Group Member, are excluded from the above chart. (2) St. Luke s Hospital, inclusive of St. Luke s Hospital Foundation, withdrew from the Obligated Group as of April 1, 2016 and no longer has any obligation in respect of any Obligation issued under the Master Indenture. Quarterly Disclosure 5

9 Obligated Group Members s Obligated Group facilities operate solely with-in the ambulatory and acute care services and the continuum care services business lines. It is comprised of 12 acute care facilities (2,118 licensed beds) and several long-term, skilled nursing and hospice business lines. A summary of the members of the Obligated Group Acute Care Hospitals as of March 31, 2016 is as follows: BayPark Hospital Oregon, Ohio Licensed Beds: 91 Year Established: 2001 Memorial Hospital Fremont, Ohio Licensed Beds: 100 Year Affiliated: 2014 Bixby Hospital Adrian, Michigan Licensed Beds: 101 Year Affiliated: 1999 Monroe Regional Hospital Monroe, Michigan Licensed Beds: 251 Year Affiliated: 2015 Defiance Regional Hospital Defiance, Ohio Licensed Beds: 51 Year Affiliated: 1999 St. Luke's Hospital* Maumee, Ohio Licensed Beds: 315 Year Affiliated: 2010 Flower Hospital Sylvania, Ohio Licensed Beds: 315 Year Affiliated: 1996 Toledo Hospital Toledo, Ohio Licensed Beds: 641 Year Affiliated: Legacy Fostoria Hospital Fostoria, Ohio Licensed Beds: 25 Year Affiliated: 2000 Toledo Children's Hospital Toledo, Ohio Licensed Beds: 151 Year Established: 1994 Herrick Hospital Tecumseh, Michigan Licensed Beds: 35 Year Affiliated: 1999 Wildwood Orthopaedic & Spine Toledo, Ohio Licensed Beds: 42 Year Established: 2011 *St Luke s was removed from the obligated group effective 4/1/2016 Corporation Licensed Beds Location Long-Term Care/Assisted Living/Other Goerlich Center for Alzheimer's Care 60 Sylvania, Ohio Ebeid Hospice 12 Sylvania, Ohio Caring Home Health Services N/A Sylvania, Ohio Herrick Manor 25 Tecumseh, Michigan Provincial House of Adrian 117 Adrian, Michigan Charlotte Stephenson Manor 50 Adrian, Michigan Monroe Nursing Center 69 Monroe, Michigan Total Long-Term Care Beds 333 Quarterly Disclosure 6

10 Clinical Service Lines The focused work of s clinical service lines allows us to offer a greater depth of highly reliable care close to home for patients across our service area. All based on the quality of our care, clinical excellence of our physicians and staff, compassion of our service, innovation of our researchers, and operational and cost efficiencies, key initiatives include: HEART AND VASCULAR Grew our vascular physician group into the largest practice in the region and the only one with vascular medicine physicians Opened a dedicated vascular unit at Toledo Hospital to increase efficiency of care for vascular and wound care patients Created chest pain observation unit to focus care and streamline ER operations SURGERY Grew number of general surgeons and specialists to increase access NEUROSCIENCES Continued to recruit broad range of neurosciences specialists to increase patient access Initiated clinical trials to test efficacy and safety of using mesenchymal stem cells in treating traumatic brand injury WOMEN S Surgery Neurosciences Heart & Vascular Women's Expanded access to maternal fetal medicine specialty care with recruitment of physician and soon will utilize tele-medicine to further access Broadened allies to include the Mercy Health system to decrease infant mortality in our region and state. Clinical Service Lines ORTHOPAEDICS Orthopaedics Diabetes Implemented bundled payments for lower extremity joint replacements Continued to apply standardized best practices from specialty orthopedic hospital across including standards of care of osteoarthritis diagnosis and physical therapy after total knee joint replacement Cancer Behavioral Health CANCER Opened new cancer center in Fremont, Ohio, that offers both chemo and radiation. Continued lung cancer screenings, increasing to 900 patients screened with 14 positive findings. BEHAVIORAL Opened evidence-based partial hospitalization program at Defiance Regional Hospital. Model will be duplicated. Partnered with community DIABETES hospitals, health systems, Developing and local mental health recovery transitioning to a services, and county sheriff s system-wide strategy for office to develop coordinated diabetes care response to opioid abuse in Continued to connect our communities. patients with diabetes education program as population health priority Quarterly Disclosure 7

