Audited Financial Statements Disclosure For the Twelve-Month Period Ended December 31, 2019 Contents     Management’s Discussion & Analysis Consolidated Audited Financial Statements Utilization Statistics Financial Ratios & Analyses BON SECOURS MERCY HEALTH Management?s Discussion Analysis For the Twelve-Month Period Ended December 31, 2019 and 2018 BON SECOURS MERCY Management?s Discussion and Analysis of Recent Financial Performance Year Ended December 31, 2019 ABOUT BON SECOURS MERCY HEALTH OUR MISSION Bon Secours Mercy Health (or BSMH) is a health care ministry of the Catholic Church, serving communities in seven states in the US and five cities in Ireland. Through hospitals, physician clinics, a variety of care delivery sites and social services programs, we improve the health of entire communities. Bon Secours Mercy Health is sponsored by Bon Secours Mercy Ministries, a public juridic person of the Roman Catholic Church. BSMH’s Mission is “to extend the compassionate ministry of Jesus by improving the health and well-being of our communities and bring good help to those in need, especially people who are poor, dying and underserved.” OUR ORGANIZATION On September 1, 2018, Bon Secours Health System and Mercy Health combined to become the United States’ fifth largest Catholic health care ministry and one of the nation’s 20 largest health care systems. Bon Secours Mercy Health has a deep commitment to corporate and financial responsibility. Our senior leaders set the tone for the entire organization, reinforcing our commitment to "doing the right thing," which is rooted in our religious heritage and core values. Almost two centuries ago, the historical founders of BSMH established congregations dedicated to providing care to those in need. BSMH continues their legacy, providing high-quality, compassionate and affordable health care services. That commitment is fulfilled by more than 60,000 employees serving communities throughout Florida, Kentucky, Maryland, New York, Ohio, South Carolina, Virginia, and Ireland. OUR STRATEGY To support the Mission, the ministry’s Strategic Plan is built on four pillars: Improve Community Health and Well-Being, Deliver Clinical and Operational Excellence, Strengthen Culture and Capabilities, and Innovate and Grow. These pillars are described below and serve as the foundation for programs, investments and innovation across BSMH. Our Values Human dignity Integrity Compassion Stewardship Service Our Vision Inspired by God’s hope for the world, we will be a ministry where associates want to work, clinicians want to practice, people seek wellness and communities thrive. Improve Community Health and Well Being. Under this strategic pillar, BSMH strives to “bring good help to those in need” reaffirming its Mission and Values by engaging its patients and the communities it serves. BSMH has a range of initiatives focused on social determinants of health, education and training opportunities, as well as wellness and prevention services. BSMH, in partnership with local and state governments and nonprofits, is focusing on education, prevention and treatment efforts to reduce the societal and economic impact of addiction. In addition to these efforts, the ministry addresses the behavioral health needs in communities it serves. BSMH promotes advocacy priorities related to environmental stewardship, non-violence, immigration reform and health care for all. Deliver Clinical and Operational Excellence. BSMH has a range of initiatives to enhance timely and convenient patient access, deliver a differentiated patient experience, focus on patient safety, ensure continuity of care, improve clinical outcomes and drive value-based reimbursement. BSMH has a physician alignment strategy through integration models covering the full spectrum of relationships: employment, clinically integrated network affiliation, joint venture opportunities, electronic medical record (EMR) connectivity and general medical staff appointments. In addition, BSMH conducts medical staff work force planning to ensure it has the necessary physician complement and bench strength to support clinical service development and to ensure network adequacy of its clinically integrated network and accountable care organizations. 2 BSMH’s initiatives leverage the ministry’s scale to improve efficiency and effectiveness. Specific areas of focus include information technology, revenue cycle, supply chain, labor productivity and the continued development of shared services. Strengthen Culture and Capabilities. This pillar supports BSMH’s dedication to achieving its integration goals and related synergies when joining organizations through mergers or acquisitions. The pillar’s initiatives center on leadership formation, talent acquisition and retention, and engaging all who serve the ministry. BSMH will continue to build a culture of diversity and inclusion based on its Mission and Values. Innovate and Grow. Under this strategic pillar, the portfolio of initiatives focus on top-line growth across five broad categories: service line development, access strategies, consumer outreach, inorganic growth and innovation. Service lines are a key means of differentiation among BSMH and its competitors. Managing by service lines aligns resources, expertise, capital investment and marketing spend to target specific growth opportunities within each market. Service lines allow for optimal clinical alignment with physicians and serve as a rallying point for improvement efforts in patient experience, quality improvement, payor strategies and margin expansion. BSMH views access strategies as both brick and mortar and digital entry points for patients and consumers. A robust ambulatory access strategy is critical to providing convenience for consumers, to meeting changes in clinical practice and to responding to payor expectations for providing care in the most clinically appropriate, high-value settings. BSMH is prioritizing its capital investment toward ambulatory surgery, urgent care, diagnostic centers, primary care sites and virtual care services. Inorganic growth through acquisitions and mergers is also a significant part of BSMH’s growth agenda. BSMH evaluates opportunities within and adjacent to its current footprint, as well as within new markets. Acquisitions and mergers are evaluated on a stringent set of criteria: aligning with BSMH’s Mission and Values, sharing a common strategic vision, being financially accretive within a defined window of time, and providing for organizational synergies for scale and efficiency. BSMH’s innovation goals include accelerating the adoption of new capabilities to create value for patients, families, consumers and caregivers. BSMH views its innovation strategy as a means of connecting to external innovation advisors and investment opportunities. The ministry seeks opportunities to foster internal innovation and to develop new revenue streams by monetizing its capabilities. Through the successful execution of the initiatives outlined in BSMH’s Strategic Plan, the organization will provide its patients with the same compassionate, quality health care they expect from BSMH, while operating as a nimble, highperforming ministry that adds value at every level. 