Capital Health System, Inc. and Subsidiaries Year Ended December 31, 2016 With Reports of Independent Auditors

C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION AND A UDIT R EPORTS AND S CHEDULES R ELATED TO T HE U NIFORM G UIDANCE AND N EW J ERSEY OMB C IRCULAR L ETTER 15-08 System, Inc. and Subsidiaries Year Ended December 31, 2016 With Reports of Independent Auditors Ernst & Young LLP

Consolidated Financial Statements and Supplementary Information and Audit Reports and Schedules Related to the Uniform Guidance and New Jersey OMB Circular Letter 15-08 December 31, 2016 Contents Report of Independent Auditors...1 Consolidating Financial Statements Consolidated Balance Sheets...3 Consolidated Statements of Operations...4 Consolidated Statements of Changes in Net Assets...5 Consolidated Statements of Cash Flows...6 Notes to Consolidated Financial Statements...7 Supplementary Information Consolidating Balance Sheet...40 Consolidating Statement of Operations...41 Consolidating Schedule of Property and Equipment...42 Consolidating Schedule of Long-Term Debt...43 Consolidating Statement of Cash Flows...44 Consolidating Statement of Changes in Net Assets...45 Supplementary Information and Audit Reports and Schedules Related to the Uniform Guidance and New Jersey OMB Circular Letter 15-08 Schedule of Expenditures of Federal Awards...46 Schedule of Expenditures of State Awards...47 Notes to Schedules of Expenditures of Federal and State Awards...48 Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards...49 Report of Independent Auditors on Compliance for Each Major Federal and State Program and Report on Internal Control Over Compliance Required by the Uniform Guidance and New Jersey OMB Circular Letter 15-08...51 Schedule of Findings and Questioned Costs...54 Schedule of Budgeted and Actual Expenditures...57

The Board of Directors System, Inc. Report on the Financial Statements Report of Independent Auditors We have audited the accompanying consolidated financial statements of System, Inc. and Subsidiaries (), which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion Ernst & Young LLP 99 Wood Avenue South Metropark P.O. Box 751 Iselin, NJ 08830-0471 Tel: +1 732 516 4200 Fax: +1 732 516 4429 ey.com In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of System, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations, changes in their net assets and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. 1 A member firm of Ernst & Young Global Limited

Supplementary information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating balance sheet, and consolidating schedules of property and equipment and long-term debt as of December 31, 2016 and the consolidating statements of operations, cash flows, and changes in net assets for the year then ended are presented for purposes of additional analysis as required by the U.S. Department of Housing and Urban Development and the accompanying schedules of federal and state expenditures and the schedule of budget and actual expenditures as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and New Jersey Office of Management and Budget Circular Letter 15-08, Single Audit Policy for Recipients of Federal Grants, State Grants and State Aid, respectively, are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information, except for the portion marked unaudited, has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information, except for the portion marked unaudited, on which we express no opinion, is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we also have issued our report dated April 17, 2017 on our consideration of the s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering s internal control over financial reporting and compliance. April 17, 2017, except for the schedules of expenditures of federal and state awards and schedule of budget and actual expenditures for which the date is September 18, 2017 EY 2 A member firm of Ernst & Young Global Limited

Consolidated Balance Sheets December 31 2016 2015 Assets (In Thousands) Current assets: Cash and cash equivalents $ 12,309 $ 12,637 Short-term investments 105,020 114,816 Assets whose use is limited current portion 3,288 3,423 Patient accounts receivable, net of allowance for doubtful accounts of $38,545 in 2016 and $38,513 in 2015 86,119 94,244 Supplies 9,394 8,388 Prepaid expenses and other current assets 16,284 14,458 Total current assets 232,414 247,966 Investments 6,061 5,648 Assets whose use is limited noncurrent portion 107,195 93,283 Property, plant, and equipment, net 593,603 641,721 Other noncurrent assets 7,907 1,375 $ 947,180 $ 989,993 Liabilities and net assets Current liabilities: Current portion of long-term debt $ 17,263 $ 17,707 Accounts payable 34,718 26,069 Accrued expenses 43,481 37,588 Accrued interest 4,046 4,138 Estimated third-party payor settlements current portion 4,802 2,762 Total current liabilities 104,310 88,264 Long-term debt, excluding current portion 686,675 703,126 Estimated third-party payor settlements and other long-term liabilities noncurrent portion 38,065 32,261 Total liabilities 829,050 823,651 Commitments and contingencies Net assets: Unrestricted 108,921 158,026 Temporarily restricted 3,615 2,534 Permanently restricted 4,934 4,920 Total System net assets 117,470 165,480 Non-controlling interest 660 862 Total net assets including non-controlling interest 118,130 166,342 $ 947,180 $ 989,993 See accompanying notes. 3