11 Non-Obligated Group Members Paramount Insurance As a health system with a health insurance company, has a long history of managing financial risk as well as managing health. Paramount has become a key component of s integrated delivery system, especially in the areas of collaboration with providers, development of medical home and accountable care products, and introduction of care navigation. Paramount is a wholly owned subsidiary of. As the largest provider-sponsored health plan in Ohio, Paramount provides with over 25 years experience in managing risk and population health. Neither Paramount, nor any of its subsidiaries, are Members of the Obligated Group. Paramount and its subsidiaries offer the following insurance products in Ohio and Michigan: Commercial (Paramount Care): o Fully funded insurance products (Ohio and Michigan) o Self-funded administrative services-only ( ASO ) plans o Health insurance marketplace plans offering gold, silver, bronze and catastrophic plans Medicaid (Paramount Advantage): Paramount Advantage has been contracted with the Ohio Department of Medicaid since Paramount Advantage was selected as one of five statewide Medicaid product offerings in July 2013, expanding its Medicaid presence from 18 counties in Northwest Ohio to all 88 counties in Ohio. Serves Covered Families and Children, Adult and Pediatric Aged Blind and Disabled, and adult extension members. Medicare (Paramount Elite): This Medicare product is offered in 14 counties in Ohio and two counties in Michigan. Paramount Elite has been contracted with Centers for Medicare/Medicaid Services (CMS) since Managed Care Workers Compensation (HMS) This Ohio statewide product is the fifth (out of sixteen) largest worker s compensation managed care organization in Ohio. Other entities provide workers compensation third party administration services, life care planning, and expert witness testimony services. As of March 31, 2016, there were approximately 333,000 members in the various health plans offered by Paramount and its subsidiaries, with the largest growth in Paramount Advantage. In July 2013, Paramount Advantage entered into an expanded provider agreement with the Ohio Department of Medicaid (ODM) and expanded its Medicaid service area from 18 counties in Northwest Ohio to all 88 counties in Ohio. Paramount Advantage serves Covered Families and Children (CFC); Aged, Blind, and Disabled (ABD); and Extension populations (newly eligible beginning January 1, 2014) throughout Ohio. The provider contract with ODM does not have a specified termination date. Paramount Advantage served over 227,000 Medicaid members at the end of The overall plan mix among Paramount s product offerings has experienced a shift to the government sector plans over the last four years, with nearly 75% of the enrollment in the government sector (227,000 Medicaid and 15,000 Medicare enrollees) as of December 31, 2015, which is an increase from 54% in the government sectors as of December 31, Quarterly Disclosure 8

12 Physicians and Continuum Physicians and Continuum Services ( Physician/Continuum Services ) is an Ohio nonprofit corporation organized to provide management and support services to Physician Group, Inc. and its subsidiary limited liability companies (collectively, PPG ). Through PPG, s comprehensive network consists of than 765 employed providers, consisting of 171 primary care physicians, 302 specialist physicians and 292 advanced practice providers. PPG handled more than 1.5 million patient encounters in An additional 24 physicians and 18 advanced practice providers were recruited in first quarter of 2016 as part of s continued focus on expanding patient access within the provider network. Physicians/Continuum Services provides billing, administrative and staff support to physicians employed by PPG, as well as a framework for system-wide consideration and management of physicianspecific issues. physicians are engaged in achieving quality outcomes by targeting preventive health care, with special emphasis on cardiovascular diseases and cancer. Members of the physician network provide leadership to through participation on boards, councils and membership in co-management companies. Physician/Continuum Services also includes Continuing Care Services Corporation, an Ohio nonprofit corporation that provides and manages pharmacy, durable medical equipment, home health, palliative care, hospice, and inpatient and outpatient rehabilitation services. Health Network In 2015 formed Health Network, a clinically integrated network focused on providing seamless care for patients and more opportunity for provider collaboration across the region, especially with respect to population health initiatives. Health Network is comprised of 1,636 community providers. Health Network s goals are to: (i) align providers around quality, service and cost-effective care, (ii) ensure appropriate access to programs and services and (iii) effectively manage value-based contracts. This new network allows independent community physicians to collaborate with on these initiatives. Quarterly Disclosure 9

