UPMC Unaudited Quarterly Disclosure. For the Period Ended September 30, 2015

Transcription

1 UPMC Unaudited Quarterly Disclosure For the Period Ended September 30, 2015

2 UPMC UNAUDITED QUARTERLY DISCLOSURE FOR THE PERIOD ENDED SEPTEMBER 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 Interim Consolidated Financial Statements Review Report of Independent Auditors 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 as of and for the three month period ended September 30, 2015 and 2014 is derived from the interim consolidated financial statements of UPMC. The interim consolidated financial statements include 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. The financial information as of and for the twelve month period ended June 30, 2015 is derived from UPMC s audited consolidated financial statements. 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 September 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 UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER 2015

3 INTRODUCTION TO MANAGEMENT S DISCUSSION AND ANALYSIS PERIOD ENDED SEPTEMBER 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 more than 20 hospitals and more than 500 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 UPMC Enterprises. 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 unaudited consolidated financial statements. UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

4 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 30, 2015 CONSOLIDATED FINANCIAL HIGHLIGHTS (Dollars in millions) Financial Results for the Three Months Ended September Operating revenues $ 3,097 $ 2,934 Operating income $ 72 $ 93 Operating margin 2.3 % 3.2% Operating margin (including income tax and interest expense) 1.3 % 2.1% Loss from investing and financing activities $ (291) $ (42) Excess of (expenses over revenues) revenues over expenses $ (222) $ 49 Operating EBIDA $ 186 $ 207 Capital expenditures and investments $ 80 $ 86 Reinvestment ratio Selected Other Information as of September 30, 2015 June 30, 2015 Total cash and investments $ 4,730 $ 4,864 Unrestricted cash and investments $ 4,005 $ 4,100 Unrestricted cash and investments over long-term debt $ 1,029 $ 1,129 Days of cash on hand Days in net accounts receivable Average age of plant Operating revenues for the three months ended September 30, 2015 increased $163 million, or 5.5%, as compared to the three months ended September 30, 2014, primarily due to growth in Insurance Services and Health Services. Operating income for the three months ended September 30, 2015 decreased $21 million over the same period in the prior fiscal year. Operating earnings before interest, depreciation and amortization totaled $186 million, and excess of expenses over revenues was $222 million. As of September 30, 2015, UPMC had more than $4.7 billion of cash and investments. For the three months ended September 30, 2015: Total medical-surgical admissions and observation cases decreased 3% compared to the prior year. Hospital outpatient revenue per workday decreased 2% compared to the prior year as volumes decreased. Physician service revenue per weekday increased 2% from the comparable period in the prior year, and Enrollment in UPMC s Insurance Services grew to nearly 2.8 million members as of September 30, UPMC s loss from investing and financing activities for the three months ended September 30, 2015 was $291 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 UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

5 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 30, 2015 In July 2015, for the 17th consecutive year, UPMC was named one of the nation s Most Wired health systems by Hospitals & Health Networks, the journal of the American Hospital Association. The annual survey is a leading industry barometer measuring information technology use and adoption among hospitals nationwide and examines how they are leveraging technology to improve performance and value for patients. Kane Community Hospital, affiliated with UPMC Hamot in Erie, was recognized with the Most Wired Small and Rural award for the eighth time. Over the past five years, UPMC has invested more than $1.5 billion in technology to support clinical excellence and administrative efficiency. UPMC is one of the nation s earliest and most sophisticated users of electronic medical records (EMRs). More than a dozen UPMC hospitals, as well as UPMC outpatient facilities, are at the highest levels of EMR use, as measured by the Healthcare Information and Management Systems Society. 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. In August 2015, the John P. Murtha Regional Cancer Center in Johnstown, Pa. a joint venture with UPMC CancerCenter and Conemaugh Health System acquired a new linear accelerator. This offers cutting-edge radiation treatment and brings UPMC s investment in the center to more than $1 million which demonstrates the overall commitment to the highest quality of patient care. Children s Hospital of Pittsburgh of UPMC opened an expanded specialty care center in Erie, Pa. in September Located at UPMC Hamot Women s Hospital, the new Children s Hospital Specialty Care Center Erie provides increased access to Children s experts for families in the region because of its new location and increased clinic space. Pediatric experts from Children s main campus in Pittsburgh travel to Erie on a regular basis to provide improved access to subspecialty care. Previously the center had been located at the Shriners Hospitals for Children in Erie. 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 appealed that Order to the Pennsylvania Supreme Court, which granted expedited briefing and argument. The Pennsylvania Supreme Court held oral argument on the appeal on October 6, UPMC awaits the Court s decision. 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. Efforts to obtain regulatory approval from 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 December UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

