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Transcript of UNAUDITED QUARTERLY DISCLOSURE STATEMENT FOR …€¦ · UNAUDITED QUARTERLY DISCLOSURE STATEMENT...
August 26, 2011
UNAUDITED QUARTERLY DISCLOSURE STATEMENT
FOR THE PERIOD ENDED JUNE 30, 2011
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 in the
table below and disclosure and compliance obligations in connection with various banking arrangements. The
information contained herein is as of June 30, 2011. Digital Assurance Certification, L.L.C., as Dissemination
Agent, has not participated in the preparation of this Quarterly Report, has not examined its contents and makes no
representations concerning the accuracy and completeness of the information contained herein.
Issuer Bonds Original Borrower Series Allegheny County Hospital
Development Authority
Health Center Revenue, Health Center
Revenue Refunding and UPMC Health
System Revenue Bonds
UPMC Health System 1997B
UPMC Health System 1998B
UPMC 2003B
UPMC 2007A
UPMC 2007B
UPMC 2008A
UPMC 2008B
UPMC 2008 Notes
UPMC 2009A
UPMC 2010A
UPMC 2010B
UPMC 2010C
UPMC 2010D
UPMC 2010F
Variable Rate Demand Revenue Bonds UPMC Senior Communities, Inc. 2003
Allegheny County Industrial
Development Authority
Variable Rate Demand Refunding Bonds UPMC 2004A
Erie County Hospital Authority Revenue Bonds Hamot Health Foundation 2006
Revenue Bonds Hamot Health Foundation 2007
Variable Rate Demand Revenue Bonds Hamot Health Foundation 2008
Revenue Bonds Hamot Health Foundation 2010A
Revenue Bonds Hamot Health Foundation 2010B
Revenue Bonds Hamot Health Foundation 2010C
Pennsylvania Higher Educational
Facilities Authority
UPMC Health System Revenue Bonds UPMC Health System 1999A
UPMC 2010E
None Taxable Adjustable Rate Notes Bayfront Regional Dev. Corp. 2007
Taxable Adjustable Rate Notes Hamot Surgery Center, LLC 2000
The following financial data as of and for the three-month periods ended June 30, 2011 and 2010 and for the
twelve-month period ended June 30, 2011 is derived from the unaudited consolidated internal financial statements
of UPMC. The unaudited interim consolidated financial statements include all adjustments consisting of normal
recurring accruals that UPMC considers necessary for a fair presentation of the financial position and the results of
operations for these periods. The financial information as of and for the twelve-month period ended June 30, 2010
is derived from UPMC's audited consolidated financial statements. Operating results for the twelve-month period
ended June 30, 2011 are not necessarily indicative of the results that may be expected for any future periods.
TABLE OF CONTENTS
Highlights ..................................................................................................................................................................... 1
Organizational Overview .............................................................................................................................................. 3
Consolidated Financial Highlights ................................................................................................................................ 4
Revenue Metrics – Provider Services ........................................................................................................................... 5
Key Financial Indicators ............................................................................................................................................... 6
Operating Metrics - Insurance Services ........................................................................................................................ 7
Asset and Liability Management .................................................................................................................................. 8
Consolidating Statement of Operations ........................................................................................................................ 9
Sources of Revenues ..................................................................................................................................................... 9
Utilization Statistics .................................................................................................................................................... 10
Market Share ............................................................................................................................................................... 11
Debt Covenant Calculations ....................................................................................................................................... 12
Appendix A: Unaudited Interim Consolidated Financial Statements of UPMC for the Periods Ended
June 30, 2011 and 2010
Consolidated Balance Sheets .................................................................................................................................... A-1
Consolidated Statements of Operations and Changes in Net Assets ........................................................................ A-2
Consolidated Statements of Cash Flows ................................................................................................................... A-4
Notes to Consolidated Financial Statements (Unaudited) ........................................................................................ A-5
1
Highlights
UPMC is an integrated global health enterprise headquartered in Pittsburgh, Pennsylvania and one of the leading
nonprofit health systems in the United States. Through June 30, 2011, UPMC's financial results reflect continued
reinvestment to fulfill its commitment of providing outstanding patient care while shaping tomorrow’s health
system.
For the twelve months ended June 30, 2011, operating revenues increased by $955 million (11.9%) to $9.0 billion
due to growth in both Provider Services and Insurance Services. The Provider Services increase includes $211
million in operating revenue from the UPMC Hamot affiliation from February 1, 2011 through June 30, 2011 as
described below (the “UPMC Hamot Affiliation”). Operating income, which is reinvested in programs that support
UPMC’s mission, was $406 million for the period1.
Operating earnings before interest, depreciation and
amortization totaled $801 million. Both of these metrics benefitted from increased reimbursement related to a
redesign of the Pennsylvania Medicaid payment system ($57.2 million) and a one-time gain from the accrual of a
medical resident FICA tax refund for tax periods prior to April 1, 2005 ($21.4 million). As of June 30, 2011,
UPMC had approximately $4.0 billion of cash and investments.
UPMC continued to expand its services within western Pennsylvania. For the twelve months ended June 30, 2011,
which include the UPMC Hamot affiliation:
Enrollment in UPMC’s insurance services grew 8.6% to nearly 1.6 million members,
Hospital outpatient revenue per workday rose 29%,
Hospital medical surgical admissions and observation cases rose 7.3% to nearly 220,000, and
Physician service revenue per weekday increased 4% from the prior year.
UPMC’s income from investing and financing activities for the twelve months ended June 30, 2011 was $282
million driven by a portfolio return of 18.3% and $9.7 million in one-time interest income from the medical
resident FICA tax refund. UPMC has made no material changes to its asset allocation policies and continues to
have a long term perspective with regard to its investment activities.
UPMC’s capital investment over the last several years has resulted in an Average Age of Plant of an industry-
leading 8.0 years. During the twelve months ended June 30, 2011, UPMC made capital expenditures of $436
million. UPMC also invested more than $14 million to acquire ownership interests in businesses based in western
Pennsylvania, bringing the total capital and business investment in the region to $450 million. Significant
components of these capital expenditures included:
$77 million of construction costs related to UPMC East, a new hospital located in Monroeville,
Pennsylvania, which is scheduled to open in July of 2012;
$15 million of construction costs related to the completion of the UPMC Passavant Pavilion;
$9 million of construction costs related to two Senior Communities projects: and
Expenditures of $89 million on various components of UPMC’s best-in-class information technology
platform.
Construction continued during fiscal year 2011 for UPMC East, the new 156-bed community hospital scheduled to
open in July 2012 in Monroeville to serve the growing needs of the communities east of Pittsburgh. This $240
million investment allows for a state-of-the-art hospital set on 13.6 acres designed to put patients at the center of all
care and services. UPMC East will have the latest technology and environmentally efficient construction and is
expected to receive LEED certification. The project includes various improvements to benefit the local community
including improving intersections and roads around the site. Nearly 500 jobs will be created by the opening of
UPMC East. The hospital’s construction employs more than 300 local skilled workers.