13 Other Affiliations and Joint Ventures utilizes joint ventures and other affiliation arrangements to provide healthcare and related services. also participates in various management agreements with physicians which are actively engaged in the management of the various service lines to achieve high levels of quality, service and patient outcomes. Academic Affiliation 2015, and The University of Toledo entered into a 50 year Academic Affiliation Agreement to support the academic programs of the College of Medicine and Life Sciences (including research, education of medical students and residency programs) which is anticipated to develop Toledo Hospital and Toledo Children s Hospital into a premier academic medical center and preeminent quaternary center. The mission is to enhance the education and training of the next generation of healthcare providers for the communities serves, through engaging in targeted, cutting edge research, and providing outstanding, high quality and cost effective patient care. As part of this affiliation, substantially all of The University of Toledo medical students, residents, fellows and other health professional learners will be placed at facilities over a multi-year transition plan. Since finalizing the affiliation, teams from both organizations have been working collaboratively to transition medical students, residents and some University of Toledo faculty to Toledo and Toledo Children s Hospitals in the specialty areas of emergency medicine, family medicine, internal medicine, surgery and pediatrics. The comprehensive transition plan will span over the next three to five years and when completed, more than 200 University of Toledo College of Medicine faculty members, 400 residents and 700 medical students will be rotating through Toledo Hospital and Toledo Children s Hospitals and other learning environments within. Community Health Center of Branch County. On February 1, 2016 and Community Health Center of Branch County entered into a three-year Management Agreement to provide executive management personnel and consulting services to Community Health Center of Branch County, an 87- bed county hospital located in Coldwater, Michigan (CHC). Lima Memorial Health System. and Lima Memorial Hospital are partners in Lima Memorial Health System ( LMHS ), a joint operating company that currently controls the operations of a 328 bed acute care hospital and other related facilities owned by Lima Memorial Hospital in Lima, Ohio. LMHS is owned 50% by Lima Memorial Hospital and 50% by PHS Ventures, LLC. Midwest Health Collaborative. In 2014, formed a partnership with six major health systems in Ohio called the Midwest Health Collaborative ( MHC ). The collaborative includes Aultman Hospital, Cleveland Clinic, OhioHealth, Premier Health, TriHealtand. MHC intends to create a statewide direct-to-employer network product by January 1, Utilizing population health capabilities to improve quality and utilization, MHC will work with Statewide employees to improve outcomes and reduce costs. Cleveland Clinic. Beginning with the innovation alliance in 2012, Cleveland Clinic and are working to identify and develop innovative ways for the two organizations to work together. and Cleveland Clinic have entered into strategic clinical alliance in the clinical service lines of oncology, heart/vascular and pediatrics in which the systems will collaborate on clinical care paths and protocols. has entered into an exclusive agreement designating Cleveland Clinic Laboratories as its primary reference lab for highly specialized laboratory testing. Quarterly Disclosure 10

14 Harbor. and Harbor, a regional behavioral health provider, formed a joint operating company (JOC) to address a growing community need for mental health services in northwest Ohio and southeast Michigan. The JOC will increase access to much needed behavioral health services and enhance care through a more integrated, coordinated model capable of touching behavioral health patients in crisis or at the onset of their illness moving them through a continuum of care designed to achieve beneficial wellness and lasting health. also participates in joint ventures with various partners and physicians to operate three ambulatory surgery centers, a breast magnetic resonance imaging center and a 42-bed behavioral health hospital for adults in the Toledo area. Foundation Foundation serves as the fundraising entity for the benefit of hospitals and continuing care facilities and services. Each facility supported by Foundation is represented by an advisory board. Over the last few years, Foundation has experienced significant growth adding major gift officers, a portfolio manager and prospect researcher to focus on donor cultivation and solicitation. Currently, Foundation has four capital campaigns underway: Toledo Generations; Lenawee County New Hospital; Flower/PPCS Campus Campaign; and Bay Park Community Campaign. As of March 31, 2016, had total foundation assets of $306.5 million. Total philanthropy raised as of March 31, 2016 was $1.8 million. In 2015 approximately $18.5 million in philanthropy was raised. Quarterly Disclosure 11

