UPMC Quarterly Disclosure. For the Period Ended June 30, 2015

Transcription

1 UPMC Quarterly Disclosure For the Period Ended June 30, 2015

2 UPMC QUARTERLY DISCLOSURE FOR THE PERIOD ENDED JUNE 30, 2015 TABLE OF CONTENTS Introduction to Management s Discussion and Analysis Management s Discussion and Analysis Financial Highlights Operating Component Information Revenue and Operating Metrics Key Financial Indicators Market Share Asset and Liability Management Utilization Statistics Outstanding Debt Debt Covenant Calculations Audited Consolidated Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations and Changes in Net Assets Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements The following financial data is derived from both the June 30, 2015 audited consolidated financial statements of UPMC and the unaudited interim consolidated financial statements of UPMC. The interim financial data includes all adjustments consisting of a normal recurring nature that UPMC considers necessary for a fair presentation of its financial position and the results of operations for these periods. Operating and financial results reported herein are not necessarily indicative of the results that may be expected for any future periods. The information contained herein is being filed by UPMC for the purpose of complying with its obligations under Continuing Disclosure Agreements entered into in connection with the issuance of the series of bonds listed herein and disclosure and compliance obligations in connection with various banking arrangements. The information contained herein is as of June 30, Digital Assurance Certification, L.L.C., as Dissemination Agent, has not participated in the preparation of this Unaudited Quarterly Disclosure, has not examined its contents and makes no representations concerning the accuracy and completeness of the information contained herein. UPMC QUARTERLY DISCLOSURE JUNE 2015

3 INTRODUCTION TO MANAGEMENT S DISCUSSION AND ANALYSIS PERIOD ENDED JUNE 30, 2015 UPMC, doing business as the University of Pittsburgh Medical Center, is one of the world s leading Integrated Delivery and Financing Systems ( IDFS ). UPMC is based in Pittsburgh, Pennsylvania and primarily serves residents of western Pennsylvania. We also draw patients for highly specialized services from across the nation and around the world. UPMC s 21 hospitals and more than 400 clinical locations comprise one of the largest nonprofit health systems in the United States. UPMC has three major operating components: Health Services, Insurance Services, and International and Commercial Services. We are committed to providing the communities that our hospitals, outpatient centers and other health care facilities serve, as well as our insurance members, with high quality, cost-effective health care while continuing to grow our business and execute on our mission to provide Life Changing Medicine. As the stewards of UPMC s community assets, we are guided by our core values of integrity, excellence, respect and teamwork. These values govern the manner in which we serve our communities and are embedded in the execution and delivery of Life Changing Medicine. UPMC continues to make significant investments in equipment, technology, education and operational strategies designed to improve clinical quality at our hospitals and outpatient centers. As a result of our efforts, UPMC is currently ranked number 13 on the U.S. News & World Report Honor Roll of America s Best Hospitals. Investments in our operations and continued capital improvements are expected to become increasingly important as the competitive environment of the western Pennsylvania market and changes to health care nationally continue to progress and change the landscape of patient care and reimbursement. We build new facilities, make strategic acquisitions, and enter into joint venture arrangements or affiliations with health care businesses in each case in communities where we believe our mission can be effectively utilized to improve the overall health of those communities. By continually evolving and refining UPMC s world-class financial processes, we focus on achieving optimal financial results that support the continued development of our organization, as well as ongoing investment in the future of western Pennsylvania. We are committed to achieving these objectives with unyielding commitments to transparency in reporting and disclosure, enterprise-wide integration, and ongoing process improvement. The purpose of this section, Management s Discussion and Analysis ( MD&A ), is to provide a narrative explanation of our financial statements that enhances our overall financial disclosures, to provide the context within which our financial information may be analyzed, and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows. Unless otherwise indicated, all financial and statistical information included herein relates to our continuing operations, with dollar amounts expressed in thousands (except for statistical information). MD&A should be read in conjunction with the accompanying consolidated financial statements. UPMC QUARTERLY DISCLOSURE JUNE