3 GOVERNANCE AND MANAGEMENT Executive Leadership Council The Executive Leadership Council (ELC) at Bon Secours Mercy Health embodies our Mission of improving the health of the communities we serve. ELC members are listed below: Individual John M. Starcher, Jr. Michael Bezney, JD Deborah Bloomfield, PhD, CPA David Cannady Fr. Joseph Cardone Joe Gage, JD Wael Haidar, MD Sr. Anne Lutz, CBS Sandra Mackey Andrea Mazzoccoli, RN, PhD Thomas H. Morris, PhD Sam Ross, MD Brian Smith Laishy Williams-Carlson Title President and CEO Chief Legal Officer Chief Financial Officer Chief Strategy Officer Chief Mission Officer Chief Human Resources Officer Chief Clinical Officer Chief Sponsorship & Mission Officer Chief Marketing Officer Chief Nurse & Quality Officer Chief Sponsorship & Theology Officer Chief Community Health Officer Chief Operating Officer Chief Information Officer Board of Directors The Bon Secours Mercy Health Board of Directors provides overall system direction, approves appointments to market boards and appoints and evaluates the system CEO. The members of the Board of Directors are listed below: Board of Directors Chris Allen, Chair Katherine W. Vestal, PhD, Vice Chair Katherine A. Arbuckle, CPA Sr. Pat Eck, CBS (PJP) ex-officio Stephanie L. Ferguson, PhD Sr. Fran Gorsuch, CBS Sr. Doris Gottemoeller, RSM (PJP) ex-officio Lizanne C. Gottung Clarion E. Johnson, MD Gerard Kells Peter Maddox Jennifer O’Brien, JD Joseph D. O’Shea Raja Rajamannar Janet B. Reid, PhD Myles N. Sheehan, SJ, MD Sr. Carol Anne Smith, MH (PJP) John M. Starcher, Jr. ex-officio 4 GROUP INFORMATION UNITED STATES Atlantic Group  18 acute care hospitals  5 nursing care facilities  4 assisted care facilities  14 home care and hospice services Great Lakes Group  13 acute care hospitals  2 long-term care facilities  1 assisted care facility  3 hospice care sites  2 home care services Mid-American Group  10 acute care hospitals  4 long-term care facilities EUROPE Ireland  5 acute care hospitals  1 nursing home 5 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s discussion and analysis provides additional narrative explanation of the financial condition, operational results and cash flows of BSMH to assist in increased understanding of the consolidated financial statements. The financial information as of and for the year ended December 31, 2019, presented below, has been derived from BSMH’s audited internal financial information. This document is incorporated herein by reference and is available for review on the Electronic Municipal Market Access (“EMMA”) website operated by the Municipal Securities Rulemaking Board (“MSRB”). PRINCIPLES OF CONSOLIDATION In conformity with U.S. generally accepted accounting principles, the consolidated financial statements and this Management’s Discussion and Analysis include the financial position, results of operations, changes in net assets and cash flows of Bon Secours Mercy Health, HealthSpan Partners and subsidiaries. Information as of and for the year ended December 31, 2019, is consistent with the presentation of BSMH’s audited financial statements. The unaudited pro forma financial information presented below for BSMH for the year ended December 31, 2018, has been derived by combining the consolidated year-to-date results of Mercy Health and Bon Secours, assuming that the merger of the two organizations occurred as of January 1, 2018. This pro forma information does not include adjustments for the acquisition of Ireland or the southeastern Virginia hospitals (acquired from Community Health Systems) or Ensemble syndication (discussed in more detail below). Four significant transactions occurred during 2019 that contributed to the continued growth of the Ministry. On July 1, 2019, Bon Secours Health System Ireland (Ireland) was acquired by Bon Secours Mercy Health and became a whollyowned subsidiary. Ireland is a five-hospital health system located within the Republic of Ireland with annual revenues of approximately $320 million. As of July 1, 2019, Ireland is a fully consolidated subsidiary of Bon Secours Mercy Health, as reflected in this management’s discussion and analysis and the consolidated financial statements. This transaction resulted in a $77.7 million inherent contribution included in non-operating income. On August 1, 2019, Bon Secours Mercy Health sold 51 percent equity in Ensemble Health Partners (a revenue cycle management company) to Golden Gate Capital, a leading private equity investment firm. Beginning on that date, the consolidated financial statements reflect the remaining investment in Ensemble accounted for as investment in unconsolidated organizations. This transaction resulted in a non-operating gain of $1.9 billion. On November 1, 2019, Bon Secours Mercy Health sold BSMH Baltimore Hospital to LifeBridge Health. The disposition has been reflected in the 2019 consolidated financial statements. On December 31, 2019, Bon Secours Mercy Health purchased the assets of three hospitals in southeastern Virginia from Community Health Systems, Inc. These three hospitals became fully consolidated subsidiaries of BSMH. A bridge loan of $240 million was issued to fund the acquisition. The assets of these hospitals as of December 31, 2019 and the bridge loan are reflected within the consolidated BSMH’s balance sheet. KEY FINANCIAL RATIOS Year Ended December 31, ($s in thousands) 2019 Amount Net operating revenues Pro forma 2018 Margin Amount Margin $8,135,816 $8,717,639 Operating cash flow $805,038 9.2% $813,618 10.0% Recurring operating income $262,702 3.0% $280,092 3.4% $2,593,203 *6.8% ($66,388) (0.8%) Excess of revenue over expenses *Margin excludes Ireland inherent contribution ($77.7 million) and Ensemble transaction gain ($1.9 billion) Net operating revenues for the year ended December 31, 2019 grew compared to 2018 by $581.8 million (7.2%) due to the