Nadder Mirsepassi Assistant Treasurer Director of Treasury Operations 2200 River Plaza Drive Sacramento, CA 95833 (916) 286-6679 (Tel) (916) 286-6668 (Fax) mirsepn@sutterhealth.org March 6, 2019 Attached please find the following documents for the fiscal year ended December 31, 2018 required pursuant to certain documents relating to certain Sutter Health System obligations. Please note that these documents are also available on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system (“EMMA”) at http://emma.msrb.org. • • • • Audited financial statements of the Sutter Health System and Obligated Group Continuing Disclosure Annual Report Officer’s Certificate of the Corporation as to Compliance with No Event of Default Supplemental Information Should you have questions, please contact me at (916) 286-6679. 2018 Audited Financial Statements December 31, 2018 Sutter Health Sutter Health and Affiliates Consolidated Financial Statements and Supplementary Information Years ended December 31, 2018 and 2017 Contents Audited Consolidated Financial Statements Report of Independent Auditors ........................................................................................... 1 Consolidated Balance Sheets ................................................................................................ 2 Consolidated Statements of Operations and Changes in Net Assets .................................... 3 Consolidated Statements of Cash Flows ............................................................................... 5 Notes to Consolidated Financial Statements ........................................................................ 7 Supplementary Information Report of Independent Auditors on Supplementary Information ....................................... 50 Consolidating Balance Sheet: Areas, Other and Sutter Health Support Services ............................................................ 51 Sutter Health Bay Area .................................................................................................... 54 Sutter Health Valley Area ................................................................................................ 57 Other ................................................................................................................................ 60 Consolidating Statement of Operations and Changes in Net Assets: Areas, Other and Sutter Health Support Services ............................................................ 52 Sutter Health Bay Area .................................................................................................... 55 Sutter Health Valley Area ................................................................................................ 58 Other ................................................................................................................................ 61 Consolidated Balance Sheets – Sutter Health Obligated Group ......................................... 63 Consolidated Statements of Operations and Changes in Net Assets – Sutter Health Obligated Group .............................................................................................................. 64 Consolidated Statements of Cash Flows – Sutter Health Obligated Group ....................... 66 Consolidating Balance Sheet – Sutter Health Obligated Group ......................................... 68 Consolidating Statement of Operations and Changes in Net Assets – Sutter Health Obligated Group .............................................................................................................. 70 Ernst & Young LLP Sacramento Office Suite 300 2901 Douglas Boulevard Roseville, CA 95661 Tel: +1 916 218 1900 Fax: +1 916 218 1999 ey.com Report of Independent Auditors The Board of Directors Sutter Health and Affiliates We have audited the accompanying consolidated financial statements of Sutter Health and Affiliates, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations and changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sutter Health and Affiliates at December 31, 2018 and 2017, and the consolidated results of their operations and changes in net assets, and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. ey March 6, 2019 1 A member firm of Ernst & Young Global Limited Sutter Health and Affiliates Consolidated Balance Sheets (Dollars in millions) December 31, 2018 2017 Assets Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables Inventories Other Total current assets $ Non-current investments Property, plant and equipment, net Other non-current assets $ Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and related benefits Other accrued expenses Current portion of long-term obligations Total current liabilities $ Non-current liabilities: Long-term obligations, less current portion Other Net assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total net assets $ 362 5,000 1,223 835 127 179 7,726 983 8,193 401 17,303 761 647 811 57 2,276 $ $ $ 395 5,052 1,277 878 118 200 7,920 773 7,954 434 17,081 854 576 877 150 2,457 4,626 1,290 3,972 1,094 8,530 112 469 9,111 17,303 8,965 108 485 9,558 17,081 $ See accompanying notes. 2 Sutter Health and Affiliates Consolidated Statements of Operations and Changes in Net Assets (Dollars in millions) Year ended December 31, 2018 2017 Net assets without donor restrictions: Operating revenues: Patient service revenues Premium revenues Contributions Other Total operating revenues Operating expenses: Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses $ 10,957 1,383 6 351 12,697 $ 10,828 1,220 9 387 12,444 5,852 3,372 1,492 681 176 115 15 793 12,496 5,627 3,246 1,391 655 176 105 15 903 12,118 Income from operations 201 326 Investment income Change in net unrealized gains and losses on investments classified as trading Loss on extinguishment of debt 187 336 (454) (54) 315 (19) (Loss) income (120) 958 (78) (65) (198) 893 Less income attributable to noncontrolling interests (Loss) income attributable to Sutter Health 3 Sutter Health and Affiliates Consolidated Statements of Operations and Changes in Net Assets (continued) (Dollars in millions) Year ended December 31, 2018 2017 Net assets without donor restrictions (continued): Controlling: (Loss) income attributable to Sutter Health Change in net unrealized gains and losses on investments classified as other-than-trading Net assets released from restriction for equipment acquisition Pension-related changes other than net periodic pension cost Other (Decrease) increase in controlling $ $ Net assets with donor restrictions: Contributions Investment income Change in net unrealized gains and losses on investments Net assets released from restriction Other (Decrease) increase in net assets with donor restrictions $ 893 25 22 17 13 (301) 22 (435) Noncontrolling: Income attributable to noncontrolling interests Distributions Other Increase (decrease) in noncontrolling (Decrease) increase in net assets Net assets, beginning of year Net assets, end of year (198) 91 – 1,019 78 (74) – 4 65 (73) 4 (4) 39 12 (8) (35) (24) (16) 45 15 23 (35) (3) 45 (447) 9,558 9,111 $ 1,060 8,498 9,558 See accompanying notes. 4 Sutter Health and Affiliates Consolidated Statements of Cash Flows (Dollars in mil lions) Year ended December 31, 2018 2017 Operating activities (Decrease) increase in net assets Adjustments to reconcile (decrease) increase in net assets to net cash provided by operating activities: Loss on extinguishment of debt Depreciation and amortization Amortization of bond issuance costs, (premium) and discount, net Net realized gains and losses and change in net unrealized gains and losses on investments Restricted contributions and investment income Distributions to noncontrolling interest Loss on impairment of property, plant and equipment Loss on impairment of goodwill Net loss (gain) on disposal of property, plant and equipment Change in net postretirement benefits Net changes in operating assets and liabilities: Patient accounts receivable and other receivables Inventories and other assets Accounts payable and accrued expenses Other non-current liabilities Net cash provided by operating activities Investing activities Purchases of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchases of investments Proceeds from sales of investments Other Net cash used in investing activities $ (447) $ 1,060 54 652 19 633 (40) (29) 315 (51) 74 18 4 (649) (60) – 5 14 4 241 (16) (32) 97 30 (149) (44) 758 (357) (28) 547 39 1,146 (924) 34 (3,529) 3,056 (2) (1,365) (924) 19 (3,185) 3,050 (8) (1,048) 5 Sutter Health and Affiliates Consolidated Statements of Cash Flows (continued) (Dollars in millions) Year ended December 31, 2018 2017 Financing activities Payments of long-term obligations Refund of bonds Proceeds from issuance of long-term obligations Bond issuance costs Bond issuance premium (discount), net Restricted contributions and investment income Distributions to noncontrolling interest Net cash provided by (used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ $ (152) (633) 1,314 (9) 77 51 (74) 574 (33) 395 362 $ $ (54) (631) 438 (4) 62 60 – (129) (31) 426 395 See accompanying notes. 6 Sutter Health and Affiliates Notes to Consolidated Financial Statements December 31, 2018 and 2017 (Dollars in millions) 1. ORGANIZATION Sutter Health is a California not-for-profit multi-provider integrated health care delivery system headquartered in Sacramento, California, which includes a centralized support group and various health care-related businesses operating primarily in Northern California. Sutter Health and its affiliates and subsidiaries provide health care, education, research and administrative services. Sutter Health’s integrated health care delivery system includes acute care, medical foundations, fundraising foundations and a variety of other specialized health care services. These entities are commonly referred to as the affiliates. Most acute care hospitals provide a full range of medical services (e.g., surgical, intensive care, emergency room, and obstetrics). All emergency rooms provide emergency care, regardless of a patient’s ability to pay. Sutter Health and its affiliates also serve their communities with various programs, such as health education, health libraries, school-based clinics, home health care, hospice care, adult day care, prenatal clinics, community clinics, immunization services, and health professions education. 2. ACCOUNTING POLICIES Basis of Consolidation: The Sutter Health and Affiliates consolidated financial statements include the accounts of Sutter Health and its controlled affiliates and subsidiaries (Sutter). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with United States (U.S.) Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents: Cash equivalents include all highly liquid investments with original maturities of 90 days or less, including money market accounts with limited market risk, and investment-grade debt instruments, many of which are backed by the U.S. Government or other government agencies. Financial instruments that potentially subject Sutter to concentrations of credit risk include cash equivalents and investments. Cash equivalents are stated at fair market value. 7 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 2. ACCOUNTING POLICIES (continued) Investments: Investments consist principally of U.S. and foreign equity, corporate and government securities, a hedge fund portfolio and private equity funds, all of which are designated as either trading or other-than-trading and carried at fair value or Net Asset Value (NAV) as a practical expedient to estimate fair value. Certain investments are held in trust, including assets held by trustees in accordance with the indentures relating to longterm obligations. In addition, certain investments are designated by the appropriate Sutter governing boards for future capital improvements. Derivative Instruments: Sutter offsets fair value amounts recognized for certain derivative transactions from contracts executed with the same counterparty under a master netting arrangement. As a result, the net exposure to counterparties is $0 at December 31, 2018 and 2017. Patient Accounts Receivable: Sutter’s primary concentration of credit risk is patient accounts receivable, which consist of amounts owed from patients and third-party payers. Sutter manages the receivables by regularly reviewing its patient accounts and contracts. Significant concentrations of gross patient accounts receivable are as follows: December 31, 2018 2017 Medicare Medi-Cal 30% 26% 31% 26% Inventories: Inventories, which consist principally of medical and other supplies, are stated on the basis of cost determined by the first-in, first-out method, which is not in excess of market. Property, Plant and Equipment: Property, plant and equipment are stated on the basis of cost, or in the case of donated items, on the basis of fair market value at the date of donation, less depreciation and any impairment write-downs. Equipment includes medical equipment, furniture and fixtures, software, and internally-developed software. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase values, change capacities or extend useful lives are capitalized, as is interest on amounts borrowed to finance constructed assets during the construction phase. Sutter capitalized interest costs of $42 and $55 and accrued obligations for property, plant and equipment of $112 and $123 as of December 31, 2018 and 2017, respectively. 8 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 2. ACCOUNTING POLICIES (continued) Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which range from 2 to 40 years for buildings and improvements, and leasehold improvements, and from 3 to 20 years for equipment. Amortization of equipment under capital leases is included in depreciation and amortization expense. Asset Impairment: Sutter routinely evaluates the carrying value of its long-lived assets for impairment. The evaluations address the estimated recoverability of the assets’ carrying value, which is principally determined based on a qualitative test using the projected net cash flows generated by the underlying tangible assets. When the carrying value of an asset exceeds estimated recoverability, asset impairment is recognized. Other Assets: Goodwill represents the excess of purchase price over the fair value of net assets acquired. Goodwill and other intangible assets acquired in business combinations that have indefinite useful lives are subject to impairment tests. Sutter performs impairment tests at the reporting unit level annually or when events occur that require an evaluation to be performed. If the carrying value of goodwill is determined to be impaired, or if the carrying value of a business that is to be sold or otherwise disposed of exceeds its fair value, the carrying value is reduced, including any allocated goodwill, to fair value. Estimates of fair value are based on appraisals, established market prices for comparative assets or internal estimates of future net cash flows based on projected performance, depending on circumstances. The changes in the carrying amount of goodwill, which are included in Other non-current assets, are as follows: Year ended December 31, 2018 2017 Goodwill at beginning of year Additions Impairment Goodwill at end of year $ $ 152 – (4) 148 $ $ 163 3 (14) 152 Other Liabilities: Other non-current liabilities consist of (i) insurance liabilities, including estimated liabilities for professional liability and comprehensive general liability losses, and workers’ compensation, (ii) the portion of estimated third-party settlements not expected to be settled within a year, (iii) other postretirement benefits liabilities, and (iv) certain other liabilities. 9 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 2. ACCOUNTING POLICIES (continued) Liquidity Management: As part of its liquidity management, Sutter’s strategy is to structure its financial assets to be available to satisfy general operating expenses, current liabilities, and other obligations as they come due. Sutter invests cash in excess of daily requirements in short-term investments and has a committed syndicated line of credit, as discussed in Note 7, to help manage unanticipated liquidity needs. Additionally, board-designated funds, as discussed in Note 9, may be utilized if necessary. Sutter’s financial assets available for general operating expenses within one year of December 31, 2018, are as follows: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables $ $ 362 4,978 1,223 835 7,398 Risk Management: Sutter Health and most affiliates are insured by a wholly owned selfinsured captive insurance company for professional liability claims and comprehensive general liability. Sutter is also self-insured for workers’ compensation and employee health for most affiliates. Claim reserves are based on the best data available to Sutter; however, these estimates are subject to a significant degree of inherent variability. Estimates are continually monitored and reviewed, and as reserves are adjusted, the differences are reflected in current operations. Management is of the opinion that the associated liabilities recognized in the accompanying consolidated financial statements are adequate to cover such claims. The provisions for estimated professional liability and comprehensive general liability claims, workers’ compensation, and employee health include estimates of the ultimate costs for both uninsured reported claims and claims incurred-but-not-reported, in accordance with actuarial projections or paid claims lag models based on historical experience. Professional liabilities and comprehensive general liabilities were $112 and $110, discounted at a rate of 2.8% and 2.3%, as of December 31, 2018 and 2017, respectively. Workers’ compensation liabilities were $269 and $278, discounted at a rate of 3.1% and 2.7%, as of December 31, 2018 and 2017, respectively. Employee health liabilities were $69 and $57 as of December 31, 2018 and 2017, respectively, and were recorded on an undiscounted basis. 