1 Excludes inherent Hamot contribution, asset impairment and income tax expense.
2
In July 2011, UPMC was once again western Pennsylvania’s only hospital named to the Honor Roll of America’s
Best Hospitals in the annual US News and World Report survey. This was UPMC’s 12th year on the Honor Roll
with its highest ranking to date, reflecting consistent clinical excellence and a stellar reputation among national
peers. UPMC is ranked 12th overall, up from last year’s 13th place. UPMC is one of only 17 hospitals nationwide
that made the Honor Roll of the “nation’s best” in the 2011 survey. UPMC was ranked in 15 of 16 adult specialty
areas, including nine specialties for which UPMC is in the top 10. UPMC improved its ranking in 10 specialties,
more than any other Honor Roll hospital. Only 140 of the 4,825 nationally eligible hospitals were ranked in any
specialty area. According to U.S. News & World Report, the Honor Roll lists those institutions that demonstrate
excellence and breadth of expertise by ranking at or near the top in at least six specialties. In May 2011, Children’s
Hospital of Pittsburgh of UPMC was one of 11 pediatric hospitals in the country named to U.S. News & World
Report’s Honor Roll of America’s “Best Children’s Hospitals.” UPMC’s Children’s Hospital is ranked in all 10 of
the pediatric specialties on the magazine’s annual Best Children’s Hospitals list.
UPMC, in May 2011, released its Community Benefits Report for fiscal year 2010 which once again demonstrated
benefits of more than half-a-billion dollars. Specifically for FY2010, community benefits totaled $563 million, a
$20 million increase from FY2009. Of the $563 million, $218 million was in charity care and unreimbursed
amounts from programs for the poor; $101 million was for community health programs and donations; and $244
million supported research and education. UPMC’s community benefits represents 13 percent of its net patient
revenue.
In May 2011, UPMC and Alcatel-Lucent of Paris, France, announced plans to develop a joint telemedicine platform
that goes far beyond the limited, point-to-point systems now available on the market. The solution will offer
secure, real-time clinical encounters in a virtual “exam room” designed to fit the workflow of health care providers
and the mobility of patients.
Marking its first medical services agreement in Asia, UPMC announced in June 2011 that it will provide remote,
second-opinion pathology consultations to KingMed Diagnostics, the largest independent medical diagnostic
laboratory in China. Using equipment that scans glass pathology slides and stores and transmits the images
electronically, KingMed will have the ability to seek second opinions on patient diagnoses from UPMC’s world-
renowned pathologists through a secure, Web-based telepathology portal. The service is expected to start by late
summer 2011.
In June 2011, Pittsburgh-based Highmark Blue Cross Blue Shield announced its intention to enter the provider
market by acquiring West Penn Allegheny Health System. Highmark’s decision to buy WPAHS and create an
integrated delivery and financing system (“IDFS”) will result in Highmark directly competing with UPMC.
Therefore, there will not be a contract renewal between UPMC and Highmark when the current contract expires on
July 1, 2012. This changes the health care delivery and insurance market place in the region. As UPMC is strongly
committed to choice and competition, UPMC is devoting its time and resources on planning to compete in a new
market in which employers and subscribers will now have more choice and competition. UPMC has new provider
contracts with national insurers Aetna, Cigna, United HealthCare and HealthAmerica. Regional employers and
subscribers need to carefully evaluate their health insurance options to ensure continuity of in-network access to
care at UPMC when the current Highmark-UPMC contract expires.
On February 1, 2011, UPMC completed its affiliation with Hamot Medical Center, now called UPMC Hamot. The
affiliation is intended to advance healthcare for the people of Erie and its surrounding communities. Hamot
operates approximately 350 beds and had annual revenue of approximately $430 million for its fiscal year ended
June 30, 2010. As described in Appendix A, the affiliation has been accounted for as a contribution of assets and
includes UPMC’s assumption of certain of the bonds listed on the cover hereof and certain other bank facilities
totaling approximately $100 million.
3
Organizational Overview
UPMC, doing business as the University of Pittsburgh Medical Center, is one of the world's leading integrated
global health enterprises. UPMC is based in Pittsburgh, Pennsylvania, and primarily serves residents of western
Pennsylvania. It also draws 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: Provider Services, Insurance Services and
International and Commercial Services. To support these operating components, UPMC has an array of integrated
enterprise capabilities, including information services, human resources, regulatory/compliance, finance, treasury,
risk management, facilities, quality and community relations. The costs of these services are allocated to the
operating components.
Provider Services
UPMC’s Provider 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 2,800 employed
physicians with associated practices. Also included within Provider 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 are located in Pittsburgh; (ii) community hospitals that
provide core clinical services mainly to the suburban Pittsburgh and, with the addition of UPMC Hamot effective
February 1, 2011, greater Erie populations; (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.
Insurance Services
UPMC holds various interests in health care financing initiatives and network care delivery operations that have
nearly 1.6 million members. 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 exclusively in providing
coverage to Medical Assistance beneficiaries. UPMC Health Network offers preferred provider organization (PPO)
plan designs to serve both commercial and Medicare beneficiaries. UPMC for Life is a Medicare product line
offered by various companies within the Insurance Services division. UPMC Work Partners provides 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 35 Pennsylvania counties, including Allegheny County.
International and Commercial Services The goal of UPMC’s 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 more than 1,120 transplants since its founding in 1999. Other international ventures
currently include two cancer centers and UPMC Beacon, a private hospital in Ireland and remote second-opinion
pathology consultations for patients in China.
4
Consolidated Financial Highlights (Dollars in Millions)
Operating revenues for the twelve months ended June 30, 2011 increased $955 million (11.9%) as compared to
the twelve months ended June 30, 2010 primarily due to increased Provider Services revenues of $601 million
and Insurance Services revenues of $344 million. The Provider Services increase included $211 million of
operating revenue from the UPMC Hamot affiliation.
Operating income for the twelve months ended June 30, 2011 increased $166 million over the same period in the
prior fiscal year due primarily to an increase in Provider Services results. This improvement benefitted from
increased reimbursement related to a redesign of the Pennsylvania Medicaid payment system ($57.2 million) and
a one-time gain from the accrual of a medical resident FICA tax refund for tax periods prior to April 1, 2005
($21.4 million).
Investment and financing gain of $282 million for the twelve months reflects a return on UPMC’s investment
portfolio of 18.3% and the accrual of $9.7 million in interest income related to the FICA refund.
UPMC funded $450 million of capital expenditures and business investments to enhance information technology,
create new programs and services and maintain infrastructure. Major projects included construction at UPMC
East, the UPMC Passavant campus, Senior Communities projects, enhancement of information technology
infrastructure, and investments in various patient care software applications.
(2)
Excludes inherent Hamot contribution, asset impairment and separation costs.
Financial Results for the Twelve-Month Periods Ended
June 30
Operating revenues increased by
$955 million or 11.9%.
Investment gains reflect financial
market conditions.
UPMC generated $801 million of
operating earnings before interest,
depreciation and amortization
(“Operating EBIDA”).