4 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 CONSOLIDATED FINANCIAL HIGHLIGHTS (Dollars in millions) Financial Results for the Twelve Months Ended June Operating revenues $ 12,020 $ 11,416 Operating income $ 338 $ 190 Operating margin 2.8 % 1.7% Operating margin (including income tax and interest expense) 1.9 % 0.5% Gain from investing and financing activities $ 66 $ 393 Excess of revenues over expenses $ 417 $ 463 Operating EBIDA $ 804 $ 644 Capital expenditures and investments $ 412 $ 458 Reinvestment ratio Selected Other Information as of June 30, 2015 June 30, 2014 Total cash and investments $ 4,864 $ 4,722 Unrestricted cash and investments $ 4,100 $ 3,970 Unrestricted cash and investments over long-term debt $ 1,129 $ 1,001 Days of cash on hand Days in net accounts receivable Average age of plant Operating revenues for the twelve months ended June 30, 2015 increased $604 million, or 5.3%, as compared to the twelve months ended June 30, 2014, primarily due to growth in Insurance Services and Health Services. Operating income for the twelve months ended June 30, 2015 increased $148 million over the same period in the prior fiscal year, primarily due to higher revenues, cost productivity improvements, and the gain on the Evolent transaction described herein. Operating earnings before interest, depreciation and amortization totaled $804 million, and excess of revenues over expenses was $417 million. As of June 30, 2015, UPMC had nearly $4.9 billion of cash and investments. For the twelve months ended June 30, 2015: Hospital medical-surgical admissions and observation cases were comparable to the prior year. Hospital outpatient revenue per workday was comparable to the prior year. Physician service revenue per weekday increased 4% from the comparable period in the prior year, and Enrollment in UPMC s Insurance Services grew to more than 2.7 million members as of June 30, UPMC s gain from investing and financing activities for the twelve months ended June 30, 2015 was $66 million. UPMC made no material changes to its asset allocation policies during the quarter and continues to have a long-term perspective with regard to its investment activities. UPMC QUARTERLY DISCLOSURE JUNE

5 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 In June 2015, Evolent Health Inc. (Evolent ), co-founded by UPMC less than five years ago, went public on the New York Stock Exchange with a market capitalization exceeding $1 billion. At the time of the transaction, UPMC held 22.5 percent of the outstanding shares in Evolent and marked the investment to market value. The mark-to-market event resulted in a gain of $233 million, net of associated expenses, in operating income. The gain is divided between the Health Services and Insurance Services divisions, reflecting their shared participations in the value created. The successful initial public offering underscores UPMC s strategy of commercializing its clinical, technological and managerial expertise to improve health care while earning funds to support the world-renowned health system and creating new jobs in the communities it serves. Evolent helps physicians and hospitals create population health programs and their own insurance operations in a rapidly changing health care landscape. Changes in the market value of Evolent s stock will be recorded as Investment revenue on the Statement of Operations and changes in Net Assets on a prospective basis. In July 2015, for the 16th year, UPMC was named to the U.S. News & World Report Honor Roll of America s Best Hospitals, a month after U.S. News & World Report named Children s Hospital of Pittsburgh of UPMC to its Honor Roll as one of America s Best Children s Hospitals for the 6th consecutive year. UPMC earned 13th position on the Honor Roll. Nationally, UPMC is ranked for excellence in 14 of 16 specialties, and is among the top 10 hospitals in six specialties. Children s earned 8th place on the Best Children s Hospitals Honor Roll, ranking in each of the 10 pediatrics specialty areas, and is among the top 10 hospitals in six specialties. The UPMC Lemieux Sports Complex in Cranberry Township, Pa., opened in August The $70 million complex features two ice rinks and a sports performance training center. In addition to serving as a practice rink for the Pittsburgh Penguins and a home to local youth hockey and public skating, it is believed to be the first medical facility in the world to focus specifically on hockey-related injuries and training. The 185,000-square-foot facility is situated on 12 acres. As a significant expansion of its long-time partnership in Colombia, UPMC announced in April 2015 a 10-year agreement with the Fundacion Cardiovascular de Colombia (FCV) in Bucaramanga to develop, co-manage and finance a comprehensive oncology center for adults and children, the first private cancer program in Colombia. The new Oncology Institute at the Hospital International de Colombia (HIC) is expected to open in 2016 in the city of Piedecuesta, serving an unmet need in the region for advanced oncology services. This agreement builds on FCV s successful six-year relationship in cardiology with Children s Hospital of Pittsburgh of UPMC. In February 2015, the Boards of Directors of UPMC and Jameson Health System in New Castle, Pa., ( Jameson ), signed a definitive agreement to merge Jameson into UPMC. Jameson, UPMC and UPMC Horizon are collaborating to develop a plan that will ensure growth and continued access to quality health care services in Lawrence and Mercer counties. UPMC plans $70 million for the development of facilities and services at Jameson, and has committed to no less than 10 years of planned services improvements for the region, including physician recruitment, capital improvements and coordination of clinical programs. A formal regulatory review of the prospective transaction by the Federal Trade Commission and the Pennsylvania Attorney General continues. The outcome of that process cannot be determined at this time, but the parties hope to finalize the transaction by the end of In April 2015, Children s Hospital of Pittsburgh of UPMC began construction of its new pediatric outpatient special care center in Erie, located on the campus of UPMC Hamot Women s Hospital. Scheduled to open in the fall of 2015, Children s Hospital Specialty Care Center Erie will offer access to an array of subspecialty care for families in the tri-state region. In April 2015, UPMC gave notice to Highmark of UPMC s decision to not renew UPMC s Medicare Advantage provider contracts with Highmark, effective January 1, This non-renewal applied to all UPMC hospitals and employed providers and was prompted by Highmark s refusal to honor its contract. On or about April 27, 2015, the Commonwealth of Pennsylvania filed a Motion to Enforce Consent Decrees and Compel Arbitration against UPMC and Highmark, which sought an Order compelling UPMC to withdraw its notice of termination of Medicare Advantage contracts with Highmark as well as an Order requiring UPMC and Highmark to submit all of their Consent Decree disputes to binding arbitration. After a one-day hearing, the Commonwealth Court entered an Order on May 29, 2015 holding that, inter alia, UPMC shall be in a contract with Highmark for Medicare Advantage for the term of the Consent Decrees. UPMC has appealed that Order to the Pennsylvania Supreme Court, which agreed to establish an expedited briefing schedule for the appeal. The argument date has not been scheduled yet. UPMC QUARTERLY DISCLOSURE JUNE