10 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 2. ACCOUNTING POLICIES (continued) Sutter has entered into reinsurance, excess, and stop loss policy agreements with independent insurance companies to limit its losses on professional liability, comprehensive general liability, workers’ compensation, and employee health claims. In lieu of a workers’ compensation security deposit requirement, Sutter paid assessment charges to participate in the California Self Insurers’ Alternative Security Program, which provided coverage of $293 and $288 as of December 31, 2018 and 2017, respectively. Contingencies: Estimated losses from contingencies are recorded when they are probable and reasonably estimable. Net Assets: Net resources that are not restricted by donors are included in Net assets without donor restrictions. Gifts of long-lived operating assets, such as property, plant or equipment, are reported as Net assets without donor restrictions and excluded from income. Resources restricted by donors for a specified time or purpose are reported as Net assets with donor restrictions. When the specific purposes are met, either through passage of a stipulated time period or when the purpose for restriction is accomplished, they are released to Other operating revenues in the Statement of Operations and Changes in Net Assets. Resources restricted by donors for additions to property, plant and equipment are initially reported as Net assets with donor restrictions and are transferred to Net assets without donor restrictions when expended. Donor-imposed restrictions, which stipulate that the resources be maintained permanently, are reported as Net assets with donor restrictions. Investment income related to net assets with donor restrictions is classified as either Net assets without donor restrictions or Net assets with donor restrictions based on the intent of the donor. Purchased Services: Purchased services expense is made up of a wide variety of contracted and other purchased services, including medical group compensation, other professional fees, repairs and maintenance, and capitated purchased services. Medical group compensation is accrued by Sutter according to professional services agreements between affiliated medical foundations and contracted medical groups. Research and Development: Sutter expenses research and development costs as incurred. Research and development expense, included in Operating expenses, was $54 and $57 for the years ended December 31, 2018 and 2017, respectively. 11 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 2. ACCOUNTING POLICIES (continued) Income Taxes: Sutter Health, the legal entity, and many affiliates have been determined to be exempt organizations by the Internal Revenue Service and the California Franchise Tax Board and generally are not subject to taxes on income. Certain activities of Sutter are subject to income taxes; however, such activities are not significant to the consolidated financial statements. With respect to its taxable activities, Sutter records income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods that the deferred tax asset or liability is expected to be realized or settled. Sutter recognizes the tax benefit from uncertain tax positions, only if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The statute of limitations for tax years 2015 through 2017 remain open in U.S. tax jurisdictions in which Sutter and its affiliates are subject to taxation. Sutter recognizes interest and penalties related to income tax matters in operating expenses. At December 31, 2018 and 2017, there were no such uncertain tax positions. Performance Indicator: “(Loss) income” and “(Loss) income attributable to Sutter Health”, as reflected in the Consolidated Statements of Operations and Changes in Net Assets, are performance indicators. The performance indicators include all changes in Net assets without donor restrictions, excluding Net assets released from restriction for equipment acquisition, Changes in net unrealized gains and losses on investments classified as otherthan-trading, Pension-related changes other than net periodic pension cost, and Other changes. Adoption of New Accounting Pronouncements: In August 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments help entities evaluate the accounting for implementation costs paid by a customer in a cloud computing arrangement by providing guidance for determining when the service contract includes a software license. Sutter is evaluating the impact of this guidance, which will be effective in 2021. 12 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 2. ACCOUNTING POLICIES (continued) In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which enhances ASU No. 2016-02, Leases (Topic 842). The guidance of these ASUs requires the rights and obligations arising from the lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet and allows for an option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements. The ASUs are effective January 1, 2019, and Sutter elected the practical expedient to initially apply the new leasing standard at the adoption date. Sutter is finalizing its analysis of certain key assumptions that will be utilized at the transition date, including the incremental borrowing rate. The primary effect of the new standard will be to record right-of-use assets and obligations for current operating leases which will have a material impact on the Consolidated Balance Sheets and significant incremental disclosures in the Notes to Consolidated Financial Statements. The standard will not have a material adverse effect on Sutter’s consolidated results of operations. In June 2018, the FASB issued ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This guidance clarifies and improves the scope and the accounting guidance for contributions received and made with the objective of reducing the existing diversity in practice. Sutter is evaluating the impact of this guidance, which will be effective in 2019. In August 2016, the FASB issued ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The update addresses the complexity and understandability of net asset classification, deficiencies in information about liquidity and availability of resources, and the lack of consistency in the type of information provided about expenses and investment return. Sutter has adjusted the presentation of these statements accordingly. The ASU has been applied retrospectively to all periods presented. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded virtually all revenue recognition guidance in U.S. GAAP. This guidance is intended to improve, converge, and replace existing revenue recognition guidance, including industry-specific guidance and requires revenue to be recognized in an amount that reflects the consideration the entity expects to be entitled to in an exchange of goods or services. Sutter adopted this guidance as of the January 1, 2018, effective date, using the full retrospective method of transition. The adoption of the new standard did not have an impact on recognition of Total operating revenues for any periods, but did result in expanded footnote disclosures. 13 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 3. INVESTMENTS Investments are held for the following uses: December 31, 2018 2017 Principal, interest and other reserves held in trust under bond indentures Board-designated Investments Less short-term investments Non-current investments $ $ 14 289 5,680 5,983 (5,000) 983 $ $ 14 170 5,641 5,825 (5,052) 773 4. FAIR VALUE MEASUREMENTS Sutter accounts for certain assets at fair value. A fair value hierarchy for valuation inputs has been established to prioritize the valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels, which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: Level 1: Quoted prices are available in active markets for identical assets as of the measurement date. Level 2: Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and modelbased valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Level 3: Pricing inputs are generally unobservable for the assets and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets. The fair values are therefore determined using factors that involve judgment and interpretations, including, but not limited to, private and public comparables, third-party appraisals, discounted cash flow models, fund manager estimates and net asset valuations provided by the underlying private investment companies and/or their administrators. Sutter held no Level 3 financial instruments as of December 31, 2018 and 2017. 14 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 4. FAIR VALUE MEASUREMENTS (continued) The fair value of Sutter’s assets measured on a recurring basis consists of the following: December 31, 2018 Quoted Prices in Active Markets for Identical Instruments (Level 1) Liquid investments Cash equivalents $ 108 Significant Other Observable Inputs (Level 2) $ – Total $ 108 Equity securities U.S. equity Foreign equity Fixed income securities U.S. government U.S. government agencies U.S. state and local government U.S. federal agency mortgage-backed Foreign government U.S. corporate Foreign corporate $ 1,088 464 – – 1,088 464 388 – – – – 56 2 2,106 – 3 78 274 223 671 176 1,425 388 3 78 274 223 727 178 3,531 2,452 5,983 $ $ Investments measured at net asset value $ 15 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 4. FAIR VALUE MEASUREMENTS (continued) December 31, 2017 Quoted Prices in Active Markets for Identical Instruments (Level 1) Liquid investments Cash equivalents $ Equity securities U.S. equity Foreign equity Fixed income securities U.S. government U.S. government agencies U.S. state and local government U.S. federal agency mortgage-backed Foreign government U.S. corporate Foreign corporate $ 261 Significant Other Observable Inputs (Level 2) $ – Total $ 261 1,145 629 – – 1,145 629 368 – – – – 54 4 2,461 – 39 70 294 219 618 188 1,428 368 39 70 294 219 672 192 3,889 1,936 5,825 $ $ Investments measured at net asset value $ There were no transfers to or from Levels 1 or 2 during the periods presented. As of December 31, 2018 and 2017, the Level 2 instruments listed in the fair value hierarchy tables above use the following valuation techniques and inputs: U.S. government agencies securities: The fair value of investments in U.S. government agencies securities classified as Level 2 is primarily determined using consensus pricing methods of observable market-based data. Significant observable inputs include quotes, spreads, and data points for yield curves. U.S. state and local government securities: The fair value of U.S. state and local government securities classified as Level 2 is determined using a market approach. The inputs include yield benchmark curves, prepayment speeds, and observable market data, such as institutional bids, dealer quotes, and two-sided markets. 16 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 4. FAIR VALUE MEASUREMENTS (continued) U.S. federal agency mortgage-backed securities: The fair value of U.S. federal agency mortgage-backed securities classified as Level 2 is primarily determined using matrices. These matrices utilize observable market data of bonds with similar features, prepayment speeds, credit ratings, and discounted cash flows. Additionally, observed market movements, tranche cash flows and benchmark yields are incorporated in the pricing models. Foreign government and corporate securities: The fair value of investments in foreign government and corporate securities classified as Level 2 is primarily determined using consensus pricing methods of observable market-based data. Significant observable inputs include quotes, bid and ask yields, and issue-specific factors. U.S. corporate securities: The fair value of investments in U.S. corporate securities classified as Level 2 is primarily determined using techniques that are consistent with the market approach. Significant observable inputs include reported trades, dealer quotes, security-specific characteristics, and multiple sources of spread data points in developing yield curves. Investments measured at net asset value: Certain investments that are measured using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets. 17 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 4. FAIR VALUE MEASUREMENTS (continued) Certain of the investments are reported using a calculated NAV or its equivalent. These investments are not expected to be sold at amounts that are different from NAV. The following table and explanations identify attributes relating to the nature and risk of such investments: Fair Value Commingled funds – U.S. equity securities $ Commingled funds – foreign equity securities Commingled funds – debt securities Commodity-linked funds Hedge funds Private equity funds Private equity real estate funds Total 161 392 290 127 999 $ 217 266 2,452 Fair Value Commingled funds – U.S. equity securities $ Commingled funds – foreign equity securities Commingled funds – debt securities Commodity-linked funds Hedge funds Private equity funds Private equity real estate funds Total $ 125 374 265 160 652 137 223 1,936 December 31, 2018 Redemption Frequency Unfunded (if currently Commitments eligible) $ $ – – – – – 307 237 544 Daily Monthly Daily, Monthly Daily Monthly, Quarterly None None December 31, 2017 Redemption Frequency Unfunded (if currently Commitments eligible) $ $ – – – – – 259 182 441 Daily Monthly Daily, Monthly Monthly Monthly, Quarterly None None Redemption Notice Period (if currently eligible) 1 day 5–30 days 3–15 days None 5–120 days None None Redemption Notice Period (if currently eligible) 1 day 5–30 days 3–15 days 5 days 5–197 days None None 18 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 4. FAIR VALUE MEASUREMENTS (continued) Commingled funds – U.S. and foreign equity securities: This class includes investments in commingled funds that invest primarily in U.S. or foreign equity securities and attempt to match the returns of specific equity indices. As of December 31, 2018, approximately 29% of this class is redeemable daily with a 1-day notice period. The remaining 71% of this class is redeemable monthly with a notice period of 5 to 30 days. Commingled funds – debt securities: This class includes investments in commingled funds that invest primarily in foreign debt, of which the majority are traded in over-the-counter markets. As of December 31, 2018, approximately 24% of the value of this class is redeemable daily with a notice period of 3 days. The remaining 76% of this class is redeemable monthly with a 15-day notice period. Commodity-linked funds: This class includes commodity-linked funds that pursue longonly fully collateralized commodity futures strategies to provide diversification and inflation protection. As of December 31, 2018, these funds are redeemable daily with no notice period. Hedge funds: This class includes investments in hedge funds that expand the universe of potential investment approaches available by employing a variety of strategies and techniques within and across various asset classes. The primary objective for these funds is to balance returns while limiting volatility by allocating capital to external portfolio managers selected for expertise in one or more investment strategies which may include, but are not limited to, equity long/short, event driven, relative value, and directional. The following summarizes the redemption criteria for the hedge fund portfolio as of December 31, 2018: % of Hedge Funds Redemption Criteria Notice Period 74% 3% 10% 13% Redeemable monthly Redeemable quarterly Limited to a 25% gate, redeemable quarterly Two-year rolling lock-ups periodically expiring through April 2020 5–75 days 45–90 days 60–90 days 120 days 19 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 4. FAIR VALUE MEASUREMENTS (continued) Private equity funds: This class includes domestic and foreign private equity funds that specialize in providing capital to a variety of investment groups, including but not limited to venture capital, leveraged buyout, mezzanine debt, distressed debt, and other strategies, which may include land, water processing, and alternative energy. There is no provision for redemptions during the life of these funds. Distributions from each fund will be received as the underlying investments of the funds are liquidated, estimated at December 31, 2018, to be over the next 10 to 15 years. Private equity real estate funds: This class includes domestic and foreign investments in real estate that are held in limited partnership funds, joint ventures, and other investments comprised of retail, office, industrial, and multi-family properties. There is no provision for redemptions during the life of these funds. Distributions from each fund will be received as the underlying investments of the funds are liquidated, estimated at December 31, 2018, to be over the next 2 to 13 years. