St. Barnabas Hospital Year Ended December 31, 2016 With Reports of Independent Auditors

C ONSOLIDATED F INANCIAL S TATEMENTS, S UPPLEMENTARY I NFORMATION AND A UDIT R EPORTS AND S CHEDULES R ELATED TO THE U NIFORM G UIDANCE St. Barnabas Hospital Year Ended December 31, 2016 With Reports of Independent Auditors Ernst & Young LLP

Consolidated Financial Statements, Supplementary Information and Audit Reports and Schedules Related to the Uniform Guidance Year Ended December 31, 2016 Contents Report of Independent Auditors...1 Consolidated 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 and Audit Reports and Schedules Related to the Uniform Guidance Schedule of Expenditures of Federal Awards...43 Notes to Schedule of Expenditures of Federal Awards...44 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...46 Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance...48 Schedule of Findings and Questioned Costs...50

Ernst & Young LLP 5 Times Square New York, NY 10036-6530 Tel: +1 212 773 3000 Fax: +1 212 773 6350 ey.com Management and the Board of Trustees St. Barnabas Hospital Report on the Financial Statements Report of Independent Auditors We have audited the accompanying consolidated financial statements of St. Barnabas Hospital, 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 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 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 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. A member firm of Ernst & Young Global Limited 1

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of St. Barnabas Hospital at December 31, 2016 and 2015, and the consolidated results of its operations, changes in its net assets and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying Schedule of Expenditures of Federal Awards for the year ended December 31, 2016, as required by Title 2 U.S. Code of Federal Regulations Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is 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 has been subjected to the auditing procedures applied in the audits 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 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 May 25, 2017, on our consideration of St. Barnabas Hospital 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 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 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 St. Barnabas Hospital s internal control over financial reporting and compliance. May 25, 2017, except for the schedule of expenditures of federal awards for which the date is September 29, 2017 EY 2 A member firm of Ernst & Young Global Limited

Consolidated Balance Sheets December 31 2016 2015 Assets Current assets: Cash and cash equivalents $ 1,148,805 $ 1,018,141 Current portion of assets limited as to use 15,637,923 10,051,418 DSRIP funds assets limited as to use 25,290,231 8,901,004 Patient accounts receivable, net of allowance for doubtful accounts of approximately $18,314,000 in 2016 and $28,145,000 in 2015 36,540,434 32,869,766 Due from third-party payer reimbursement programs 23,563,345 22,708,944 Other receivables 6,301,297 9,192,937 Prepaid expenses and supplies 6,541,963 4,312,281 Total current assets 115,023,998 89,054,491 Assets limited as to use: Externally limited: Under malpractice funding requirements 6,903,116 4,348,524 Under financing agreements 19,273,581 31,854,717 Funds held in trust by others 17,404,755 17,356,041 Internally limited 30,190,244 20,417,455 Property, plant, and equipment, net 229,572,026 229,664,543 Receivable from Union Community Health Center, Inc. 9,832,781 9,490,113 Other assets 13,730,220 14,300,698 Total assets $ 441,930,721 $ 416,486,582 Liabilities and net assets Current liabilities: Accounts payable, accrued expenses and other deferred liabilities $ 48,683,005 $ 40,910,515 Accrued salaries, wages, and related expenses 26,751,828 23,370,999 DSRIP deferred revenue 26,594,945 8,962,804 Current portion of long-term debt 10,502,780 9,896,293 Due to third-party payer reimbursement programs 5,806,411 15,070,677 Total current liabilities 118,338,969 98,211,288 Long-term debt, net of current portion 89,683,838 99,826,560 Due to third-party payer reimbursement programs, net of current portion 12,983,981 13,885,196 Estimated malpractice liability, net of current portion 17,082,514 16,269,412 Accrued pension liability 39,938,414 42,722,259 Accrued postretirement benefit cost, net of current portion 822,116 1,024,030 Construction liability 4,366,753 Other liabilities 8,868,855 8,037,263 Total liabilities 292,085,440 279,976,008 Net assets: Unrestricted 128,103,117 116,292,694 Temporarily restricted 4,337,409 2,861,839 Permanently restricted 17,404,755 17,356,041 Total net assets 149,845,281 136,510,574 Total liabilities and net assets $ 441,930,721 $ 416,486,582 See accompanying notes. 3