6 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 30, 2015 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Three Months Ended September 30, 2015 (in millions) Revenues: Health Services Insurance Services Eliminations Consolidated Net patient service revenue less provision for bad debts $ 1,784 $ $ (380) $ 1,404 Insurance enrollment revenue 1,446 1,446 Other revenue (28) 247 Total operating revenues $ 1,987 $ 1,518 $ (408) $ 3,097 Expenses: Salaries, professional fees and benefits $ 1,063 $ 65 $ (7) $ 1,121 Supplies, purchased services and general 761 1,430 (401) 1,790 Depreciation and amortization Total operating expenses 1,936 1,497 (408) 3,025 Operating income $ 51 $ 21 $ 72 Operating margin % 2.6% 1.4% 2.3% Operating margin % (including income tax and interest expense) 1.7% 1.2% 1.3% Operating EBIDA $ 163 $ 23 $ 186 Operating EBIDA % 8.2% 1.5% 6.0% Three Months Ended September 30, 2014 (in millions) Revenues: Net patient service revenue less provision for bad debts $ 1,771 $ $ (309) $ 1,462 Insurance enrollment revenue 1,246 1,246 Other revenue (23) 226 Total operating revenues $ 1,964 $ 1,302 $ (332) $ 2,934 Expenses: Salaries, professional fees and benefits $ 1,060 $ 55 $ (7) $ 1,108 Supplies, purchased services and general 711 1,233 (325) 1,619 Depreciation and amortization Total operating expenses 1,882 1,291 (332) 2,841 Operating income $ 83 $ 11 $ 93 Operating margin % 4.2% 0.8% 3.2% Operating margin % (including income tax and interest expense) 2.7% 0.7% 2.1% Operating EBIDA $ 193 $ 14 $ 207 Operating EBIDA % 9.9% 1.1% 7.1% UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

7 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 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 3,600 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. The Health Services division also includes its international ventures which aims to bring new revenue streams into western Pennsylvania. International ventures currently include ISMETT, a transplant and specialty surgery hospital in Palermo, Italy, that has performed more than 1,600 transplants since its founding in 1999, 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. Health Services revenue of $2.0 billion increased $23 million from prior year due primarily to inflationary rate increases. Operating income of $51 million decreased $32 million from prior year due to lower volumes, growth in governmental payers and continuing physician investment. Insurance Services UPMC holds various interests in health care financing initiatives and network care delivery operations that have nearly 2.8 million members as of September 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 $1.5 billion increased $216 million from prior year primarily as a result of increased membership. Insurance Services experienced an operating income increase of $10 million compared to prior year primarily due to higher underwriting margins which more than offset higher administrative expense related to increased membership. UPMC Enterprises The goal of UPMC Enterprises is to leverage UPMC s integrated delivery and financing system capabilities to generate new revenue streams. This is accomplished by fostering new ideas for improvement in the delivery of health care, pursuing commercialization opportunities of smart technologies and developing strategic partnerships with industry leaders. These ventures both support UPMC s core mission and help to stimulate the economy of western Pennsylvania. UPMC Enterprises manages a portfolio that includes various internally-focused initiatives and numerous operating companies with commercially-available products and services directed toward the improvement of the delivery of health care. Unlike the Health Services and Insurance Services divisions, UPMC Enterprises results are classified as investing and financing activity in the Statements of Operations and Changes in Net Assets, consistent with the long-term nature of developing and commercializing technology-enabled initiatives. UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