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 31, 2018 2017 Land improvements Leasehold improvements Buildings and improvements Equipment $ Less amortization and accumulated depreciation Land Construction-in-progress $ 195 523 7,228 3,899 11,845 (6,544) 5,301 546 2,346 8,193 $ $ 177 502 6,834 3,886 11,399 (6,248) 5,151 563 2,240 7,954 20 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 6. OTHER NON-CURRENT ASSETS Other non-current assets consist of the following: December 31, 2018 2017 Goodwill, net Trust receivable Reinsurance recoveries receivable Non-current portion of pledges receivable Other $ $ 148 94 74 22 63 401 $ $ 152 106 75 24 77 434 7. LONG-TERM OBLIGATIONS Long-term obligations consist of the following: December 31, 2018 2017 Non-taxable revenue bonds under the Sutter Health Master Indenture of Trust, fixed interest at 1.0% to 5.5%, through 2052 (includes net unamortized premiums and discounts of $336 and $297 and debt issuance costs of ($21) and ($22) at December 31, 2018 and 2017, respectively) $ Taxable revenue bonds under the Sutter Health Master Indenture of Trust, fixed interest at 2.29% to 4.09%, through 2048 (includes unamortized discount of ($4) and $0 and debt issuance costs of ($4) and $0 at December 31, 2018 and 2017, respectively) Various collateralized and unsecured obligations Obligations under capital leases Less current portion $ 3,864 $ 3,881 779 200 32 33 8 4,683 (57) 4,626 $ 8 4,122 (150) 3,972 21 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 7. LONG-TERM OBLIGATIONS (continued) The aggregate estimated fair market value of Sutter’s revenue bonds at December 31, 2018 and 2017, of $4,625 and $4,220, respectively, was established using discounted cash flow analyses based on (i) the current market yield to maturity for similar types of publicly traded debt issues, and (ii) Sutter’s current incremental borrowing rates for all other debt instruments. Based on the inputs and valuation techniques, the fair value of long-term debt is classified as Level 2 within the fair value hierarchy. The central financing vehicle of credit for Sutter is the Obligated Group. Sutter Health, the legal entity, and certain affiliates are members of the Obligated Group, with their assets being subject to the indebtedness of the Obligated Group. Although the Obligated Group is not a legal entity, members of the Obligated Group are jointly and severally liable for repayment of the tax-exempt obligations issued through the California Health Facilities Financing Authority (CHFFA) and California Statewide Communities Development Authority (CSCDA) and taxable obligations issued by Sutter. The related financing documents and various other debt agreements contain certain restrictive covenants requiring compliance by all Obligated Group members, including a pledge of gross revenue. In April 2018, $619 of Series 2018A CHFFA tax-exempt revenue bonds were issued at a premium of $81 on behalf of Sutter. The proceeds of the 2018A bonds were used to reimburse prior capital expenditures. In April 2018, $688 of Series 2018A Sutter Health taxable bonds were issued at a discount of $4 by Sutter to advance refund $237 of Series 2011A CSCDA tax-exempt revenue bonds and $396 of Series 2011B CHFFA tax-exempt revenue bonds (collectively, the “2018 Refunded Bonds”). The proceeds of Series 2018A taxable bonds, together with the release of certain funds related to the 2018 Refunded Bonds, were placed in escrow funds pursuant to the related escrow agreements with the related bond trustee. The funds held in each escrow fund will be sufficient to pay the regularly scheduled interest payments when due, and 100% of the principal amount of the applicable 2018 Refunded Bonds at the applicable redemption date. The 2018 Refunded Bonds were legally defeased and derecognized at the date of refunding, with redemptions scheduled to occur in August 2020. These refunds resulted in a loss on extinguishment of debt of $54. In July 2017, $434 of Series 2017A CHFFA tax-exempt revenue bonds (“Series 2017A Bonds”) were issued at a premium of $62 on behalf of Sutter to advance refund $119 of Series 2008A CHFFA tax-exempt revenue bonds, $300 of Series 2008BC CSCDA taxexempt revenue bonds and $69 of Series 2004CD CSCDA tax-exempt revenue bonds 22 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 7. LONG-TERM OBLIGATIONS (continued) (collectively, the “2017 Refunded Bonds”). The proceeds of Series 2017A Bonds, together with the release of certain funds related to the 2017 Refunded Bonds, were placed in escrow funds pursuant to the related escrow agreements with the related bond trustee. The funds held in each escrow fund were sufficient to pay the regularly scheduled interest payments when due, and 100% of the principal amount of the applicable 2017 Refunded Bonds at the applicable redemption date. The 2017 Refunded Bonds were legally defeased and derecognized at the date of refunding, with redemptions that occurred in May and August 2018. These refunds resulted in a loss on extinguishment of debt of $19. In August 2016, $749 of Series 2016B CHFFA tax-exempt revenue bonds (“Series 2016B Bonds”) were issued on behalf of Sutter to refund certain bonds. The proceeds of the Series 2016B Bonds, together with the release of certain funds related to the refunded bonds were placed in escrow funds pursuant to the related escrow agreements with the related bond trustee. The associated debt of $143 related to the portion of the refunded bonds consisting of the Series 2005BC and the Series 2003AB CSCDA tax-exempt bonds was included in the current portion of long-term obligations as of December 31, 2016, and was legally defeased on the date of the refunding and derecognized at the dates of redemption, which occurred in May and August 2017, respectively. Aggregate principal payments of long-term obligations, excluding capital leases, various collateralized and unsecured obligations, net unamortized premiums, and issuance costs, as of December 31, 2018, are as follows: 2019 2020 2021 2022 2023 Thereafter $ $ 50 49 49 52 54 4,082 4,336 Sutter paid interest of $156 and $150 for the years ended December 31, 2018 and 2017, respectively. Sutter has a $400 revolving line of credit with a syndicate of banks, with $400 available for borrowing as of December 31, 2018. 23 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 8. LEASES Sutter leases various buildings, office space and equipment. The leases expire at various times and contain certain contingent rental provisions, guarantees and various renewal options. These leases are classified as either capital leases, which were not material as of December 31, 2018 and 2017, or operating leases, based on the terms of the respective agreements. Future minimum payments, by year and in the aggregate, under noncancellable operating leases with terms of one year or more at inception consist of the following as of December 31, 2018: Lease Payments 2019 2020 2021 2022 2023 Thereafter $ $ 154 132 120 106 81 415 1,008 Sublease Receipts $ 1 1 Net Lease Payments $ – – – – $ 2 $ 153 131 120 106 81 415 1,006 24 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 9. NET ASSETS AND CONTRIBUTIONS Sutter receives donations from generous individuals and organizations that support certain programs and services. Donations included in Net assets with donor restrictions were maintained for the following purposes: December 31, 2018 2017 Subject to expenditure for specified purpose: Capital projects and medical equipment Research and education Operations Operations or capital projects $ Subject to passage of time Subject to donor restrictions in conjunction with Sutter spending policy: Investment in perpetuity – endowment $ 44 85 28 154 311 20 138 469 $ $ 52 88 30 138 308 21 156 485 From time to time, a Sutter board will designate certain unrestricted funds to be used in the future for specific projects. Board-designated funds included in Net assets without donor restrictions were maintained for the following purposes: December 31, 2018 2017 Capital projects and medical equipment Research and education Operations or capital projects $ $ 143 27 119 289 $ $ 113 2 55 170 Sutter reports individuals’ and organizations’ unconditional promises to give cash or other assets at fair value at the date Sutter receives the promises. Sutter reports conditional promises to give and conditional indications of intentions to give at fair value when the conditions are met. Therefore, Sutter does not recognize any revenue or receivable at the time a conditional promise or indication of intent is received. Sutter’s conditional promises 25 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 9. NET ASSETS AND CONTRIBUTIONS (continued) or indication of intent received were $153 and $103 for the years ended December 31, 2018 and 2017, respectively. These gifts will support clinical programs and technology such as cardiology and innovation. As of December 31, 2018, Sutter’s pledges receivable, which is included in Other receivables and Other non-current assets, consisted of the following unconditional promises to give: Pledges due in 2019 Pledges due 2020–2023 Pledges due after 2023 Less allowance for uncollectible pledges Less discount on pledges receivable $ $ 16 19 9 (2) (6) 36 Endowments: Sutter follows the Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA eliminates the concept of “historic dollar value” and allows an institution to spend or accumulate as the board determines is prudent for the uses, benefits, purposes, and duration of the endowment fund unless the gift instrument states a particular spending rate or formula. California’s version of UPMIFA also includes a rebuttable provision that spending greater than 7% of the average fair market value, calculated at least quarterly over a minimal period of three years, is presumed to be imprudent. In accordance with UPMIFA, Sutter considers the following factors when appropriating or accumulating an endowment fund: (i) general economic conditions, (ii) effects of inflation and deflation, (iii) the purposes of the institution and the endowment fund, (iv) expected total return from income and appreciation of investments, (v) Sutter’s other resources, (vi) the duration and preservation of the endowment fund, and (vii) Sutter’s investment policies. If the fair market value of assets associated with individual endowment funds falls below the corpus, Sutter management assesses facts and circumstances to determine whether to suspend appropriation activities until the corpus has recovered or to continue to withdraw funds in compliance with UPMIFA in order to fund critical initiatives. Deficiencies of this nature reported in Net assets with donor restrictions were a result of unfavorable investment market fluctuations and not material as of December 31, 2018 and 2017. 26 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 9. NET ASSETS AND CONTRIBUTIONS (continued) Following UPMIFA, Sutter’s investment and spending policies for endowment assets attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Under these policies, endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results while assuming a moderate level of investment risk. To satisfy its long-term rate-of-return objectives, Sutter relies on a balanced investment strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). Sutter targets a diversified asset allocation that places a great emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. The endowment net asset composition by type of fund consists of the following: December 31, 2018 Net Assets Net Assets with Donor without Donor Restrictions Restrictions Donor-restricted endowment funds Board-designated funds Total funds $ $ – 102 102 $ $ 193 – 193 Total $ $ December 31, 2017 Net Assets Net Assets without Donor with Donor Restrictions Restrictions Donor-restricted endowment funds Board-designated funds Total funds $ $ – 83 83 $ $ 213 – 213 193 102 295 Total $ $ 213 83 296 27 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 9. NET ASSETS AND CONTRIBUTIONS (continued) The changes in endowment net assets are as follows: Net Assets without Donor Restrictions Balance at December 31, 2016 Investment return, net Contributions Appropriation of endowment assets for expenditure Other Balance at December 31, 2017 Investment return, net Contributions Appropriation of endowment assets for expenditure Other Balance at December 31, 2018 $ $ 74 11 – Net Assets with Donor Restrictions $ 178 30 11 Total $ 252 41 11 (1) (1) 83 (5) – (5) (1) 213 5 1 (6) (2) 296 – 1 (4) 28 102 (3) (23) 193 (7) 5 295 $ $ 10. OPERATING REVENUES Sutter records revenue in four financial statement categories: Patient service revenues, Premium revenues, Contributions, and Other. Performance obligations are identified based on the nature of the services provided. Sutter has elected the practical expedient allowed under FASB ASC 606-10-32-18, and does not adjust the promised amount of consideration for the effects of a significant financing component, due to Sutter’s expectation that the period between the time the service is provided and the receipt of payment will be one year or less. However, Sutter does, in certain instances, enter into payment agreements that allow payments in excess of one year. For those cases, the financing component is not deemed to be significant to the contract. Additionally, Sutter has elected to apply the optional exemption provided in FASB ASC 606-10-50-14(a), because all of its performance obligations relate to contracts with a duration of less than one year. Therefore, Sutter is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially satisfied at the end of the reporting period. 28 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 10. OPERATING REVENUES (continued) Patient service revenues: Sutter’s Patient service revenues are reported at the amount that reflects the consideration to which Sutter expects to be paid for providing patient care. These amounts are due from patients and third-party payers, including health insurers and government programs. Patients who meet Sutter’s criteria for charity care are provided care without charge or at amounts less than established rates. Such amounts determined to qualify as charity care are not reported as revenue. Generally, Sutter bills the patients and third-party payers after the services are performed. Patient service revenues are recognized as performance obligations are satisfied. Inpatient services are performance obligations satisfied over time and revenue is recognized based on actual charges incurred in relation to total expected or actual charges. Unsatisfied or partially unsatisfied performance obligations relate to inpatient acute care services at the end of the reporting period. The performance obligations for these contracts are generally completed when the patients are discharged, which generally occurs within days or weeks of the end of the reporting period. Outpatient services are performance obligations satisfied at a point in time and revenue is recognized when goods or services are provided, and Sutter does not believe it is required to provide additional goods or services. Sutter uses a portfolio approach to account for categories of patient contracts as a collective group, rather than recognizing revenue on an individual contract basis. The portfolios consist of major payer classes for inpatient and outpatient revenue. Based on historical collection trends, Sutter believes that revenue recognized by utilizing the portfolio approach approximates the revenue that would have been recognized if an individual contract approach was used. The health care industry is subject to voluminous and complex laws and regulations of federal, state and local governments. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement laws and regulations, anti-kickback and anti-referral laws and false claims prohibitions, and in the case of tax-exempt hospitals, the requirements of tax exemption. Sutter operates an Ethics and Compliance Program, which reviews compliance with government health care program requirements and investigates allegations of non-compliance received from internal and external sources. From time to time, findings may result in repayment of monies previously received from government and other third-party payers and/or disclosure of such overpayments, including, but not limited to, disclosure to the Centers for Medicare and Medicaid Services 29 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 10. OPERATING REVENUES (continued) (CMS) and its contracted agents, or the Office of Inspector General, Department of Health and Human Services. As a result, there is at least a reasonable possibility that the recorded estimates may change by a material amount in the near term. The majority of Sutter’s services are provided to patients with third-party coverage and Sutter has agreements with third-party payers that provide for payments to Sutter at contractually adjusted amounts. Patient service revenues are estimated based on the terms of the contractual agreement with the payer, Sutter’s historical settlement activity and other information. Settlements with third-party payers for retroactive adjustments due to audits, reviews or investigations are considered variable consideration, and are included in the determination of Patient service revenues when information becomes available. Additional revenues arising from a change in the estimate of transaction price concessions for performance obligations satisfied in prior years were $66 and $82 for the years ended December 31, 2018 and 2017, respectively. Payment arrangements are as follows: Medicare: Inpatient acute care services and outpatient services provided to Medicare program beneficiaries are paid at prospectively determined rates per diagnosis. Sutter is paid for cost-reimbursable items at a tentative rate. Physician services are paid based upon established fee schedules. Outpatient services are paid using prospectively determined rates. Amounts received from the Medicare programs are subject to audit and final settlement by a Medicare Administrative Contractor after submission of annual cost reports. Sutter’s Medicare cost reports have been audited generally through December 31, 2014. The estimated net settlement payables are $26 and $21 and adjustments from the finalization of prior-year cost reports were immaterial at December 31, 2018 and 2017, respectively. Medi-Cal: Inpatient and outpatient services provided to Medi-Cal program beneficiaries are paid either under contracted rates or cost-reimbursable items at a tentative rate. Services are generally paid at prospectively determined rates per discharge, per occasion of service, or per covered member. Amounts received from Medi-Cal programs are subject to audit and final settlement by the California Department of Health Care Services after submission of annual cost reports. Sutter’s Medi-Cal cost reports have been audited generally through December 31, 2014. The estimated net settlement payables and adjustments from the finalization of prior-year cost reports were immaterial in 2018 and 2017. 30 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 10. OPERATING REVENUES (continued) Commercial: Inpatient and outpatient services provided to patients covered under commercial insurance policies are paid using a variety of payment methodologies based on contractual agreements. The transaction price for commercial payers is reduced by explicit contractual adjustments, and implicit price concessions based on collection history with this portfolio of patients. Other: Inpatient and outpatient services provided to patients, not covered by thirdparty payers, are paid based on Sutter’s policies and the patient’s ability to pay. Sutter reduces the transaction price by implicit price concessions to uninsured patients and patients with uninsured balances, such as copays and deductibles. The implicit price concessions included in estimating the transaction price represent the difference between amounts billed to patients and the amounts Sutter expects to collect based on its collection history with this portfolio of patients. Subsequent changes to the estimates are considered variable consideration and are included in Patient service revenues when information becomes available. As part of its Patient service revenues analysis, Sutter examines the fluctuations in payer, geographical area, and entity type as each factor represents a varying degree of uncertainty regarding the nature, timing, and extent of payments. The composition of Patient service revenues by payer is as follows: Year ended December 31, 2018 2017 Medicare Medi-Cal Commercial Other $ $ 2,797 1,602 6,331 227 10,957 $ $ 2,630 1,713 6,298 187 10,828 31 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 10. OPERATING REVENUES (continued) The composition of Patient service revenues based on Sutter’s area of operations and entity type are as follows: Year ended December 31, 2018 Sutter Health Sutter Health Bay Area Valley Area Acute care Medical foundation Other Eliminations $ $ 3,970 2,351 117 (89) 6,349 $ $ 3,018 1,089 29 (80) 4,056 Other $ $ 112 – 550 (110) 552 Total $ $ 7,100 3,440 696 (279) 10,957 Year ended December 31, 2017 Sutter Health Sutter Health Bay Area Valley Area Acute care Medical foundation Other Eliminations $ $ 4,072 2,183 112 (78) 6,289 $ $ 3,010 1,020 28 (75) 3,983 Other $ $ 102 – 510 (56) 556 Total $ $ 7,184 3,203 650 (209) 10,828 The State of California enacted legislation for a hospital fee program to fund certain MediCal coverage expansions. The program charges certain hospitals a quality assurance fee that is used to obtain federal matching funds for Medi-Cal, with the proceeds redistributed as supplemental payments to California hospitals that treat Medi-Cal patients. There are two hospital fee programs that had activity in 2018 and 2017: a 36-month hospital fee program covering the period from January 1, 2014 through December 31, 2016, and a 30month hospital fee program covering the period from January 1, 2017 through June 30, 2019. Supplemental payments met all criteria related to revenue recognition, and the quality assurance fees are both probable and estimable. Accordingly, all related supplemental payments have been recognized as revenue and related quality assurance fees recognized as expense as of December 31, 2018 and December 31, 2017. 32 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 10. OPERATING REVENUES (continued) Patient service revenues and Other expenses include amounts for the hospital fee program as follows: Year ended December 31, 2018 2017 Hospital fee program revenue Hospital fee program expense Income from operations from hospital fee program $ $ 577 (305) 272 $ $ 821 (389) 432 December 31, 2018 2017 Other receivables Accounts payable $ $ 561 219 $ $ 646 320 Premium revenues: Sutter has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, preferred provider organizations, and members of individual and family plans and subscribing employers for small and large cap coverage. The basis for payment to Sutter, under these agreements, includes capitated arrangements, prospectively determined rates per diagnosis, prospectively determined daily rates, rates by demographics and rates by a number of factors including experience. The transaction price may be reduced by discounts, reinsurance premiums, and implicit price concessions based on collection history. Other adjustments may include prior year settlements, stop loss recoveries, ceded premiums and risk adjustment factors. Performance obligations are satisfied over the passage of time by standing ready to provide services. Settlements with third-party payers for retroactive adjustments are considered variable consideration and are included in the determination of Premium revenues when information becomes available. Adjustments from the finalization of prior-year settlements resulted in an increase to Premium revenues of $2 and a decrease of $32 for the years ended December 31, 2018 and 2017, respectively. Adjustments arising from a change in the transaction price were not significant in 2018 and 2017. As part of its Premium revenues analysis, Sutter examines the fluctuations in geographical area and entity type, as each factor represents a varying degree of uncertainty regarding the nature, timing and extent of payments. Sutter’s premium revenue is reported at an amount that reflects the consideration to which Sutter expects to be paid. 33 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 10. OPERATING REVENUES (continued) The composition of Premium revenues based on Sutter’s area of operations and entity type is as follows: Year ended December 31, 2018 Sutter Health Sutter Health Bay Area Valley Area Acute care Medical foundation Insurance Other Eliminations $ $ 191 328 – – (1) 518 $ $ 356 341 – 29 (4) 722 Other $ $ – – 429 89 (375) 143 Total $ $ 547 669 429 118 (380) 1,383 Year ended December 31, 2017 Sutter Health Sutter Health Bay Area Valley Area Acute care Medical foundation Insurance Other Eliminations $ $ 179 309 – – (1) 487 $ $ 313 316 – 27 (5) 651 Other $ $ 1 – 320 70 (309) 82 Total $ $ 493 625 320 97 (315) 1,220 Other revenues: Sutter has additional revenue streams from tuition, health professionals, rental properties and parking. Revenue is recognized when obligations under the terms of the contract are satisfied. Revenues from these services are measured as the amount of consideration Sutter expects to receive for those services. 11. COMMUNITY BENEFIT EXPENSE Services for the poor and underserved include traditional charity care, unpaid costs of public programs treating Medi-Cal, county, and indigent beneficiaries, other services for the poor and underserved, and cash donations towards programs and services for the underserved. Charity care covers health care services provided to persons who meet certain criteria and cannot afford to pay. Sutter provided charity care services to patients at an estimated cost of $89 and $65 for 2018 and 2017, respectively. Estimated costs are based on a ratio of costs to charges. 34 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 11. COMMUNITY BENEFIT EXPENSE (continued) Benefits for the broader community include costs of providing the following services: health screenings and other health-related services, training health professionals, educating the community with various seminars and classes, the cost of performing medical research, and the costs associated with providing free clinics and community services. Benefits for the broader community also include contributions Sutter makes to community agencies to fund charitable activities. The following is a summary of Sutter’s estimated costs of providing services to the poor and broader community for the year ended December 31, 2018 (unaudited): Services for the poor and underserved Traditional charity care Unpaid costs of public programs: Medi-Cal Other public programs Other benefits for the poor and underserved Total services for the poor and underserved $ 89 435 43 58 625 Benefits for the broader community Nonbilled services Education and research Cash and in-kind donations Other community benefits Total benefits for the broader community $ 37 54 15 3 109 734 12. POSTRETIREMENT BENEFITS Sutter sponsors and participates in various employee benefit plans, including a noncontributory defined benefit plan (the “Retirement Plan”), a noncontributory defined contribution plan, and several contributory defined contribution plans. In addition, certain affiliates participate in multiemployer defined benefit retirement plans. Sutter’s total retirement benefit expense was $291 and $319 in 2018 and 2017, respectively. 35 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) Sutter’s measurement date for plan assets, pension obligations and net periodic pension cost associated with the Retirement Plan is December 31. The changes in benefit obligations and plan assets for the Retirement Plan are as follows: Year ended December 31, 2018 2017 Projected benefit obligation at beginning of year Service cost Interest cost Actuarial (gain) loss Benefits paid Projected benefit obligation at measurement date $ 4,493 276 174 (199) (162) 4,582 $ Fair value of plan assets at beginning of year Actual (loss) gain on plan assets Employer contributions Benefits paid Fair value of plan assets at measurement date $ $ $ 4,134 (239) 250 (162) 3,983 $ 3,460 673 145 (144) 4,134 Net accrued benefit cost at end of year $ (599) $ (359) $ $ 3,825 242 170 400 (144) 4,493 The accumulated benefit obligation for the Retirement Plan was $3,990 and $3,880 as of December 31, 2018 and 2017, respectively. The actuarial gain of $199 for the year ended December 31, 2018, was primarily due to the increase in discount rate of 4.3% in 2018 from 3.7% in 2017. This was offset by the cash balance interest crediting rate increase of 3.4% in 2018 from 2.8% in 2017 and changes in census data that differed from expectations. The actuarial loss of $400 for the year ended December 31, 2017, was primarily due to the decrease in discount rate of 3.7% in 2017 from 4.3% in 2016. This was offset by changes in census data and rate assumptions that differed from expectations. Unrecognized actuarial losses of $1,263 and $965 are included in Controlling net assets without donor restrictions at December 31, 2018 and 2017, respectively. 36 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) The benefits expected to be paid from the Retirement Plan in each of the next five years, and in the aggregate for the next five years, are as follows: 2019 2020 2021 2022 2023 2024–2028 $ $ 162 178 200 217 236 1,432 2,425 The actuarial assumptions used by the Retirement Plan are as follows: December 31, 2018 2017 Weighted-average discount rates for calculating pension expense Weighted-average discount rates for calculating projected benefit obligation Weighted-average rates of compensation increase for calculating pension expense Weighted-average rates of compensation increase for calculating projected benefit obligation Weighted-average interest crediting rates for calculating projected benefit expense Weighted-average interest crediting rates for calculating pension obligation Expected long-term rates of return on plan assets for calculating pension expense 3.7% 4.3% 4.3% 3.7% 4.0% 4.0% 4.0% 4.0% 2.8% 2.9% 3.4% 2.8% 7.5% 7.6% As of December 31, 2018 and 2017, the healthy mortality assumption reflected the RP2014 table (adjusted back to 2006). As of December 31, 2018, the mortality projection scale was updated to the MP-2018, with adjustments to the long-term rate of improvement at 0.75%, grading down linearly to 0.00% from age 85 to 115 and a 10-year convergence period for age and 20-year for cohort from 2014. In contrast, as of December 31, 2017, the mortality projection scale was MP-2017, with adjustments to the long-term rate of improvement at 0.75%, grading down linearly to 0.00% from age 85 to 95 and a 10-year convergence period for age and 20-year for cohort from 2013. 37 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) The components of the Retirement Plan’s net periodic benefit cost are as follows: Year ended December 31, 2018 2017 Service cost Interest cost Expected return on plan assets Amortization of actuarial loss $ $ 276 174 (303) 45 192 $ $ 242 170 (258) 66 220 In addition to the Retirement Plan, Sutter also has noncontributory postretirement health benefit plans (the “Health Plans”). Sutter’s measurement date for plan assets, retiree medical obligations and net periodic retiree medical cost associated with the Health Plans is December 31. The changes in benefit obligations for the Health Plans are as follows: Year ended December 31, 2018 2017 Projected benefit obligation at beginning of year Service cost Interest cost Actuarial (gain) loss Other change in benefit obligation Benefits paid Projected benefit obligation at measurement date $ 279 13 10 (28) 3 (12) 265 $ Fair value of plan assets at beginning of year Actual (loss) gain on plan assets Employer contributions Benefits paid Fair value of plan assets at measurement date $ $ $ 227 (13) 10 (12) 212 $ 175 40 23 (11) 227 Net accrued benefit cost at end of year $ (53) $ (52) $ $ 253 11 10 16 – (11) 279 38 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) The actuarial gain of $28 for the year ended December 31, 2018 was primarily due to discount rate increases in ranges of 4.2% to 4.3% in 2018 from ranges of 3.6% to 3.7% in 2017 and updated drawdown assumptions. The actuarial loss of $16 for the year ended December 31, 2017 was primarily due to decreases in discount rate ranges of 3.6% to 3.7% in 2017 from ranges of 3.9% to 4.2% in 2016 and by changes in termination rate assumptions. Included in Controlling net assets without donor restrictions at December 31, 2018 and 2017, are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service costs of $6 and $5, respectively, and unrecognized actuarial loss of $9 and $7, respectively. The benefits expected to be paid from the Health Plans in each of the next five years, and in the aggregate for the next five years, are as follows: 2019 2020 2021 2022 2023 2024–2028 $ 14 17 19 21 22 121 214 $ The actuarial assumptions used by the Health Plans are as follows: December 31, 2018 2017 Weighted-average discount rates for calculating retiree medical expense Weighted-average discount rates for calculating projected benefit obligation Expected long-term rates of return on plan assets for calculating retiree medical expense 3.6%–3.7% 3.9%–4.2% 4.2%–4.3% 3.6%–3.7% 7.5% 7.6% 39 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) The components of the Health Plans’ net periodic benefit cost are as follows: Year ended December 31, 2018 2017 Service cost Interest cost Expected return on plan assets Amortization of prior service cost $ $ 13 10 (17) 1 7 $ 11 10 (14) 1 8 $ Sutter’s projected medical cost trend rate related to the Health Plans for 2019 is 6.0%. The assumed medical cost trend rate is expected to gradually decrease in subsequent years to 4.8% in 2026 and thereafter. The Retirement Benefits Investment Committee oversees the investments and investment policy of the plans. Management of the assets is governed by the application of modern portfolio theory, resulting in