2011 2010
Operating Revenues $9,001 $8,046
Operating Income(2)
$406 $240
Operating Margin(2)
4.5% 3.0%
Operating Margin (rating agency)(2)
3.1% 1.5%
Investment and Financing Gain $282 $142
Excess of Revenues over Expenses(2)
$680 $379
Operating EBIDA(2)
$801 $630
Capital Expenditures and Investments $450 $450
Reinvestment Ratio 1.11 .91
Selected Other Information as of
Total Cash and Investments,
Unrestricted Cash and Investments
and related ratios improved due to
the improvement in both operating
performance and financial markets.
June 30, 2011 June 30, 2010
Total Cash and Investments $3,951 $3,210
Unrestricted Cash and Investments $3,337 $2,608
Unrestricted Cash and Investments
Over (Under) Long Term Debt $245 $(218)
Days of Cash on Hand 145 130
Days in Accounts Receivable 33 34
Average Age of Plant 8.0 7.6
Revenue Metrics - Provider Services (Dollars in Millions)
Medical-Surgical Admissions and Observation Visits
Outpatient Revenue per Work day
Physician Service Revenue per Week day
204,740
204,960
204,341
204,831
205,828
207,063
212,729
219,747
200,000
204,000
208,000
212,000
216,000
220,000
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Quarter Ending
Trailing 12-Month For the Twelve Months Ended
June 30: (in thousands)
2011 Variance 2010
Academic 137.9 3% 133.7
Community 62.2 24% 50.2
Regional 19.6 (6%) 20.9
Total 219.7 7% 204.8
Inpatient activity as measured by medical-surgical admissions and observation visits at UPMC’s hospitals
for the twelve months ended June 30, 2011 (including 10,079 medical-surgical admissions and observation
visits from the UPMC Hamot Affiliation) is 7% higher than the comparable period in 2010.
UPMC’s outpatient activity for the twelve months ended June 30, 2011 (including the UPMC Hamot
Affiliation impact) as measured by average revenue per work day increased by 29% from the comparable
period in 2010. Hospital outpatient activity is measured on an equivalent work day (EWD) basis to adjust
for weekend and holiday hours.
Average for the Twelve Months Ended
June 30:
2011 Variance 2010
Academic $3.989 23% $3.244
Community 1.724 60% 1.078
Regional .487 (2%) 0.499
Total $6.200 29% $4.821
UPMC’s physician activity for twelve months ended June 30, 2011 as measured by average revenue per
week day increased 4% from the comparable period in 2010. Physician services activity is measured on a
week day basis.
5
Average for the Twelve Months
Ended June 30:
2011 Variance 2010
Academic $2.664 6% $2.507
Community 1.653 0% 1.658
Total $4.317 4% $4.165
$4.7$4.9
$4.7$5.0 $5.2
$5.7
$6.2$6.6
$4.0
$4.5
$5.0
$5.5
$6.0
$6.5
$7.0
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Quarter Ending
Quarterly Average
$4.1
$4.3 $4.2 $4.2 $4.2 $4.2
$4.1
$4.3
$3.0
$3.5
$4.0
$4.5
$5.0
$5.5
$6.0
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Quarter Ending
Quarterly Average
Operating Earnings Before Interest, Depreciation and Amortization
Unrestricted Cash Over (Under) Long Term Debt
Days in Accounts Receivable
Key Financial Indicators (Dollars in Millions)
For the Twelve Months Ended
June 30:
2011 2010
Operating Income $406 $240
Depreciation and
Amortization 395 390
Operating EBIDA $801 $630
Operating EBIDA for the twelve months ended June 30, 2011 increased by 27% as compared to the
twelve months ended June 30, 2010.
By Division as of June 30
2011
Balance
Days:
2011 2010
Provider Services $661 39 36
ICSD 34 69 78
Insurance Services 218 21 30
Consolidated $913 33 34
Unrestricted cash over
(under) long term debt
improved from June
2010 as Operating
EBIDA and investment
gains more than offset
capital expenditures
and the $135 million
pension contribution
made during FY2011.
30 30
34 3433
34
36
33
25
30
35
40
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Quarter Ending
Consolidated Days in Accounts Receivable continue to be lower than industry averages due to
UPMC’s rigorous procedures in this area.
6
$703
$312
($334)($218)
($104)
$50 $113
$245
($600)
($400)
($200)
$0
$200
$400
$600
$800
Jun-07 Jun-08 Jun-09 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Quarter Ending
$587 $610 $627 $630 $657$702
$762$801
$0
$200
$400
$600
$800
$1,000
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Four Quarters Ending
Membership
Operating Metrics – Insurance Services
Membership in the UPMC Insurance
Services Division increased to 1,584,545
as of June 30, 2011. The increase since
December 2010 is a result of
membership growth in Community Care
of 23,000, Commercial of 12,000,
Medicaid of 11,000 and Medicare of
9,000, as well as 12,000 members in a
new dental product offering.
Healthcare Spending Ratio
UPMC Insurance Services Medical
Expense Ratio remains stable reflecting
alignment of premium rates with
medical trend.
Administrative Expense Ratio
UPMC Insurance Services maintains
one of the lowest administrative
expense ratios in the insurance industry.
7
8
Asset and Liability Management
During the fiscal year ended June 30, 2011, UPMC’s investment portfolio returned 18.3%. As of June 30, 2011,
UPMC utilized 143 external managers, including 26 traditional investment managers, 26 hedge fund managers and
91 private equity managers. UPMC’s investment portfolio has a long-term perspective and has generated
annualized returns of 18.3%, 1.3% and 4.5% for the trailing one, three and five-year periods. Approximately 49%
of the investment portfolio consists of securities that can be liquidated within three days.
UPMC’s annualized cost of capital during the period was 3.95%. 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, 2011, the interest rates on
UPMC’s long-term debt were approximately 79% fixed and 21% variable after giving effect to derivative contracts.
Annualized interest cost for the variable rate debt for the period averaged 0.96%. The annualized interest cost for
the fixed rate debt was 4.47%. UPMC recently renewed its credit facility which now expires in June 2016. As of
June 30, 2011, UPMC had approximately $212 million available on its then $300 million facility to fund operating
and capital needs. This line of credit was increased to $350 million after June 30, 2011.
UPMC has undertaken a process to standardize its bond covenants. The process consists of the replacement of
notes issued under a 1995 Master Trust Indenture ("1995 MTI") with notes issued under a 2007 Master Trust
Indenture ("2007 MTI"). Until all of the 1995 MTI notes have been defeased, UPMC will operate under both
MTI's. As of June 30, 2011, 94% of UPMC's debt is secured by both MTI's.
The table below compares reported Investment and Financing Activity for the twelve months ended June 30, 2011
and 2010 by component.
Investing and Financing Activity by Type for the
Twelve-Month Periods Ended June 30 (Dollars in Thousands)
2011 2010
Realized Gains $172,918 $86,666
Interest, Dividends and Fees 47,894 20,638
Realized Investment Income $220,812 $107,304
Unrealized Gains on Derivative Contracts 12,454 69,976
Other Unrealized Gains 190,983 153,013
Impairment on Cost Based Investments (19,700) (39,752)
Investment Gains $404,549 $290,541
Interest Expense (122,516) (119,909)
Loss on Extinguishment of Debt (18) (28,270)
Investment and Financing Gains $282,015 $142,362
9
Sources of Revenues
The patient service revenues of UPMC are derived from third-party payors which reimburse or pay UPMC for the
services it provides to patients covered by such payors. Third-party payors 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 payor
for the twelve months ended June 30, 2011 and 2010.