8 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 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 three months ended September 30, 2015 decreased 3% compared to the same period in For the Three Months Ended September 30 (in thousands) 2015 Variance 2014 Trailing Twelve-Months 280,000 Academic 33.4 (3%) 34.3 Community 21.4 (3%) , , , , , , ,708 Regional 11.0 (6%) , ,238 Total 65.8 (3%) , ,000 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 QUARTER ENDING Outpatient Revenue per Workday UPMC s outpatient activity for the three months ended September 30, 2015 as measured by average revenue per workday decreased 2% 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 Three Months Ended September 30 (in thousands) 2015 Variance 2014 Quarterly Average (in millions) $10 Academic $ 5,150 (2%) $ 5,236 Community 2,100 (5%) 2,221 Regional 1,453 0% 1,447 $9 $9.2 $8.8 $9.0 $8.9 $9.2 $8.5 $8.5 $8.7 Total $ 8,703 (2%) $ 8,904 $8 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 * Reclasses were made to prior year totals to conform to current year presentation QUARTER ENDING UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

9 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 30, 2015 REVENUE METRICS HEALTH SERVICES (CONTINUED) Physician Service Revenue per Weekday UPMC s physician activity for the three months ended September 30, 2015 as measured by average revenue per weekday increased 2% from the comparable period in Physician services activity is measured on a weekday basis. For the Three Months Ended September 30 Quarterly Average (in millions) (in thousands) 2015 Variance $5.3 Academic $ 2,953 2% $ 2, $5.0 $5.2 $5.2 Community 2,071 2% 2, $4.8 $4.8 $4.9 $5.0 Total $ 5,024 2% $ 4,924 * Reclasses were made to prior year totals to conform to current year presentation 4.5 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 QUARTER ENDING Mar-15 Jun-15 Sep-15 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. Three Months Ended September Medicare 44% 43% Medicaid 17% 15% UPMC Insurance Services 12% 10% Highmark Commercial 11% 17% National Insurers 7% 6% Other 9% 9% Total 100% 100% *Prior period has been reclassified to conform to current year presentation UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

10 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 30, 2015 OPERATING METRICS - INSURANCE SERVICES Membership Membership in the UPMC Insurance Services Division increased to 2,798,281 as of September 30, 2015, an increase of 19% over the same period in the prior year. 3,000,000 2,604,292 2,730,191 2,798,281 2,500,000 2,263,479 2,302,722 2,328,031 2,348,388 2,372,724 2,000,000 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 QUARTER ENDING As of Sept 30, 2015 Sept 30, 2014 June 30, 2015 June 30, 2014 Commercial Health 562, , , ,527 Medicare 145, , , ,908 Medicaid 354, , , ,243 Behavioral Health 889, , , ,553 Sub-Total Health Products 1,951,830 1,624,579 1,885,474 1,624,231 Work Partners and Life Solutions 442, , , ,315 Ancillary Products 204, , , ,508 Evolent 199, , , ,977 Total Membership 2,798,281 2,348,388* 2,730,191 2,328,031* * Reclasses have been made to prior membership categories to conform to current year presentation. Healthcare Spending Ratio UPMC Insurance Services Medical Expense Ratio remained stable as medical expenses trended consistently with premiums. Trailing Twelve-Months 95% 90% % Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 QUARTER ENDING UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