asset class diversification and mean-variance optimization. Sutter’s investment strategy is to balance the liquidity needs of the plans with the longterm return goals necessary to satisfy future obligations. The target asset allocation seeks to reduce volatility while capturing the equity premium from the capital markets over the long term and maintaining security of principal to meet near-term expenses and obligations. The target asset allocation at December 31, 2018, by major asset category, is as follows: Major Asset Category Equity securities Fixed income securities Other investments – alternative Real estate investments Total Target Allocation 50% 15% 25% 10% 100% 40 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) Equity securities are comprised of U.S. and foreign equity securities, common and collective trusts, and commingled funds. The equity securities’ target asset allocation of 50% is further comprised of 20% domestic large capitalization, 5% domestic small capitalization and 25% international/global. The portfolio return assumption of 7.5% and 7.6% for 2018 and 2017, respectively, was based on the weighted-average return of comparative market indices for the major asset classes represented in the portfolio, net of administrative expenses. A fair value hierarchy has been established, with three levels that prioritize the valuation inputs into each level (see Note 4). The fair value and NAV of the Retirement Plan’s and the Health Plans’ assets measured on a recurring basis consist of the following: December 31, 2018 Quoted Prices in Active Significant Markets for Other Identical Observable Net Asset Instruments Inputs Value (Level 1) (Level 2) (NAV) Liquid investments: Cash equivalents $ Equity securities: U.S. equity Foreign equity Common collective trusts Commingled funds 6 $ – $ 87 Total $ 93 873 517 – – – – – – – – 365 422 873 517 365 422 88 – – – – – 3 115 113 137 50 – – – – – – 103 91 115 113 137 50 103 Other investments: Private equity funds Private equity real estate funds Commodity-linked funds Commingled funds Hedge funds – – – – – – – – – – 264 335 96 10 605 264 335 96 10 605 Accrued income 6 – – 6 418 $ 2,287 $ 4,195 Fixed income securities: U.S. government and agencies U.S. federal agency mortgage-backed Foreign government U.S. corporate Foreign corporate Common collective trusts and commingled funds Total Retirement Plan and Health Plan assets $ 1,490 $ 41 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) December 31, 2017 Quoted Prices in Active Significant Markets for Other Identical Observable Net Asset Instruments Inputs Value (Level 1) (Level 2) (NAV) Liquid investments: Cash equivalents $ Equity securities: U.S. equity Foreign equity Common collective trusts Commingled funds Fixed income securities: U.S. government and agencies U.S. federal agency mortgage-backed Foreign government U.S. corporate Foreign corporate Common collective trusts and commingled funds Other investments: Private equity funds Private equity real estate funds Commodity-linked funds Commingled funds Hedge funds Accrued income Total Retirement Plan and Health Plan assets $ 26 $ – $ 51 Total $ 77 1,004 660 – – – – – – – – 465 383 1,004 660 465 383 100 – – – – – 11 109 128 123 40 – – – – – – 113 111 109 128 123 40 113 – – 17 – – – – – – – 261 313 158 10 384 261 313 175 10 384 5 – – 5 411 $ 2,138 $ 4,361 1,812 $ There were no transfers to or from Levels 1 or 2 during the years presented. 42 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) The multiemployer defined benefit retirement plans are described below: Pension Plan Employer Identification Number/Plan Number Plan Pension Protection Act Zone Status As of January 1, 2018 2017 Funding Improvement/ Rehabilitation Plan Retirement Plan for Hospital Employees 94-2995676/001 Green Green N/A I.U.O.E. Stationary Engineers Local 39 Pension Plan 94-6118939/001 Green Green Implemented Pension Protection Act Zone Status (from worst to best): Critical Status Red Seriously Endangered Orange Endangered Yellow None of the above Green Contributions 2019 (expected) 2018 Plan Retirement Plan for Hospital Employees $ I.U.O.E. Stationary Engineers Local 39 Pension Plan 13 $ Not Available Total contributions $ 13 Collective Bargaining Agreement Expiration Date Contributions to Plan Exceeded More Than 5% of Total Contributions 16 No July 15, 2021, or prior 2018 and 2017 4 No 2017 $ 4 17 Surcharge Imposed (during 2018) $ January 31, 2022, or prior 2018 and 2017 20 For the two participating affiliates in the Retirement Plan for Hospital Employees, participant benefits were frozen for the non-contractual employees on January 1, 2011, and for the contractual employees on January 1, 2014. Both affiliates will continue to make periodic contributions as needed for eligible participants. 43 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 12. POSTRETIREMENT BENEFITS (continued) There are no minimum contributions required for future periods by the collective bargaining agreements, statutory obligations, or other contractual obligations for both plans. The risks of participating in multiemployer plans are different from single-employer plans in the following aspects: (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and (iii) if the affiliates choose to stop participating in the multiemployer plan, the affiliates may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. See Note 14 for additional information regarding the Retirement Plan for Hospital Employees. Sutter also maintains various defined contribution plans for eligible employees. Sutter’s contributions to such plans were $75 and $71 in 2018 and 2017, respectively. 44 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 13. FUNCTIONAL CLASSIFICATION OF EXPENSES Sutter groups like expenses into financial statement lines and classifies programmatic expenses by business line. Expenses that are attributable to one or more programs or supporting functions are allocated based on operating expenses, square footage, and other criteria. The following is a functional classification of Sutter’s expenses: Year ended December 31, 2018 General and Administrative Program Medical Acute care Foundation Other Eliminations Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses $ $ 3,472 1,813 998 473 52 97 56 439 7,400 $ $ 1,068 $ 2,374 344 146 95 27 8 59 4,121 $ 865 490 152 105 52 1 13 617 2,295 $ $ (274) $ (1,620) (20) (109) (35) (10) (65) (371) (2,504) $ 721 315 18 66 12 – 3 49 1,184 Total $ $ Year ended December 31, 2017 General and Program Administrative Medical Acute care Foundation Other Eliminations Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses $ $ 3,305 1,813 949 442 55 76 46 537 7,223 $ $ 971 $ 2,229 304 157 90 30 6 75 3,862 $ 912 407 143 97 53 1 10 510 2,133 $ $ (252) $ (1,492) (17) (99) (35) (2) (50) (263) (2,210) $ 691 289 12 58 13 – 3 44 1,110 5,852 3,372 1,492 681 176 115 15 793 12,496 Total $ $ 5,627 3,246 1,391 655 176 105 15 903 12,118 45 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 14. CONTINGENCIES AND COMMITMENTS Contingencies: From time to time, Sutter receives, and responds to, investigations and requests concerning possible violations of reimbursement, false claims, anti-kickback and anti-referral statutes and regulations by health care providers from federal and state regulatory agencies, including, but not limited to, the Centers for Medicare and Medicaid (CMS), the U.S. Department of Justice (DOJ), the California Attorney General, and the California Department of Public Health. Sutter is also involved in litigation such as medical malpractice and contractual disputes, as both plaintiff and defendant, and other routine labor matters, class-action complaints, tax examinations, security events resulting in potential privacy incidents, internal compliance activities (including those discussed in Operating Revenues) and regulatory investigations and examinations arising in the ordinary course of business. Based on Sutter’s assessment of the matters, the uncertainty of litigation, and the preliminary stages of many of the matters, Sutter cannot estimate the reasonable possible loss or range of loss that may result from these matters, if any. However, there can be no assurance that the resolution of any of these matters will not have a material adverse effect on Sutter’s consolidated financial position or results of operations and following is a discussion of matters of note. As a part of its compliance activities, Sutter performed an internal compliance audit related to certain physician arrangements of certain affiliates. Sutter elected to make voluntary self-disclosures to the federal government (in accordance with federal self-disclosure guidelines) related to certain physician financial arrangements that may constitute potential violations of federal regulatory standards. These disclosures were made in October and November 2010, November 2011, January 2014, and October 2014. A supplement to the disclosure was later submitted in October 2016. The resolution of the voluntary selfdisclosures was placed on hold in February 2015 when Sutter received notification of a regulatory investigation regarding certain physician financial arrangements, spanning a timeframe beginning in January 2006 through 2018. Due to the overlapping nature of the voluntary self-disclosures and investigation, discussions of these matters were consolidated. These matters could result in payments to the government and/or the imposition of additional compliance requirements. At this time, management cannot estimate the amounts of any payments or settlements that may result, or whether additional, related matters may arise. There can be no assurance that the resolution of these matters will not have a material adverse effect on Sutter’s consolidated financial position or results of operations. 46 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 14. CONTINGENCIES AND COMMITMENTS (continued) In December 2012, a plaintiff filed a civil class action lawsuit against Sutter Health and certain affiliates, alleging violations of Federal antitrust law arising out of, among other things, Sutter Health and those certain affiliates’ arrangements with health plans. Following multiple amended complaints, the court dismissed the lawsuit with prejudice, entering judgment in favor of Sutter Health and the related affiliates in June 2014. Plaintiff appealed to the Ninth Circuit and the Ninth Circuit overturned the dismissal, returning the case back to the court. The court heard Sutter Health and the related affiliates’ summary judgment motion on January 24, 2019, and the plaintiff’s motion for class certification on January 29, 2019. If the court denies the summary judgment motion and certifies the class, the lawsuit will be allowed to proceed as a class action lawsuit. The certification of the class would be a procedural decision and no decision will have been made on the substantive allegations of the lawsuit with trial anticipated in Spring 2020. There can be no assurance that the resolution of this matter will not have a material adverse effect on Sutter’s consolidated financial position or results of operations. In April 2014, UFCW & Employers Benefit Trust, a self-funded labor union trust fund which accesses the Sutter network through Sutter’s contract with Blue Shield, filed a civil class action lawsuit against Sutter Health and certain affiliates. This lawsuit alleges that Sutter Health and those certain affiliates’ contracting practices led to high prices and reduced competition for health care services in violation of state antitrust and unfair competition laws. In August 2017, the court certified the class, allowing the lawsuit to proceed as a class action lawsuit. The certification of the class is a procedural decision and no decision has been made on the substantive allegations of the lawsuit. In March 2018, the California Attorney General filed a complaint against Sutter Health and certain affiliates that mirrors UFCW & Employers Benefit Trust’s class action lawsuit. The court ordered the California Attorney General’s lawsuit consolidated with UFCW & Employers Benefit Trust’s class action lawsuit. Trial is scheduled for August 12, 2019. The consolidated lawsuits presently seek monetary damages in addition to certain injunctive relief, which would proceed to trial in the event that the court awards any monetary damages. Sutter Health and the related affiliates believe their contracting practices are in compliance with industry standards and with all applicable laws and regulations and will continue to vigorously defend the consolidated lawsuits. However, there can be no assurance that the resolution of these matters will not have a material adverse effect on Sutter’s consolidated financial position or results of operations. 47 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 14. CONTINGENCIES AND COMMITMENTS (continued) Sutter Health and one of its affiliates are finalizing contractual dispute issues with certain third-party commercial payers related to a lab outreach program. Specifically, Sutter Health and this affiliate have addressed and settled a number of these payment inquiries and are close to settling all remaining payment inquiries from third-party commercial payers. Management estimated and accrued an amount reasonably anticipated to be paid due to these payment inquiries and it is management’s opinion that payments due beyond the accrual, if any, will not have a material adverse effect on Sutter’s future consolidated financial position or results of operations. Management is also in the process of responding to inquiries from the DOJ related to the lab outreach program. Concurrently with the implementation of certain Medicare billing rules in October 2013, CMS has indicated that a written and authenticated inpatient admission order from an authorized physician was a condition of payment for Medicare billing. As a part of its compliance activities, Sutter undertook an internal compliance audit process related to these Medicare billing rules. Based on preliminary data analysis and an audit of samples of cases, management accrued an amount for potential liabilities and Sutter submitted an estimated overpayment refund. CMS accepted the overpayment refund and, to date, has not requested any additional information. The ultimate resolution of this matter will not have a material adverse effect on Sutter’s future consolidated financial position or results of operations. In June 2016, Sutter Health received notice from the DOJ that it is investigating Sutter Health and certain affiliates for potential False Claims Act violations in connection with the provision of diagnostic and other data submitted to Medicare Advantage (MA) organizations or MA plans related to MA enrollees who have received medical services from those affiliates. Sutter Health and the related affiliates provided responses to the DOJ’s document requests through rolling productions and, following extended negotiations, has agreed in principle to settle the matter on an overpayment basis as to all related affiliates except one. Management accrued an amount for potential liabilities related to this settlement. It is management’s opinion that the liability accrued will be adequate for the settlement and that the settlement will not have a material adverse effect on Sutter’s future consolidated financial position or results of operations. As to the single remaining related affiliate involved in the investigation, in March 2019, the government intervened in the lawsuit that prompted the investigation. The lawsuit, a previously sealed False Claims Act qui tam complaint that is now public, was brought by a former employee. There can be no assurance that the resolution of the lawsuit will not have a material adverse effect on Sutter’s consolidated financial position or results of operations. 48 Sutter Health and Affiliates Notes to Consolidated Financial Statements (continued) (Dollars in millions) 14. CONTINGENCIES AND COMMITMENTS (continued) Two affiliates (collectively, the “Sutter Participants”) participate in a multi-employer plan that covers certain hospital employees in the San Francisco Bay Area. The main contributing employers in the plan are the Sutter Participants, Dignity Health and Verity Health System of California, Inc., formerly known as Daughters of Charity Health System (“Verity”). On August 31, 2018, Verity filed for bankruptcy. If any of the contributing employers defaults on its plan obligations or an employer’s obligations are ultimately discharged in bankruptcy, then the funding liability of the related employer could become the responsibility of the remaining employers. As the parent of the Sutter Participants, Sutter Health could be jointly and severally liable for certain liabilities related to plan funding. The amount of any such additional liability, which remains subject to determination by the bankruptcy court and the value of the plan assets at the time of such determination, could be approximately $50. As of December 31, 2018, Sutter has approximately 53,000 employees of which approximately 25% are represented by collective bargaining units. Commitments: Sutter is required to remediate certain of its health care facilities to comply with earthquake retrofit requirements under a State of California law. Most of Sutter’s facilities are compliant or have received extensions, making the facilities compliant until 2030, and Sutter is evaluating its facilities and is considering all options. Sutter’s capital allocation plan, which includes amounts for seismic retrofits, replacement facilities and equipment, relocations and expansion, and technology investments is approximately $4,558 (unaudited) from January 1, 2019 to December 31, 2023. Management and the Board of Directors evaluate Sutter’s capital needs on an ongoing basis. 