15 Executive Leadership & Governance Executive Leadership The 14-member Executive System Team plans and administers the strategic plans of and its subsidiary entities, subject to the policies and authority of the Board of Trustees. The Executive System Team consists of the following individuals: Name Title Years with Promedica Years in Health Care Randy Oostra President & Chief Executive Officer Gary Akenberger Interim Chief Financial Officer Holly Bristoll Chief Academic Affiliation Officer Dan Cassavar, MD President & Chief Medical Officer, PPG Gary Cates Chief Philanthropy Officer Lee Hammerling, MD Chief Physician Executive & Chief Medical Officer Lori Johnston Chief Information Officer Jeff Kuhn Chief Legal Officer/General Counsel and Chief Construction & Property Management Officer Barb Petee Chief Government Relations & Advocacy Officer John Pigott, MD Chief Innovations Officer/Strategic Business Development Arturo Polizzi President, Toledo/Toledo Children's Hospitals Jack Randolph President, Insurance Corporation Karen Strauss Chief Strategy, Marketing & HR Officer 3 3 Kevin Webb Chief Acute Care Officer Governance The Code of Regulations provides for a board of no fewer than three and no more than 30 trustees. The Board is comprised of the 29 members, five of which are members of various Subsidiary Boards while the remainder are members of s standing committees or represent business units, physicians or areas requiring special expertise. A majority of members of the Board of Trustees serve for staggered three-year terms and each Board member may serve up to two three-year terms on the Board. The Board has also established standing committees, with members appointed to standing committees, except for the Investment Committee (which requires specific expertise), may serve for a term of up to six years. The Subsidiary Boards exercise the powers delegated to them in their respective Code of Regulations or Bylaws and granted to them by statutory authority. The Board appoints or approves all members to the Subsidiary Boards. Committees Advocacy Audit/Compliance Center of Nursing Excellence Compensation Economic Development Executive Finance Fund Development Innovation Insurance/Risk Investment Heart and Vascular Institute Retirement Plan Quarterly Disclosure 12

16 Strategy has adopted and implemented, and continues to execute, various strategic initiatives to advance key components of its integrated healthcare delivery system in the fulfillment of its mission. remains committed to the Integrated Delivery System structure first implemented in the 1990 s. Highlights of s Strategic Plan are as follows: Provide a highly-reliable patient care & customer experience Ensure great health care outcomes and preferred healthcare experiences through a focus on safety, clinical quality, and service excellence, leading to affordable, convenient, coordinated, and compassionate care. Safety - Quality - Service - Transparency Be a high-performance health care organization Achieve highly efficient & effective operational performance and pursue catalytic philanthropy to aid funding for major initiatives. Growth - Cost Transformation - Performance Targets - Philanthropy Drive strategic innovation Continuously pursue innovative solutions in the delivery of care and services. Midwest Health Collaborative - Health Network - Disruptive Business Models - Telemedicine Be a leading community advocate for health & well-being Lead partnering relationships and healthcare advocacy efforts throughout all of our communities to improve the social determinants of health. Hunger - Social Determinants - Economic Development - Infant Mortality, Diabetes, Behavioral Health Be the workplace of choice Build a workplace culture based on trust, pride, and camaraderie that improves employee engagement. Hire & Retain Talent - Leadership Development - Culture of Diversity & Inclusion Be a leader in health care education & research Enhance the education and training of the next generation of healthcare providers for our communities, engage in targeted cutting edge research and provide outstanding patient care. Academic Medical Center - Clinical Performance, Care Delivery, & Cost of Care Quarterly Disclosure 13

17 RECENT SIGNIFICANT DEVELOPMENTS Expansion Activities Community Health Center of Branch County On February 1, 2016 and Community Health Center of Branch County entered into a threeyear Management Agreement to provide executive management personnel and consulting services to Community Health Center of Branch County, an 87-bed county hospital located in Coldwater, Michigan ( CHC ). During the term of the Management Agreement, has an obligation to purchase CHC s assets (subject to limited termination rights), and CHC s Board of Trustees will continue to exercise ultimate authority, supervision, direction and control of the hospital. Health and Wellness Center On January 11, 2016 the Health and Wellness Center was opened. The three-story, 230,000 square foot facility houses primary care and specialty physician offices, medical imaging, laboratory, behavioral health and wellness services, an endoscopy center, optical, pharmacy, urgent care and an innovative food pharmacy. Additional distinctive features include standardized, interconnected medical offices for timely consultation between providers for a better patient experience and real-time consult services from ancillary services and potential same day referrals for diagnostic testing. Generations Tower Ceremonial Groundbreaking On April 14, 2016, a ceremonial groundbreaking for the Generations Tower, a $350 million, 13-story, 302- bed patient care tower located on the Toledo Hospital campus was held. The tower, which will eventually replace an 86-year old existing tower has been more than 20 years in the making and will significantly transform the Toledo Hospital campus. Dorothy L. Kern Cancer Center The Dorothy L. Kern Cancer Center opened in January The 12,000 square foot facility, which is just two miles away from Memorial Hospital in Fremont, Ohio, offers highly-advanced cancer treatments and therapies in a patient-focused setting. The new center will feature several chemotherapy bays, a treatment room and state of the art radiation oncology and will have the capacity to treat 50 to 60 patients a day. Urgent Care Driven by the demand for immediate access to medical care, has opened four urgent care centers with an additional one opening Summer of 2016 for easier access to convenient, high-quality cost effective care. Urgent Care offers alternative options for minor emergencies and immediate medical needs offering a broad range of services, including X-rays and lab testing at a much lower cost than a hospital emergency room. Quarterly Disclosure 14