11 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 30, 2015 KEY FINANCIAL INDICATORS (Dollars in millions) Operating Earnings before Interest, Depreciation and Amortization Operating EBIDA for the three months ended September 30, 2015 decreased as compared to the three months ended September 30, 2014 due to lower volumes, growth in governmental payers and continuing physician investment. For the Three Months Ended September 30 Trailing Twelve Months EBIDA Operating Income $ 72 $ 93 Depreciation and Amortization Unrestricted Cash to Long Term Debt Operating EBIDA $ 186 $ 207 $1,000 Unrestricted cash to long term debt decreased by $100 million as compared to June 2015 primarily due to pension contributions $800 $600 $400 $200 of $89 million and unrealized investment losses in the current quarter. $0 $654 $662 $644 Dec-13 Mar-14 Jun-14 $684 Sep-14 $731 Dec-14 FOUR QUARTERS ENDING $706 Mar-15 $849 $828 Jun-15 Sep-15 $1,200 $1,129 $1,000 $1,001 $1,061 $979 $955 $1,029 $800 $734 $664 $600 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 QUARTER ENDING Days in Accounts Receivable Consolidated Days in Accounts Receivable increased versus September 30, 2014 primarily as a result of disputed Highmark oncology receivables of $188 million. The decrease versus June 30, 2015 was due to the timing of Medicaid receipts. By Division as of September Balance Days Health Services $ Insurance Services Other Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Consolidated $ 1, QUARTER ENDING UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

12 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 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 UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

13 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 30, 2015 ASSET AND LIABILITY MANAGEMENT During the three months ended September 30, 2015, UPMC s investment portfolio returned (4.9%). As of September 30, 2015, UPMC utilized 195 external investment managers, including 38 traditional managers, 26 hedge fund managers and 131 private equity managers. UPMC s investment portfolio has a long-term perspective and has generated annualized returns of (1.8%), 6.0% and 6.6% for the trailing one-, three- and five-year periods. As of September 30, 2015, 57% of UPMC s investment portfolio could be liquidated within three days. UPMC s annualized cost of capital during the period was 3.64%. 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 September 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 0.78%. The annualized interest cost for the fixed rate debt was 4.26%. UPMC has a revolving credit facility which expires in July 2019 and has a borrowing limit of $500 million. As of September 30, 2015, UPMC had approximately $64 million letters of credit outstanding under the credit facility leaving $436 million available to fund operating and capital needs, of which $50 million was drawn. The table below compares reported Investing and Financing Activity for the three months ended September 30, 2015 and 2014 by type. Investing and Financing Activity by Type Three Months Ended September (in thousands) Realized (losses) gains $ (6,070) $ 52,568 Interest and dividends, net of fees 5,210 9,868 Realized investment (loss) revenue $ (860) $ 62,436 Unrealized losses on derivative contracts (2,370) (7,659) Other unrealized losses (242,615) (65,712) Investment loss $ (245,845) $ (10,935) Loss on extinguishment of debt - (179) Interest expense (27,990) (28,542) UPMC Enterprises results (16,890) (2,231) Loss from investing and financing activities $ (290,725) $ (41,887) Prior year UPMC Enterprises results were reclassified to investing and financing activities to conform with current year presentation. This reclassification did not impact excess of revenues over expenses in the Statement of Operations and Changes in Net Assets. UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

14 MANAGEMENT S DISCUSSION & ANALYSIS PERIOD ENDED SEPTEMBER 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 September 30, 2015, UPMC had approximately $414 million of cash and cash equivalents on hand to fund operations and capital expenditures, and borrowing availability under the credit facility was $436 million, $50 million of which was drawn. Operating EBIDA was $186 million for the three months ended September 30, 2015, compared to $207 million for the three months ended September 30, Net cash provided by operating activities was $231 million in the three months ended September 30, 2015 compared to $221 million provided by operating activities in the three months ended September 30, Key sources and uses of cash from investing activities for the three month period ended September 30, 2015 include capital expenditures and investments in joint ventures of $80 million. Major capital projects included construction of the Luna Garage to service the Shadyside campus, renovations to UPMC Presbyterian Radiology, and construction of the UPMC 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 three month period ended September 30, 2015, contributions to the defined benefit pension plan of $89 million were made to maintain its funded status and to avoid paying excess premiums to the Pension Benefit Guaranty Corporation ( PBGC ). UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