15. SUBSEQUENT EVENTS Sutter has evaluated subsequent events and disclosed all material events through March 6, 2019, which is the date these consolidated financial statements were issued. 49 Ernst & Young LLP Sacramento Office Suite 300 2901 Douglas Boulevard Roseville, CA 95661 Tel: +1 916 218 1900 Fax: +1 916 218 1999 ey.com Report of Independent Auditors on Supplementary Information The Board of Directors Sutter Health and Affiliates Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating financial statement schedules for Sutter Health and the Sutter Health – Obligated Group consolidated financial statements with consolidating details are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. ey March 6, 2019 50 A member firm of Ernst & Young Global Limited Sutter Health and Affiliates Consolidating Balance Sheet - Areas, Other and Sutter Health Support Services December 31, 2018 (Dollars in millions) Assets Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables Inventories Other Total current assets Sutter Health Bay Area Sutter Health Valley Area $ $ Non-current investments Property, plant and equipment, net Other non-current assets $ Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and related benefits Other accrued expenses Current portion of long-term obligations Total current liabilities $ Non-current liabilities: Long-term obligations, less current portion Other Net assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total net assets $ 286 337 698 522 64 22 1,929 427 5,878 92 8,326 202 263 736 28 1,229 $ $ 147 51 457 317 53 28 1,053 31 1,866 55 3,005 109 196 312 22 639 Adjustments Sutter Health and Support Services Eliminations Other $ $ $ 49 19 65 40 3 5 181 12 38 3 234 17 30 97 1 145 $ $ $ 76 4,398 21 691 7 124 5,317 513 411 327 6,568 433 157 427 6 1,023 3,379 61 1,169 25 11 7 67 1,226 3,217 19 421 3,657 8,326 1,128 4 40 1,172 3,005 69 2 71 234 4,171 74 7 4,252 6,568 $ $ $ $ $ $ Consolidated (196) $ 195 (18) (735) (754) 362 5,000 1,223 835 127 179 7,726 (76) (830) $ 983 8,193 401 17,303 - $ 1 (761) (760) 761 647 811 57 2,276 (29) $ (55) 15 (1) (41) (830) $ 4,626 1,290 8,530 112 469 9,111 17,303 51 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Areas, Other and Sutter Health Support Services Year ended December 31, 2018 (Dollars in millions) Net assets without donor restrictions: Operating revenues: Patient service revenues Premium revenues Contributions Other Total operating revenues Operating expenses: Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses Sutter Health Bay Area Sutter Health Valley Area $ $ 6,349 518 5 263 7,135 4,056 722 1 64 4,843 2,865 2,498 783 409 83 86 42 312 7,078 1,856 1,593 578 219 55 38 27 232 4,598 Adjustments Sutter Health and Support Services Eliminations Other $ 423 449 1 18 891 317 116 43 10 10 1 2 407 906 $ 195 63 1,465 1,723 $ Consolidated (66) $ (369) (1) (1,459) (1,895) 10,957 1,383 6 351 12,697 910 466 88 154 30 (10) 5 150 1,793 (96) (1,301) (111) (2) (61) (308) (1,879) 5,852 3,372 1,492 681 176 115 15 793 12,496 (16) 201 Income (loss) from operations 57 245 (15) (70) Investment income Change in net unrealized gains and losses on investments classified as trading Loss on extinguishment of debt 27 6 1 153 - 187 (7) - - - (447) (54) - (454) (54) (Loss) income 77 Less income attributable to noncontrolling interests (Loss) income attributable to Sutter Health (22) 55 251 (5) 246 (14) (14) (418) (16) (120) (35) (16) (78) (453) (32) (198) 52 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Areas, Other and Sutter Health Support Services (continued) Year ended December 31, 2018 (Dollars in millions) Net assets without donor restrictions (continued): Controlling: (Loss) income attributable to Sutter Health Change in net unrealized gains and losses on investments classified as other-than-trading Net assets released from restriction for equipment acquisition Pension-related changes other than net periodic pension cost Transfers with related entities, net Other (Decrease) increase in controlling Sutter Health Bay Area Sutter Health Valley Area $ $ Noncontrolling: Income attributable to noncontrolling interests Distributions Other Increase (decrease) in noncontrolling Net assets with donor restrictions: Contributions Investment income Change in net unrealized gains and losses on investments Net assets released from restriction Other (Decrease) increase in net assets with donor restrictions (Decrease) increase in net assets Net assets, beginning of year Net assets, end of year 55 Other $ Consolidated (14) $ (453) $ (1) 2 (13) 87 (301) 419 (32) (280) (1) 33 - 25 17 (301) 22 (435) (32) $ (198) (53) 14 (192) 21 (155) (7) 3 (229) 13 22 (19) 3 5 (4) 1 2 - 35 (51) 14 (2) 16 (15) 1 78 (74) 4 29 11 (7) (28) (22) (17) 9 (1) (6) 2 1 (1) - 1 (1) - (1) 1 1 (2) (1) 39 12 (8) (35) (24) (16) (13) 84 (282) 4,534 (41) (447) 9,558 (41) $ 9,111 (169) 3,826 $ 246 Adjustments Sutter Health and Support Services Eliminations 3,657 17 1,155 $ 1,172 $ 71 $ 4,252 $ 53 Sutter Health and Affiliates Consolidating Balance Sheet - Sutter Health Bay Area December 31, 2018 (Dollars in millions) Sutter Bay Hospitals and Affiliates Assets Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables Inventories Other Total current assets $ Non-current investments Property, plant and equipment, net Other non-current assets $ Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and related benefits Other accrued expenses Current portion of long-term obligations Total current liabilities $ Non-current liabilities: Long-term obligations, less current portion Other Net assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total net assets $ 93 326 525 498 62 21 1,525 376 4,721 55 6,677 133 167 624 28 952 Sutter Bay Medical Foundation $ $ $ 193 11 173 45 2 1 425 52 1,157 37 1,671 69 96 133 298 2,807 44 572 17 2,496 19 359 2,874 6,677 721 63 784 1,671 $ Adjustments and Eliminations $ $ $ $ Consolidated - $ (21) (21) 286 337 698 522 64 22 1,929 (1) (22) $ 427 5,878 92 8,326 - $ (21) (21) 202 263 736 28 1,229 - 3,379 61 (1) (1) (22) $ 3,217 19 421 3,657 8,326 54 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Sutter Health Bay Area Year Ended December 31, 2018 (Dollars in millions) Sutter Bay Hospitals and Affiliates Net assets without donor restrictions: Operating revenues: Patient service revenues Premium revenues Contributions Other Total operating revenues Operating expenses: Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses $ 4,080 191 5 205 4,481 Sutter Bay Medical Foundation $ Adjustments and Eliminations 2,351 328 134 2,813 $ Consolidated (82) $ (1) (76) (159) 6,349 518 5 263 7,135 (83) (63) 1 (11) 1 (4) (159) 2,865 2,498 783 409 83 86 42 312 7,078 2,146 1,090 517 305 36 65 36 277 4,472 802 1,471 266 103 58 21 5 39 2,765 9 48 - 57 Investment income Change in net unrealized gains and losses on investments classified as trading Loss on extinguishment of debt 23 4 - 27 (7) - - - (7) - (Loss) income 25 52 - 77 - - (22) 52 - 55 Income (loss) from operations Less income attributable to noncontrolling interests (Loss) income attributable to Sutter Health (22) 3 55 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Sutter Health Bay Area (continued) Year Ended December 31, 2018 (Dollars in millions) Sutter Bay Hospitals and Affiliates Net assets without donor restrictions (continued): Controlling: (Loss) income attributable to Sutter Health Change in net unrealized gains and losses on investments classified as other-than-trading Net assets released from restriction for equipment acquisition Pension-related changes other than net periodic pension cost Transfers with related entities, net Other (Decrease) increase in controlling $ $ (50) 5 (178) 22 (198) Noncontrolling: Income attributable to noncontrolling interests Distributions Other Increase (decrease) in noncontrolling (209) 3,083 $ 2,874 Consolidated $ $ $ - 55 (1) (1) (53) 14 (192) 21 (155) 1 1 22 (19) 3 7 1 (1) (11) 1 (3) (1) (1) 29 11 (7) (28) (22) (17) 41 743 (1) - (169) 3,826 (1) $ 3,657 - 22 10 (6) (17) (22) (13) (Decrease) increase in net assets Net assets, beginning of year 52 Adjustments and Eliminations (3) 9 (14) 44 22 (20) 2 Net assets with donor restrictions: Contributions Investment income Change in net unrealized gains and losses on investments Net assets released from restriction Other (Decrease) increase in net assets with donor restrictions Net assets, end of year 3 Sutter Bay Medical Foundation 784 $ 56 Sutter Health and Affiliates Consolidating Balance Sheet - Sutter Health Valley Area December 31, 2018 (Dollars in millions) Sutter Valley Sutter Valley Medical Hospitals Foundation and and Affiliates Subsidiaries Assets Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables Inventories Other Total current assets $ Non-current investments Property, plant and equipment, net Other non-current assets $ Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and related benefits Other accrued expenses Current portion of long-term obligations Total current liabilities $ Non-current liabilities: Long-term obligations, less current portion Other Net assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total net assets $ 51 50 361 313 42 27 844 31 1,546 17 2,438 85 160 189 22 456 $ $ $ 91 1 91 14 10 1 208 316 38 562 21 36 131 188 977 14 192 6 953 38 991 2,438 173 1 2 176 562 $ Roseville Endoscopy Center LLC $ $ $ 2 2 2 1 1 Sutter Amador Stanislaus Surgery Surgical Center LLC Hospital LLC Adjustments and Eliminations $ $ $ $ - $ 3 (2) 1 2 $ 2 2 - $ $ $ 3 4 1 1 9 4 16 29 2 1 1 4 - 1 5 2 2 2 12 7 19 29 $ $ $ Consolidated - $ 1 (10) (1) (10) 147 51 457 317 53 28 1,053 (18) (28) $ 31 1,866 55 3,005 1 $ (1) (10) (10) 109 196 312 22 639 (1) - $ (15) (2) (17) (28) $ 1,169 25 1,128 4 40 1,172 3,005 57 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Sutter Valley Health Area Year Ended December 31, 2018 (Dollars in millions) Sutter Valley Sutter Valley Medical Hospitals Foundation and Subsidiaries and Affiliates Net assets without donor restrictions: Operating revenues: Patient service revenues Premium revenues Contributions Other Total operating revenues Operating expenses: Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses Income (loss) from operations Investment income Change in net unrealized gains and losses on investments classified as trading Loss on extinguishment of debt (Loss) income Less income attributable to noncontrolling interests (Loss) income attributable to Sutter Health $ 2,958 385 1 58 3,402 $ 1,132 341 83 1,556 Roseville Endoscopy Center LLC $ Sutter Amador Stanislaus Surgical Surgery Center LLC Hospital LLC 10 10 $ 2 2 $ 34 2 36 Adjustments and Eliminations $ Consolidated (80) $ (4) (79) (163) 4,056 722 1 64 4,843 1,500 725 480 171 25 31 24 207 3,163 418 931 90 44 38 7 3 24 1,555 4 1 5 1 1 2 14 4 8 1 3 1 31 (76) (72) (2) 3 (11) (158) 1,856 1,593 578 219 55 38 27 232 4,598 239 1 5 - 5 (5) 245 5 1 - - - - 6 - - - - - - - 244 2 5 - 5 (5) (1) - - - (4) 1 5 - 5 (9) 244 251 (5) 246 58 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Sutter Valley Health Area (continued) Year Ended December 31, 2018 (Dollars in millions) Sutter Valley Sutter Valley Medical Hospitals Foundation and Subsidiaries and Affiliates Net assets without donor restrictions (continued): Controlling: (Loss) income attributable to Sutter Health $ Change in net unrealized gains and losses on investments classified as other-than-trading Net assets released from restriction for equipment acquisition Pension-related changes other than net periodic pension cost Transfers with related entities, net Other (Decrease) increase in controlling Noncontrolling: Income attributable to noncontrolling interests Distributions Other Increase (decrease) in noncontrolling Net assets with donor restrictions: Contributions Investment income Change in net unrealized gains and losses on investments Net assets released from restriction Other (Decrease) increase in net assets with donor restrictions (Decrease) increase in net assets Net assets, beginning of year Net assets, end of year 244 $ (7) 3 (225) 15 $ 5 Sutter Amador Stanislaus Surgical Surgery Center LLC Hospital LLC Adjustments and Eliminations $ $ - $ 5 Consolidated (9) $ 246 (4) (3) (5) - - 5 5 (4) (7) 3 (229) 13 - 1 (1) - (3) 2 (1) - - 4 (1) 3 5 (4) 1 2 7 (1) (5) 1 2 (1) 1 - - - - 9 (1) (6) 2 (1) 2 2 5 14 16 975 $ 1 Roseville Endoscopy Center LLC 991 (2) 178 $ 176 $ 1 $ 2 $ 19 $ (1) (16) 17 1,155 (17) $ 1,172 59 Sutter Health and Affiliates Consolidating Balance Sheet - Other December 31, 2018 (Dollars in millions) Kahi Mohala Assets Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables Inventories Other Total current assets $ Non-current investments Property, plant and equipment, net Other non-current assets $ Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and related benefits Other accrued expenses Current portion of long-term obligations Total current liabilities $ Non-current liabilities: Long-term obligations, less current portion Other Net assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total net assets $ Sutter Care at Home Sutter Coast Hospital 3 1 4 4 8 1 1 2 $ $ $ 1 10 6 1 18 23 41 3 3 5 1 12 $ $ $ Sutter Health Plus 3 6 52 2 2 2 67 12 8 3 90 9 25 20 54 $ $ $ Adjustments and Eliminations 46 13 31 2 92 3 95 5 1 71 77 $ $ $ Consolidated (1) $ 1 - - $ $ 49 19 65 40 3 5 181 12 38 3 234 17 30 97 1 145 2 11 - 4 1 - 11 7 4 4 8 18 18 41 30 2 32 90 17 17 95 - 69 2 71 234 $ $ $ $ $ 60 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Other Year ended December 31, 2018 (Dollars in millions) Kahi Mohala Net assets without donor restrictions: Operating revenues: Patient service revenues Premium revenues Contributions Other Total operating revenues Operating expenses: Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses $ Sutter Care at Home Sutter Coast Hospital 23 1 24 $ 89 89 $ Sutter Health Plus 311 20 1 17 349 17 3 1 1 1 23 40 25 9 5 1 1 1 2 84 242 54 33 3 8 1 13 354 Income (loss) from operations 1 5 (5) Investment income Change in net unrealized gains and losses on investments classified as trading Loss on extinguishment of debt - - 1 - - - (Loss) income 1 5 (4) Less income attributable to noncontrolling interests - - - (Loss) income attributable to Sutter Health 1 5 (4) $ 429 429 Adjustments and Eliminations Consolidated $ $ - 423 449 1 18 891 18 35 1 1 390 445 (1) 1 - 317 116 43 10 10 1 2 407 906 (16) - (15) - - 1 - - - (16) (16) - (14) (14) 61 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Other (continued) Year ended December 31, 2018 (Dollars in millions) Kahi Mohala Net assets without donor restrictions (continued): Controlling: (Loss) income attributable to Sutter Health Change in net unrealized gains and losses on investments classified as other-than-trading Net assets released from restriction for equipment acquisition Pension-related changes other than net periodic pension cost Transfers with related entities, net Other (Decrease) increase in controlling $ Noncontrolling: Income attributable to noncontrolling interests Distributions Other Increase (decrease) in noncontrolling Net assets with donor restrictions: Contributions Investment income Change in net unrealized gains and losses on investments Net assets released from restriction Other (Decrease) increase in net assets with donor restrictions (Decrease) increase in net assets Net assets, beginning of year Net assets, end of year $ Sutter Care at Home Sutter Coast Hospital 1 $ 5 $ Sutter Health Plus (4) $ Adjustments and Eliminations (16) $ - Consolidated $ (14) (4) (3) (7) (2) (1) 4 (1) 8 (8) 1 1 - - - - - - - - 1 (1) 1 1 - (1) (1) 1 (1) - (3) 7 (2) 20 32 (8) 25 - (13) 84 4 $ 18 $ 32 $ 17 $ - (1) 2 (13) $ 71 62 Sutter Health and Affiliates Consolidated Balance Sheets – Sutter Health Obligated Group (Dollars in millions) December 31, 2018 2017 Assets Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables Inventories Other Total current assets $ Non-current investments Property, plant and equipment, net Other non-current assets $ Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and related benefits Other accrued expenses Current portion of long-term obligations Total current liabilities $ Non-current liabilities: Long-term obligations, less current portion Other Net assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total net assets $ 260 4,383 1,220 792 127 173 6,955 682 8,163 397 16,197 753 641 676 57 2,127 $ $ $ 304 4,343 1,274 841 118 195 7,075 500 7,926 433 15,934 844 571 740 150 2,305 4,626 1,157 3,972 966 8,082 112 93 8,287 16,197 8,484 108 99 8,691 15,934 $ 63 Sutter Health and Affiliates Consolidated Statements of Operations and Changes in Net Assets – Sutter Health Obligated Group (Dollars in millions) Year ended December 31, 2018 2017 Net assets without donor restrictions: Operating revenues: Patient service revenues Premium revenues Contributions Other Total operating revenues