Consolidated Statements of Operations Year Ended December 31 2016 2015 Operating revenues Net hospital patient service revenue $ 306,026,852 $ 298,683,760 Less: provision for bad debts (9,001,384) (9,183,778) Net hospital patient service revenue, net of provision for bad debts 297,025,468 289,499,982 Southern Medical Group capitated health service revenue 10,265,404 10,522,474 SBH Behavioral Health operating revenue 11,060,877 12,540,230 Other operating revenue 65,011,654 38,504,390 Net assets released from restrictions used for operations 954,463 718,384 Total operating revenues 384,317,866 351,785,460 Operating expenses Professional care of patients 208,693,328 197,116,312 Dietary services 5,186,719 5,175,009 Household and maintenance 18,039,935 17,051,927 Administration and general services 69,048,548 48,798,274 Employee health and welfare 58,154,664 55,245,402 Malpractice expense 5,605,438 7,072,649 Interest 4,989,822 4,995,640 Depreciation, amortization, and rentals 21,743,748 20,866,584 SBH Behavioral Health operating expenses 12,227,599 12,537,083 Total operating expenses 403,689,801 368,858,880 Operating loss (19,371,935) (17,073,420) Investment income 2,680,478 116,461 (Loss) gain on disposal of fixed assets (112,027) 1,400 Deficiency of revenues over expenses (16,803,484) (16,955,559) Change in pension and postretirement benefits liability to be recognized in future periods 4,448,407 7,032,249 Transfer from related party 24,165,500 Increase (decrease) in unrestricted net assets $ 11,810,423 $ (9,923,310) See accompanying notes. 4

Consolidated Statements of Changes in Net Assets Unrestricted Net Assets Temporarily Restricted Net Assets Permanently Restricted Net Assets Total Balance at December 31, 2014 $ 126,216,004 $ 2,153,323 $ 18,758,704 $ 147,128,031 Deficiency of revenues over expenses (16,955,559) (16,955,559) Change in unrealized gains and losses on investments (1,402,663) (1,402,663) Interest and dividend income from permanently restricted net assets 654,000 654,000 Change in pension and postretirement benefits liability to be recognized in future periods 7,032,249 7,032,249 Restricted gifts and bequests 772,900 772,900 Net assets released from restrictions used for operations (718,384) (718,384) Change in net assets (9,923,310) 708,516 (1,402,663) (10,617,457) Balance at December 31, 2015 116,292,694 2,861,839 17,356,041 136,510,574 Deficiency of revenues over expenses (16,803,484) (16,803,484) Change in unrealized gains and losses on investments 48,714 48,714 Interest and dividend income from permanently restricted net assets 550,000 550,000 Change in pension and postretirement benefits liability to be recognized in future periods 4,448,407 4,448,407 Restricted gifts and bequests 1,880,033 1,880,033 Net assets released from restrictions used for operations (954,463) (954,463) Transfer from related party 24,165,500 24,165,500 Change in net assets 11,810,423 1,475,570 48,714 13,334,707 Balance at December 31, 2016 $ 128,103,117 $ 4,337,409 $ 17,404,755 $ 149,845,281 See accompanying notes. 5