Twelve Months Ended
June 30
2011 2010
Medicare 42% 42%
Medicaid 15% 15%
Highmark 23% 23%
UPMC Insurance Services 8% 9%
Other 12% 11%
Total 100% 100%
Consolidating Statement of Operations for the
Twelve Months Ended June 30, 2011 (Dollars in Millions)
Unit
Eliminations Consolidated
Provider
Services
International
and
Commercial
Services
Insurance
Services
Revenues:
Net patient service revenue $5,741 $95 $0 ($790) $5,046
Insurance enrollment revenue 0 0 3,324 0 3,324
Other revenue 440 64 190 (63) 631
Total operating revenues $6,181 $159 $3,514 ($853) $9,001
Expenses:
Salaries, professional fees and benefits 3,047 81 149 (19) 3,258
Supplies, purchased services and general 2,220 74 3,283 (834) 4,743
Depreciation and amortization 380 9 6 0 395
Provision for bad debts 197 1 1 0 199
Total operating expenses 5,844 165 3,439 (853) 8,595
Operating income (loss) $337 ($6) $75 $0 $406
10
Utilization Statistics
The following table presents selected consolidated statistical indicators of medical/surgical, psychiatric, sub-acute
and rehabilitation patient activity for the twelve-month periods ended June 30, 2011 and 2010. Note that the
statistics include UPMC Hamot beginning February 1, 2011.
Twelve-Month Periods
Ended June 30
2011 2010
Licensed Beds 4,505 4,164
Beds in Service Medical-Surgical 3,595 3,172
Psychiatric 394 426
Rehabilitation 157 160
Skilled Nursing 122 160
Total Beds in Service 4,268 3,918
Patient Days
Medical-Surgical 918,947 863,852
Psychiatric 132,856 134,399
Rehabilitation 45,918 47,797
Skilled Nursing 36,050 40,570
Total Patient Days
1,133,771 1,086,618
Observation Days 63,346 50,087
Average Daily Census 3,445 3,206
Admissions and Observation Cases Medical-Surgical 175,178 165,893
Observation Cases 44,569 38,938
Subtotal 219,747 204,831
Psychiatric 8,243 9,166
Rehabilitation 3,796 3,765
Skilled Nursing 2,999 3,393
Total Admissions and Observation Cases 234,785 221,155
Overall Occupancy 81% 82%
Average Length of Stay
Medical/Surgical 5.2 5.2
Psychiatric 16.1 14.7
Rehabilitation 12.1 12.7
Skilled Nursing 12.0 12.0
Overall Average Length of Stay 6.0 6.0
Emergency Room Visits 534,537 482,599
Transplants (Pittsburgh)
Liver 133 165
Kidney 135 185
All Other 369 385
Total 637 735
Transplants (ISMETT)
Liver 62 70
Other 64 53
Total 126 123
11
Market Share
The chart below shows the increase in UPMC’s estimated inpatient market share for the first two quarters of fiscal
years 2010 and 2011 (July 1 through December 31), by service area(3). For fiscal year 2011, estimated market share
is displayed both including and excluding discharges for UPMC Hamot. The following table shows the decrease in
medical-surgical discharges from all hospitals within each service area for the same period. This is the most recent
market share data currently available.
__________________
(3) UPMC's three service areas are (1) Allegheny County, (2) a 10-county region including Allegheny, Armstrong, Beaver,
Butler, Fayette, Greene, Indiana, Lawrence, Washington and Westmoreland counties and (3) a 29-county region which also
includes Bedford, Blair, Cambria, Cameron, Centre, Clarion, Clearfield, Crawford, Elk, Erie, Forest, Huntingdon, Jefferson,
McKean, Mercer, Potter, Somerset, Venango, and Warren counties.
Total Medical-Surgical Discharges Within the
Service Areas (All Hospitals)
FY 2010 Q2 YTD and FY 2011 Q2 YTD
(July 1 through December 31 of fiscal years 2010 and 2011)
Allegheny County
FY 10 Q2 YTD FY 11 Q2 YTD Percent Change
81,070 77,179 (4.80%)
Southwestern Pennsylvania
(10-County Region) 174,467 167,162 (4.19%)
Western Pennsylvania
(29-County Region) 260,210 250,040 (3.91%)
55.9%
37.0%
30.2%
57.2%
37.9%
30.9%
57.2%
38.0%
34.0%
0%
10%
20%
30%
40%
50%
60%
Allegheny County Southwestern PA (10-County) Western PA (29-County)
Ma
rket
Sh
are
Service Areas
UPMC Inpatient Medical-Surgical Market Share
FY 10 Q2 YTD and FY 11 Q2 YTD
FY10 Q2 YTD
FY11 Q2 YTD
FY11 Q2 YTD (including UPMC Hamot)
12
Debt Covenant Calculations (Dollars in Thousands)
Debt Service Coverage Ratio
Twelve-Month Period Ended
June 30, 2011
Net Income $726,815
Adjusted By:
Revenues Available for Debt Service from Properties Financed with Non-recourse
Indebtedness (5,438)
Net Unrealized Gains from Period (4)
(183,737)
Depreciation and Amortization (4)
394,542
Loss on Defeasance of Debt (4)
18
Hamot Purchase Accounting – Inherent Contribution (4)
(60,868)
Pension Commitment (4)
1,021
Asset Impairment (4)
12,643
Realized Investment Impairments (4)(5)
(5,829)
Interest Expense 121,476
Revenues Available for Debt Service $1,000,639
Maximum Annual Debt Service - 1995 MTI $205,528
Debt Service Coverage Ratio – 1995 MTI 4.87X
Historical Debt Service Requirements – 2007 MTI $204,926
Debt Service Coverage Ratio – 2007 MTI 4.88X
Historical Debt Service Requirements – All Debt and Leases $251,050
Debt Service Coverage Ratio – All Debt and Leases 3.99X
Liquidity Ratios As of June 30, 2011
Unrestricted Cash & Investments $3,337,008 Master Trust Indenture Debt $2,820,273
Total Operating Expenses
(includes interest expense) 9,011,489
Unrestricted Cash to MTI Debt 1.18
Less: Depreciation and Amortization (405,450)
Provision for Bad Debts (222,131) Parent Unrestricted Cash and Investments $2,581,329
Cash Operating Expenses (6)
$8,383,908
Maximum Annual Debt Service 205,528
Daily Cash Expenses
(Cash Operating Expenses/ 365) 22,970
Days’ Cash on Hand 145.3 Parent Cushion Ratio 12.56X
(4) Non-Cash.
(5) Reflects ultimate realization of previously impaired cost-based investments.
(6) Hamot expenses are annualized at 150/365 for this calculation. DCOH would be 149.9 if Hamot actual expenses are used.
I hereby certify to the best of my knowledge that, as of June 30, 2011, UPMC is in compliance with the applicable covenants
contained in the financing documents for the bonds listed on the cover hereof and all applicable bank lines of credit and no
Event of Default (as defined in any related financing document) has occurred and is continuing.