Operating expenses: Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses $ 10,935 1,244 1 314 12,494 $ 10,807 1,122 3 366 12,298 5,760 3,325 1,490 676 172 115 77 652 12,267 5,536 3,218 1,389 651 173 105 62 787 11,921 Income from operations 227 377 Investment income Change in net unrealized gains and losses on investments classified as trading Loss on extinguishment of debt 168 312 (378) (54) 262 (19) (Loss) income (37) 932 Less income attributable to noncontrolling interests (78) (65) (115) 867 (Loss) income attributable to Sutter Health Obligated Group 64 Sutter Health and Affiliates Consolidated Statements of Operations and Changes in Net Assets – Sutter Health Obligated Group (continued) (Dollars in millions) Year ended December 31, 2018 2017 Net assets without donor restrictions (continued): Controlling: (Loss) income attributable to Sutter Health Obligated Group Change in net unrealized gains and losses on investments classified as other-than-trading Net assets released from restriction for equipment acquisition Pension-related changes other than net periodic pension cost Transfers with related entities, net Other (Decrease) increase in controlling $ Noncontrolling: Income attributable to noncontrolling interests Distributions Other Increase (decrease) in noncontrolling Net assets with donor restrictions: Contributions Investment income Change in net unrealized gains and losses on investments Net assets released from restriction Other (Decrease) increase in net assets with donor restrictions (Decrease) increase in net assets Net assets, beginning of year Net assets, end of year $ (115) $ 867 20 21 17 13 (301) (22) (1) (402) 91 (51) (1) 940 78 (74) – 4 65 (73) 4 (4) 12 1 (3) (16) – (6) 12 1 4 (10) (1) 6 (404) 8,691 8,287 $ 942 7,749 8,691 65 Sutter Health and Affiliates Consolidated Statements of Cash Flows – Sutter Health Obligated Group (Dollars in millions) Year ended December 31, 2018 2017 Operating activities (Decrease) increase in net assets Adjustments to reconcile (decrease) increase in net assets to net cash provided by operating activities: Loss on extinguishment of debt Depreciation and amortization Amortization of bond issuance costs, (premium) and discount, net Net realized gains and losses and change in net unrealized gains and losses on investments Restricted contributions and investment income Distributions to noncontrolling interest Loss on impairment of property, plant and equipment Loss on impairment of goodwill Net loss (gain) on disposal of property, plant and equipment Change in net postretirement benefits Net changes in operating assets and liabilities: Patient accounts receivable and other receivables Inventories and other assets Accounts payable and accrued expenses Other non-current liabilities Net cash provided by operating activities Investing activities Purchases of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchases of investments Proceeds from sales of investments Other Net cash used in investing activities $ (404) $ 942 54 647 19 629 (40) (29) 256 (13) 74 18 4 (547) (13) – 5 14 4 241 (16) (32) 103 34 (146) (49) 783 (334) (37) 523 31 1,155 (916) 33 (3,090) 2,612 (2) (1,363) (920) 19 (2,679) 2,594 (8) (994) 66 Sutter Health and Affiliates Consolidated Statements of Cash Flows – Sutter Health Obligated Group (continued) (Dollars in millions) Year ended December 31, 2018 2017 Financing activities Payments of long-term obligations Refund of bonds Proceeds from issuance of long-term obligations Bond issuance costs Bond issuance premium (discount), net Restricted contributions and investment income Distributions to noncontrolling interest Net cash provided by (used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ $ (152) (633) 1,314 (9) 77 13 (74) 536 (44) 304 260 $ $ (54) (631) 438 (4) 62 13 – (176) (15) 319 304 67 Sutter Health and Affiliates Consolidating Balance Sheet - Sutter Health Obligated Group December 31, 2018 (Dollars in millions) Sutter Bay Hospitals and Affiliates Assets Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables Inventories Other Total current assets $ Non-current investments Property, plant and equipment, net Other non-current assets $ Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and related benefits Other accrued expenses Current portion of long-term obligations Total current liabilities $ Non-current liabilities: Long-term obligations, less current portion Other Net assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total net assets $ 29 1 525 475 61 18 1,109 106 4,699 37 5,951 130 164 586 28 908 Sutter Coast Hospital $ $ $ 1 10 6 1 18 23 41 3 3 5 1 12 Sutter Bay Medical Foundation Sutter Valley Hospitals $ $ $ 46 3 361 313 42 27 792 1,544 13 2,349 85 160 186 22 453 $ $ $ 193 11 173 45 2 1 425 52 1,157 37 1,671 69 96 133 298 Sutter Valley Medical Foundation and Subsidiaries $ $ $ 91 1 91 14 10 1 208 316 38 562 21 36 131 188 Roseville Endoscopy Center LLC $ $ $ 2 2 2 1 1 2,807 20 11 - 977 14 572 17 192 6 - 2,179 19 18 2,216 5,951 18 18 41 903 2 905 2,349 721 63 784 1,671 173 1 2 176 562 3 (2) 1 2 $ $ $ $ $ 68 Sutter Health and Affiliates Consolidating Balance Sheet - Sutter Health Obligated Group (continued) December 31, 2018 (Dollars in millions) Assets Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable Other receivables Inventories Other Total current assets Sutter Amador Surgery Center LLC Stanislaus Surgical Hospital LLC $ $ Non-current investments Property, plant and equipment, net Other non-current assets $ Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and related benefits Other accrued expenses Current portion of long-term obligations Total current liabilities $ Non-current liabilities: Long-term obligations, less current portion Other Net assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total net assets $ 2 2 - $ $ 3 4 1 1 9 4 16 29 2 1 1 4 Sutter Care at Home $ $ $ 3 6 52 2 2 2 67 12 8 3 90 9 25 20 54 Sutter Health Support Services Adjustments and Eliminations $ $ $ $ 74 4,180 21 690 7 124 5,096 513 411 325 6,345 433 156 390 6 985 - 1 5 4 67 1,101 2 2 2 12 7 19 29 30 2 32 90 4,111 74 7 4,192 6,345 $ $ $ $ $ Consolidated (182) $ 181 (17) (753) 1 (1) (771) 260 4,383 1,220 792 127 173 6,955 (1) 1 (74) (845) $ 682 8,163 397 16,197 1 $ (777) (776) 753 641 676 57 2,127 (1) (10) $ (70) 13 (1) (58) (845) $ 4,626 1,157 8,082 112 93 8,287 16,197 69 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Sutter Health Obligated Group Year ended December 31, 2018 (Dollars in millions) Sutter Bay Hospitals and Affiliates Net assets without donor restrictions: Operating revenues: Patient service revenues Premium revenues Contributions Other Total operating revenues Operating expenses: Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses Income (loss) from operations Investment income Change in net unrealized gains and losses on investments classified as trading Loss on extinguishment of debt (Loss) income Less income attributable to noncontrolling interests (Loss) income attributable to Sutter Health Obligated Group $ 4,080 191 146 4,417 Sutter Coast Hospital $ Sutter Valley Hospitals 89 89 $ 2,958 385 60 3,403 Sutter Valley Medical Foundation and Subsidiaries Sutter Bay Medical Foundation $ 2,351 328 134 2,813 $ 1,132 341 83 1,556 Roseville Endoscopy Center LLC $ 10 10 2,086 1,075 516 302 32 65 35 267 4,378 40 25 9 5 1 1 1 2 84 1,497 724 480 171 25 31 24 206 3,158 802 1,471 266 103 58 21 5 39 2,765 418 931 90 44 38 7 3 24 1,555 4 1 5 39 5 245 48 1 5 7 - 3 4 1 - - - - - - - 46 5 248 52 2 5 (22) - - - (1) - 24 5 248 52 1 5 70 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Sutter Health Obligated Group (continued) Year ended December 31, 2018 (Dollars in millions) Sutter Amador Stanislaus Surgery Surgical Center LLC Hospital LLC Net assets without donor restrictions: Operating revenues: Patient service revenues Premium revenues Contributions Other Total operating revenues $ 2 2 $ 34 2 36 Sutter Care at Home $ 311 20 1 17 349 Sutter Health Support Services Adjustments and Eliminations $ $ 195 1,469 1,664 Consolidated (227) $ (21) (1,597) (1,845) 10,935 1,244 1 314 12,494 910 463 88 154 30 (10) 8 116 1,759 (249) (1,427) (2) (107) (23) (16) (1,824) 5,760 3,325 1,490 676 172 115 77 652 12,267 Operating expenses: Salaries and employee benefits Purchased services Supplies Depreciation and amortization Rentals and leases Interest Insurance Other Total operating expenses 1 1 2 14 4 8 1 3 1 31 Income (loss) from operations - 5 (5) (95) (21) 227 Investment income Change in net unrealized gains and losses on investments classified as trading Loss on extinguishment of debt - - 1 153 (1) 168 - - - (378) (54) - (378) (54) (Loss) income - 5 (4) (374) (22) (37) Less income attributable to noncontrolling interests - - - (35) (20) (78) (Loss) income attributable to Sutter Health Obligated Group - 5 (4) (409) (42) (115) 242 54 33 3 8 1 13 354 71 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Sutter Health Obligated Group (continued) Year ended December 31, 2018 (Dollars in millions) Sutter Bay Hospitals and Affiliates Net assets without donor restrictions (continued): Controlling: (Loss) income attributable to Sutter Health Change in net unrealized gains and losses on investments classified as other-than-trading Net assets released from restriction for equipment acquisition Pension-related changes other than net periodic pension cost Transfers with related entities, net Other (Decrease) increase in controlling Noncontrolling: Income attributable to noncontrolling interests Distributions Other Increase (decrease) in noncontrolling $ 0 Net assets with donor restrictions: Contributions Investment income Change in net unrealized gains and losses on investments Net assets released from restriction Other (Decrease) increase in net assets with donor restrictions (Decrease) increase in net assets Net assets, beginning of year Net assets, end of year 24 Sutter Coast Hospital $ $ 248 (8) 5 (192) (2) (173) (7) (2) 22 (20) 2 - - 2 (2) (2) (2) - 1 (1) (1) (1) (173) 2,389 $ Sutter Valley Hospitals 5 2,216 $ 18 $ (1) 3 (229) 21 (2) 20 905 52 $ (3) 9 (14) 44 7 1 (1) (11) 1 (3) 20 885 $ Sutter Valley Medical Foundation and Subsidiaries Sutter Bay Medical Foundation 41 743 $ 784 1 Roseville Endoscopy Center LLC $ (4) (3) (5) - 1 (1) - (3) 2 (1) 2 (1) 1 - (2) 178 $ 5 176 (1) 2 $ 1 72 Sutter Health and Affiliates Consolidating Statement of Operations and Changes in Net Assets - Sutter Health Obligated Group (continued) Year ended December 31, 2018 (Dollars in millions) Net assets without donor restrictions (continued): Controlling: (Loss) income attributable to Sutter Health Change in net unrealized gains and losses on investments classified as other-than-trading Net assets released from restriction for equipment acquisition Pension-related changes other than net periodic pension cost Transfers with related entities, net Other (Decrease) increase in controlling Sutter Amador Surgery Center LLC Stanislaus Surgical Hospital LLC $ $ - 5 Sutter Care at Home $ Sutter Health Support Services Adjustments and Eliminations (4) $ (409) $ Consolidated (42) $ (115) - 5 (1) 4 (1) 33 (301) 419 (32) (290) 1 38 (3) 20 17 (301) (22) (1) (402) - - - 35 (51) 14 (2) 20 1 (16) 5 78 (74) 4 Net assets with donor restrictions: Contributions Investment income Change in net unrealized gains and losses on investments Net assets released from restriction Other (Decrease) increase in net assets with donor restrictions - - 1 (1) 1 1 1 (1) - (2) 1 (1) (2) 12 1 (3) (16) (6) (Decrease) increase in net assets Net assets, beginning of year 2 5 14 (292) 4,484 (58) (404) 8,691 (58) $ 8,287 Noncontrolling: Income attributable to noncontrolling interests Distributions Other Increase (decrease) in noncontrolling Net assets, end of year $ 2 $ 19 32 $ 32 $ 4,192 $ 73 CONTINUING DISCLOSURE REPORT OF SUTTER HEALTH FOR THE YEAR ENDED DECEMBER 31, 2018 This report (the “Continuing Disclosure Report”) contains an update of certain information contained in Appendix A of the Official Statements related to the issues identified below (collectively, the “Bonds”) pursuant to Sutter Health’s undertakings under the related continuing disclosure agreements (collectively, the “Disclosure Agreements”). Unless otherwise required by the context, all terms used herein that are defined in the bond indentures, by and between Sutter Health and Wells Fargo Bank, National Association related to the Bonds shall have the meanings assigned to them therein, except as set forth herein. Bonds CUSIP* California Health Facilities Financing Authority Revenue Bonds (Sutter Health), Series 2008A 13033F2X7 California Statewide Communities Development Authority Revenue Bonds (Sutter Health), Series 2011A 1307952J5, 1307952K2 California Health Facilities Financing Authority Revenue Bonds(Sutter Health), Series 2011B 13033LKP1, 13033LKQ9 California Statewide Communities Development Authority Revenue Bonds (Sutter Health), Series 2011C 1307954M6, 1307954N4, 1307954P9, 1307954V6, 1307954Q7, 1307954W4, 1307954R5, 1307954X2, 1307954S3, 1307954T1, 1307954Y0, 1307954U8 California Health Facilities Financing Authority Revenue Bonds (Sutter Health), Series 2011D 13033LVM6, 13033LVN4, 13033LVP9, 13033LVQ7, 13033LVR5, 13033LVS3, 13033LVT1, 13033LVU8, 13033LVX2, 13033LVV6, 13033LVW4 California Statewide Communities Development Authority Revenue Bonds (Sutter Health), Series 2012A 1307956A0, 1307956R3, 1307956M4,1307956B8, 1307956N2, 1307956C6, 1307956D4, 1307956P7, 1307956E2, 1307956F9, 1307956G7, 1307956H5, 1307956J1, 1307956Q5, 1307956S1, 1307956K8 California Health Facilities Financing Authority Revenue Bonds (Sutter Health), Series 2013A 13033LW52 Sutter Health Taxable Bonds, Series 2013C 86944BAC7 California Health Facilities Financing Authority Refunding Revenue Bonds (Sutter Health) Series 2015A 13032UAQ1, 13032UAR9 ____________________ * A registered trademark of The American Bankers Association. CUSIP is provided by Standard & Poor’s CUSIP Service Bureau, a Standard & Poor’s Financial Services LLC business. CUSIP numbers are provided for convenience of reference only. Sutter Health does not assume any responsibility for the accuracy of such numbers. California Health Facilities Financing Authority Revenue Bonds (Sutter Health), Series 2016A 13032UBT4, 13032UBU1, 13032UBV9, 13032UBW7, 13032UBX5,13032UBY3, 13032UBZ0, 13032UCA4, 13032UCB2, 13032UCC0, 13032UCD8, 13032UCE6, 13032UCF3, 13032UCG1, 13032UCH9, 13032UCJ5, 13032UCL0, 13032UCK2 California Health Facilities Financing Authority Refunding Revenue Bonds (Sutter Health), Series 2016B 13032UDD7, 13032UDE5, 13032UDF2, 13032UDG0, 13032UDH8, 13032UDJ4, 13032UDK1, 13032UDL9, 13032UDM7, 13032UDN5, 13032UDP0, 13032UDQ8, 13032UDR6, 13032UDS4, 13032UDV7, 13032UDT2, 13032UDU9 California Health Facilities Financing Authority Revenue Bonds (Sutter Health), Series 2016C 13032UDW5 California Health Facilities Financing Authority Refunding Revenue Bonds (Sutter Health), Series 2017A 13032UNK0, 13032UNL8, 13032UNM6, 13032UNN4, 13032UNP9, 13032UNQ7, 13032UNR5, 13032UNS3, 13032UNT1, 13032UNU8, 13032UNV6, 13032UNW4, 13032UNX2, 13032UNY0 California Health Facilities Financing Authority Revenue Bonds (Sutter Health), Series 2018A 13032UQS0, 13032UQT8, 13032UQU5, 13032UQV3, 13032UQW1,13032UQX9, 13032UQY7, 13032UQZ4, 13032URA8, 13032URB6, 13032URC4, 13032URD2, 13032URE0, 13032URF7, 13032URG5, 13032URH3, 13032URJ9, 13032URK6, 13032URL4, 13032URM2, 13032URN0, 13032URP5 Sutter Health Taxable Bonds, Series 2018A 86944BAD5, 86944BAE3 Employees, Unions and Collective Bargaining Units As of December 31, 2018, the Sutter Health system had approximately 53,000 employees, of whom approximately 34,000 were full-time employees. Approximately 5,000 of these 53,000 employees were employed by Sutter Health and the remaining employees were employed by Affiliated Entities. Approximately 25% of these employees (employed at 21 Sutter Health facilities) were represented by collective bargaining units, with 52 collective bargaining agreements in place that remain subject to renegotiation from time to time. In connection with renegotiation of the collective bargaining agreements there could be work stoppages or other adverse labor actions and potential sympathy walkouts. Labor strikes have occurred in the past at the Obligated Group’s facilities and likely will occur again in the future. List of Obligated Group Members As of December 31, 2018, the Obligated Group Members consisted of the following: • • • • Sutter Bay Hospitals Sutter Bay Medical Foundation Sutter Coast Hospital Sutter Health • Sutter Valley Hospitals • Sutter Valley Medical Foundation • Sutter Visiting Nurse Association and Hospice Obligated Group Utilization Data The following table summarizes the Obligated Group’s acute care facility utilization data for the fiscal year ended December 31, 2018. No Obligated Group long-term care facility utilization data is provided as Mills-Peninsula Skilled Nursing, Sutter Health’s last remaining freestanding skilled nursing facility operating under its own license and Medicare provider number was sold outside of the Sutter Health system on June 30, 2015. This sale did not have a material adverse effect on the financial condition of the Obligated Group. Obligated Group Acute Care Facility Utilization Data Fiscal Year Ended December 31, 2018 Licensed Beds(1) Beds in Service Admissions(2) Patient Days(2) Average Length