6 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Twelve Months Ended June 30, 2015 (in millions) Revenues: Health Services International & Commercial Services Insurance Services Eliminations Consolidated Net patient service revenue less provision for bad debts $ 7,081 $ $ $ (1,430) $ 5,651 Insurance enrollment revenue 5,315 5,315 Other revenue (119) 1,054 Total operating revenues $ 7,804 $ 91 $ 5,674 $ (1,549) $ 12,020 Expenses: Salaries, professional fees and benefits $ 4,251 $ 44 $ 227 $ (26) $ 4,496 Supplies, purchased services and general 2, ,313 (1,523) 6,720 Depreciation and amortization Total operating expenses 7, ,550 (1,549) 11,682 Operating income $ 208 $ 6 $ 124 $ 338 Operating margin % 2.7% 6.6% 2.2% 2.8% Operating margin % (including income tax and interest expense) 1.2% 2.2% 2.2% 1.9% Operating EBIDA $ 662 $ 8 $ 134 $ 804 Operating EBIDA % 8.4% 8.8% 2.4% 6.7% Twelve Months Ended June 30, 2014 (in millions) Revenues: Net patient service revenue less provision for bad debts $ 6,905 $ 89 $ $ (1,217) $ 5,777 Insurance enrollment revenue 4,813 4,813 Other revenue (94) 826 Total operating revenues $ 7,470 $ 215 $ 5,042 $ (1,311) $ 11,416 Expenses: Salaries, professional fees and benefits $ 4,180 $ 81 $ 208 $ (29) $ 4,440 Supplies, purchased services and general 2, ,795 (1,282) 6,332 Depreciation and amortization Total operating expenses 7, ,012 (1,311) 11,226 Operating income $ 107 $ 53 $ 30 $ 190 Operating margin % 1.4% 24.7% 0.6% 1.7% Operating margin % (including income tax and interest expense) (0.2)% 20.0% 0.6% 0.5% Operating EBIDA $ 547 $ 58 $ 39 $ 644 Operating EBIDA % 7.3% 27.0% 0.8% 5.6% UPMC QUARTERLY DISCLOSURE JUNE