Consolidated Statements of Cash Flows Year Ended December 31 2016 2015 Operating activities Change in net assets $ 13,334,707 $ (10,617,457) Adjustments to reconcile change in net assets to net cash provided by operating activities: Change in pension and postretirement benefits liability to be recognized in future periods (4,448,407) (7,032,249) Transfer from related party (24,165,500) Depreciation and amortization 21,679,585 20,660,112 Provision for bad debts 9,001,384 9,183,778 Change in net unrealized and realized gains and losses on investments (1,647,702) 899,183 Impact of disposal of fixed assets 112,027 (1,400) Change in other operating assets and liabilities: Equity earnings in Healthfirst, LLC (978,721) (2,321,160) Changes in operating assets and liabilities: Patient accounts receivable, net (12,672,052) (12,805,396) Other assets and liabilities 23,595,745 1,418,341 Prepaid expenses and supplies (2,229,682) 593,397 Accounts payable, accrued expenses, salaries, and wages 9,045,951 5,530,846 Accrued postretirement benefit cost (1,338,514) (1,584,672) Accrued pension liability 2,801,162 3,918,528 Due to third-party payer reimbursement programs, net (11,019,882) 10,356,627 Estimated malpractice liability 813,102 1,003,466 Net cash provided by operating activities 21,883,203 19,201,944 Investing activities Purchases of property, plant, and equipment (17,010,982) (14,345,970) Proceeds from sale of fixed assets 1,265,311 1,400 Sales of assets limited as to use 46,300,154 26,760,942 Purchases of assets limited as to use, net (67,672,855) (37,807,159) Increase in receivable for professional services rendered to UCHC (8,349,292) (8,015,813) Distribution of equity from Healthfirst, LLC 8,006,624 1,439,280 Decrease in note receivable from UCHC due to payments made 1,439,280 5,950,000 Net cash used in investing activities (36,021,760) (26,017,320) Financing activities Payments on long-term debt (9,896,279) (7,255,024) Proceeds due to transfer from related party 24,165,500 Proceeds from the issuance of new debt 13,297,587 Payment of deferred financing fees (97,906) Net cash provided by financing activities 14,269,221 5,944,657 Net increase (decrease) in cash and cash equivalents 130,664 (870,719) Cash and cash equivalents Beginning of year 1,018,141 1,888,860 End of year $ 1,148,805 $ 1,018,141 Supplemental disclosures of cash flow information Interest paid (includes capitalized interest aggregating $254,971 in 2016 and $242,644 in 2015) $ 4,089,589 $ 5,267,888 See accompanying notes. 6

Notes to Consolidated Financial Statements December 31, 2016 1. Organization St. Barnabas Hospital (the Hospital) is a not-for-profit acute care hospital providing health care related services primarily to residents of the Bronx. St. Barnabas Community Enterprises, Inc. (Enterprises) is the sole member of the Hospital. The Hospital is a not-for-profit corporation and is exempt from Federal income taxes under the provisions of Section 501(a) of the Internal Revenue Code (the Code) as an organization described in Section 501(c)(3). The Hospital is also exempt from New York State and local income taxes. Arthur Management Corporation (the Company) is a wholly owned, for profit subsidiary of Enterprises. The Company was established in 1986 as the holding company for all for-profit corporations of Enterprises. Mid-Bronx Credit Corporation (Mid-Bronx) is a wholly owned subsidiary of the Company. Mid-Bronx was established in 1986 for the purpose of providing billing and collection services for physicians. Mid-Bronx ceased providing such services for the Hospital in 2000 and has since had no significant business activity. The Company s primary business activity relates to the operation of a 210,615 square foot, 605 space parking facility located on the Hospital s grounds. The land on which the parking facility is located is subject to a ground lease (the Ground Lease) between the Hospital, as landlord, and the Company, as tenant, dated December 1, 2010. The Company and the Hospital have also entered into a Dedicated Parking Facility Agreement (the Agreement), pursuant to which the Hospital shall pay certain fees to the Company during the term of the agreement in exchange for the Company s agreement to dedicate the parking facility in accordance with the terms of the agreement. The provision for income taxes for the Company is not material in 2016 or 2015. Quarry Underwriting Assurance Limited (QUAL) is a wholly owned captive insurance company of the Hospital formed under the laws of the Cayman Islands Monetary Authority. Effective January 1, 2013, QUAL began to provide insurance, on an occurrence basis, for select medical professional liabilities of the Hospital, as well as its employed and affiliated medical staff physicians. In accordance with Accounting Standards Codification (ASC) 958-810-25, Not-for-Profit Entities Consolidation, Special Purpose-Entity Lessors, the activities of the Company have been consolidated with the Hospital, together with QUAL, and is collectively referred to within these notes as the Organization, where appropriate. All intercompany transactions have been eliminated in consolidation. 7