15 UTILIZATION STATISTICS PERIOD ENDED SEPTEMBER 30, 2015 The following table, presents selected consolidated statistical indicators of medical-surgical, psychiatric, sub-acute and rehabilitation patient activity for the three months ended September 30, 2015 and Three Months Ended September Licensed Beds 5,087 5,131 BEDS IN SERVICE Medical-Surgical 3,723 3,965 Psychiatric Rehabilitation Skilled Nursing Total Beds in Service 4,429 4,688 PATIENT DAYS Medical-Surgical 240, ,848 Psychiatric 32,359 33,574 Rehabilitation 15,702 15,298 Skilled Nursing 5,773 6,576 Total Patient Days 293, ,296 Observation Days 23,513 24,635 Average Daily Census 3,450 3,521 ADMISSIONS AND OBSERVATION CASES Medical-Surgical 46,906 48,554 Observation Cases 18,838 19,511 Subtotal 65,744 68,065 Psychiatric 2,619 2,640 Rehabilitation 1,079 1,086 Skilled Nursing Total Admissions and Observation Cases 69,942 72,306 Overall Occupancy 78% 75% AVERAGE LENGTH OF STAY Medical-Surgical Psychiatric Rehabilitation Skilled Nursing Overall Average Length of Stay Emergency Room Visits 181, ,904 TRANSPLANTS (PITTSBURGH) Liver Kidney All Other Total TRANSPLANTS (ISMETT) Liver Other Total UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

16 OUTSTANDING DEBT PERIOD ENDED SEPTEMBER 30, 2015 (IN THOUSANDS) Issuer Original Borrower Series Amount Outstanding Allegheny County Hospital UPMC Health System 1997B $ 43,847 Development Authority UPMC Health System 1998B 4,915 UPMC 2007A 86,590 UPMC 2007B 65,000 UPMC 2008A 92,446 UPMC 2008B 128,351 UPMC 2008 Notes 89,875 UPMC 2009A 342,877 UPMC 2010A 206,161 UPMC 2010B 100,000 UPMC 2010C 50,000 UPMC 2010D 150,000 UPMC 2010F 95,000 UPMC 2011A 95,251 Monroeville Finance Authority UPMC ,184 UPMC 2013B 69,967 UPMC 2014B 52,303 UPMC 2015A Notes 71,235 Pennsylvania Economic UPMC 2013A 123,135 Development Financing Authority UPMC 2014A 336,762 Erie County Hospital Authority Hamot Health Foundation ,578 Hamot Health Foundation ,098 Hamot Health Foundation 2010A 14,985 Hamot Health Foundation 2010C 2,250 Pennsylvania Higher Educational UPMC 2010E 258,467 Facilities Authority Blair County Hospital Authority Altoona 1998A 2,168 None UPMC 2011B 100,000 UPMC Swap liabilities 20,322 Various - Capital Leases and Loans 83,063 Total $ 3,102,830 Includes original issue discount and premium and other. Source: UPMC Records UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

17 DEBT COVENANT CALCULATIONS PERIOD ENDED SEPTEMBER 30, 2015 DEBT SERVICE COVERAGE RATIO (Dollars in Thousands) Trailing Twelve-Month Period Ended September 30, 2015 Net Income $ 145,652 ADJUSTED BY: Net Unrealized Losses from Period 1 263,583 Depreciation and Amortization 1 465,582 (Gain) loss on Defeasance of Debt 1 (311) Asset Impairment Inherent Contribution 1 (915) Realized Investment Impairments 2 (16,765) Interest Expense 115,347 Revenues Available for Debt Service $ 972,274 Historical Debt Service Requirements 2007 MTI $ 247,529 Debt Service Coverage Ratio 2007 MTI 3.93X Historical Debt Service Requirements All Debt and Leases $ 281,894 Debt Service Coverage Ratio All Debt and Leases 3.45X LIQUIDITY RATIO AS OF SEPTEMBER 30, 2015 Unrestricted Cash and Investments $ 4,004,814 Master Trust Indenture Debt $ 2,914,985 Unrestricted Cash to MTI Debt 1.37 (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 September 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 UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