of Stay (Days) Occupancy %(3) Emergency Room Visits(4) 4,393 4,215 187,713 846,919 4.5 55.0% 844,249 _________________________________________________ (1) (2) (3) (4) Conforms to the Office of Statewide Health Planning and Development’s definition of “licensed bed.” Excluding well newborns. Based on Beds in Service. Does not include Emergency Room patients subsequently admitted as inpatients. Obligated Group Medical Foundations Operating Data The following table summarizes the operating data for medical foundations within the Obligated Group for the fiscal year ended December 31, 2018. Obligated Group Medical Foundations Operating Data Fiscal Year Ended December 31, 2018 2,498 315 9,159,694 Physicians Facilities Outpatient Visits Sources of Revenues Following are summaries of gross patient revenue for the Obligated Group by payer source for the fiscal year ended December 31, 2018. Obligated Group Payer Mix December 31, 2018 Medicare Medi-Cal Commercial Programs Other Payers NonCapitated Capitated NonCapitated Capitated NonCapitated Capitated Total Obligated Group 38.4% 4.6% 18.4% 0.4% 31.1% 3.8% 3.3% Acute Care Hospitals 40.7% 4.4% 21.9% 0.4% 26.3% 2.5% 3.8% Medical Foundations 30.1% 4.9% 5.9% 0.4% 48.5% 8.8% 1.4% The following table summarizes the number of individuals in each region for whom certain physician independent practice associations and Sutter Health system medical foundation corporations provide health care services on a capitated basis as of December 31, 2018. Capitated members’ lives covered by both Sutter Health’s hospital corporations and these physician associations and corporations are not included in the following table. Sutter Health Capitated Members (1) December 31, 2018 Sutter Health Valley Area Capitated Members (1) 150,707 Sutter Health Total Bay Area 148,809 299,516 Includes Aligned IPAs, which are Non-Obligated Group Members. Summary Financial Information A copy of Sutter Health’s audited financial statements for the fiscal year ended December 31, 2018 (the “Financial Statements”) has been provided within this package. Please note that this Continuing Disclosure Report should be read in conjunction with the Financial Statements. Included within the Financial Statements is a summary statement of operations of the Obligated Group and a summary balance sheet of the Obligated Group, each for the fiscal year ended December 31, 2018. Fixed Payment Coverage Ratio The table below sets forth the actual Obligated Group’s funds generated to cover fixed payments for the fiscal year 2018, and the Obligated Group’s maximum annual fixed payment requirements of long-term debt and capital leases outstanding for that period. Sutter Health Obligated Group Fixed Payment Coverage Ratio (dollars in millions) Fiscal Year Ended December 31, 2018 Income (Loss) (1) Depreciation, amortization, loss on disposal of assets Interest expense Loss on extinguishment of debt Income available for debt service(2) Interest and principal on long-term debt and payment requirements on capital leases(3) Fixed payment coverage ratio (times) $ (115) 676 115 54 730 $ 272 2.7 ___________________________ (1) (2) (3) In accordance with the Master Indenture, includes certain operating and non-operating income (or loss), including, but not limited to, a change in net unrealized gains and losses on investments. While the Sutter Health Obligated Group reported a change in net unrealized gains and losses on investments of $262 million for the fiscal year ended December 31, 2017, it reported a change in net unrealized gains and losses on investments of ($378) million for fiscal year ended December 31, 2018 due to volatility in equity markets in the fourth quarter. The shift in overall performance between fiscal years December 31, 2017 and December 31, 2018 is also due to the recognition of multiple years of revenue from the Hospital Fee Program in fiscal year ended December 31, 2017. For fiscal year ended December 31, 2017, the Sutter Health Obligated Group recognized $432 million from the Hospital Fee Program compared to $272 million for fiscal year ended December 31, 2018. Calculated in accordance with the Master Indenture. Assumes an annual interest rate of 5.00% on the Sutter Health Taxable Bonds Series 2013C and an annual interest rate of 4.00% on the California Health Facilities Financing Authority Revenue Bonds (Sutter Health), Series 2016C, from their respective mandatory tender dates until maturity. Capitalization The following table sets forth the actual capitalization of the Obligated Group as of December 31, 2018. Capitalization of the Obligated Group (dollars in millions) Fiscal Year Ended December 31, 2018 Long-Term Debt, including current portion Total Long-Term Debt $ 4,336 4,336 Net Assets: Without donor restrictions: Controlling Noncontrolling With donor restrictions Total Net Assets 8,082 112 93 8,287 Total Capitalization Long-Term Debt to Capitalization Ratio $12,623 34.3% Contractual Obligations and Other Contingent Commercial Commitments of the Obligated Group The Obligated Group’s contractual debt and capital lease obligations at December 31, 2018, are shown in the table below. Contractual Debt and Capital Lease Obligations As of December 31, 2018 (dollars in thousands) Long-term debt – bond principal (1) Capital Leases (2) ___________________________ (1) (2) Secured under the Master Indenture. Not secured under the Master Indenture. Total Outstanding Current Portion Non Current 2020 - 2021 Non Current 2022 & thereafter $ 4,336,575 $ 8,070 50,070 1,124 98,725 1,627 4,187,780 5,319 The Obligated Group also is obligated with respect to the following contingent obligations, which are secured under the Master Indenture. Sutter Health management expects to renew or replace any letters of credit as they expire, in accordance with the terms of such letters of credit. Contingent Commercial Obligations As of December 31, 2018 (dollars in thousands) Letters of credit Total Outstanding Commitment Total Outstanding Commitment Due Fiscal Year 2019 Total Outstanding Commitment Due Fiscal Year 2020 and . thereafter $60 $60 . $0 Other Matters . This Continuing Disclosure Report is provided solely pursuant to the Disclosure Agreements. The filing of this Continuing Disclosure Report does not constitute or imply any representation (i) that all of the information provided herein is material to investors, (ii) regarding any other financial, operating or other information about Sutter Health, the Obligated Group Members or the Bonds, or (iii) that no changes, circum.stances or events have occurred since the end of the quarter to which this Continuing Disclosure Report relates (other than as contained in this Continuing Disclosure Report), or any other date specified with respect to any of the information contained in this Continuing Disclosure Report, or that no other information exists, which may have a bearing on the security for the Bonds, or an investor's decision to buy, sell, or hold the Bonds. The information contained in this Continuing Disclosure. Report has been obtained from sources which are believed to be reliable, but such information is not guaranteed .as to accuracy or completeness. No statement in this Continuing Disclosure Report should be construed as P prediction or representation about future financial performance of Sutter Health or any Obligated Group Member. Dated: March 6, 2019 SUTIER HEALTH, a California nonprofit public benefit corporation, on behalf of itself and the other Obligated Group Members By: Senior Vice President and Chief Financial Officer Officer's Certificate of the Corporation as to Compliance with No Event of Default Covenant I, Jeff Sprague, Senior Vice President and Chief Financial Officer of Sutter Health (formerly Sutter Health/California Healthcare System), do hereby certify, in accordance with Section 3.09(c) of the Master Indenture of Trust by and between Sutter Health, the other Obligated Group Members (as defined therein) and U. S. Bank Trust, National Association, as Trustee, dated August 1, 1985, that, to the best of my knowledge, No event which constitutes an Event of Default has occurred and is continuing as of the date of this certificate. Certified by: Jeff Spgue "'2i Senior Vice President and Chief Financial Officer Sutter Health March 6, 2019 Supplemental Information Acute Care Payer Mix As of December 31, 2018 Medicare Non-Capitated Risk Medi-Cal Non-Capitated Risk Commercial Non-Sutter Risk Risk Other Total Sutter Medical Center-Sacramento 32.6% 6.9% 24.1% 0.0% 23.0% 4.8% 8.6% 100.0% Sutter Solano Medical Center 45.0% 0.0% 35.8% 0.0% 16.8% 0.3% 2.1% 100.0% Sutter Davis Hospital 34.1% 7.9% 22.5% 0.0% 28.6% 5.0% 1.9% 100.0% Sutter Coast Hospital 49.0% 0.0% 28.4% 0.0% 20.1% 0.0% 2.5% 100.0% Sutter Delta Medical Center 42.8% 1.2% 35.2% 0.0% 17.1% 0.6% 3.1% 100.0% Sutter Auburn Faith Hospital 49.9% 11.5% 14.3% 0.0% 19.0% 3.6% 1.7% 100.0% Sutter Tracy Community Hospital 34.7% 0.0% 30.6% 0.0% 30.6% 0.8% 3.3% 100.0% Sutter Roseville Medical Center 40.7% 8.4% 16.8% 0.0% 27.1% 4.4% 2.6% 100.0% California Pacific Medical Center 42.9% 0.3% 15.8% 2.7% 33.6% 1.2% 3.5% 100.0% Sutter Maternity and Surgery Center 35.3% 0.3% 9.3% 0.0% 51.8% 2.0% 1.3% 100.0% Mills Peninsula Medical Center 44.3% 7.0% 10.4% 0.0% 34.5% 2.3% 1.5% 100.0% Sutter Lakeside Hospital 49.5% 0.0% 31.6% 0.0% 16.9% 0.0% 2.0% 100.0% Memorial Medical Center & Memorial Hospital Los Banos 37.3% 12.3% 25.2% 0.0% 20.6% 2.8% 1.8% 100.0% Novato Community Hospital 54.8% 0.6% 16.6% 0.0% 25.1% 0.8% 2.1% 100.0% Alta Bates Summit Medical Center 42.3% 0.5% 25.4% 0.0% 26.3% 1.1% 4.4% 100.0% Sutter Santa Rosa Regional Hospital 40.0% 25.0% 0.0% 23.4% 4.7% 2.9% 100.0% Sutter Amador Hospital 58.1% 4.0% . 0.3% 19.8% 0.0% 20.0% 0.1% 1.7% 100.0% Eden Medical Center 46.0% 0.3% 26.3% 0.0% 24.1% 0.7% 2.6% 100.0% Menlo Park Surgical Hospital 25.2% 1.2% 1.2% 0.0% 67.2% 3.0% 2.2% 100.0% Total Acute Care Payer Mix (%) 40.7% 4.4% 21.9% 0.4% 26.3% 2.5% 3.8% 100.0% Sutter Health Acute Care Utilization Statistics Obligated Group Total Current Licensed Beds 1 Beds in Service 2 Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Medical Center Sacramento Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Novato Community Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Coast Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Solano Medical Center Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues 2015 2016 2017 2018 4,470 4,062 189,568 873,732 4.6 58.9% 867,113 8,539,528,847 22,446,229,479 38.0% 4,466 4,055 198,185 892,592 4.5 60.3% 873,966 8,945,870,751 23,297,759,241 38.4% 596 596 31,724 149,047 4.7 69% 99,339 922,966,113 3,443,026,546 26.8% 596 596 31,847 155,098 4.9 98% 100,427 1,056,165,987 3,622,494,769 29.2% 596 596 33,245 158,148 4.8 73% 103,164 1,157,778,686 3,752,406,962 30.9% 596 596 31,535 149,266 4.7 69% 102,807 1,265,776,574 3,832,767,608 33.0% 47 47 1,633 5,598 3.4 33% 14,850 130,529,111 239,930,956 54.4% 47 47 1,790 6,111 3.4 36% 15,087 133,630,040 236,086,089 56.6% 47 47 1,828 6,367 3.5 37% 15,299 141,866,011 243,095,349 58.4% 47 47 1,944 6,131 3.2 36% 15,478 133,036,039 238,712,981 55.7% 49 49 1,877 6,271 3.3 35% 21,508 139,655,822 207,687,669 67.2% 45 42 2,075 8,052 3.9 53% 22,326 145,151,304 231,521,955 62.7% 49 46 4,448 9,571 2.2 57% 21,329 157,433,263 263,008,669 59.9% 49 49 2,394 9,564 4.0 53% 19,655 162,356,102 271,793,256 59.7% 102 102 4,098 17,152 4.2 46% 41,559 268,727,064 552,635,232 48.6% 102 102 4,246 17,786 4.2 48% 40,898 261,713,920 561,339,759 46.6% 106 106 4,456 18,781 4.2 49% 38,291 264,129,826 582,858,678 45.3% 106 106 4,087 17,336 4.2 45% 35,062 265,278,110 568,324,186 46.7% 4,466 4,393 4,082 4,215 193,202 187,713 868,809 846,919 4.5 4.5 58.3% 55.0% 868,837 844,249 9,355,708,283 9,774,679,432 23,521,450,120 24,061,534,271 39.8% 40.6% Sutter Health Acute Care Utilization Statistics Sutter Davis Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Auburn Faith Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Delta Medical Center Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Lakeside Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Amador Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues 2015 2016 2017 2018 48 48 3,574 9,209 2.6 53% 28,595 209,171,532 361,729,281 57.8% 48 48 3,710 9,896 2.7 56% 29,164 237,349,125 405,969,707 58.5% 48 48 3,918 11,030 2.8 63% 29,242 255,391,580 439,011,463 58.2% 48 48 3,810 10,877 2.9 62% 29,078 263,065,734 450,202,076 58.4% 64 64 3,482 11,232 3.2 48% 28,206 254,471,262 433,807,323 58.7% 64 64 3,678 12,098 3.3 52% 29,855 293,208,717 486,805,923 60.2% 64 64 3,036 10,480 3.5 45% 29,528 299,727,539 478,903,937 62.6% 64 64 3,076 10,240 3.3 44% 28,947 332,632,224 515,067,596 64.6% 145 145 8,189 31,101 3.8 59% 59,696 293,022,249 782,414,063 37.5% 145 145 7,966 29,381 3.7 56% 60,913 296,759,044 764,037,914 38.8% 145 145 7,491 28,993 3.9 55% 58,705 319,798,959 791,202,016 40.4% 145 145 7,411 27,864 3.8 53% 54,403 317,074,807 798,960,253 39.7% 30 30 1,704 5,790 3.4 53% 19,692 126,671,126 192,087,691 65.9% 30 30 1,718 5,575 3.2 51% 20,545 145,558,463 202,408,991 71.9% 30 30 1,844 5,930 3.2 54% 20,553 170,838,123 237,088,270 72.1% 30 30 1,917 6,110 3.2 56% 19,783 168,313,799 234,816,323 71.7% 52 52 2,525 9,107 3.6 48% 23,219 115,888,894 245,843,424 47.1% 52 52 2,400 8,705 3.6 46% 24,648 143,621,764 263,901,962 54.4% 52 52 2,411 8,725 3.6 46% 24,276 152,524,815 274,519,970 55.6% 52 52 2,396 8,881 3.7 47% 23,215 158,868,056 289,980,042 54.8% Sutter Health Acute Care Utilization Statistics Sutter Tracy Community Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Roseville Medical Center Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Maternity and Surgery Center Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Sutter Santa Rosa Regional Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Memorial Medical Center & Memorial Hospital Los Banos Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues 2015 2016 2017 2018 81 81 3,949 12,121 3.1 41% 38,236 277,752,731 462,086,653 60.1% 81 81 3,931 12,314 3.1 42% 38,003 257,997,832 450,730,541 57.2% 77 77 3,826 12,259 3.2 44% 36,944 266,167,563 455,391,247 58.4% 77 77 3,661 11,132 3.0 40% 35,846 274,177,942 455,080,816 60.2% 328 328 19,575 84,021 4.3 70% 79,268 551,990,731 1,746,697,892 31.6% 328 328 20,195 91,669 4.5 77% 80,555 652,145,291 2,042,326,471 31.9% 328 328 19,799 87,783 4.4 73% 80,823 748,886,023 2,198,779,605 34.1% 328 328 19,837 86,163 4.3 72% 81,554 845,520,330 2,268,781,541 37.3% 30 30 1,426 4,061 2.8 37% 110,554,585 169,634,733 65.2% 30 30 1,540 4,133 2.7 38% 121,024,770 179,785,088 67.3% 30 30 1,535 3,903 2.5 36% 140,004,621 200,799,150 69.7% 30 30 1,331 3,477 2.6 32% 149,983,259 204,101,797 73.5% 84 84 6,071 25,019 4.1 82% 31,218 262,020,726 613,488,034 42.7% 84 84 6,199 25,614 4.1 84% 35,047 331,352,883 748,992,688 44.2% 84 84 6,580 23,606 3.6 77% 34,545 365,115,148 790,730,801 46.2% 84 84 6,785 25,516 3.8 83% 35,275 399,278,618 882,400,936 45.2% 467 467 18,322 82,350 4.5 48% 113,250 1,036,647,249 2,459,261,854 42.2% 467 467 18,781 81,569 4.3 48% 109,833 938,506,158 2,390,429,201 39.3% 463 463 18,972 79,039 4.2 47% 114,186 1,033,162,656 2,456,921,461 42.1% 459 419 18,718 79,308 4.2 52% 110,821 1,147,110,817 2,582,267,792 44.4% Sutter Health Acute Care Utilization Statistics Alta Bates Summit Medical Center Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Mills-Peninsula Medical Center Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Menlo Park Surgical Hospital Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues California Pacific Medical Center Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues Eden Medical Center Current Licensed Beds Beds in Service Admissions Patient Days Average Length of Stay % Occupancy Based on Beds in Service Emergency Room Visits Outpatient Revenues Total Gross Revenues Outpatient Revenue as % of Total Revenues 2015 2016 2017 2018 918 752 29,707 166,842 5.6 61% 92,725 1,338,187,018 3,688,016,415 36.3% 918 752 35,545 164,653 4.6 60% 92,259 1,403,019,029 3,756,539,195 37.3% 918 779 29,875 155,393 5.2 55% 91,201 1,278,475,234 3,520,663,986 36.3% 918 780 29,225 151,871 5.2 53% 86,942 1,316,271,174 3,646,856,642 36.1% 301 301 13,334 58,397 4.4 53% 48,066 707,742,002 1,522,299,541 46.5% 301 301 13,060 58,508 4.5 53% 48,376 748,533,452 1,598,683,989 46.8% 301 301 13,391 58,741 4.4 53% 48,737 791,752,546 1,676,105,179 47.2% 301 301 13,447 59,393 4.4 54% 48,189 803,421,548 1,744,900,968 46.0% 16 16 214 312 1.5 5% 36,146,914 47,062,490 76.8% 16 16 214 279 1.3 5% 38,556,378 49,948,795 77.2% 16 16 230 366 1.6 6% 36,647,595 52,410,044 69.9% 16 16 225 365 1.6 6% 36,801,597 54,086,272 68.0% 982 740 30,060 157,439 5.2 58% 81,633 1,303,298,649 4,130,139,887 31.6% 982 740 30,042 162,432 5.4 60% 78,155 1,303,673,669 4,121,257,394 31.6% 982 740 27,417 152,251 5.6 56% 74,971 1,349,064,589 3,895,545,111 34.6% 913 913 26,842 145,361 5.4 44% 70,240 1,311,541,064 3,807,830,714 34.4% 130 130 8,104 38,663 4.8 81% 46,053 454,085,069 1,148,379,795 39.5% 130 130 9,248 38,719 4.2 82% 47,875 437,902,925 1,184,498,810 37.0% 130 130 8,900 37,443 4.2 79% 47,043 426,943,506 1,212,008,222 35.2% 130 130 9,072 38,064 4.2 80% 46,954 424,171,638 1,214,602,472 34.9% Notes: 1. The calculation of current licensed beds conforms to the Office of Statewide Health Planning and Development’s definition of “licensed bed."