2. Summary of Significant Accounting Policies Basis of Accounting The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting standards. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the amounts of revenues and expenses during the reporting period. The most significant estimates relate to third-party payer adjustments, allowances for doubtful accounts, malpractice, and pension and postretirement liabilities. 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. Reclassifications For purposes of comparison, certain reclassifications have been made to the accompanying 2015 consolidated financial statements to conform to the 2016 presentation. These reclassifications have no effect on the performance indicator or net assets previously reported. Cash and Cash Equivalents Cash and cash equivalents include certain investments in highly liquid financial instruments purchased with an original maturity of three months or less, excluding amounts included in assets limited as to use. The Organization invests cash and cash equivalents with major banks, and has determined that the amount of credit exposure at any one financial institution is not significant to the consolidated financial position of the Organization. Included in cash and cash equivalents are amounts in excess of $250,000, which is the maximum insured by the Federal Deposit Insurance Corporation. Management acknowledges that this risk exists and attempts to mitigate this risk through its weekly cash management policies. 8

2. Summary of Significant Accounting Policies (continued) Investments and Investment Income Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value and are considered trading. Investment income, which consists of interest, dividends, and realized and unrealized gains and losses on investments, is included within deficiency of revenues over expenses unless the income or loss is restricted by donor or law. Investment income earned on permanently restricted net assets, upon which restrictions have been placed by donors, is added to temporarily restricted net assets. Assets Limited as to Use Assets limited as to use primarily include cash and investments held by trustees under financing agreements, medical malpractice funding requirements, charitable trusts, Delivery System Reform Incentive Payment Program funding, and designated assets set aside by the Board of Trustees for future capital improvements, over which the Board of Trustees retains control and may at its discretion subsequently use for other purposes. Amounts required to meet the Hospital s current liabilities or available for use in the next twelve months have been classified as current assets in the consolidated balance sheets. Funds held in trust by others represent investments held in perpetuity by other institutions. Income earned on these investments can be used for general operating purposes or other donor-restricted purposes based on terms of the trust, which is reported as temporarily restricted. These funds are recognized at the estimated fair value of the assets. Property, Plant, and Equipment Property, plant, and equipment purchased are stated at cost. Gifts of long-lived assets such as land, buildings, or equipment are reported at fair value at the date of the contribution as unrestricted support, and are excluded from the deficiency of revenues over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used as gifts or cash, or other assets that must be used to acquire long-lived assets are reported as restricted support. 9

2. Summary of Significant Accounting Policies (continued) Absent explicit donor stipulations about how those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Depreciation of property, plant, and equipment is computed using the straight-line method over the estimated useful lives of the related assets as follows: Buildings and improvements Major movable equipment 5 40 years 3 20 years Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets, net of related income. Deferred Financing Costs Deferred financing costs represent costs incurred to obtain long-term financing for various construction and renovation projects at the Organization. Amortization of these costs extends over the term of the applicable indebtedness using the effective interest method. The Organization adopted Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs, retrospectively, as required. As a result, unamortized deferred financing costs of $2,057,799 and $2,417,858 at December 31, 2016 and 2015, respectively, has been reported as a direct reduction from long-term debt in the consolidated balance sheets. Temporarily and Permanently Restricted Net Assets Net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. Unconditional promises to donate cash and other assets are reported at fair value at the date the promise is received. Conditional promises to donate and indications of intentions to donate are recognized when the condition is substantially met. Gifts of long-lived assets under specific restrictions that specify the use of assets and gifts of cash or other assets that must be used to acquire long-lived assets are reported as additions to temporarily restricted net assets if the assets are not placed in service during the year. Funds held in trust by others are recorded within permanently restricted net assets as they have been restricted by donors to be maintained by the Hospital in perpetuity and these funds are included in assets limited as to use. 10