UPMC
C. Talbot Heppenstall, Jr.
Treasurer
APPENDIX A
Unaudited Interim Consolidated Financial Statements of UPMC For the Periods Ended June 30, 2011 and 2010
A-1
As of June 30, 2011 As of June 30, 2010
Current assets
Cash and cash equivalents 386,718$ 158,067$
Patient accounts receivable, net of allowance for
uncollectible accounts of $94,090 at June 30, 2011
and $81,441 at June 30, 2010 532,548 458,239
Other receivables 380,415 328,565 Other current assets 99,412 96,413
Total current assets 1,399,093 1,041,284
Board-designated, restricted, trusteed and other investments 3,564,421 3,051,536
Beneficial interests in foundations 344,344 273,997
Net property, buildings and equipment 3,439,443 3,198,425
Other assets 376,201 352,810
Total assets 9,123,502$ 7,918,052$
Current liabilities
Accounts payable and accrued expenses 379,451$ 314,806$
Accrued salaries and related benefits 397,493 335,447
Current portion of insurance reserves 283,336 292,256
Current portion of long-term obligations 263,788 139,370 Other current liabilities 245,255 206,096
Total current liabilities 1,569,323 1,287,975
Long-term obligations 2,976,925 2,979,790
Pension liability 143,188 300,352
Long-term insurance reserves 199,028 174,260 Other long-term liabilities 172,530 143,503
Total liabilities 5,060,994 4,885,880
Unrestricted net assets 3,489,251 2,615,201 Restricted net assets 573,257 416,971
Total net assets 4,062,508 3,032,172
Total liabilities and net assets 9,123,502$ 7,918,052$
See accompanying notes
Consolidated Balance Sheets
(Unaudited)(in thousands)
A-2
2011 2010 2011 2010
Unrestricted net assets
Revenues:
Net patient service revenue 5,045,466$ 4,424,252$ 1,347,849$ 1,136,233$
Insurance enrollment revenue 3,323,550 3,042,021 870,796 781,730 Other revenue 632,029 580,194 169,738 114,599
Total operating revenues 9,001,045 8,046,467 2,388,383 2,032,562
Expenses:
Salaries, professional fees and employee benefits 3,258,938 2,993,634 900,020 756,482
Supplies, purchased services and general 4,743,034 4,196,218 1,238,464 1,066,318
Depreciation and amortization 394,538 389,893 102,619 95,592 Provision for bad debts 198,510 234,690 54,569 53,443
Total operating expenses 8,595,020 7,814,435 2,295,672 1,971,835
Operating income (excluding asset impairment
charge, inherent contribution - Hamot acquisitionand income tax expense) 406,025 232,032 92,711 60,727
Asset impairment charge (12,643) (14,224) – – Inherent contribution - Hamot acquisition 60,868 – (878) –
Operating income 454,250 217,808 91,833 60,727
Income tax expense (8,429) (2,256) (1,475) (2,117)
After-tax operating income (carried forward) 445,821$ 215,552$ 90,358$ 58,610$
See accompanying notes
Consolidated Statements of Operations and Changes in Net Assets
(Unaudited)(in thousands)
Twelve Months Ended
June 30
Three Months Ended
June 30
A-3
2011 2010 2011 2010
After-tax operating income (brought forward) 445,821$ 215,552$ 90,358$ 58,610$
Investing and financing activity:
Investment revenue 404,549 290,539 38,000 (78,878)
Interest expense (122,516) (119,909) (31,074) (29,703) Loss on extinguishment of debt (18) (28,270) (18) –
Income from investing and financing activities 282,015 142,360 6,908 (108,581)
Nonoperating loss (1,021) (850) – –
Excess of revenues over expenses 726,815 357,062 97,266 (49,971)
Decrease (increase) in postretirement benefits liabilities 124,641 (88,819) 124,641 (80,399) Other changes in unrestricted net assets 22,594 (1,919) (2,170) 685
Increase (decrease) in unrestricted net assets 874,050 266,324 219,737 (129,685)
Restricted net assets
Contributions 7,365 10,806 2,958 67
Net realized and unrealized (losses) gains on restricted
investments 17,421 595 5,786 125
Assets released from restriction for operations and
capital purchases (9,178) (19,200) (3,566) (5,085)
Restricted net assets acquired - Hamot acquisition 88,587 – – –
Net increase (decrease) in beneficial interests infoundations 52,091 18,036 (6,370) (746)
Increase (decrease) in restricted net assets 156,286 10,237 (1,192) (5,639)
Increase (decrease) in net assets 1,030,336 276,561 218,545 (135,324) Net assets, beginning of period 3,032,172 2,755,611 3,843,963 3,167,496
Net assets, end of period 4,062,508$ 3,032,172$ 4,062,508$ 3,032,172$
See accompanying notes
Consolidated Statements of Operations and Changes in Net Assets (continued)
(Unaudited)(in thousands)
Twelve Months Ended
June 30
Three Months Ended
June 30
A-4
2011 2010 2011 2010
Operating activities
Increase (decrease) in net assets 1,030,336$ 276,561$ 218,545$ (135,324)$
Adjustments to reconcile increase (decrease) in net assets
to net cash provided by operating activities:
Depreciation and amortization 394,538 389,893 102,619 95,592
Change in beneficial interest in foundations (52,091) (18,036) 6,370 746
(Decrease) increase in postretirement benefits liabilities (124,641) 88,819 (44,259) 89,371
Inherent contribution - Hamot acquisition (60,868) – 878 –
Asset impairment charge 12,643 14,224 – –
Restricted contributions and investment income (24,786) (11,401) (8,744) (192)
Restricted net assets acquired (88,587) – – –
Net change in trading securities (402,348) (186,624) (141,591) (41,618) Changes in operating assets and liabilities (33,634) (51,883) (26,132) (72,131)
Net cash provided by (used in) operating activities 650,562 501,553 107,686 (63,556)
Investing activities
Purchase of property and equipment (net of disposals) (436,203) (355,109) (132,157) (114,841)
Other investments (14,150) (95,097) (3,500) (4,797)
Net decrease (increase) in investments designated
as nontrading 15,369 (28,265) 23,007 1,837
Cash acquired in Hamot acquisition 13,892 – – – Net decrease in other assets 8,915 1,309 7,689 23,996
Net cash used in investing activities (412,177) (477,162) (104,961) (93,805)
Financing activities
Repayments of long-term obligations (127,870) (1,231,583) (64,676) (44,243)
Borrowings of long-term obligations 93,350 1,176,948 36,878 19,469 Restricted contributions and investment income (loss) 24,786 11,401 8,744 192
Net cash used in financing activities (9,734) (43,234) (19,054) (24,582)
Increase (decrease) in cash and cash equivalents 228,651 (18,843) (16,329) (181,943) Cash and cash equivalents, beginning of period 158,067 176,910 403,047 340,010
Cash and cash equivalents, end of period 386,718$ 158,067$ 386,718$ 158,067$
See accompanying notes
Consolidated Statements of Cash Flows
(Unaudited)(in thousands)
Twelve Months Ended
June 30
Three Months Ended
June 30
A-5
Notes to Consolidated Financial Statements (Unaudited) (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 leading academic medical centers in the United States. UPMC is an integrated global health enterprise leveraging medical expertise, geographic reach, and financial stability in a model of care excellence that can transform health care nationally and internationally. 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, 2010. 2. New Accounting Pronouncements Effective July 1, 2010, UPMC adopted the guidance provided by Accounting Standards Codification (“ASC”) 805, Business Combinations, with additional guidance unique to not-for-profit entities in ASC 958-805 and guidance specific to healthcare entities in ASC 954-805. The new accounting literature provides not-for-profit organizations with specific guidance on accounting for mergers and acquisitions, including determining whether a combination between two or more not-for-profit entities is a merger or an acquisition, how to account for each and the disclosures that should be made. Beginning on July 1, 2010, UPMC applied the transition provisions of the guidance in ASC 350-20, Intangibles-Goodwill and Other, which requires UPMC to cease amortization of previously recognized goodwill and to test goodwill for impairment annually or more frequently if events or circumstances indicate that the carrying value of an asset may not be recoverable. UPMC completed a transitional goodwill impairment test measured as of July 1, 2010 and an annual goodwill impairment test measured as of April 30, 2011. No adjustments to the carrying value of UPMC’s previously recognized goodwill were recorded during the twelve months ended June 30, 2011.