7 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 Health Services UPMC Health Services include a comprehensive array of clinical capabilities consisting of hospitals, specialty service lines (e.g., transplantation services, woman care, behavioral health, pediatrics, cancer care and rehabilitation services), contract services (emergency medicine, pharmacy and laboratory) and more than 3,500 employed physicians with associated practices. Also included within Health Services are supporting foundations and UPMC s captive insurance programs. Hospital activity is monitored in four distinct groups: (i) academic hospitals that provide a comprehensive array of clinical services that include the specialty service lines listed above and serve as the primary academic and teaching centers for UPMC and are located in Pittsburgh, Pa.; (ii) community hospitals that provide core clinical services mainly to the suburban Pittsburgh, greater Erie, and the greater Altoona populations of Pennsylvania; (iii) regional hospitals that provide core clinical services to certain other areas of western Pennsylvania; and (iv) pre- and post-acute care capabilities that include: UPMC HomeCare, a network of home health services, and UPMC Senior Communities, the facilities of which provide a complete network of senior living capabilities in greater Pittsburgh and surrounding counties. Health Services revenue of $7.8 billion increased $334 million from prior year due primarily to inflationary rate increases and the recognized gain related to the Evolent IPO. Operating Income of $208 million increased $101 million from prior year due primarily to the $111 million portion of the gain associated with the Evolent IPO and $30 million of other cost productivity improvements offset by $40 million of costs associated with a voluntary separation program offered to certain UPMC employees. Insurance Services UPMC holds various interests in health care financing initiatives and network care delivery operations that have more than 2.7 million members as of June 30, UPMC Health Plan is a health maintenance organization ( HMO ) offering coverage for commercial and Medicare members. UPMC for You is also an HMO, which is engaged in providing coverage to Medical Assistance & Medicare Special Needs Plan beneficiaries. UPMC Health Network offers preferred provider organization ( PPO ) plan designs to serve Medicare beneficiaries. UPMC Health Options offers PPO plan designs to serve commercial beneficiaries. UPMC for Life is a Medicare product line offered by various companies within the Insurance Services division. UPMC Work Partners provides fully insured workers compensation, and integrated workers compensation and disability services to employers. Community Care Behavioral Health Organization ( Community Care ) is a state-licensed, risk-bearing PPO that manages the behavioral health services for Medical Assistance through mandatory managed care programs in 39 Pennsylvania counties, including Allegheny County. Insurance Services revenues of $5.7 billion increased $632 million from prior year primarily as a result of increased membership. Insurance Services experienced an operating income increase of $94 million compared to prior year primarily due to the $122 million portion of the gain associated with the Evolent IPO offset by a net $28 million of higher administrative costs to support increased membership, higher medical expense reserves and other favorability in underwriting margins. International and Commercial Services The goal of UPMC International and Commercial Services division is to leverage UPMC s capabilities to generate new revenue streams. This is accomplished by exporting medical expertise and management know-how internationally, pursuing commercialization opportunities and developing strategic partnerships with industry leaders. These ventures both support UPMC s core mission and help to revitalize the economy of western Pennsylvania. The first of the major international ventures, ISMETT, a transplant and specialty surgery hospital in Palermo, Italy, has performed nearly 1,600 transplants since its founding in Other international ventures currently include a cancer center located in Ireland, a contract to provide remote second-opinion pathology consultations for patients in China and Singapore, a national oncology treatment and research center in Kazakhstan, as well as the Advanced Radiosurgery Center of Excellence at San Pietro FBF Hospital in Rome. International and Commercial Services operating income has been favorably impacted by growth in its international advisory services, offset by investments in collaborative arrangements that are designed to develop innovative technologies for use in the health industry. Operating income is lower than prior year primarily from the gain of $38 million related to the sale of Intrexon in UPMC QUARTERLY DISCLOSURE JUNE

8 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 REVENUE METRICS HEALTH SERVICES Medical-Surgical Admissions and Observation Visits Inpatient activity as measured by medical-surgical admissions and observation visits at UPMC s hospitals for the twelve months ended June 30, 2015 remained consistent compared to the same period in For the Twelve Months Ended June 30 (in thousands) 2015 Change 2014 Trailing Twelve-Months 300,000 Academic (2%) Community % 87.7 Regional % , , , , , , , ,029 Total (1%) , ,000 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 QUARTER ENDING Outpatient Revenue per Workday UPMC s outpatient activity for the twelve months ended June 30, 2015 as measured by average revenue per workday remained consistent compared to the same period in Hospital outpatient activity is measured on an equivalent workday (EWD) basis to adjust for weekend and holiday hours. For the Twelve Months Ended June 30 (in thousands) 2015 Change 2014 Quarterly Average (in millions) $10.0 Academic $ 5,159 (2%) $ 5,264 $9.1 $9.1 Community 2,140 0% 2,131 $9.0 $8.9 Regional 1,417 4% 1,367 $8.8 $8.7 $8.8 $8.5 $8.5 Total $ 8,716 (1%) $ 8,762 $8.0 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 QUARTER ENDING Dec-14 Mar-15 Jun-15 * Reclasses were made to prior year totals to conform to current year presentation UPMC QUARTERLY DISCLOSURE JUNE