2. Summary of Significant Accounting Policies (continued) Inventories of Supplies Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories are used in the provision of patient care and are not held for sale. Performance Indicator The consolidated statements of operations include deficiency of revenues over expenses as the performance indicator. The Organization differentiates its operating activities through the use of operating loss as an intermediate measure of operations. For the purpose of display, investment income and (loss) gain on disposal of fixed assets are excluded from operating loss in the consolidated statements of operations. Changes in unrestricted net assets which are excluded from deficiency of revenues over expenses include change in pension and postretirement benefits liability to be recognized in future periods and transfer from related party (see Note 13). The natural classification of operating expenses presented in the accompanying consolidated statements of operations for the years ended December 31 is presented as follows: 2016 2015 Salaries and wages $ 178,129,336 $ 159,673,221 Employee benefits 61,425,865 57,934,463 Other operating expenses 141,772,554 129,840,055 Depreciation and amortization 17,372,224 16,415,501 Interest 4,989,822 4,995,640 Total $ 403,689,801 $ 368,858,880 Net Patient Service Revenue and Accounts Receivable The Hospital recognizes patient service revenue associated with services provided to patients who have third-party payer coverage on the basis of contractual or formula-driven rates for the services rendered. For uninsured and under-insured patients who do not qualify for charity care, the Hospital recognizes revenue on the basis of charges. Under the charity care policy, a patient who has no insurance or is under-insured and is ineligible for any government assistance program has his or her bill reduced on a sliding-scale basis. The effect of this policy on the consolidated 11

2. Summary of Significant Accounting Policies (continued) financial statements is lower net patient service revenue, as the discount is considered an allowance. Patient service revenue for the year ended December 31, 2016, net of contractual allowances and discounts (but before the provision for bad debts), recognized from these major payer sources based on primary insurance designation, is as follows (in thousands): Third-Party Payers Total All Payers Self-Pay Hospital patient service revenue (net of contractual allowances and discounts) $ 305,699 $ 328 $ 306,027 Deductibles and copayments under third-party payment programs within the third-party payer amount above are the patient s responsibility and the Hospital considers these amounts in its determination of the provision for bad debts based on collection experience. The process for estimating the ultimate collection of receivables involves significant assumptions and judgments. The Hospital has implemented a monthly standardized approach to estimate and review the collectability of receivables based on the payer classification and the period from which the receivables have been outstanding. Account balances are written off against the allowance for doubtful accounts when management feels it is probable the receivable will not be recovered. Historical collection and payer reimbursement experience is an integral part of the estimation process related to the allowance for doubtful accounts. In addition, the Hospital assesses the current state of its billing functions in order to identify any known collection or reimbursement issues and assess the impact, if any, on allowance estimates. The Hospital believes that the collectability of its receivables is directly linked to the quality of its billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services it provides. Revisions to the allowance for doubtful accounts estimates are recorded as an adjustment to the provision for bad debts. The Hospital s allowance for doubtful accounts totaled approximately $18.3 million and $28.1 million at December 31, 2016 and 2015, respectively. The allowance for doubtful accounts for self-pay patients was approximately 36% and 44% of self-pay accounts receivable as of December 31, 2016 and 2015, respectively. The Hospital did not experience significant changes in its charity care policy. 12

2. Summary of Significant Accounting Policies (continued) Net patient service revenue is reported at estimated net realizable amounts due from patients, thirdparty payers and others for services rendered and includes estimated retroactive revenue adjustments due to ongoing and 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 are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Non-Medicare Reimbursement In New York State, hospitals and all non-medicare payers, except Medicaid, workers compensation and no-fault insurance programs, negotiate hospitals payment rates. If negotiated rates are not established, payers are billed at hospitals established charges. Medicaid, workers compensation and no-fault payers pay hospital rates promulgated by the New York State Department of Health (NYSDOH). Payments to hospitals for Medicaid, workers compensation and no-fault inpatient services are based on a statewide rate, with retroactive adjustments for certain rate components paid concurrently with the settlement of the final rate. Outpatient services are also paid based on a statewide prospective system. Medicaid rate methodologies are subject to approval at the Federal level by the Centers for Medicare and Medicaid Services (CMS), which may routinely request information about such methodologies prior to approval. Revenue related to specific rate components that have not been approved by CMS is not recognized until the Hospital is reasonably assured that such amounts are realizable. Adjustments to the current and prior years payment rates for those payers will continue to be made in future years. Medicare Reimbursement Medicare pays hospitals for most inpatient and outpatient services under its respective national prospective payment systems, and uses other, generally fee-schedule based, methodologies for payment for other services. Federal regulations provide for certain adjustments to current and prior years payment rates, based on industry-wide and hospital-specific data. The Hospital has established estimates, based on information presently available, of amounts due to or from Medicare and non-medicare payers for adjustments to current and prior years payment rates, based on industry-wide and hospital-specific data. 13