A-6
2. New Accounting Pronouncements (continued) In July 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts. The guidance requires certain health care entities to present the bad debt expense associated with patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) rather than an operating expense. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. 3. Significant Transactions Acquisition of Hamot Medical Center On February 1, 2011, UPMC, Hamot Medical Center (“Hamot”) and the Hamot Health Foundation (“Foundation”) executed an Integration and Affiliation Agreement (the “Agreement”) providing for an affiliation between UPMC and Hamot. On the date of the acquisition, the articles of incorporation and bylaws of Hamot were amended such that UPMC became the sole corporate member of Hamot. Hamot is a multi-institutional nonprofit health system that includes hospitals and a network of other healthcare providers servicing the city of Erie and a larger multi-county area in northwestern Pennsylvania, western New York and northeastern Ohio. The transaction is intended to preserve and enhance the mission of Hamot and to enhance Hamot’s ability to provide high quality health services to the Erie community. Pursuant to the Agreement, UPMC will provide Hamot with a total investment of $300,000 over a 10-year period that will support expansion and enhancement of medical services for the communities that Hamot serves. On the date of the acquisition, UPMC established a $100,000 fund on Hamot’s balance sheet (the “Hamot Fund”) which is dedicated solely for the support of Hamot and is controlled solely by Hamot’s board of directors. Over a 10-year period, $50,000 from the Hamot Fund, along with an additional $200,000 committed by UPMC from other sources including UPMC Hamot’s cash flows, is to be spent for the enhancement of facilities and services at Hamot. Such amounts will be expended pursuant to plans and budgets approved by the Hamot board of directors and UPMC. The remaining $50,000 of the Hamot Fund may be expended as directed by Hamot’s board of directors following such 10-year period, but without any requirement that it be expended on a specific schedule. UPMC applied the business combination accounting guidance in ASC 958-805 as described above in Note 2 to account for the transaction. The guidance primarily characterizes business combinations between not-for-profit entities as nonreciprocal transfers of assets resulting in the contribution of the acquiree’s net assets to the acquirer. ASC 958-805 prescribes that the acquirer recognize an excess of the acquisition date unrestricted net assets acquired over the fair value of the consideration transferred as a separate credit in its statement of operations and changes in net assets as of the acquisition date. Accordingly, UPMC recognized contribution income related to the unrestricted net assets acquired in the transaction of $60,868 in its statements of operations and changes in net assets for the twelve months ended June 30, 2011. UPMC recorded an increase in restricted net assets of $88,587 in its statements of operations and changes in net assets for the twelve months ended June 30, 2011.
A-7
3. Significant Transactions (continued) Medical Assistance (“MA”) Payment Modernization In December 2010, the Department of Public Welfare (“DPW”) received approval from the Centers for Medicare and Medicaid Services (“CMS”) for the Pennsylvania state plan amendments pursuant to Pennsylvania Act 49 of 2010 that, among other things, established a new inpatient hospital fee-for-service payment system (using APR-DRG), established enhanced hospital payments through the state’s Medical Assistance managed care program and secured additional matching Medicaid funds through the establishment of the Quality Care Assessment. In February 2011, the DPW received the approvals necessary from CMS on the final technical language for the DPW contracts with managed care organizations. The Hospital and Healthcare Association of Pennsylvania issued hospital-specific impacts of the MA payment modernization for fiscal year 2011. UPMC recorded the operating income impact of $16,739 and $57,226, respectively, in its consolidated statements of operations for the three and twelve months ended June 30, 2011. Medical Resident FICA Tax Refunds In March 2010, the Internal Revenue Service (“IRS”) published an administrative determination to accept the position that medical residents are exempt from Federal Insurance Contributions Act (“FICA”) taxes based on the student exception for services provided during tax periods prior to April 1, 2005, which is when new IRS regulations took effect. UPMC previously remitted such taxes for medical residents and filed protective claims related to the student exception incorporating both the employer and employee portion of the FICA taxes remitted between January 1996 and March 2005. During the twelve months ended June 30, 2011, UPMC perfected its claims with the IRS and recorded a receivable of $71,112, including both the employer and employee portion of the expected FICA tax refund, in other receivables. UPMC recorded a credit of $22,110 to salaries, professional fees and employee benefits and $9,746 in investment revenue, related to the employer portion of the FICA tax refund and accrued interest in its statements of operations and changes in net assets for the twelve months ended June 30, 2011. The claims remain subject to review by the IRS prior to remittance of the refund to UPMC. Asset Impairment Charge UPMC evaluates the recoverability of the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable and adjusts the cost to fair market value if undiscounted cash flows are less than the carrying amount of the asset. During the twelve months ended June 30, 2011, UPMC evaluated the recoverability of certain software licenses and recorded an asset impairment charge of $12,643.
A-8
4. Fair Value Measurements As of June 30, 2011, UPMC held certain assets that are required to be measured at fair value on a recurring basis. These include cash and cash equivalents and certain board-designated, restricted, trusteed, and other investments and derivative instruments. UPMC’s alternative investments are measured using either the cost or equity method of accounting and are therefore excluded from the fair value hierarchy table presented herein. The valuation techniques used to measure fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs are generally unsupported by market activity. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, includes:
Level 1: Quoted prices for identical assets or liabilities in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table represents UPMC’s fair value hierarchy for its financial assets (cash and investments) and liabilities measured at fair value on a recurring basis of as June 30, 2011. The interest rate swaps are valued using internal models, which are primarily based on market observable inputs including interest rate curves. When quoted market prices are unobservable for fixed income securities, quotes from independent pricing vendors based on recent trading activity and other relevant information including market interest rate curves, referenced credit spreads and estimated prepayment rates where applicable are used for valuation purposes. These investments are included in Level 2 and include corporate fixed income, government bonds, and mortgage and asset-backed securities. Public real estate that has a limited liability company structure is classified as Level 2. The net asset value has been derived using quoted market prices for the underlying securities.