9 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 REVENUE METRICS HEALTH SERVICES (CONTINUED) Physician Service Revenue per Weekday UPMC s physician activity for the twelve months ended June 30, 2015 as measured by average revenue per weekday increased 4% from the comparable period in Physician services activity is measured on a weekday basis. For the Twelve Months Ended June 30 (in thousands) 2015 Change 2014 Quarterly Average (in millions) $6.0 Academic $ 3,051 1% $ 3,020 $5.5 $5.2 $5.5 Community 2,217 9% 2,025 $5.0 $5.0 $5.0 $5.0 $5.1 $5.2 $5.2 Total $ 5,268 4% $ 5,045 $4.5 $4.0 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 QUARTER ENDING Sources of Patient Service Revenue The gross patient service revenues of UPMC are derived from third-party payers which reimburse or pay UPMC for the services it provides to patients covered by such payers. Third-party payers include the federal Medicare Program, the federal and state Medical Assistance Program ( Medicaid ), Highmark Blue Cross Blue Shield ( Highmark ) and other third-party insurers such as health maintenance organizations and preferred provider organizations. The following table is a summary of the percentage of the subsidiary hospitals gross patient service revenue by payer. Twelve Months Ended June Medicare 46% 43% Medicaid 13% 15% Highmark 15% 19% UPMC Insurance Services 12% 10% National Insurers 8% 7% Other 6% 6% Total 100% 100% UPMC QUARTERLY DISCLOSURE JUNE

10 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 OPERATING METRICS - INSURANCE SERVICES Membership Membership in the UPMC Insurance Services Division increased to 2,748,069 as of July 1, ,000,000 2,748,069 2,730,191 2,500,000 2,604,292 2,238,262 2,263,479 2,302,722 2,328,031 2,320,017 2,348,388 2,372,724 2,000,000 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 QUARTER ENDING As of July 1, 2015 July 1, 2014 June 30, 2015 June 30, 2014 Commercial Health 565, , , ,527 Medicare 144, , , ,908 Medicaid 341, , , ,243 Behavioral Health 840, , , ,553 Sub-Total Health Products 1,892,134 1,622,789 1,885,474 1,624,231 Work Partners and Life Solutions 444, , , ,315 Ancillary Products 203, , , ,508 Evolent 208, , , ,977 Total Membership 2,748,069 2,320,017 2,730,191 2,328,031 Medical Expense Ratio UPMC Insurance Services Medical Expense Ratio remained stable due to essentially flat premiums in all products. Trailing Twelve-Months 100% 95% % 85% 80% Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 QUARTER ENDING UPMC QUARTERLY DISCLOSURE JUNE

11 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 KEY FINANCIAL INDICATORS (Dollars in millions) Operating Earnings before Interest, Depreciation and Amortization Operating EBIDA for the twelve months ended June 30, 2015 increased as compared to the twelve months ended June 30, 2014 primarily as a result of increased operating income. For the Twelve Months Ended June Change 2014 Trailing Twelve Months EBIDA 1000 Operating Income $ % $ 190 Depreciation and Amortization 466 3% $603 $654 $662 $644 $682 $716 $677 $804 Operating EBIDA $ % $ Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 FOUR QUARTERS ENDING Unrestricted Cash and Investments Over Long Term Debt Unrestricted cash and investments over long term debt increased by $128 million as compared to June 2014 due to increased operating income and consistent debt. $1,200 $1,129 $1,061 $1,000 $1,001 $979 $955 $800 $664 $734 $600 $494 $400 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 QUARTER ENDING Days in Net Accounts Receivable Consolidated Days in Accounts Receivable continues to increase as a result of disputed Highmark oncology receivables of $170 million. By Division as of June Balance Days Health Services $ Insurance Services ICSD Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Consolidated $ 1, QUARTER ENDING UPMC QUARTERLY DISCLOSURE JUNE