18 University of Toledo Affiliation On July 1, 2016, the first phase of s academic affiliation with The University of Toledo College of Medicine and Life Sciences will commence with the transition of 30 resident physicians from the University of Toledo Medical Center to Toledo and Toledo Children s Hospitals. This will bring the total resident count to 80 and will include residents in the specialties of emergency medicine, family medicine, internal medicine and surgery. To accommodate the growing number of faculty and learners, a new academic space at Toledo Hospital and Toledo Children s Hospitals is currently being built. This space includes classrooms, on-call rooms and a learner lounge, as well as administrative office space for faculty. Epic Implementation Epic Launch On November 2, 2015, launched its new integrated Epic electronic health record system. Twenty one providers and a new consolidated billing office came online. Providers and clinical teams continue to become more proficient with the new software and workflows, and report teams are viewing business operations through new data-rich dashboards. The Epic electronic health record platform is now live at all inpatient hospital services lines and ancillary services, except laboratory, at Fostoria, Defiance, and Flower Hospitals. and Defiance hospitals were significant go-lives because these two hospitals were still on paper charts and the transition while operationally significant went very smoothly. Health and Wellness Center, the system s multispecialty flagship medical office building, is also now live. Home Health and Hospice are scheduled to go live in May. Significant build and training efforts were underway during the first quarter of 2016 with 4,500 people trained. In addition, as part of the vision to establish a single billing process, has gone live with Epic at the centralized billing office. s MyChart, the Epic patient portal, now includes patients seen anywhere throughout, with nearly 11,000 people enrolled in the account. St. Luke s Divestiture (Please see previous filings for a detailed sequence of events regarding the divestiture order) On April 25, 2016, filed an Application for Approval of Proposed Divestiture of St. Luke s Hospital with the Federal Trade Commission ( FTC ). After the conclusion of a 30-day public comment period, the FTC will vote on the proposed application and plan of divestiture. Once approved, closing of the divestiture transaction will be scheduled, which we anticipate could occur sometime in Summer Until the effective date of divestiture, St. Luke s Hospital will continue to remain a member of. Quarterly Disclosure 15

19 Other Wildwood Orthopedic and Spine Hospital-Centers for Medicare and Medicaid Services On April 1, 2016, Wildwood Orthopedic and Spine Hospital launched the Center for Medicare and Medicaid Services (CMS) new Comprehensive Care for Joint Replacement (CJR) payment model. The primary goal of the model is to minimize the discrepancy in episode price for hip and knee joint replacement surgeries. Participating hospitals will be incentivized to deliver a high standard of care at a reasonable cost. Toledo is one of 67 cities across the United States participating in this program. To maximize the reimbursement, Wildwood Orthopedic and Spine, Toledo, Flower and Bay Park Hospitals have formed a multidisciplinary team to evaluate and standardize the processes at those facilities. Owens Corning Agreement As part of a three-year agreement with Owens Corning, will operate an employee health clinic and fitness center inside Owen s Corning world headquarters facility in Toledo, Ohio. The health center is exclusively for Owens Corning employees, their spouses and eligible adult dependents. The clinic will also offer a broad continuum of healthcare services including basic primary care, lab testing, workplace physicals and physical therapy. More than 500 patients were treated at the new clinic within its first month of opening and the clinic is seeing approximately 13 patients a day for primary care needs. Innovations Innovations is dedicated to working with local researchers, physicians and inventors to bring innovations to the healthcare market as efficiently as possible. has partnered with the Cleveland Clinic to utilize and share resources. A major new initiative relative to advancing innovation in traumatic brain injury is expected to be announced during the second quarter of Leadership Changes Corporate In February of 2016, Alan Sattler, the System s Chief Financial Officer, transitioned to a new role as Vice President Business Development at Paramount. Gary Akenberger, a 30 year seasoned veteran at and Senior Vice President of Finance, will serve as the interim Chief Financial Officer. A national search is currently underway for a new Chief Financial Officer. In January of 2016, Rose Ann Laureto was replaced as Chief Information Officer by Lori Johnston, who most recently served as President/Chief Administrative Officer of PPG. Lori has held various executive leadership positions during her 20 year career at and was instrumental in the integration and implementation of the EPIC system platform. Dr. Daniel Cassavar, who is currently the President/Chief Medical Officer of PPG, will continue to lead PPG as Lori transitions into her new role. Acute Care Effective March 31, 2016, Annette Phillips resigned from her position as President of Monroe Regional Hospital (PMRH). Dan Schwanke, Chief Operating Officer at St. Luke s Hospital, was appointed the interim President for PMRH, effective March 31. Dan will be responsible for overall day-to-day operations of PMRH and will transition into this new role during the first quarter of 2016, Dan has more than 28 years of experience with in multiple senior leadership positions. Physician Group In January 2016, Angela Brandt, the Vice President of Operations at PPG, accepted the position of Chief Operating Officer for PPG. Angela started with in 2013 after serving over 16 years in various leadership roles in healthcare. Quarterly Disclosure 16