18 UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2015 UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

19 REVIEW REPORT OF INDEPENDENT AUDITORS The Board of Directors UPMC Pittsburgh, Pennsylvania We have reviewed the consolidated financial information of UPMC and subsidiaries, which comprise the consolidated balance sheet as of September 30, 2015, and the related consolidated statements of operations and changes in net assets for the threemonth periods ended September 30, 2015 and 2014 and cash flows for the three-month periods ended September 30, 2015 and Management s Responsibility for the Financial Information Management is responsible for the preparation and fair presentation of the interim financial information in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in conformity with U.S. generally accepted accounting principles. Auditor s Responsibility Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion. Conclusion Based on our review, we are not aware of any material modifications that should be made to the consolidated financial information referred to above for it to be in conformity with U.S. generally accepted accounting principles. Pittsburgh, Pennsylvania November 4, 2015 UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

20 CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) September As of June ASSETS Current assets Cash and cash equivalents $ 413,517 $ 290,291 Patient accounts receivable, net of allowance for uncollectable accounts of $121,342 at September 30, 2015 and $100,249 at June 30, , ,251 Other receivables 566, ,719 Other current assets 181, ,018 Total current assets 2,028,646 2,123,279 Board-designated, restricted, trusteed and other investments 4,316,657 4,573,337 Beneficial interests in foundations 438, ,404 Property, buildings and equipment: Land and land improvements 350, ,587 Buildings and fixed equipment 4,883,971 4,872,612 Movable equipment 2,561,693 2,527,843 Capital Leases 121, ,221 Construction in progress 188, ,041 Property, plant and equipment 8,106,599 8,035,304 Less: allowance for depreciation (4,486,139) (4,374,512) Net property, plant and equipment 3,620,460 3,660,792 Other assets 284, ,794 Total assets $ 10,688,322 $ 11,093,606 LIABILITIES AND NET ASSETS Current liabilities Accounts payable and accrued expenses $ 422,033 $ 420,766 Accrued salaries, wages and related benefits 524, ,557 Current portion of insurance reserves 500, ,069 Current portion of long-term debt 173, ,114 Other current liabilities 354, ,808 Total current liabilities 1,974,579 2,019,314 Long-term obligations 2,929,300 2,975,573 Pension liability 146, ,846 Long-term insurance reserves 279, ,855 Other long-term liabilities 164, ,922 Total liabilities 5,493,881 5,652,510 Unrestricted net assets 4,569,519 4,789,288 Restricted net assets 624, ,808 Total net assets 5,194,441 5,441,096 Total liabilities and net assets $ 10,688,322 $ 11,093,606 See accompanying notes UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

21 CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITY Three Months Ended September Net patient service revenue: Patient service revenue (net of contractual allowances and discounts) $1,483,161 $1,520,222 Provision for bad debts (79,408) (57,535) Net patient service revenue less provision for bad debts 1,403,753 1,462,687 Insurance enrollment revenue 1,446,318 1,245,702 Other revenue 246, ,904 Total operating revenues 3,096,966 2,934,293 Expenses: Salaries, professional fees and employee benefits 1,120,228 1,108,311 Supplies, purchased services and general expenses 1,790,587 1,618,917 Depreciation and amortization 114, ,162 Total operating expenses 3,025,207 2,841,390 Operating income 71,759 92,903 Other operating income 85 - Income tax expense (2,839) (1,754) Investing and financing activities: Investment loss (245,845) (10,935) Interest expense (27,990) (28,542) Loss on extinguishment of debt - (179) UPMC Enterprises activity (16,890) (2,231) Loss from investing and financing activities (290,725) (41,887) Excess of (expenses over revenues) revenues over expenses (221,720) 49,262 Other changes in unrestricted net assets 1,951 (26,759) (Decrease) increase in unrestricted net assets (219,769) 22,503 RESTRICTED NET ASSETS Contributions and other changes (1,902) 189 Net realized and unrealized (losses) gains on restricted investments (3,965) 1,508 Assets released from restriction for operations and capital purchases (3,165) (2,832) Net (decrease) increase in beneficial interests in foundations (17,854) 2,704 (Decrease) increase in restricted net assets (26,886) 1,569 (Decrease) increase in net assets (246,655) 24,072 Net assets, beginning of period 5,441,096 5,314,791 Net assets, end of period $5,194,441 $5,338,863 See accompanying notes UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