12 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 Market Share The chart below shows the change in UPMC s estimated inpatient market share for the first two quarters of fiscal years 2014 and 2015 (July 1 through December 31), by service area (1). This is the most recent market share data currently available. UPMC INPATIENT MEDICAL-SURGICAL MARKET SHARE JULY 1 THROUGH DECEMBER 31 80% 70% FY 2014 FY 2015 MARKET SHARE 60% 50% 40% 30% 20% 61% 60% 41% 41% 10% 0% Allegheny County Western PA (29-County) Discharges The following tables show the change in medical-surgical discharges from all hospitals, as well as UPMC hospitals, within each service area for the same period. This is the most recent discharge data currently available. TOTAL MEDICAL-SURGICAL DISCHARGES WITHIN THE SERVICE AREAS (ALL HOSPITALS) FY 2015 AND FY 2014 July 1 through December 31 FY 15 FY 14 Percent Change Allegheny County 69,507 71,140 (2.3%) Western Pennsylvania (29-County Region) 225, ,401 (1.4%) UPMC MEDICAL-SURGICAL DISCHARGES WITHIN THE SERVICE AREAS FY 2015 AND FY 2014 July 1 through December 31 FY 15 FY 14 Percent Change Allegheny County 41,571 43,417 (4.3%) Western Pennsylvania (29-County Region) 91,804 94,449 (2.8%) (1) UPMC s two service areas are (1) Allegheny County, and (2) a 29-county region which also includes Armstrong, Beaver, Bedford, Blair, Butler, Cambria, Cameron, Centre, Clarion, Clearfield, Crawford, Elk, Erie, Fayette, Forest, Greene, Huntingdon, Indiana, Jefferson, Lawrence, McKean, Mercer, Potter, Somerset, Venango, Warren, Washington and Westmoreland counties. UPMC QUARTERLY DISCLOSURE JUNE

13 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 ASSET AND LIABILITY MANAGEMENT During the twelve months ended June 30, 2015, UPMC s investment portfolio returned 3.2%, excluding the $37 million of investment revenue related to increases in stock value for Evolent subsequent to the IPO. As of June 30, 2015, UPMC utilized 191 external investment managers, including 36 traditional managers, 26 hedge fund managers and 129 private equity managers. UPMC s investment portfolio has a long-term perspective and has generated annualized returns of 3.2%, 9.1% and 9.0% for the trailing one-, three- and five-year periods. As of June 30, 2015, 58% of UPMC s investment portfolio could be liquidated within three days. UPMC s annualized cost of capital during the period was 3.71%. This cost of capital includes the accrual of interest payments, the amortization of financing costs and original issue discount or premium, the ongoing costs of variable rate debt and the cash flow impact of derivative contracts. As of June 30, 2015, the interest rates on UPMC s long-term debt were approximately 81% fixed and 19% variable after giving effect to derivative contracts. Annualized interest cost for the variable rate debt for the period averaged 0.69%. The annualized interest cost for the fixed rate debt was 4.23%. UPMC has a revolving credit facility which expires in July 2019 and has a borrowing limit of $500 million. As of June 30, 2015, UPMC had approximately $65 million of letters of credit outstanding under the credit facility leaving $435 million available to fund operating and capital needs, of which none was drawn. The table below compares reported Investing and Financing Activity for the twelve months ended June 30, 2015 and 2014 by type. Investing and Financing Activity by Type Twelve Months Ended June (in thousands) Realized gains $ 225,049 $ 256,119 Interest and dividends, net of fees 49,289 42,171 Realized investment revenue $ 274,338 $ 298,290 Unrealized (losses) gains on derivative contracts (8,333) 8,678 Gain on Evolent holdings 36,815 Other unrealized (losses) gains (90,561) 222,674 Impairment on cost basis investments (29,900) Investment revenue $ 182,359 $ 529,642 Gain (loss) on extinguishment of debt 132 (6,152) Interest expense (116,735) (129,992) Gain from investing and financing activities $ 65,756 $ 393,498 UPMC QUARTERLY DISCLOSURE JUNE