20 MANAGEMENT DISCUSSION AND ANALYSIS Operational Performance s operating performance for the first three months of 2016 has been challenging as large expenses were incurred related to the EPIC electronic health record launch, start-up costs for the Health and Wellness Center, and incremental costs relating to additional urgent care centers which recently opened. Additionally softer volumes and lower quality of revenue also impacted profitability during the first quarter. Income Statement ($000's omitted) Health System Three Months Ended March 31 Obligated Group Three Months Ended March Revenues Net Patient Service Revenue $422,870 $423,526 $413,200 $414,792 Member Revenue 336, , Other 18,574 19,525 12,095 17,364 Total Operating Revenue 777, , , ,156 Expenses Salaries and Benefits 286, , , ,111 Supplies 58,643 57,514 53,379 52,126 Contracted Fees 81,133 69,245 42,662 37,839 Depreciation and Amortization 34,220 31,542 24,163 22,851 Interest 8,825 7,017 8,413 6,964 Other 322, , , ,913 Total Operating Revenue 791, , , ,804 Operating Income (14,233) 13,269 1,257 7,352 Other Income 8, ,214 2,353 31,505 Excess (Deficiency) of Revenue over Expenses ($5,369) $161,483 $3,610 $38,857 *Detailed financial statements are presented in the Appendix For the first three months ended March 31, 2016, s total operating revenue was $777.7 million, an increase of $2.3 million over the comparable period in Net patient service revenue declined ($0.7) million due to the closing in December of 2015 of Lake Park nursing care facility as they ramped down to a minimum number of patients. Also contributing to the decline in net patient revenue were decreased reimbursement rates due to a shift to more governmental payors. Membership revenue increased $4.0 million due to increased membership across the majority of the product lines. Quarterly Disclosure 17

21 Net Operating income For the first quarter of fiscal 2016, s operating income declined by $27.5 million when compared to the prior period in This equates to an operating margin of (1.8%) compared to 1.7% for the same period in As noted above, the decline in operating income was driven by significant expenses due to the implementation of the EPIC electronic health record launch. Increased salaries and benefits expenses also contributed to the decline in operating performance due to provider growth, startup of additional urgent care centers and expansion in the philanthropy area. Based on compliance requirements and expanded Medicaid membership, Paramount also incurred increased salaries and benefits as they increased their full-time equivalent employees. Revenue & Payor Mix As Health System has experienced continued growth in Medicaid products from the statewide expansion of coverage, the health plan now accounts for approximately 43% of Health System s total operating revenue. Continuum 4% Physician 7% Acute Care 43% Philanthropy & Other 3% Health Plan 43% Total System revenue as of March 31, 2016 of $777.7 million Uncompensated Care Bad debt and charity care for the three months ended March 31, 2016 increased from the prior year comparable period from 4.4% to 5.0% of operating revenue primarily due to increases in the patients deductible and coinsurance amounts in Health System (000's omitted) Three Months Ended March 31, 2016 Three Months Ended March 31, 2015 Charity Care $19,956 $15,844 Bad Debt $18,828 $18,355 Total Uncompensated Care $38,784 $34,199 % of Total Operating Revenue 5.0% 4.4% Quarterly Disclosure 18