22 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Three Months Ended September OPERATING ACTIVITIES (Decrease) increase in net assets $ (246,655) $ 24,072 Adjustments to reconcile (decrease) increase in net assets to net cash provided by operating activities: Depreciation and amortization 114, ,365 Provision for bad debts 79,408 57,536 Change in beneficial interest in foundations 17,854 (2,704) Net change in pension liability (70,663) (54,810) Restricted contributions and investment income (5,867) (1,697) Unrealized losses on investments 242,615 65,712 Realized gains on investments 6,070 (52,568) Net change in non-alternative investments 6,957 51,824 Changes in operating assets and liabilities: Accounts receivable 165, ,791 Other current assets (26,693) (22,928) Accounts payable and accrued liabilities (98,154) (77,788) Insurance reserves 23,370 33,070 Other current liabilities 18,031 (20,269) Other noncurrent liabilities 1,644 12,971 Other operating changes 3,231 (25,375) Net cash provided by operating activities 230, ,202 INVESTING ACTIVITIES Purchase of property and equipment, net of disposals (75,801) (68,712) Investments in joint ventures (3,500) (6,000) Net change in investments designated as nontrading 9,064 (1,565) Net change in alternative investments (10,395) (36,189) Net change in other assets (2,174) (25,887) Net cash used in investing activities (82,806) (138,353) FINANCING ACTIVITIES Repayments of long-term obligations (30,519) (198,402) Borrowings of long-term obligations - 282,956 Restricted contributions and investment income 5,867 1,697 Net cash (used in) provided by financing activities (24,652) 86,251 Net change in cash and cash equivalents 123, ,100 Cash and cash equivalents, beginning of period 290, ,539 Cash and cash equivalents, end of period $ 413,517 $ 618,639 SUPPLEMENTAL INFORMATION Capital lease obligations incurred to acquire assets $ - $ 10,810 UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