A-9
4. Fair Value Measurements (continued)
5. Financial Instruments Substantially all of UPMC’s investments in debt and equity securities are classified as trading. This classification requires UPMC to recognize unrealized gains and losses on substantially all of its investments in debt and equity securities as investment revenue in the consolidated statements of operations and changes in net assets. UPMC’s investments in debt and equity securities that are donor-restricted assets are designated as nontrading. Unrealized gains and losses on donor-restricted assets are recorded as changes in restricted net assets in the consolidated statements of operations and changes in net assets. Gains and losses on the sales of securities are determined by the average cost method. Realized gains and losses are included in investment revenue in the consolidated statements of operations and changes in net assets.
Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value using quoted market prices or model-driven valuations. Cash and cash equivalents and investments recorded at fair value aggregate $2,389,485 and $1,801,142 at June 30, 2011 and June 30, 2010, respectively.
Level 1 Level 2 Level 3
Total
Carrying
AmountAssets
Cash and cash equivalents 386,718$ –$ –$ 386,718$
Fixed income 361,037 619,446 – 980,483
Domestic equity 338,263 999 – 339,262
International equity 488,501 112,929 – 601,430
Public real estate 41,485 – – 41,485
Commodities 40,107 – – 40,107 Derivative instruments – 2,962 – 2,962
Total assets 1,656,111$ 736,336$ –$ 2,392,447$
LiabilitiesDerivative instruments – (17,338) – (17,338)
Total liabilities –$ (17,338)$ –$ (17,338)$
Fair Value Measurements
As of June 30, 2011
A-10
5. Financial Instruments (continued) Investments in limited partnerships that invest in nonmarketable securities (private equity) are primarily recorded at cost if the ownership percentage is less than 5% and are reported using the equity method of accounting if the ownership percentage is greater than 5%. These investments are periodically evaluated for impairment. As of June 30, 2011 and 2010, respectively, UPMC had investments recorded at cost of $850,551 and $791,184. These investments include private equity limited partnerships recorded at cost, as well as assets recorded as other assets in the consolidated balance sheets. As of June 30, 2011 and 2010, respectively, UPMC had nontrading investments of $213,366 and $128,722. At June 30, 2011, $196,497 of these investments was in an unrealized loss position and unrealized losses on these investments were $2,808. At June 30, 2010, $90,173 of these investments was in an unrealized loss position and unrealized losses on these investments were $1,272.
The carrying value of long-term debt at June 30, 2011 and June 30, 2010 is $3,214,811 and $3,119,160, respectively. The fair value of long-term debt at June 30, 2011 and June 30, 2010 is $3,243,383 and $3,136,038, respectively, based on market prices as estimated by financial institutions.
6. Derivative Instruments UPMC uses derivative financial instruments (“derivatives”) to manage its exposure on its debt instruments and its asset allocation. By using derivatives to manage these risks, UPMC exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivatives. When the fair value of a derivative is positive, the counterparty owes UPMC, which creates credit risk for UPMC. When the fair value of a derivative is negative, UPMC owes the counterparty and, therefore, it does not incur credit risk. UPMC minimizes the credit risk in derivatives by entering into transactions that require the counterparty to post collateral for the benefit of UPMC based on the credit rating of the counterparty and the fair value of the derivative. If UPMC has a derivative in a liability position, UPMC’s credit is a risk and fair market values could be adjusted downward. Market risk is the effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate changes is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Management also mitigates risk through periodic reviews of their derivative positions in the context of their total blended cost of capital. UPMC maintains interest rate swap programs on certain of its revenue bonds in order to manage its interest rate risk. To meet this objective and to take advantage of low interest rates, UPMC entered into various interest rate swap agreements to manage interest rate risk. The notional amount under each interest rate swap agreement is reduced over the term of the respective agreement to correspond with reductions in various outstanding bond series.
A-11
6. Derivative Instruments (continued) The following table summarizes UPMC’s interest rate swap agreements:
1 The SIFMA Index is a 7-day high-grade market index comprised of tax-exempt variable rate demand obligations.
UPMC has also entered into equity-related derivative instruments to manage the asset allocation in its investment portfolio. Under the equity index swap agreements UPMC pays a fixed income-like return in order to receive an equity-like return. The notional amount of these swaps is based upon UPMC’s target asset allocation. The following table summarizes UPMC’s equity swap agreements:
2 The MSCI EAFE Index is a free-float adjusted market capitalization index that is designed to measure the equity market performance
of developed markets, excluding the US and Canada.
Swap
Maturity
Date UPMC Pays UPMC Receives June 30, 2011 June 30, 2010
Floating to fixed 12/1/2025 3.60% 68% of one-month LIBOR 141,030$ 147,005$
Basis 2/1/2021 SIFMA Index 1 67% of three-month 53,905 53,905
plus .2077%Basis 2/1/2037 SIFMA Index 67% of three-month 46,095 46,095
plus .3217%241,030$ 247,005$
Notional Amount at
Maturity
Date UPMC Pays UPMC Receives June 30, 2011 June 30, 2010
10/7/2011 Three-month LIBOR S&P 500 Total Return 75,000$ 50,000$
plus .0600% Index
6/25/2012 Three-month LIBOR MSCI EAFE Daily Total 50,001 –
minus .2500% Return 2
6/25/2012 Three-month LIBOR S&P 500 Total Return 25,000 –
plus .1700% Index150,001$ 50,000$
Notional Amount at
A-12
6. Derivative Instruments (continued) The fair value of UPMC’s derivatives at June 30, 2011 and 2010 is classified in the consolidated balance sheets as follows:
The accounting for changes in the fair value (i.e., unrealized gains or losses) of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. None of UPMC’s swaps outstanding as of June 30, 2011 and 2010 are designated as hedging instruments and as such, changes in fair value are recognized in investing and financing activities as investment revenue in the consolidated statements of operations and changes in net assets. The effects of changes in the fair value of the derivatives on the consolidated statements of operations and changes in net assets for the twelve months ended June 30, 2011 and 2010 are as follows:
UPMC’s derivatives contain provisions that require UPMC’s debt to maintain an investment grade credit rating from certain major credit rating agencies. If UPMC’s debt were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivatives could request payment or demand immediate and ongoing full overnight collateralization on derivatives in net liability positions. The aggregate fair value of all derivatives with credit-risk-related contingent features that are in a liability position at June 30, 2011 and June 30, 2010 is $16,942 and $21,129, respectively, for which UPMC has posted no collateral. If the credit-risk-related contingent features underlying these agreements were triggered to the fullest extent on June 30, 2011, UPMC would be required to post $19,424 of collateral to its counterparties. Pursuant to master netting arrangements, UPMC offsets the fair value of amounts recognized for derivatives, including the right to reclaim or obligation to return cash collateral from/to counterparties.