growth in healthcare delivery revenues, as well as the addition of Ireland starting in July 2019. Excess of revenue over expenses for the year ended December 31, 2019 increased compared to 2018 due to strong operating results and investment performance, the inherent contribution of $77.7 million related to Ireland and a $1.9 billion net gain on the sale of Ensemble. Reported operating cash flow margin and recurring operating income margin have decreased from the comparable periods of the prior year, primarily due to the deconsolidation of Ensemble beginning in August 2019. Same facility information excludes the operations of hospitals and other related health entities, which were either acquired or divested during the current or prior period. Same facility net operating revenues for the year ended December 31, 2019 grew by $380.6 million (4.9%) over the prior year. 6 COMMUNITY BENEFIT Year Ended December 31, ($s in thousands) 2019 Amount Community Benefit $724,553 Pro forma 2018 % of Exp 8.6% Amount $712,438 % of Exp 9.1% Through programs and donations, health education, free care, medical research and more, community benefit investments fulfill unmet needs. Unsponsored community benefit as measured by the cost to provide services was $724.6 million for the year ended December 31, 2019, up from $712.4 million in 2018 due to higher charity care and higher unpaid costs of public programs. Community benefit as a percentage of total expenses decreased compared to 2018 due to a 7.6% increase in total operating expenses, which outpaced the growth in community benefit dollars of 1.9%. LIQUIDITY AND KEY PERFORMANCE INDICATORS December 31, 2019 254 31.2% 88.0% 174.2% Days cash on hand Total debt to capitalization Pension funding Unrestricted Cash to Debt December 31, 2018 183 40.8% 83.1% 127.1% All liquidity and key performance indicators at year-end improved compared to the prior year-end. Investment income of $584.6 million (27 days) and the syndication of Ensemble for $1.2 billion (54 days) in cash favorably impacted days cash on hand, debt to capitalization and unrestricted cash to debt. Days cash on hand increased to 254 at December 31, 2019, as compared to 183 at December 31, 2018. Debt to capitalization was 31.2% at December 31, 2019, an improvement from 40.8% at December 31, 2018, driven by favorable net income of $2.6 billion. Pension funding improved to 88.0% at December 31, 2019, up from 83.1% at December 31, 2018, driven by strong asset returns, partially offset by the rise in liabilities due to a 101-basis point decline in the weighted-average discount rate. VOLUME TRENDS Year Ended December 31, 2019 Pro forma 2018 Change % 300,014 4.7% 314,093 65,612 5.3% 69,057 25,265 0.6% 25,414 64,282 18.6% 76,210 154,121 35.3% 208,552 1,370,506 0.3% 1,375,240 Admissions Observations Deliveries Inpatient Surgeries Outpatient Surgeries ER Visits For the year ended December 31, 2019, admissions and surgeries increased from 2018 due to the addition of Ireland, which accounted for 16,307 admissions, 13,323 inpatient surgeries, and 51,312 outpatient surgeries in the second half of 2019. Same facility admissions decreased by 1.6% for the year ended December 31, 2019. However when we considering the total of admissions and observations, total occupancy increased between years. Additionally, there was a shift in certain surgical procedures from inpatient (same facility decrease of 2.7%) to outpatient (same facility increase of 1.7%). However, total surgeries increased by 0.4% for the year on a same facility basis. Physician net operating revenue increased $25.4 million, or 2.6%, for the year ended December 31, 2019 when compared to the prior year. Physician visits rose 3.3% due in part to an increase in the number of providers for the year ended December 31, 2019 from the prior year. 7 RESULTS OF OPERATIONS ($s in thousands) Year Ended December 31, 2019 Pro Forma 2018 $7,648,233 $8,136,092 487,583 581,547 8,135,816 8,717,639 Net Patient Service Revenue Other Operating Revenue Total Operating Revenue Employee Compensation Purchased Services and Other Supplies Depreciation and Amortization Interest Expense 4,396,088 1,917,434 1,612,957 432,825 95,633 4,257,575 1,597,792 1,470,195 429,463 100,699 Recurring Operating Income 262,702 280,092 (105,434) 546,854 (79,222) 1,890,636 77,667 $2,593,203 (128,141) (168,439) (49,900) ($66,388) Nonrecurring Losses, Net Nonoperating Investment Gains/(Losses), Net Other Nonoperating Losses, Net Gain on sale of Ensemble Ireland inherent contribution Excess of Revenue Over Expenses TOTAL OPERATING REVENUE Total operating revenue was $8.7 billion for the year ended December 31, 2019, representing an increase of $581.8 million (7.2%) over the prior year, due in part to growth in healthcare delivery revenues, Virginia Medicaid expansion, and the addition of Ireland in July 2019. The growth in operating revenue compared to the prior year included the impact of Virginia Medicaid expansion of $107 million, which net of provider tax of $69.9 million contributed $37.8 million to recurring operating income. Additionally, the addition of Ireland contributed revenue growth of $171.9 million. Same facility operating revenue increased $437.6 million (5.7%) for the year ended December 31, 2019 compared to 2018. OPERATING EXPENSES Total operating expenses were $8.5 billion for the year ended December 31, 2019, an increase of $599.2 million (7.6%) from the prior year. Employment expenses increased $138.5 million (3.3%) for the year ended December 31, 2019 compared to the prior year. Employment expense per CMI-adjusted admission decreased by 4.0% from the prior year due to improved performance related to self-insured employee benefits. Pharmaceuticals and supplies expenses increased $142.8 million (9.7%) for the year ended December 31, 2019 compared to the prior year due to inflation and acuity. For the year ended December 31, 2019, pharmaceutical expense per CMI-adjusted admission increased by 8.4% over 2018, while supply expense per CMI-adjusted admission decreased by 1.3%. As part of the merger of Bon Secours and Mercy Health, BSMH initiated plans to implement operational efficiencies and realize synergy savings. As of and for the year ended December 31, 2019, realized synergy savings were $160 million and implementation plans are on track to successfully achieve the planned synergy savings. NONRECURRING LOSSES, NET Nonrecurring activities, net includes items such as restructuring charges, asset impairments, gains/losses on operating asset sales and disposals and merger related expenses. Nonrecurring losses for the year ended December 31, 2019 were $105.4 million compared to losses of $128.1 million in 2018. These losses were primarily related to merger and restructuring expenses occurring during September of 2018 and into 2019, which are anticipated to generate future efficiencies and savings, principally in the area of shared services. Also included in nonrecurring losses in 2019 was $50 million of fixed asset impairments related to the anticipated closure of Our Lady of Bellefonte Hospital, included in subsequent events below. 