Consolidated Statements of Operations Year Ended December 31 2016 2015 Unrestricted net assets: (In Thousands) Revenue: Net patient service revenue $ 584,899 $ 633,535 Provision for bad debt (34,245) (52,523) Net patient service revenue, less provision for bad debts 550,654 581,012 Other revenue 18,055 14,468 Unrestricted contributions 339 326 Total revenue 569,048 595,806 Expenses: Salaries and wages 265,505 254,131 Employee benefits 39,529 40,064 Supplies and other expenses 207,037 195,904 Interest 53,583 54,788 Depreciation and amortization 59,715 63,040 Total expenses 625,369 607,927 Loss from operations prior to items below (56,321) (12,121) Investment income and realized gains and losses, net 5,353 9,215 Other 219 25 Deficiency of revenue over expenses, before non-controlling interest (50,749) (2,881) Less: gain attributable to non-controlling interest 1,333 1,656 Deficiency of revenue over expenses (52,082) (4,537) Net change in unrealized gains and losses on investments 931 (9,230) Net assets released from restrictions for equipment 1,085 214 Pension-related changes other than net periodic pension cost 961 802 Decrease in unrestricted net assets $ (49,105) $ (12,751) See accompanying notes. 4

Consolidated Statements of Changes in Net Assets Temporarily Permanently Non-controlling Unrestricted Restricted Restricted Interest Total (In Thousands) Net assets at December 31, 2014 $ 170,777 $ 2,774 $ 4,915 $ 1,116 $ 179,582 (Deficiency) excess of revenue over expenses (4,537) 1,656 (2,881) Net change in unrealized gains and losses on investments (9,230) (9,230) Member distributions, net (1,910) (1,910) Donor restricted contributions 478 5 483 Net assets released from restrictions for equipment 214 (214) Pension-related changes other than net periodic pension cost 802 802 Net assets released from restrictions for operations (504) (504) (Decrease) increase in net assets (12,751) (240) 5 (254) (13,240) Net assets at December 31, 2015 158,026 2,534 4,920 862 166,342 (Deficiency) excess of revenue over expenses (52,082) 1,333 (50,749) Net change in unrealized gains and losses on investments 931 931 Pension-related changes other than net periodic pension cost 961 961 Member distributions, net (1,535) (1,535) Donor restricted contributions 2,562 14 2,576 Net assets released from restrictions for equipment 1,085 (1,085) Net assets released from restrictions for operations (396) (396) (Decrease) increase in net assets (49,105) 1,081 14 (202) (48,212) Net assets at December 31, 2016 $ 108,921 $ 3,615 $ 4,934 $ 660 $ 118,130 See accompanying notes. 5