22 Sources of Patient Revenue Paramount is currently one out of only five providers in the state of Ohio that offers Medicaid benefits through a managed care plan. Through March 31, 2016, has experienced a higher concentration of Medicaid patients compared to the same period last year due to more patient access to insurance coverage through the Ohio Medicaid expansion and the Patient Projection and Affordable Care Act (PPACA). Health System Year to Date March 31, 2016 Calendar Year Medicare (1) 44.0% 44.1% 44.3% 44.7% Medicaid (1) 19.8% 19.3% 19.6% 18.0% Blue Cross 11.7% 11.0% 11.0% 11.1% Managed Care 23.1% 24.0% 23.8% 24.4% Self-Pay 1.4% 1.6% 1.3% 1.8% Totals 100.0% 100.0% 100.0% 100.0% (1) Includes Medicare and Medicaid HMOs. Non-Operating Income Total Investment income for the three months ending March 31, 2016 was $8.2 million. This amount included $4.3 million of unrealized gains compared to prior year investment income of $41.0 million of which $24.7 was due to unrealized gains. The total market value of swap contracts declined by $3.3 million through March, due to unfavorable net changes in the underlying indices used to establish their fair value. Quarterly Disclosure 19

23 Balance Sheet ($000's omitted) Health System As of Obligated Group As of March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 Assets Unrestricted Cash & Investments $2,068,056 $2,073,451 $1,562,110 $1,579,889 Accounts Receivable, Net $258,685 $257,031 $264,274 $259,832 Other Current Assets $127,793 $131,293 $90,888 $176,025 Property, Plant and Equipment, Net 1,130,384 1,092, , ,363 Other Assets 602, ,165 55,900 59,624 Total Assets 4,187,728 4,185,775 2,904,701 2,984,733 Liabilities & Net Assets Current Liabilities 632, , , ,600 Long-Term Debt 721, , , ,122 Other Liabilities 268, , , ,208 Net Assets 2,566,175 2,570,505 1,606,384 1,700,803 Total Liabilities & Net Assets 4,187,728 4,185,775 2,904,701 2,984,733 Balance Sheet and Cash Flow As of March 31, 2016, had $2.1 billion of unrestricted cash and investments to fund operations and capital expenditures. This equated to days cash on hand as of March 31, 2016, compared with days at December 31, The decline in days cash on hand is due to the increased expenses associated with the EPIC launch and the funding of other strategic initiatives. Total debt was $907.5 million at March 31, 2016 and $909.8 million at December 31, 2015 and the total debt to capitalization ratio remained steady at 27% from December 31, capital expenditures were $71.4 million for the three months ended March 31, 2016 compared to $63.5 million for the prior year comparable period. Net cash provided by operating activities was $34.5 million in the three months ended March 31, 2016 compared to $68.5 million provided by operating activities in the three months ended March 31, 2015 due to the decline in operating performance as well as prior year inherent contribution of acquired net assets from Monroe Regional Hospital. Quarterly Disclosure 20

24 Debt The composition of s current debt structure, as of March 31, 2016, is summarized below: Series Par Outstanding Product Final Maturity Average Coupon Tax Status Series 1998 Reynolds Road 3,785,000 Weekly VRDBS 1/1/2019 Variable Taxable Series 2008A 62,500,000 Direct Loan 11/15/2034 Variable Tax-Exempt Series 2008D 53,000,000 Fixed Rate 11/15/ % Tax-Exempt Series 2011A 181,235,000 Fixed Rate 11/15/ % Tax-Exempt Series 2011B 17,445,000 Fixed Rate 11/15/ % Tax-Exempt Series 2011C 16,975,000 Direct Loan 11/15/2019 Variable Tax-Exempt Series 2011D 132,395,000 Fixed Rate 11/15/ % Tax-Exempt Series 2011E 8,040,000 Fixed Rate 11/15/ % Tax-Exempt Series 2015A 273,000,000 Fixed Rate 11/15/ % Taxable Series 2015B 46,755,000 Fixed Rate 11/15/ % Tax-Exempt Series 2015C 28,140,000 Direct Loan 11/15/2051 Variable Taxable Series 2015D 5,000,000 Direct Loan 11/15/2025 Variable Taxable Series 2015E 38,885,000 Direct Loan 11/15/2035 Variable Taxable Sub Total 867,155,000 Other* 40,352, ,507,000 *Other debt includes capital lease obligations, and other miscellaneous notes and loans Interest Rate Swaps: utilizes interest rate swaps as part of its risk management strategy to manage exposure to fluctuations in interest rates and to manage the overall cost of its debt. Derivatives are used to manage identified and approved exposures and are not used for speculative purposes. The following is a summary of the outstanding interest rates swaps as of March 31, Debt Swapped Series 1998 Reynolds Road Series 2008A Instrument Type Notional Amount Maturity Date YTD Gain(Loss) thru 3/31/2016 3/31/2016 Mark-to-Market Floating to Fixed Rate 3,785,000 1/1/2019 (3,353,831) (326,646) Floating to Fixed Rate 62,500,000 11/15/ ,184 (21,342,107) (3,329,647) (21,668,753) Quarterly Disclosure 21