8 NONOPERATING GAINS AND LOSSES, NET Nonoperating investment gains were $584.6 million for the year ended December 31, 2019. Those amounts are made up of investment income and the gain or loss on interest rate swap agreements. Investment income, including unrealized gains and losses, was $546.9 million for the year ended December 31, 2019 compared to losses of $168.4 million in 2018. The improved investment results in 2019 were driven by strong equity and fixed income market returns. The loss on interest rate swap agreements was $37.8 million for the year ended December 31, 2019 compared to gains of $11.6 million in 2018. The Company recognized a gain on the sale of Ensemble in the amount of $1.9 billion in August 2019 and an inherent contribution of $77.7 million resulting from the consolidation of Ireland in July 2019. SUBSEQUENT EVENTS On January 2, 2020, Bon Secours Mercy Health completed an agreement with the Medical Society of South Carolina to restructure the Roper St. Francis Healthcare joint venture, increasing BSMH’s ownership interest in the joint venture from 27 percent to 51 percent equity. Roper St. Francis Healthcare, which includes four Charleston, SC-area hospitals, will be a fully consolidated subsidiary of BSMH. On January 21, 2020, BSMH announced the decision to close Our Lady of Bellefonte Hospital in Ashland, Kentucky in addition to the related Bellefonte Physician Services. This closure is expected to be completed by the end of September 2020. The Company is in the progress of evaluating the projected impact to the consolidated financial statements as a result of the coronavirus (Covid-19) including the potential impacts to patient volumes, net operating revenue and operating income. Additionally, subsequent to December 31, 2019, there has been instability in the global financial markets. BSMH has a diverse investment portfolio, including in its defined benefit pension plan portfolio. The diversified investment allocation strategy employed by BSMH serves to reduce volatility and negativity in performance. As of April 2, 2020, BSMH is not currently able to measure or predict the overall impact that this pandemic, and the related financial market volatility, may have on its future financial results. CONCLUSION The year of 2019 saw significant expansion and growth for the Ministry with the addition on July 1, 2019 of the Bon Secours Health System of Ireland, a five-hospital health system located in the Republic of Ireland, and the acquisition of three hospitals in the state of Virginia on December 31, 2019. Effective January 1, 2020, the health system also announced the consolidation of Roper St. Francis, a four-hospital health system located in Charleston, South Carolina. Volumes improved in 2019 over the prior year for all volume metrics, driven by the acquisition of Ireland. On a volume adjusted basis, expenses are consistent with the comparable period of the prior year, but declines in net patient revenue realization have led to decreases in operating cash flow margin and recurring operating income. Net income and net income margin increased compared to 2018 due to the investment gains, as well as the addition of Ireland and the sale of Ensemble in 2019. The Company’s balance sheet position strengthened significantly, with continued improvement compared to December 31, 2018, including days cash on hand of 254, total debt to capitalization of 31.2% and pension funding of 88.0% at December 31, 2019. The Company’s performance continues to support the Company’s overall mission while focusing on the delivery of value-based healthcare. This will allow for the continued integration of two ministries and provide a strong foundation for the BSMH goals including synergies of the recent merger and growth. 9 Consolidated Audited Financial Statements For the Twelve-Month Period Ended December 31, 2019 and 2018 BON SECOURS MERCY HEALTH Consolidated Financial Statements Year Ended December 31, 2019 (With Independent Auditors’ Report Thereon) Statement of Management Responsibility The accompanying consolidated financial statements of Bon Secours Mercy Health (the Company) for the year ended December 31, 2019 were prepared by the Company’s management in conformity with U.S. generally accepted accounting principles appropriate in the circumstances. Management of the Company is responsible for the integrity and objectivity of the consolidated financial statements, which are presented using the accrual basis of accounting and, accordingly, include some amounts based on judgments and estimates. The accounting procedures and related system of internal control are designed to ensure the books and records reflect the transactions of the Company in accordance with established policies and procedures as implemented by qualified personnel. The system of internal control over financial reporting is designed to provide reasonable assurance to the Company’s Management and Board of Trustees regarding the safeguarding of assets against unauthorized acquisition, the use of or disposition of the Company’s assets and the preparation of reliable published consolidated financial statements. Even effective internal controls, no matter how well designed, have inherent limitations – including the possibility of the circumvention or overriding of controls – and, therefore, can provide only reasonable assurance with respect to consolidated financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time. The Board of Directors of the Company, through its Finance Committee, reviews the financial and accounting operations of the Company, including the review and discussion of periodic consolidated financial statements and the evaluation and adoption of budgets. The Board of Directors of the Company, through its Audit & Compliance Committee reviews the accuracy and integrity of financial reporting processes, oversees compliance and auditing functions and reviews the basis of the audit engagement and reports of independent