Consolidated Statements of Cash Flows Year Ended December 31 2016 2015 (In Thousands) Cash flows from operating activities Decrease in net assets $ (48,212) $ (13,240) Adjustments to reconcile decrease in net assets to net cash provided by operating activities: Depreciation and amortization 59,715 63,040 Amortization of deferred financing fees 812 829 Net change in unrealized gains and losses on investments (931) 9,230 Gain on disposal of fixed assets (219) (25) Pension-related changes other than net periodic pension cost (961) (802) Member distributions, net, related to non-controlling interest 1,535 1,910 Changes in operating assets and liabilities: Patient accounts receivable, net 8,125 (4,058) Supplies (1,006) 2,361 Prepaid expenses and other current assets (1,826) 330 Other noncurrent assets (6,532) 96 Accounts payable 8,649 (7,810) Accrued expenses 6,854 (5,366) Accrued interest (92) (85) Estimated third-party payor settlements and other long-term liabilities 7,844 2,044 Net cash provided by operating activities 33,755 48,454 Cash flows from investing activities Net purchases of assets whose use is limited (13,218) (7,333) Net sales (purchases) of investments 9,755 (10,777) Distribution to Members (1,535) (1,910) Cash proceeds from sale of property and equipment 334 99 Purchases of property and equipment, net (11,712) (13,676) Net cash used in investing activities (16,376) (33,597) Cash flows from financing activities Payments of capital leases (1,583) (1,601) Payments of long-term debt (16,124) (15,068) Net cash used in financing activities (17,707) (16,669) Net decrease in cash and cash equivalents (328) (1,812) Cash and cash equivalents at beginning of year 12,637 14,449 Cash and cash equivalents at end of year $ 12,309 $ 12,637 Noncash investing and financing transactions Assets acquired under capitalized lease obligations $ $ 20 Supplemental disclosures of cash flow information Cash paid for interest expense $ 52,863 $ 54,044 See accompanying notes. 6

Notes to Consolidated Financial Statements December 31, 2016 1. Organization and Summary of Significant Accounting Policies System, Inc. (), a New Jersey nonprofit corporation, consists of two operating divisions: Regional Medical Center (Regional) and Medical Center Hopewell (Hopewell). Regional is a separately licensed acute care hospital with 237 licensed beds, located in Trenton, New Jersey. at Mercer ceased operations as a separately licensed acute care hospital on November 6, 2011. Hopewell consists of a separately licensed acute care hospital with 221 licensed beds, located in Hopewell Township, New Jersey and an ambulatory care facility located in Hamilton, New Jersey. is the sole member of Foundation (the Foundation), a nonprofit corporation and Population Health Management Service LLC (PHM). is also the sole shareholder of two for-profit corporations: Mercer Holding Corporation (Mercer Holding) and Capital Region Insurance Company (CRIC). Effective January 24, 2017, reorganized its corporate structure. care, Inc. (CHI), a New Jersey nonprofit corporation, was formed as the sole member of. CHI is also the sole member of Leading Integrated Network of Clinicians, LLC (LINC), a limited liability company with no activity in 2016 or 2015. is the sole member of Capital Health Medical Group (CHMG), a limited liability company with no activity in 2016 or 2015. Mercer Holding owns 100% of the capital stock of Bellevue Avenue Management, Inc. (Bellevue), a for-profit company which provides management services; 100% of the capital stock of Oasis Spa at Hopewell, LLC (Oasis Spa), a for-profit company which provides spa services at Hopewell; 100% of the capital stock of Accountable Care Organization Limited Liability Company (ACO), a for-profit Company with no activity in 2016 or 2015; and 100% of the capital stock of Capital Pharmacy LLC (Capital Pharmacy), a for-profit Company with no activity in 2016 or 2015. Mercer Holding has a 43.76% ownership interest in Hamilton Surgery Center, LLC (Hamilton Surgery Center) and majority control of the Board of Directors. Mercer Holding accounts for the non-controlling interest in Hamilton Surgery Center in accordance with Accounting Standards Codification (ASC) 810, Consolidation. Beginning January 17, 2017 Mercer Holding owns 100% of the capital stock of Comprehensive Imaging and Diagnostics LLC (CI), a for-profit company which provides radiology services. CI had no activity in 2016 or 2015. 7