2. Summary of Significant Accounting Policies (continued) 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 have been enacted by the Federal and State governments, cannot presently be determined. Future changes in the Medicare and Medicaid programs and any reduction of funding could have an adverse impact on the Hospital. Additionally, certain payers payment rates for various years have been appealed by the Hospital. If the appeals are successful, additional income applicable to those years might be realized. The current Medicaid, Medicare and other third-party payer programs are based upon extremely complex laws and regulations that are subject to interpretation. Noncompliance with such laws and regulations could result in fines, penalties and exclusion from such programs. The Hospital is not aware of any allegations of noncompliance that could have a material adverse effect on the consolidated financial statements and believes that it is in compliance with all applicable laws and regulations. Medicare cost reports, which serve as the basis for final settlement with the Medicare program, have been audited by the Medicare fiscal intermediary and settled through 2013. Other years remain open for audit and settlement. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount when open years are settled and additional information is obtained. Revenue from the Medicare and Medicaid programs accounted for approximately 17% and 20%, respectively, of the Hospital s net patient service revenue for the year ended December 31, 2016. Revenue from the Medicare and Medicaid programs accounted for approximately 16% and 28%, respectively, of the Hospital s net patient service revenue for the year ended December 31, 2015. In addition, revenue from Medicare and Medicaid managed care programs accounted for approximately 51% and 45% for the years ended December 31, 2016 and 2015, respectively. Charity Care The Hospital, in keeping with its mission and philosophy to extend quality care and compassionate service, recognizes that some patients are unable to compensate the Hospital for their treatment either through third-party coverage or their own resources. The Hospital provides free care or sliding fee scales to patients financially unable to pay for services rendered. The Hospital does not pursue collection of amounts that qualify as charity care, and therefore they are not reported as revenue. The amount of charges foregone for services and supplies furnished under the Hospital s charity care policy aggregated approximately $29.1 million and $25.5 million for the years ended 14

2. Summary of Significant Accounting Policies (continued) December 31, 2016 and 2015, respectively. The estimated cost of charity care provided was approximately $12.7 million and $11.8 million for the years ended December 31, 2016 and 2015, respectively. The estimated cost is based on the ratio of cost to charges, as determined by hospitalspecific data. The NYSDOH Hospital Indigent Care Pool (the Pool) was established to provide funds to hospitals for the provision of uncompensated care and is funded, in part, by a 1% assessment on hospital net inpatient service revenue. During the years ended December 31, 2016 and 2015, the Hospital recorded approximately $24.2 million and $24.8 million, respectively, in Pool revenue, of which approximately $14.3 million and $14.2 million, respectively, was related to charity care. The Hospital made payments into the Pool of approximately $1.4 million and $1.3 million for the years ended December 31, 2016 and 2015, respectively, for the 1% assessment. Delivery System Reform Incentive Payment Program New York State also distributes federally-funded amounts through a payment mechanism referred to as the Delivery System Reform Incentive Payment (DSRIP) program. DSRIP is the mechanism by which New York State is implementing its Medicaid Redesign Team Waiver Amendment. DSRIP seeks to fundamentally restructure the health care delivery system in New York State by reinvesting in the Medicaid program, with the primary goal of reducing avoidable hospital use by 25% over five years. DSRIP funding is available to certain hospitals and providers participating in networks (referred to as Performing Provider Systems, PPS) that are able to achieve predetermined performance milestones and metrics based on system transformation, clinical management, and population health. The Hospital is the lead applicant for DSRIP funding through its emerging PPS, Bronx Partners for Healthy Communities (BPHC). BPHC is comprised of approximately 140 partner organizations spanning approximately 360 locations. The Hospital received funding of $43,102,124 during 2016 and recognized $24,457,435 in other operating revenue based on expenses incurred during the year ended December 31, 2016, for amounts received under the DSRIP program. The balance of $25,290,231 is recorded as DSRIP funds assets limited as to use as well as a liability recorded as DSRIP deferred revenue in the accompanying consolidated balance sheet, is for future spending by the Hospital and distributions to PPS participants. Certain payments under the DSRIP program are subject to meeting specified performance criteria and other requirements which may be evaluated in future periods. 15