14 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED JUNE 30, 2015 Sources and Uses of Cash UPMC s primary source of operating cash is the collection of revenues and related accounts receivable. As of June 30, 2015, UPMC had approximately $290 million of cash and cash equivalents on hand to fund operations and capital expenditures, and borrowing availability under the credit facility was $435 million, of which none was drawn. Operating EBIDA was $804 million for the twelve months ended June 30, 2015, compared to $644 million for the twelve months ended June 30, The increase over prior year is primarily the result of the gain recorded on Evolent. Net cash provided by operating activities was $259 million in the twelve months ended June 30, 2015 compared to $569 million provided by operating activities in the twelve months ended June 30, Key sources and uses of cash from investing activities for the year ended June 30, 2015 include capital expenditures of $392 million, as well as $20 million to acquire ownership interests in and fund businesses. Major capital projects included construction of the Luna Garage to service the Shadyside campus, renovations to UPMC Presbyterian Radiology, and construction of the Mario Lemieux Sports Complex in Cranberry Township. Major Information Services projects included enhancements that are advancing UPMC s leading clinician-centric computing environment, technology infrastructure that supports UPMC s diversified digital environment, investments in enterprise data analytics, and other technologies that are transforming the consumer experience across the spectrum of health care. Additionally, in the year ended June 30, 2015, contributions to the defined benefit pension plan of $137 million were made to maintain its funded status and to avoid paying excess premiums to the Pension Benefit Guaranty Corporation ( PBGC ). UPMC QUARTERLY DISCLOSURE JUNE

15 UTILIZATION STATISTICS PERIOD ENDED JUNE 30, 2015 The following table, presents selected consolidated statistical indicators of medical-surgical, psychiatric, sub-acute and rehabilitation patient activity for the twelve months ended June 30, 2015 and Twelve Months Ended June Licensed Beds 5,109 5,118 BEDS IN SERVICE Medical-Surgical 3,742 4,071 Psychiatric Rehabilitation Skilled Nursing Total Beds in Service 4,446 4,805 PATIENT DAYS Medical-Surgical 982,455 1,001,333 Psychiatric 133, ,998 Rehabilitation 62,452 52,410 Skilled Nursing 25,641 34,290 Total Patient Days 1,204,325 1,230,030 Observation Days 100,426 97,486 Average Daily Census 3,575 3,637 ADMISSIONS AND OBSERVATION CASES Medical-Surgical 192, ,386 Observation Cases 75,962 72,505 Subtotal 268, ,891 Psychiatric 10,457 10,659 Rehabilitation 4,301 3,860 Skilled Nursing 2,052 2,963 Total Admissions and Observation Cases 284, ,373 Overall Occupancy 80% 76% AVERAGE LENGTH OF STAY Medical-Surgical Psychiatric Rehabilitation Skilled Nursing Overall Average Length of Stay Emergency Room Visits 710, ,809 TRANSPLANTS (PITTSBURGH) Liver Kidney All Other Total TRANSPLANTS (ISMETT) Liver Other Total UPMC QUARTERLY DISCLOSURE JUNE

16 OUTSTANDING DEBT PERIOD ENDED JUNE 30, 2015 Issuer Original Borrower Series Amount Outstanding Allegheny County Hospital UPMC Health System 1997B $ 43,851 Development Authority UPMC Health System 1998B 4,914 UPMC 2007A 86,590 UPMC 2007B 65,000 UPMC 2008A 106,585 UPMC 2008B 128,512 UPMC 2008 Notes 89,875 UPMC 2009A 350,486 UPMC 2010A 206,837 UPMC 2010B 100,000 UPMC 2010C 50,000 UPMC 2010D 150,000 UPMC 2010F 95,000 UPMC 2011A 95,360 Monroeville Finance Authority UPMC ,677 UPMC 2013B 71,624 UPMC 2014B 52,327 UPMC 2015A Notes 71,235 Pennsylvania Economic UPMC 2013A 125,304 Development Financing Authority UPMC 2014A 337,193 Erie County Hospital Authority Hamot Health Foundation ,588 Hamot Health Foundation ,099 Hamot Health Foundation 2010A 14,985 Hamot Health Foundation 2010C 2,250 Pennsylvania Higher Educational UPMC 2010E 258,657 Facilities Authority Blair County Hospital Authority Altoona 1998A 4,218 None UPMC 2011B 100,000 UPMC Swap liabilities 17,685 Various - Capital Leases and Loans 88,835 Total $ 3,135,687 Includes original issue discount and premium and other. Source: UPMC Records UPMC QUARTERLY DISCLOSURE JUNE