1. Organization and Summary of Significant Accounting Policies (continued) CRIC is a captive insurance company formed under the laws of the Cayman Islands, which provides professional and general liability coverage for and its employees. System Condominium Association, Inc. (the Association) is a nonprofit corporation that provides maintenance, preservation and control of the common areas within Hopewell. Capital Health is grantor of the Association and has majority control of its Board of Trustees. As such, the Association is consolidated in the accompanying consolidated financial statements. Stroke and Cerebrovascular Center of New Jersey, P.C. (SCNJ) is a professional service corporation which operates a medical practice specializing in cerebrovascular and neurosurgical services at. An employed physician of was the sole shareholder of SCNJ. had control over the appointment of shareholders and directors in SCNJ, and as such, SCNJ was included in the accompanying consolidated financial statements in December 31, 2015. On March 15, 2015, SCNJ ceased operations as a professional service corporation. A summary of significant accounting policies of follows: Principles of Consolidation The consolidated financial statements include the accounts of, The Foundation, Mercer Holding, The Association, PHM, and CRIC. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, such as estimated allowance for doubtful accounts, estimated settlements with third-party payors, professional liability insurance, pension benefit assets, and disclosures of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the amounts of revenue and expenses reported during the period. There is at least a reasonable possibility that certain estimates will change by material amounts in the near term. Actual results could differ from those estimates and assumptions. 8

1. Organization and Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents Cash and cash equivalents include investments in highly-liquid instruments with a maturity of three months or less when purchased, excluding assets whose use is limited by board designation, debt and trust agreements or other arrangements and those held in the investment portfolio. does not hold any money market funds with significant liquidity restrictions that would require the funds to be excluded from cash equivalents Patient Accounts Receivable and Net Patient Service Revenue Patient accounts receivable results from health care services provided by. Additions to the allowance for doubtful accounts result from the provision for bad debts. Accounts written off as uncollectible are deducted from the allowance for doubtful accounts. The amount of the allowance for doubtful accounts is based upon management s assessment of historical and expected net collections, business and economic conditions, trends in Medicare and Medicaid health care coverage and other collection indicators. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, and includes estimated retroactive revenue adjustments due to future audits, reviews and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are provided and adjusted in future periods, as adjustments become known, or as years are no longer subject to such audits, reviews and investigations (see Note 3). Investments Short-term investments are readily marketable and not subject to donor restriction. Investments include amounts under donor restrictions. 9

1. Organization and Summary of Significant Accounting Policies (continued) Investments in equity securities (including mutual funds) with readily determinable fair values and all investments in debt securities (including mutual funds) are measured at fair value in the consolidated balance sheets. Investment income or loss (including realized gains and losses on investments, other than temporary impairments of investments, and interest and dividends) are included in the deficiency of revenue over expenses, unless the income or loss is restricted by donor or law. Net change in unrealized gains and losses on investments, except for those unrealized losses which are deemed to be other than temporary impairments, are excluded from the deficiency of revenue over expenses. The fair value of marketable investments is determined by reference to quoted market prices. Assets Whose Use is Limited Assets whose use is limited includes investments held by CRIC (see Note 4), restricted investments for collateral, assets held under the debt agreement and assets held under a supplemental retirement plan. Assets whose use is limited are recorded at fair value determined by reference to quoted market prices. Supplies Supplies are carried at the lower of cost, determined on the first-in, first-out method, or market. Deferred Financing Costs Deferred financing costs include the costs of obtaining financing and are amortized over the period the obligation is outstanding using the effective interest method. adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, retrospectively as required. As a result, unamortized deferred financing costs of $10,124 and $10,936 at December 31, 2016 and 2015, respectively, has been reported as a direct reduction from longterm debt in the consolidated balance sheets. Deferred financing fees are reported net of accumulated amortization of $6,565 and $5,753 at December 31, 2016 and 2015, respectively. Property, Plant, and Equipment Property, plant, and equipment are recorded at cost, except those acquired by gift or bequest which are recorded at their fair value established at date of contribution. 10

1. Organization and Summary of Significant Accounting Policies (continued) Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line method. The estimated lives range from two to forty years. continually evaluates whether later events and circumstances have occurred that indicate that the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, uses an estimate of the related undiscounted operating income over the remaining life of the long-lived asset, or determines the fair value of the long-lived asset in measuring whether the long-lived asset is recoverable. Estimated Professional Liabilities Insurance reserves represent estimated unpaid losses and loss adjustment expenses. Such amounts are established using management s estimates on the basis of claims records and an independent actuarial review and include an amount for the adverse development of reported claims. Adjustments to the estimate of the liability for losses are reflected in earnings in the period in which the adjustment is determined. The insurance reserves are based on estimates and, while management believes that the amount is adequate, the ultimate liability may vary significantly from the amount provided. Amounts are recorded within other long-term liabilities within the accompanying consolidated balance sheets. Classification of Net Assets separately accounts for and reports upon donor restricted and unrestricted net assets. Unrestricted net assets are not externally restricted for identified purposes by donors or grantors. Resources arising from the results of operations or assets set aside by the Board of Directors are not considered to be donor restricted. Temporarily restricted net assets are those whose use is temporarily limited by the donor. Permanently restricted net assets have been restricted by donors to be maintained by in perpetuity. When a donor restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of operations as other revenue, if intended for operations, or below deficiency of revenue over expenses, if intended for capital purposes. Income earned from temporarily restricted net assets is included in investment income and realized gains and losses, net, unless the income is restricted by the 11