Balance Sheet Classification
As of June 30,
2011
As of June 30,
2010
Other assets 2,962$ –$ Long-term obligations (17,338) (27,578)
(14,376)$ (27,578)$
Type of Derivative
Classification of Gain
Recognized in Excess of
Revenues over Expenses
2011 2010
Interest rate contracts Investment revenue 4,188$ 76,158$ Equity index contracts Investment revenue 9,014 (6,445)
13,202$ 69,713$
Amount of Gain Recognized in
Excess of Revenues over Expenses
A-13
7. Pension Plans UPMC and its subsidiaries maintain defined benefit pension plans (the “Plans”), defined contribution plans and nonqualified pension plans that cover substantially all of UPMC’s employees. Benefits under the Plans vary and are generally based upon the employee’s earnings and years of participation. The following disclosures related to the Plans do not include the UPMC Hamot pension plan. The components of net periodic pension cost for the Plans are as follows:
The actuarial assumptions used to determine net periodic pension cost for the three and twelve months ended June 30, 2011 and 2010 for the Plans are as follows:
During the twelve months ended June 30, 2011 and 2010, UPMC made contributions to the Plans of $134,606 and $125,207, respectively. 8. Contingencies UPMC is involved in litigation and responding to requests for information from governmental agencies occurring in the normal course of business. Certain of these matters are in the preliminary stages and legal counsel is unable to estimate the potential effect, if any, upon operations or financial condition of UPMC. Management believes that these matters will be resolved without material adverse effect on UPMC’s financial position or results of operations. However, the ultimate outcome and effect on UPMC’s financial statements is unknown.
2011 2010 2011 2010
Service cost 59,082$ 55,064$ 14,770$ 13,766$
Interest cost 50,176 53,044 12,544 13,261
Expected return on plan assets (62,797) (49,186) (15,699) (12,297)
Recognized net actuarial loss 33,106 27,746 8,276 6,937 Amortization of prior service cost (4,952) (5,165) (1,238) (1,291)
Net periodic pension cost 74,615$ 81,503$ 18,653$ 20,376$
Twelve Months Ended
June 30
Three Months Ended
June 30
2011 2010
Discount rate 5.19% 6.70%
Expected rate of compensation increase 3.41% 3.75%
Expected long-term rate of return on plan assets 8.00% 8.00%
Three and Twelve Months Ended
June 30
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8. Contingencies (continued) During August 2007, UPMC received a request for information from the Civil Division of the Department of Justice (“DOJ”) relating to an investigation into the health insurance and hospital services market in and around Pittsburgh including any potentially anticompetitive agreements. This request covered several prior years. No specific violations, claims or assessments were ever made. Management cooperated with the information requests. In July 2011, the DOJ contacted counsel for UPMC to advise that the DOJ had formally closed its investigation of UPMC. Accordingly, UPMC believes that the matter has been resolved with no material adverse effect on UPMC’s financial position or results of operations. In April 2009, a lawsuit was filed by West Penn Allegheny Health System (“WPAHS”) against UPMC and Highmark, Inc. in the United States District Court for the Western District of Pennsylvania. WPAHS alleged that UPMC and Highmark violated the Sherman Antitrust Act and that UPMC tortiously interfered with WPAHS’ existing and prospective business relations. WPAHS sought equitable relief and unspecified compensatory, treble and punitive damages. In October 2009, WPAHS’ lawsuit was dismissed by the District Court. In November 2009, WPAHS appealed the District Court’s dismissal. In November 2010, the Court of Appeals reversed the District’s Court’s dismissal and remanded the case to the District Court for further proceedings. In December 2010, UPMC and Highmark sought rehearing before the Third Circuit en banc, which was denied. In May 2011, UPMC and Highmark filed petitions for certiorari with the United States Supreme Court, asking the Court to uphold the District Court’s dismissal and reverse the Court of Appeals. The District Court has stayed further proceedings pending resolution of the petitions for certiorari. UPMC continues to believe that WPAHS’ allegations have no merit and expects that the matter will be resolved without any material adverse effect on UPMC’s financial position or results of operations. However, the ultimate outcome and effect on UPMC’s financial statements is unknown. In December 2010, a proposed class action was filed in United States District Court for the Western District of Pennsylvania by Royal Mile Company, Inc., and certain related entities and persons against UPMC and Highmark, Inc. In that action the plaintiffs alleged that UPMC and Highmark had conspired to allow Highmark to charge excessive, above-market premiums for health insurance. The complaint closely tracks the allegations made by WPAHS in its lawsuit (described above). The action has been designated as “related” to the WPAHS lawsuit, has been assigned to the same District Court Judge, and has been stayed pending the disposition of petitions for certiorari being filed in the WPAHS lawsuit. In March and April 2009, several related class action lawsuits were filed against UPMC and certain of its affiliates in the Federal District Court for the Western District of Pennsylvania (“District Court”) and the Court of Common Pleas for Allegheny County, Pennsylvania. The Federal District Court cases allege violations of The Fair Labor Standards Act (“FLSA”) on the basis that certain employees were not paid for all hours that they worked and were not properly paid overtime and, further, that these actions also violated the Employee Retirement Income Security Act (“ERISA”) and the Racketeer Influenced and Corrupt Organizations Act (“RICO”). The state court actions allege violations of the Pennsylvania Minimum Wage Act, The Wage Payment and Collection Act and common law on the same factual basis noted above. The lawsuits seek recovery of alleged unpaid wages and benefits and other monetary damages and costs. UPMC is currently evaluating the effect of the lawsuits on UPMC’s financial position and results of operations. However, the ultimate outcome and effect on UPMC’s financial statements is unknown.
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8. Contingencies (continued) In November 2010, the DOJ opened an investigation into whether or not certain hospitals nationwide submitted claims to Medicare for payment related to the implantation of implantable cardioverter defibrillators (“ICDs”) that were excluded from Medicare coverage. UPMC is in the process of reviewing these claims related to this investigation. However, the outcome and ultimate effect on UPMC’s financial statements cannot be determined at this time. In July 2011, a lawsuit was filed by Highmark, Inc. and Keystone Health Plan West, Inc. (“Highmark”) against UPMC, UPMC Presbyterian Shadyside, Magee-Womens Hospital of UPMC, UPMC Northwest, UPMC St. Margaret, UPMC Passavant, UPMC Horizon, UPMC Bedford and UPMC McKeesport (“UPMC”) in the United States District Court for the Western District of Pennsylvania. Highmark alleged that UPMC violated the Lanham Act, breached certain contracts and tortiously interfered with Highmark’s existing and prospective business relations by making certain statements regarding the status of the Highmark/UPMC relationship. Highmark sought equitable relief including a preliminary injunction and unspecified compensatory and punitive damages. In August 2011, UPMC moved to dismiss all of Highmark’s claims and opposed Highmark’s motion for a preliminary injunction. UPMC believes that Highmark’s allegations have no merit and expects that the matter will be resolved without any material adverse effect on UPMC’s financial position or results of operations. However, the ultimate outcome and effect on UPMC’s financial statements is unknown. 9. Subsequent Events Management evaluated subsequent events occurring subsequent to June 30, 2011 through August 26,
2011, the date the unaudited interim consolidated financial statements of UPMC were issued. During this period, there were no subsequent events requiring recognition in the consolidated financial statements that have not been recorded.