17 DEBT COVENANT CALCULATIONS PERIOD ENDED JUNE 30, 2015 DEBT SERVICE COVERAGE RATIO (Dollars in Thousands) Trailing Twelve-Month Period Ended June 30, 2015 Net Income $ 416,809 ADJUSTED BY: Net Unrealized Losses from Period 1 91,971 Depreciation and Amortization 1 465,555 (Gain) loss on Defeasance of Debt 1 (132) Asset Impairment Inherent Contribution 1 (1,000) Realized Investment Impairments 2 (11,945) Interest Expense 115,800 Revenues Available for Debt Service $ 1,077,159 Historical Debt Service Requirements 2007 MTI $ 244,853 Debt Service Coverage Ratio 2007 MTI 4.40X Maximum Debt Service Requirements $ 249,269 Debt Service Coverage Ratio 4.32X Historical Debt Service Requirements All Debt and Leases $ 281,960 Debt Service Coverage Ratio All Debt and Leases 3.82X LIQUIDITY RATIO AS OF JUNE 30, 2015 Unrestricted Cash and Investments $ 4,100,446 Master Trust Indenture Debt $ 2,942,370 Unrestricted Cash to MTI Debt 1.39 (1) Non-Cash. (2) Reflects ultimate realization of previously impaired cost-based investments. I hereby certify to the best of my knowledge that, as of June 30, 2015, UPMC is in compliance with the applicable covenants contained in the financing documents for the bonds listed on the cover hereof and all applicable bank lines of credit and no Event of Default (as defined in any related financing document) has occurred and is continuing. C. Talbot Heppenstall, Jr. Treasurer UPMC UPMC QUARTERLY DISCLOSURE JUNE

18 AUDITED CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2015 UPMC QUARTERLY DISCLOSURE JUNE

19 REPORT OF INDEPENDENT AUDITORS The Board of Directors UPMC Pittsburgh, Pennsylvania We have audited the accompanying consolidated balance sheets of UPMC and subsidiaries as of June 30, 2015 and 2014, and the related consolidated statements of operations, changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UPMC and subsidiaries at June 30, 2015 and 2014, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with attestation standards established by the American Institute of Certified Public Accountants, UPMC s internal control over financial reporting as of June 30, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated August 27, 2015 expressed an unqualified opinion thereon. August 27, 2015 UPMC QUARTERLY DISCLOSURE JUNE

20 CONSOLIDATED BALANCE SHEETS June CURRENT ASSETS Cash and cash equivalents $ 290,291 $ 449,539 Accounts receivable, net of allowance for uncollectable accounts of $100,249 at June 30, 2015 and $121,740 at June 30, , ,090 Other receivables 840, ,102 Other current assets 155, ,287 Total current assets 2,123,279 1,878,018 Board-designated, restricted, trusteed and other investments 4,573,337 4,272,766 Beneficial interests in foundations and trusts 456, ,504 Property, buildings and equipment: Land and land improvements 349, ,615 Buildings and fixed equipment 4,872,612 4,695,017 Movable equipment 2,527,843 2,393,772 Capital leases 119, ,992 Construction in progress 166, ,481 8,035,304 7,711,877 Less allowance for depreciation (4,374,512) (4,037,036) 3,660,792 3,674,841 Other assets 279, ,238 Total assets $ 11,093,606 $ 10,582,367 CURRENT LIABILITIES Accounts payable and accrued expenses $ 420,766 $ 411,250 Accrued salaries and related benefits 623, ,752 Current portion of insurance reserves 478, ,777 Current portion of long-term obligations 160, ,519 Other current liabilities 336, ,672 Total current liabilities 2,019,314 1,985,970 Long-term obligations 2,975,573 2,804,541 Pension liability 216, ,532 Long-term insurance reserves 277, ,565 Other noncurrent liabilities 162, ,204 Total liabilities 5,652,510 5,396,812 Unrestricted net assets 4,789,288 4,528,034 Restricted net assets 651, ,521 Total net assets 5,441,096 5,185,555 Total liabilities and net assets $ 11,093,606 $ 10,582,367 See accompanying notes UPMC QUARTERLY DISCLOSURE JUNE