1. Organization and Summary of Significant Accounting Policies (continued) donor, in which case it is added to temporarily restricted net assets. Income earned from permanently restricted net assets is not subject to donor restriction and is, therefore, included in the consolidated statements of operations as investment income and realized gains and losses, net. follows the requirements of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as it relates to its permanently restricted contributions and net assets, as enacted by the State of New Jersey in 2009. expends the income distributed from the related assets according to donor stipulations. Advertising Costs expenses advertising costs as incurred. Total amounts charged to advertising expense during the years ended December 31, 2016 and 2015 were $2,519 and $1,931, respectively. Deficiency of Revenue Over Expenses The consolidated statements of operations include deficiency of revenue over expenses as the performance indicator. Changes in unrestricted net assets which are excluded from deficiency of revenue over expenses, include the net change in unrealized gains and losses on investments (excluding those considered to be other than temporary), net assets released from restrictions for equipment and pension-related changes other than net periodic pension cost. Transactions deemed by management to be ongoing, major or central to the provision of health care services are reported within loss from operations. Functional Expenses All operating expenses incurred by were related to the provision of health care services. 12

1. Organization and Summary of Significant Accounting Policies (continued) Income Taxes and the Foundation are nonprofit corporations as described in Section 501(c)(3) of the Internal Revenue Code (the Code) and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. The Foundation is classified with public charity status of 170(b)(1)(A)(vi) under Section 501(c)(3) of the Code. These entities are also exempt from state and local income taxes. Mercer Holding is a taxable entity; amounts provided for federal and state and local income taxes are included in supplies and other expenses in the accompanying consolidated financial statements. However, such amounts are not material for disclosure. The Association is a New Jersey nonprofit association, with no taxable income recorded during 2016 or 2015. CRIC is not subject to taxes on income or gains under Section 6 of the Cayman Islands Tax Concessions Law (Revised). Therefore, no provision for taxes has been made in the accompanying consolidated financial statements. ACO and Capital Pharmacy are taxable entities with no activity in 2016 or 2015. Therefore, no provision for taxes has been made in the accompanying consolidated financial statements. Pension Plan s policy is to fund amounts as necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). recognizes in its consolidated balance sheets an asset for its defined benefit pension plan s (the Plan) overfunded status or a liability for the Plan s underfunded status, measures the Plan s assets and obligations that determine its funded status as of the end of its fiscal year, and recognizes changes in the funded status of the Plan in changes in unrestricted net assets in the year in which the changes occur (see Note 9). Recent Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or 13

1. Organization and Summary of Significant Accounting Policies (continued) services. The guidance in ASU 2014-09 supersedes the FASB s current revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance. The provisions of ASU 2014-09 are effective for Capital Health for annual reporting periods beginning after December 15, 2018. has not completed the process of evaluating the impact of ASU 2014-09 on its consolidated financial statements. In August 2014, the FASB issued ASU 2014-15, Presentations of Financial Statements Going Concern, that will require management of public and nonpublic companies to evaluate and disclose where there is substantial doubt about an entity s ability to continue as a going concern. The amendments are effective for annual periods ending after December 15, 2016, and for annual periods thereafter. adopted the provisions of this standard for the year ended December 31, 2016. This adoption had no impact on the consolidated financial statements. In April 2015, the FASB issued ASU 2015-05, Customer s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If certain criteria are met, an entity may account for such an arrangement under the internal use software guidance included in Accounting Standards Codification ( ASC ) 350-40, Internal Use Software, whereby amounts are capitalized. If such criteria are not met, the cloud computing arrangement is considered a service contract and the related costs are expensed as incurred. ASU 2015-05 is effective for public business entities for fiscal years beginning after December 15, 2015 with the option to apply the guidance prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. adopted ASU 2015-05 prospectively as of January 1, 2016 with no impact to the 2016 consolidated financial statements. In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall. ASU 2016-01 will require business-oriented health care not-for-profit entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in the performance indicator unless the investments qualify for a new practicality exception. The practicality exception is available for equity investments without a readily determinable fair value, for which measurement would be based on cost less impairment and adjusted for observable price changes. Subsequent to the adoption of ASU 2016-01, will no longer be able to 14