2. Summary of Significant Accounting Policies (continued) Donor Restricted Gifts Unconditional promises to give cash and other assets to the Hospital are reported at fair value at the date the promise is received. The gifts are either reported as temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of operations and the statements of changes in net assets as net assets released from restrictions. Donor restricted contributions whose restrictions are met within the same year as received are reported as contributions (included in other operating revenue) in the accompanying consolidated financial statements. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. 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 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 FASB subsequently issued ASU 2015-14, Revenue from Contracts with Customers, which deferred the effective dates of ASU 2014-09. Based on ASU 2015-14, the provisions of ASU 2014-09 are effective for the Hospital for annual reporting periods beginning after December 15, 2017. The Hospital 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, Presentation of Financial Statements Going Concern, that requires 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 standard is effective for annual periods ending after December 15, 2016. Management adopted ASU 2014-15 for the year ended December 31, 2016. There was no effect on the accompanying consolidated financial statements or related disclosures. 16

2. Summary of Significant Accounting Policies (continued) 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 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. The Hospital adopted ASU 2015-05 prospectively as of January 1, 2016 with no impact to the 2016 consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases, which will require lessees to report most leases on their statement of financial position and recognize expenses on their income statement in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions. Lessors continue to recognize the underlying and recognize lease income on either a straight-line or another systematic and rational basis. The provisions of ASU 2016-02 are effective for the Hospital for annual periods beginning after December 15, 2018, and interim periods the following year. Early adoption is permitted. The Hospital 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 the Hospital for annual periods beginning after December 15, 2017 and interim periods thereafter. Early adoption is permitted. The Hospital 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 17

2. Summary of Significant Accounting Policies (continued) that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the 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 the Hospital for annual periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. The Hospital does not expect ASU 2016-15 to have a significant impact 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-ofperiod and end-of-period total amounts shown on the statement of cash flows. The provisions of ASU 2016-18 are effective for the Hospital for annual periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. The Hospital does not expect ASU 2016-18 to have a significant impact on its consolidated financial statements. In March 2017, the FASB issued ASU 2017-07, Compensation Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 addresses how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will be required to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Employers will present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of operating income, if one is presented. The standard is effective for the Hospital for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. Adoption of ASU 2017-07 will require the Hospital to include the service cost component of net periodic benefit cost related to its defined benefit pension plan and other postretirement benefit plan (aggregate of $9,499 for 2016) within employee health and welfare on the consolidated statements of operations and to present all other components (aggregate of $1,965,714 for 2016) 18

2. Summary of Significant Accounting Policies (continued) as a separate line item outside of any subtotal of the performance indicator. Net periodic benefit cost is recorded currently as a component of employee health and welfare on the consolidated statements of operations. 3. Capitated Arrangements Health Insurance Plan of New York, Inc. The Hospital has a capitated contract with Health Insurance Plan of New York (HIP) to cover inpatient and outpatient services to HIP enrollees and to manage the Southern Medical Group outpatient clinic. Under this capitated agreement, the Hospital recognizes revenue based on a predetermined monthly contractual rate for each member regardless of the services provided and assumes responsibility for payment of contracted HIP patient services. In-network and out-of-network costs resulting from the services provided under the capitated agreement are accrued in the period they are incurred. The costs of claims incurred but not reported (IBNR) are based on historical patterns of utilization to authorized levels of service, current enrollment statistics and other information. Amounts recorded within accounts payable and accrued expenses for claims IBNR were approximately $2.7 million and $2.8 million at December 31, 2016 and 2015, respectively. Healthfirst, Inc. The Hospital provides services to Healthfirst, Inc. (Healthfirst) enrollees under a capitated arrangement. The Hospital receives advances for services rendered as if a fee for service arrangement existed. The capitated amount is reconciled to actual claims expenses and amounts quarterly. The amount due from Healthfirst, included within due from third-party payer reimbursement programs at December 31, 2016 and 2015, is approximately $9,393,000 and $9,406,000, respectively. 19