auditors. KPMG LLP, the independent auditors, have audited the consolidated financial statements of the Company for the year ended December 31, 2019, and their report thereon is included herein. The independent auditors meet with members of the Audit & Compliance Committee of the Board of Trustees of the Company, in the absence of Management personnel, to discuss the results of their audit and are afforded the opportunity to present their comments with respect to the conduct of the audit engagement. John Starcher President & CEO Deborah Bloomfield Chief Financial Officer Travis L. Crum System SVP, Finance April 2, 2020 KPMG LLP Suite 3400 312 Walnut Street Cincinnati, OH 45202 Independent Auditors’ Report The Board of Directors Bon Secours Mercy Health: We have audited the accompanying consolidated financial statements of Bon Secours Mercy Health, which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statement of operations, changes in net assets, and cash flows for the year ended December 31, 2019, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bon Secours Mercy Health as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the year ended December 31, 2019 in accordance with U.S. generally accepted accounting principles. Emphasis of Matter As discussed in note 2(g), Bon Secours Mercy Health has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, Leases. Our opinion is not modified with respect to this matter. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Other Matter Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary consolidating balance sheet and operating information included on pages 50 through 52 is presented for the purpose of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and related directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Cincinnati, Ohio April 2, 2020 2 BON SECOURS MERCY HEALTH Consolidated Balance Sheets December 31, 2019 and 2018 (In thousands) Assets 2019 Current assets: Cash and cash equivalents Investments Board designated funds Self-insurance and trustee held funds Donor restricted funds $ 2018 453,258 8,798 41,715 89,238 17,301 167,535 27,292 44,496 104,903 14,774 610,310 359,000 Net patient receivables Other receivables Inventories Prepaid expenses and other current assets 1,017,577 110,335 209,577 146,977 976,269 97,963 181,926 121,097 Total current assets 2,094,776 1,736,255 5,075,847 183,040 119,126 3,493,625 186,531 78,340 5,378,013 3,758,496 3,721,991 1,343,215 310,318 125,015 601,312 3,545,712 520,220 — 40,662 407,679 $ 13,574,640 10,009,024 $ 448,696 762,807 499,610 78,845 311,639 366,947 419,994 472,209 — 277,024 Total current liabilities 2,101,597 1,536,174 Long-term debt, less current portion Retirement liabilities Self-insurance liabilities Operating lease liabilities Other long-term liabilities 2,440,078 500,924 246,649 245,360 443,375 2,507,229 520,738 256,269 — 350,723 Total liabilities Net assets without donor restrictions: Controlling interest Noncontrolling interest 5,977,983 5,171,133 7,078,276 322,927 4,244,471 415,445 7,401,203 4,659,916 195,454 177,975 7,596,657 4,837,891 13,574,640 10,009,024 Total cash and investments Assets whose use is limited: Board designated funds Self-insurance and trustee held funds Donor restricted funds Total assets whose use is limited Property and equipment, net Investments in unconsolidated organizations Operating lease right-of-use assets Retirement assets Other long-term assets Total assets Liabilities and Net Assets Current liabilities: Accounts payable Current portion of long-term debt Accrued salaries, wages and benefits Current portion of operating lease liabilities Other accrued expenses Total net assets without donor restrictions Net assets with donor restrictions Total net assets Total liabilities and net assets $ See accompanying notes to consolidated financial statements. 3 BON SECOURS MERCY HEALTH Consolidated Statement of Operations Year Ended December 31, 2019 (In thousands) Revenues: Net patient service revenue Other revenue, net $ Total operating revenues 8,136,092 581,547 8,717,639 Expenses: Employee compensation Purchased services and other Supplies Depreciation and amortization Interest expense 4,396,088 1,917,434 1,612,957 432,825 95,633 Total operating expenses 8,454,937 Recurring operating income 262,702 Nonrecurring operating losses, net (105,434) Operating income 157,268 Nonoperating gains (losses), net: Investment gains Realized and unrealized interest rate swap agreements loss Gain on sale of Ensemble, net Inherent contribution on Ireland acquisition Other nonoperating activities, net Excess of revenue over expenses 584,626 (37,772) 1,890,636 77,667 (79,222) $ See accompanying notes to consolidated financial statements. 4 2,593,203 BON SECOURS MERCY HEALTH Consolidated Statement of Changes in Net Assets Year Ended December 31, 2019 (In thousands) Controlling interest Balance at December 31, 2018 $ Excess of revenues over expenses Gain from discontinued operations Grants and restricted contributions Contribution from non controlling interest Investment gains Net assets released from restrictions used for purchase of property and equipment Net assets released from restrictions used for operations Net change in equity of joint ventures Transfer of interest from noncontrolling interest owners Distributions to noncontrolling interest owner Pension and other postemployment changes Other changes, net Balance at December 31, 2019 $ Net assets with donor restrictions Total net assets 4,244,471 415,445 4,659,916 177,975 4,837,891 2,536,073 33,335 9,212 — 920 57,130 — — 2,580 — 2,593,203 33,335 9,212 2,580 920 — — 33,121 — 13,238 2,593,203 33,335 42,333 2,580 14,158 7,141 — 7,141 — 326 135,143 — 123,922 (12,267) Increase (decrease) in net assets Noncontrolling interest Net assets without donor restrictions — — (135,143) (17,085) — — — 326 — (17,085) 123,922 (12,267) (7,141) (22,074) — — — — 335 — (22,074) 326 — (17,085) 123,922 (11,932) 2,833,805 (92,518) 2,741,287 17,479 2,758,766 7,078,276 322,927 7,401,203 195,454 7,596,657 See accompanying notes to consolidated financial statements. 