1. Organization and Summary of Significant Accounting Policies (continued) recognize unrealized holding gains and losses on equity securities currently classified as otherthan-trading outside of the performance indicator. This ASU does not impact the accounting for investments in debt securities. The guidance is effective for annual periods beginning after December 15, 2018. Early adoption is permitted for annual periods beginning after December 15, 2017. has not completed the process of evaluating the impact of ASU 2016-01 on its consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases that will require lessees to report most leases on their balance sheet and recognize expenses on their income statement in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions. Lessors in operating leases continue to recognize the underlying asset and recognize lease income on either a straight-line basis or another systematic and rational basis. The provisions of ASU 2016-02 are effective for for annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted. has not completed the process of evaluating the impact of ASU 2016-02 on its consolidated financial statements. In August 2016, the FASB issued ASU 2016-14, Not-for-Profit Financial Statement Presentation, which eliminates the requirement for not-for-profits (NFPs) to classify net assets as unrestricted, temporarily restricted and permanently restricted. Instead, NFPs will be required to classify net assets as net assets with donor restrictions or without donor restrictions. Among other things, the guidance also modifies required disclosures and reporting related to net assets, investment expenses and qualitative information regarding liquidity. NFPs will also be required to report all expenses by both functional and natural classification in one location. The provisions of ASU 2016-14 are effective for for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. Capital Health has not completed the process of evaluating the impact of ASU 2016-14 on its consolidated financial statements. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments, which addresses the following eight specific cash flow issues in order to limit diversity in practice: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the 15

1. Organization and Summary of Significant Accounting Policies (continued) settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The provisions of ASU 2016-15 are effective for for annual periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. has not completed the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements. In November 2016,the FASB issued ASU 2016-18, Statement of Cash Flows Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of- period and end-of-period total amounts shown on the statement of cash flows. The provisions of ASU 2016-18 are effective for for annual periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. has not completed the process of evaluating the impact of ASU 2016-18 on its consolidated financial statements. Reclassifications Certain reclassifications have been made to the 2015 consolidated financial statements to conform to the presentation in the 2016 consolidated financial statements. 2. Charity Care provides care to patients who meet certain criteria defined by the New Jersey Department of Health (DOH) without charge or at amounts less than established rates. Because does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. s records identify and monitor the level of charity care it provides and include the amount of charges forgone for services and supplies furnished. DOH allows retroactive application for charity care up to two years from the date of service. 16

2. Charity Care (continued) The costs of charity care is derived from both estimated and actual data. The estimated cost of charity care includes the direct and indirect cost of providing such services and is estimated utilizing s ratio of cost to gross charges, which is then multiplied by the gross uncompensated charges associated with providing care to charity patients. Charity care provided, at cost, during 2016 and 2015 totaled approximately $32,504 and $32,823, respectively. receives payments from the New Jersey Health Care Subsidy Funds for charity care and such amounts totaled approximately $21,005 and $26,790 for the years ended December 31, 2016 and 2015, respectively (Note 3). 3. Net Patient Service Revenue Patient Accounts Receivable and Net Patient Service Revenue recognizes accounts receivable and patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered (see description of third-party payor payment programs below). For uninsured patients that do not qualify for charity care, recognizes revenue on the basis of discounted rates under s self-pay patient policy. Under the policy for self-pay patients, a patient who has no insurance and is ineligible for any government assistance program has his or her bill reduced to the amount which would be billed to a commercially insured patient. Previously, uncollectible amounts for such patients were recorded as provision for bad debts. Patient service revenue for the years ended December 31, 2016 and 2015, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources, is as follows: 2016 2015 Third party payors $ 561,503 $ 608,196 Self-pay 23,396 25,339 Total payors $ 584,899 $ 633,535 17