25 maintains a conservative debt structure. Approximately 90% of debt is fixed rate as shown in the graph to the right. Fixed/Variable Debt Mix* (000 s omitted) Variable $89,000 10% Synthetic Fixed $66,285 8% Synthetic Fixed includes swap on 2008A Bonds and Reynolds Road 1998 Bonds. Fixed $711,870 82% Total outstanding debt as of March 31, 2016 of $907.5 million *Excludes capital leases, other misc notes & loans of $40,352. Recent Debt Activity On April 1, 2016, St. Luke s Hospital was withdrawn from the Obligated Group pursuant to the terms and conditions in the Restated Master Trust Indenture dated June 15, Ratings In August 2015 Moody s Investor Services affirmed its Aa3 rating with a stable outlook. Standard and Poors affirmed their AA rating in September of 2015 with outlook changed from stable to negative. Quarterly Disclosure 22

26 Investments Total unrestricted cash and investments for as of March 31, 2016 and December 31, 2015 were as follows: Unrestricted Cash and Investments (000's) 3/31/ /31/2015 Cash and Cash Equivalents 393,807 19% 363,478 17% Marketable Securities 176,292 9% 162,609 8% Internally Designated Investments for Capital Acquisitions 1,497,957 72% 1,547,364 75% Total unrestricted assets 2,068,056 2,073,451 centralizes the management of cash and investments maximizing flexibility and allowing for efficiencies in managing liquidity. The majority of s investments are pooled in a master trust arrangement, with custody provided by BNY Mellon. Investments held outside of the pooled trusts are done so due to regulatory requirements or other purposes. Governance of all investments is provided by the Investment Committee, who annually approves the investment policies. A summary of the investment portfolios is as follows: Short Term Operating Pool 14% Segregated and Restricted Funds 5% Health Plan 11% Long Term Operating Pool 70% maintains a highly diversified investment portfolio and utilizes and independent investment advisor to assist in setting the asset allocation, developing the Investment Policy Statement, performance reporting, compliance monitoring and manager selection. The following chart illustrates the asset allocation for pooled investments as of March 31, Total investment pools as of March 31, 2016 of $2.1 billion Quarterly Disclosure 23

27 Operating Pools Asset Allocation ST Fixed 16% LT Fixed 19% Real Return 5% Global Long/Short 7% US Large Cap 16% Large Cap Global 17% US Smid Cap 8% Int'l/EM Equities 12% s investment portfolio is primarily composed of Level I and Level II securities with limited exposure to level III type investments. The value of level III investments as of March 31, 2016 is $54.5 million or 3% of the portfolio, and are comprised of land held for investment, the foundations beneficial interests in funded perpetuities and a nominal allocation to private capital. 1% Liquidity maintains a high level of liquidity within the investment portfolio. Approximately $146.3 million or 6% of investments have liquidity provisions that may restrict their ability to be liquidated in 30 days or less, and approximately $26.3 million or 1% have liquidity provisions greater than one year. 5% 6% 88% Illiquid Quarterly Monthly < 5 Days Pension Plans Health System provides a cash balance pension plan covering the majority of s employees. As of December 31, 2015, the plans projected benefit obligation for the system excluding St Luke s Hospital, exceeded the fair value of the pension trusts by approximately $79 million. The System contributes to the plan annually based upon actuarially determined funding guidelines. As of March 31, 2016, the System funded $4.2 million to the plan. The total pension-related liability of the System, excluding St. Luke s Hospital Corporation was $72.4 million as of March 31, Quarterly Disclosure 24

28 Health System Financial Indicators Profitability March 31, 2016 March 31, 2015 Operating Margin (1.8%) 1.7% Operating Cash Flow Margin 3.7% 6.7% Liquidity/Leverage March 31, 2016 December 31, 2015 Days Cash on Hand Debt-to-Capitalization 27% 27% Cash to Debt Cash to Demand Debt Quarterly Disclosure 25