23 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) 1. BASIS OF PRESENTATION UPMC is a Pennsylvania nonprofit corporation and is exempt from federal income tax pursuant to Section 501(a) of the Internal Revenue Code (the Code ) as an organization described in Section 501(c)(3) of the Code. Headquartered in Pittsburgh, Pennsylvania, UPMC is one of the world s leading integrated delivery and financing systems. UPMC comprises nonprofit and for-profit entities offering medical and health-care-related services, including health insurance products. Closely affiliated with the University of Pittsburgh ( University ) and with shared academic and research objectives, UPMC partners with the University s Schools of the Health Sciences to deliver outstanding patient care, train tomorrow s health care specialists and biomedical scientists, and conduct groundbreaking research on the causes and course of disease. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ( GAAP ) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. The accompanying unaudited interim consolidated financial statements include the accounts of UPMC and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. For further information, refer to the audited consolidated financial statements and notes thereto as of and for the year ended June 30, RECLASSIFICATIONS UPMC Enterprises conducts research, development and innovation activities on behalf of UPMC primarily focused on technologies for use in the healthcare industry to lower costs and improve care; such activities are expensed as incurred. From time to time, UPMC also invests in companies who are developing technologies that align with its strategic imperatives, including arrangements that provide UPMC with a controlling and non-controlling ownership interest. As the impact to the consolidated statement of operations and changes in net assets of this investment activity is not considered material, the aggregate of the associated investment revenue and expense has been classified as UPMC Enterprises activity in the investing and financing activities section in the consolidated statement of operations and changes in net assets. To conform with the current period presentation, the September 30, 2014 aggregate amount of $2,231 has been reclassified from operating income to UPMC Enterprises activity presented within investing and financing in the consolidated statement of operations and changes in net assets. For the three month period ended September 30, 2014, supplies, purchased services and general expenses of approximately $28,000 were reclassified from other revenues to supplies, purchased services and general expenses within the consolidated statement of operations and changes in net assets to correct the classification of these expenses within the consolidated statement of operations and changes in net assets. The reclassification had no impact on the changes in net assets or excess of revenues over expenses previously reported and is not considered material to the financial statements of UPMC. 3. NEW ACCOUNTING PRONOUNCEMENTS In May 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) , Revenue from Contracts with Customers, which willreplace most existing revenue recognition guidance inu.s.gaap and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU allows for both retrospective and prospective methods of adoption and is effective for periods beginning after December 15, 2017, upon the FASB s decision to delay the effective date by one year. UPMC is currently evaluating the impact that the adoption of ASU will have on its consolidated financial statements. UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER

24 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) In April 2015, the FASB issued ASU , Interest Imputation of Interest. ASU requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction form the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The requirements of ASU are effective for reporting periods beginning after December 15, 2015, with early adoption permitted for financial statements that have not been previously issued. A reporting entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the periodspecific effects of applying the new guidance. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of UPMC. In April 2015, the FASB issued ASU , Intangibles Goodwill and Other Internal-Use Software (Subtopic ): Customer s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU provides guidance to clarify the customer s accounting for fees paid in a cloud computing arrangement. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after 15 December The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of UPMC. In May 2015, the FASB issued ASU , Fair Value Measurement, which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and limits the disclosure requirements. ASU is effective for annual and interim periods beginning after December 15, Early adoption is permitted. We will implement these amended disclosure requirements at December 31, NET PATIENT SERVICE REVENUE AND ACCOUNTS RECEIVABLE The provision for bad debts is based upon management s assessment of historical and expected net collections considering historical business and economic conditions, trends in health care coverage, and other collection indicators. UPMC records a significant provision for bad debts in the period services are provided related to self-pay patients, including both uninsured patients and patients with deductible and copayment balances due for which third-party coverage exists for a portion of their balance. Periodically throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off experience. The results of this review are then used to make any modifications to the provision for bad debts to establish an appropriate allowance for uncollectible accounts. Accounts receivable are written off after collection efforts have been followed in accordance with internal policies. Allowance for uncollectable accounts have increased to $121,342 at September 30, 2015 from $100,249 at June 30, 2015 primarily as a result of increased aging in the self-pay category. Net patient service revenue is reported at estimated net realizable amounts in the period in which services are provided. The majority of UPMC s services are rendered to patients under Medicare and Medical Assistance programs. Reimbursement under these programs is based on a combination of prospectively determined rates and actual costs. Amounts received under Medicare and Medical Assistance programs are subject to review and final determination by program intermediaries or their agents. For the three months ended September 30, 2015 and 2014, the percentage of patient service revenue, net of contractual allowances, derived from third party payers and self-pay patients is as follows: Three Months Ended September Third party 92% 94% Self-pay 8% 6% 100% 100% Laws and regulations governing the Medicare and Medical Assistance programs are extremely complex and subject to interpretation. Compliance with such laws and regulations are subject to government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medical Assistance programs. As a result, there is at least a reasonable possibility that the recorded estimates may change. UPMC UNAUDITED QUARTERLY DISCLOSURE SEPTEMBER