3. Net Patient Service Revenue (continued) Deductibles and copayments under third-party payment programs with third-party payors are the patient s responsibility and considers these amounts in its determination of the provision for bad debts based on collection experience. Accounts receivable are also reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, Capital Health analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for payors who are known to have financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients, which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill, records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between discounted rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. s allowance for doubtful accounts totaled $38,545 and $38,513 at December 31, 2016 and 2015, respectively. The allowance for doubtful accounts for self-pay patients was approximately 31% and 29% of self-pay accounts receivable as of December 31, 2016 and 2015. Overall, the total of self-pay discounts and write-offs has not changed significantly for the year ended December 31, 2016. has not experienced significant changes in write-off trends and has not changed its charity care policy for the years ended December 31, 2016 and 2015. 18

3. Net Patient Service Revenue (continued) Third Party Payment Programs has agreements with third-party payors that provide for payment for services rendered at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: Medicare: Hospitals are paid for most Medicare inpatient and outpatient services under the national prospective payment system and other methodologies of the Medicare program for certain other services. Federal regulations provide for certain adjustments to current and prior years payment rates, based on industry-wide and hospital-specific data. Medicare cost reports of have been audited and settled for years through 2013, except for 2008, at December 31, 2016. Medicaid: Inpatient acute care services rendered to Medicaid program beneficiaries are paid at prospectively determined rates per discharge. Outpatient services rendered to Medicaid program beneficiaries are reimbursed under cost-based and fee schedule methodologies. is reimbursed for outpatient services at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by the Medicaid fiscal intermediary. The Medicaid cost reports of for years through 2013 have been audited and settled at December 31, 2016. Other Third Party Payors: also has entered into payment agreements with certain commercial insurance carriers and health maintenance organizations. The basis for payment to under these agreements includes prospectively determined rates per discharge or days of hospitalization and discounts from established charges. No material revenue was recorded in 2016 or 2015 for net adjustments and settlements related to prior years. has appealed certain items in audited cost reports. The outcome of these appeals is uncertain and, therefore, potential revenue associated with these appeals is not included within the accompanying consolidated statements of operations. 19

3. Net Patient Service Revenue (continued) has provided for certain amounts which are expected to be repaid in relation to a Medicare supplemental payment referred to as disproportionate share, under which is paid additional funds based on the number of Medicaid and similar patients it serves. The disproportionate share formula and the requirements for inclusion of certain types of patient days are extremely complex. The underlying data for the formula has been subject to state-wide evaluations by the national and regional administrators of the federal Medicare and New Jersey Medicaid programs in recent years. In 2009, amounts related to cost report years 2001 through 2004 were settled by Medicare. Beginning in August 2010, certain data related to cost report years 2005 through 2007 was required to be resubmitted by hospitals state-wide. As part of this resubmission process in 2010, reviewed and revised the applicable data to be in conformity with management s interpretation of the disproportionate share formula requirements. Data for cost report years 2005 through 2007 and analysis for similar revisions for cost report years through 2014, and the impact on the estimated disproportionate share calculations from any resulting data revisions, are reviewed regularly by management of. In 2013, Medicare settled cost reports for years 2006 and 2007. In 2014, Medicare settled cost reports for years 2009 and 2010. In 2015, Medicare settled cost reports for the year 2011. In 2016, Medicare settled cost reports for the years 2012 and 2013. believes that adequate provision has been made for this issue; however, the resubmitted data and subsequent years information are subject to review in the future by the national and regional administrators of the Medicare and Medicaid programs. Revenue from the Medicare and Medicaid programs accounted for approximately 23% and 24% of s net patient service revenue for the years ended December 31, 2016 and 2015, respectively. There are various proposals at the federal and state levels that could, among other things, significantly reduce payment rates or modify payment methods. The ultimate outcome of these proposals and other market changes, including the potential effects of health care reform that has been enacted by the federal government, cannot presently be determined. Future changes in the Medicare and Medicaid programs and any reduction of funding could have an adverse impact on. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. believes that it is in compliance 20