5 BON SECOURS MERCY HEALTH Consolidated Statement of Cash Flows Year Ended December 31, 2019 (In thousands) Cash flows from operating activities: Increase in net assets Depreciation and amortization Amortization of premium on issued debt securities Gain on sale of Ensemble, net Gain on remeasurement of retained interest in Ensemble Ireland inherent contribution Impairment of long-lived assets Gain on disposal of long-lived assets Gain from discontinued operations Change in valuation of interest rate swap agreements Other changes in net assets, net Pension and other post employment adjustments Contributions restricted by donor Net unrealized gains on certain investments Cash provided by (used in) changes in operating assets and liabilities: Net patient receivables Other current assets Other assets Accounts payable Current liabilities Other long-term liabilities $ 2,758,766 432,825 (11,183) (1,045,636) (845,000) (77,667) 50,625 (2,054) (33,335) 28,383 (27,697) (123,922) (33,121) (258,656) 31,926 (90,360) (35,741) 27,204 67,352 (8,809) Net cash provided by operating activities 803,900 Cash flows from investing activities: Sale of subsidiary, net of cash sold Acquisitions, net of cash received Property and equipment additions, net of disposals Purchase of alternative investments and other securities Sales of alternative investments and other securities Investments and assets whose use is limited, net Sale of equity investment 1,184,150 (233,821) (409,202) (379,851) 330,613 (1,277,210) 46,741 Net cash used in investing activities (738,580) Cash flows from financing activities: Restricted contributions Proceeds from debt issuance Repayment of long-term debt Repayment of finance lease Cost of long-term debt issuance 33,121 240,000 (44,037) (7,519) (1,045) Net cash provided by financing activities 220,520 Effect of exchange rates on cash and cash equivalents (117) Net increase in cash and cash equivalents 285,723 Cash and cash equivalents, beginning of the year 167,535 Cash and cash equivalents, end of the year $ See accompanying notes to consolidated financial statements. 6 453,258 BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) (1) Basis of presentation (a) Organizational Structure and Mission On September 1, 2018, Bon Secours Health System, Inc. (BSHSI) and Mercy Health (Mercy), merged to become the United States’ fifth largest Catholic health care ministry and the new ministry was named Bon Secours Mercy Health (BSMH or the Company). BSMH is a nonprofit, nonstock membership Catholic health organization, supervising market delivery consisting of hospitals, physician clinics, and other organizations providing health-related services. BSMH is sponsored by partners in Bon Secours Mercy Ministries (BSMM). BSMM is a public juridic person of the Roman Catholic Church. BSMH provides management direction to these separately organized market delivery systems (the Groups) to carry out the mission, vision, and values of BSMH. The Groups operate as the Atlantic, Mid-American and Great Lakes and European groups. The Atlantic group encompasses Virginia, New York, South Carolina and Maryland, the Mid-American and Great Lakes groups encompass Ohio and Kentucky and the European group encompasses Ireland. The mission of the Company is to extend the compassionate ministry of Jesus by improving the health and well-being of our communities and bring good help to those in need, especially people who are poor, dying and underserved. The consolidated financial statements include the accounts of all members of the corporate group controlled by BSMH. Members of the corporate group include all entities that BSMH directly or indirectly controls. Investments in entities where the Company holds a noncontrolling interest are recorded under the equity or cost method of accounting. The Company has included its equity share of income or losses and changes in net assets from investments in unconsolidated affiliates in other revenue, net in the accompanying consolidated statement of operations. All material intercompany transactions and account balances have been eliminated in consolidation. (b) Acquisitions and Disposals On July 1, 2019, BSMH acquired Bon Secours Health System CLG (Ireland) through a members substitution for no consideration. BSMH accounted for this business combination under the acquisition method, consistent with Accounting Standards Codification (ASC) Topic 954-805 Health Care Entities Business Combinations and recorded an inherent contribution of $77,667, which is recorded in nonoperating gains (losses), net. 7 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The assets, liabilities, and net assets of Ireland on the acquisition date were as follows: Current assets Property and equipment Other long-term assets Current liabilities Long-term debt Other long-term liabilities Total identifiable net assets $ 90,827 169,545 113,477 (50,987) (107,903) (137,292) $ 77,667 The following are the results of Ireland’s operations that have been included in the consolidated statement of operations and statement of changes in net assets from the acquisition date: Total operating revenues Total operating expenses $ 171,921 168,395 Recurring operating income 3,526 Nonrecurring operating losses, net (1,723) Operating income 1,803 Nonoperating gains (losses), net: (83) Excess of revenue over expenses $ 1,720 The fair value of the acquired property and equipment is provisional pending receipt of the final valuation report for those assets from a third-party valuation specialist. 8 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) On December 31, 2019, BSMH acquired three hospitals from affiliates of Community Health Systems, Inc. BSMH accounted for this business combination under the acquisition method. The goodwill of $35,321 arising from the acquisition relates to the synergies and cost reductions. The fair value at December 31, 2019, is estimated to be $204,457 and is provisional pending receipt of the final valuation report for those assets from a third-party valuation specialist. The following table summarizes the consideration paid for the acquisition and the estimated fair value of the assets acquired and liabilities assumed at the acquisition date. Cash consideration (subject to pending final working capital adjustments) $ 239,778 Acquisition related costs included in nonrecurring operating losses, net $ 754 Recognized amounts of identifiable assets acquired and liabilities assumed: Current assets Property and equipment Intangible assets Other long-term assets Current liabilities Other long-term liabilities $ Total identifiable net assets assumed 11,290 194,651 10,365 7,147 (6,157) (12,839) 204,457 Goodwill 35,321 Total $ 239,778 The following unaudited financial information presents BSMH’s results had the acquisition date been January 1, 2019 for all acquisitions: 2019 (Unaudited) Total operating revenues Total operating expenses $ Recurring operating income 9,200,863 8,951,178 249,685 Nonrecurring operating losses, net (105,135) Operating