4. Assets Limited as to Use The composition of assets limited as to use at December 31, 2016 and 2015, stated at fair value, is as follows: 2016 2015 Cash and cash equivalents $ 32,310,989 $ 33,102,170 U.S. treasury obligations 8,061,583 9,412,424 Mutual funds 56,895,478 32,892,784 Funds held in trust by others 17,404,755 17,356,041 Other 27,045 165,740 Total assets limited as to use $ 114,699,850 $ 92,929,159 Under malpractice funding requirements $ 7,034,895 $ 4,503,649 Under financing agreements 25,436,944 32,939,717 Funds held in trust by others 17,404,755 17,356,041 Internally limited 39,533,025 29,228,748 DSRIP funds 25,290,231 8,901,004 Total assets limited as to use $ 114,699,850 $ 92,929,159 Amounts included within the current portion of assets limited as to use primarily relate to expected DSRIP expenditures, required debt service payments and amounts available for drawdown under financing arrangements. 20

4. Assets Limited as to Use (continued) Investment income, including changes in net unrealized gains and losses on assets limited as to use included in the consolidated statements of operations for the years ended December 31, 2016 and 2015, consist of the following: 2016 2015 Interest and dividend income $ 1,043,724 $ 1,018,793 Realized gains and losses on sales of securities 727,174 328,824 Change in net unrealized gains and losses on assets limited as to use 909,580 (1,231,156) Investment income $ 2,680,478 $ 116,461 5. Fair Value Measurements For assets and liabilities required to be measured at fair value, the Organization measures fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are applied based on the unit of account from the Organization s perspective. The unit of account determines what is being measured by reference to the level at which the asset or liability is aggregated (or disaggregated) for purposes of applying other accounting pronouncements. The Organization follows a valuation hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2: Observable inputs that are based on inputs not quoted in active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. In determining fair value, the Organization uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers nonperformance risk in its assessment of fair value. 21

5. Fair Value Measurements (continued) Financial assets carried at fair value as of December 31, 2016, are classified in the following table in one of the three categories described previously: Total Level 1 Level 2 Level 3 Cash and cash equivalents $ 33,459,794 $ 33,459,794 $ $ U.S. treasury obligations 8,061,583 8,061,583 Mutual funds 56,895,478 49,992,362 6,903,116 Funds held in trust by others 17,404,755 17,404,755 Other 27,045 27,045 $ 115,848,655 $ 91,513,739 $ 24,334,916 $ Financial assets carried at fair value as of December 31, 2015, are classified in the following table in one of the three categories described previously: Total Level 1 Level 2 Level 3 Cash and cash equivalents $ 34,120,311 $ 34,120,311 $ $ U.S. treasury obligations 9,412,424 9,412,424 Mutual funds 32,892,784 28,544,260 4,348,524 Funds held in trust by others 17,356,041 17,356,041 Other 165,740 165,740 $ 93,947,300 $ 72,076,995 $ 21,870,305 $ The following is a description of the Organization s valuation methodologies for assets measured at fair value. Fair value for Level 1 is based upon quoted market prices. Fair value for Level 2 is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Assets included within the funds held in trust by others include cash, equities, fixed income, hedge funds, private equity, and tangible assets. The fair value of long-term debt approximates carrying value at December 31, 2016 and 2015. The fair value of long-term debt is based upon quoted market prices and is classified as Level 2. 22