3. Net Patient Service Revenue (continued) with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that could have a material adverse effect on its consolidated financial statements. Noncompliance with such laws and regulations could result in fines, penalties and exclusion from such programs. State Subsidy Funds The New Jersey Health Care Subsidy Funds were established for various purposes, including the distribution of charity care payments to hospitals statewide. The following is a summary of subsidy revenue included in net patient service revenue: 2016 2015 Charity care (Note 2) $ 21,005 $ 26,790 Delivery system reform incentive payments 4,074 4,949 Mental health 957 958 $ 26,036 $ 32,697 Effective January 1, 2014, the State of New Jersey replaced the Hospital Relief Subsidy Fund with a new payment mechanism referred to as the Delivery System Reform Incentive Payment Pool (the Pool). The Pool is available to certain hospitals that are able to establish performance improvement activities in one of eight specified clinical improvement areas. s application with the State of New Jersey to participate in the Pool has been approved. Amounts received from the Pool are subject to the satisfaction of clinical improvement areas. Amounts received from the Pool are subject to the satisfaction of certain performance criteria, which adjustments to the Pool allocations processed prospectively. expects to receive approximately $9,460 in Charity Care subsidies for distributions scheduled through June 30, 2017. Charity Care subsidies subsequent to June 30, 2017 are presently unknown. 21

4. Assets Whose Use is Limited Assets whose use is limited consist of the following: December 31 2016 2015 Restricted investments for collateral $ 8,285 $ 8,183 Assets held under supplemental retirement plan 11,236 8,790 Assets held under debt agreement 71,097 56,073 Assets held by CRIC (see Note 13) 19,865 23,660 Total assets whose use is limited 110,483 96,706 Less: assets whose use is limited current portion 3,288 3,423 $ 107,195 $ 93,283 Assets held under debt agreements are maintained for the following purposes: December 31 2016 2015 Mortgage reserve fund $ 67,809 $ 52,650 Mortgage insurance premium 3,288 3,373 Environmental escrow 50 $ 71,097 $ 56,073 22

4. Assets Whose Use is Limited (continued) s gross unrealized losses and fair value of individual securities, classified as assets whose use is limited, aggregated by investment category, which have been in a continuous unrealized loss position less than 12 months and greater than 12 months at December 31, 2016 and 2015 are as follows: December 31, 2016 Less than Twelve Months Twelve Months or Longer Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses Fixed income securities (6 securities) $ 7,730 $ (73) $ 4,685 $ (161) $ 12,415 $ (234) Mutual funds equity income securities (7 funds) 1,706 (90) 1,706 (90) Total $ 7,730 $ (73) $ 6,391 $ (251) $ 14,121 $ (324) December 31, 2015 Less than Twelve Months Twelve Months or Longer Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses Fixed income securities (7 securities) $ 12,556 $ (849) $ 3,532 $ (259) $ 16,088 $ (1,108) Mutual funds fixed income securities (12 funds) 7,394 (324) 7,394 (324) Total $ 19,950 $ (1,173) $ 3,532 $ (259) $ 23,482 $ (1,432) At December 31, 2016 and 2015, the unrealized losses of approximately $324 and $1,432, respectively, were not deemed to be other than temporary based on s ability and intent to hold the funds until recovery. 23

5. Investments Investments consist of the following: December 31 2016 2015 Cash and cash equivalents $ 564 $ 12,323 Mutual funds fixed income securities 76,492 77,382 Mutual funds equity securities 33,941 30,684 Accrued interest 84 75 Total investments 111,081 120,464 Less short-term investments 105,020 114,816 $ 6,061 $ 5,648 Investment income, included within investment income and realized gains and losses, net, consists of the following: Year Ended December 31 2016 2015 Interest and dividend income $ 2,367 $ 3,339 Net realized gains 2,986 5,876 Total investment income $ 5,353 $ 9,215 24