income 144,550 Nonoperating gains (losses), net: 2,395,342 Excess of revenue over expenses 9 $ 2,539,892 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The proforma financial information was adjusted to exclude the $77,667 inherent contribution on the Ireland acquisition and $754 costs relating to the acquisitions. On August 1, 2019, BSMH sold a 51% and 1% equity interest in Ensemble Health Partners (Ensemble) to Golden Gate Capital, a leading non-affiliated private equity investment firm, and other non-affiliated persons, respectively. Prior to the transaction, Ensemble was a wholly owned subsidiary of BSMH. As a result of the transaction, the Company derecognized Ensemble from its balance sheet as of the transaction date. The retained noncontrolling interest of 48% is accounted for under the equity method of accounting and included in other long-term assets on the consolidated balance sheets. The fair value of retained interest was estimated by applying the income approach and market approach by a third-party valuation specialist. The Company has recorded a gain relating to the sale and resulting deconsolidation stake amounting to $1,890,636 which is included in nonoperating gains (losses), net on the consolidated statement of operations. The following table summarizes the consideration received and the net assets derecognized at the sale date, as well as the fair value of the remaining interest: Proceeds Fair value of retained interest in Ensemble Net assets of Ensemble at date of sale Goodwill and other intangible assets, net $ Gain on sale 1,194,459 845,000 (49,817) (88,696) 1,900,946 Transaction costs (10,310) Gain on sale of Ensemble, net $ 1,890,636 (2) Significant Accounting Policies (a) Cash and Cash Equivalents The Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows, Accounting Standards Codification (ASC) Topic 230 on January 1, 2019 which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of this ASU did not have a significant impact on the consolidated financial statements other than additional disclosure about the nature of cash and cash equivalents held by BSMH. The Company considers highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents held by outside investment managers are considered investments and classified as board designated funds. Cash, cash equivalents, and 10 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) investments that are restricted per contractual or regulatory requirements are classified as donor restricted or trustee held funds. (b) Assets Whose Use is Limited Assets whose use is limited include assets held by trustees under indentures, self-insurance trust arrangements, assets related to donor-restricted net assets, and assets designated by the board of directors over which it retains control and may, at its discretion, use for other purposes. Investments consist of marketable equity securities, corporate bonds, U.S. government and government related marketable debt securities, alternative investments and money market funds. Funds held by trustees are primarily related to the unexpended proceeds of the 2017 tax-exempt bond obligation issuance. Unrealized gains or losses on trading securities are included in investment gains. As of December 31, 2019, all investments and assets whose use is limited are designated as trading securities, except for certain foundation investments and trustee held funds, which are designated as other than trading securities. (c) Fair Value Measurement The carrying values of financial instruments classified as current assets and current liabilities approximate fair values. The fair values of assets limited or restricted as to use, with the exception of alternative investments, are based on quoted market prices or other observable inputs. Alternative investments are recorded under the equity method, but approximate fair value. The Company elected to record its investments in equity and fixed income commingled funds at fair value. See note 4 for additional disclosures of assets limited or restricted as to use. ASC Topic 820 Fair Value, emphasizes that fair value is a market-based measurement, not an entity specific measurement. ASC Topic 820 defines a three-level fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participants. The fair value hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 – inputs utilize quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 – inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset and liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 – inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in 11 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. In order to meet the requirements of ASC Topic 820, the Company utilizes three basic valuation approaches to determine the fair value of its assets and liabilities required to be recorded at fair value. The first approach is the cost approach. The cost approach is generally the value a market participant would expect to replace the respective asset or liability. The second approach is the market approach. The market approach looks at what a market participant would consider an exact or similar asset or liability to that of the Company, including those traded on exchanges, to determine value. The third approach is the income approach. The income approach uses estimation techniques to determine the estimated future cash flows of the Company’s respective asset or liability expected by a market participant and discounts those cash flows back to present value (more typically referred to as a discounted cash flow approach). The Company’s nonfinancial assets and liabilities not permitted or required to be measured at fair value on a recurring basis typically relate to assets and liabilities acquired in a business combination and long-lived assets and liabilities held for sale. The Company is required to provide additional disclosures about fair value measurements as part of the consolidated financial statements for each major category of assets and liabilities measured at fair value on a nonrecurring basis. In general, nonrecurring fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to nonfinancial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets, and historical cash payment trends. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows. (d) Net Patient Service Revenue and Net Patient Receivables In accordance with ASC Topic 606, Revenue from Contracts with Customers, the Company records patient service revenue at the transaction price estimated by the Company to reflect the total consideration due from patients and third-party payors (including commercial payors and government programs) and others, and they include variable consideration for retroactive revenue adjustments. Revenue is recognized as performance obligations are satisfied in exchange for providing goods and services in patient care. Revenue is recorded as these goods and services are provided. The transaction price, which involves significant estimates, is determined based on the Company’s standard charges for the goods and services provided, with a reduction recorded for price concessions related to third-party contractual arrangements as well as patient discounts and other patient price concessions. Patient service revenue for services provided to patients who have third-party payor coverage is recognized based on contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, the Company recognizes revenue when services are provided. Based on historical experience, a significant portion of the Company’s uninsured patients (self-pay) will be unable or unwilling to pay for the services provided. 12 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The Company’s concentration of credit risk related to net patient receivables is limited due to the diversity of patients and payors. Net patient receivables consist of amounts due from government programs (primarily Medicare and Medicaid), private insurance companies, managed care programs and patients themselves. The Medicare program represented 18% and 20% of net patient accounts receivable as of December 31, 2019, and December 31, 2018, respectively, while the Medicaid program represented 9% as of December 31, 2019 and December 31, 2018. Excluding the Medicare and Medicaid programs, no one other payor represents more than 10% of the Company’s net patient accounts receivable as of December 31, 2019, or December 31, 2018. Patient receivables are recorded at net realizable value based on certain assumptions determined by payor class. For third-party payors including Medicare, Medicaid, and commercial insurance, the net realizable value is based on the estimated contractual reimbursement percentage, which is based on current contract prices or historical paid claims data by payor. For self-pay receivables, which includes patients who are uninsured and the patient responsibility portion for patients with insurance, the net realizable value is determined using estimates of historical collection experience. These estimates are adjusted for estimated conversions of patient responsibility portions, expected recoveries and any anticipated changes in trends. Patient receivables can be impacted by the effectiveness of the Company’s collection efforts. Additionally, significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental healthcare coverage could affect the net realizable value of patient receivables. The Company also continually reviews the net realizable value of patient receivables by monitoring historical cash collections as a percentage of trailing net operating revenue, as well as by analyzing current period net revenue and admissions by payor classification, aged receivables by payor and the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables. The Company’s net patient service revenues during the year ended December 31, 2019 has been presented in the following table based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage: Medicare Medicaid Other governmental Commercial and other third party Self-pay 37 % 12 2 48 1 Total 100 % (e) Inventories Inventories, consisting primarily of pharmacy drugs and medical and surgical supplies are stated at the lower of cost or net realizable value and are valued principally by the weighted average method. 13 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) (f) Property and Equipment, Net Property and equipment, net is recorded at cost or, if donated, at fair value on the date of receipt. Depreciation is calculated over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Estimated useful lives of the assets are as follows: Buildings Fixed equipment Major movable equipment Software 20 to 60 years 10 to 20 years 5 to 10 years 3 to 7 years Gifts of long-lived assets, such as land, buildings, or equipment are reported as unrestricted support and are excluded from the excess of revenues over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit donor restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Interest cost is capitalized as part of the cost of constructing capital assets, net of any interest income earned on unexpended bond proceeds borrowed for a specific project, during the construction period. Costs incurred in the development and installation of internal-use software are expensed if they are incurred in the preliminary project stage or post-implementation stage, while certain costs are capitalized if incurred during the application development stage. Internal-use software is amortized over its expected useful life, generally between 3 and 7 years, with amortization beginning when the project is completed and the software is placed in service. The cost and related accumulated depreciation of property and equipment that is sold or retired is removed from the respective accounts and the resulting gain or loss is recorded in other loss related to long-lived assets. (g) Leases The Company adopted ASU No. 2016-02 Leases (ASC Topic 842) on January 1, 2019. ASC Topic 842 required the recognition of right-of-use assets (“ROU”) and lease liabilities on the consolidated balance sheet and the disclosure of qualitative and quantitative information about leasing arrangements. The Company elected the effective date method to adopt this standard. All leases that existed at the effective date were recognized and measured using a modified retrospective approach without restating prior comparative periods. The Company elected to utilize the practical expedients being made available, including the package of practical expedients to not reassess whether a contract is or contains a lease, the lease classification and initial direct costs. On January 1, 2019, the Company recognized operating ROU assets of $359,719, financing ROU assets of $64,288 and corresponding operating lease liabilities of $367,992 and financing lease liabilities of $64,859 on the Company's consolidated balance sheet. The recognition represented a material noncash investing activity that 14 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) affected the amount reported in other changes in assets and liabilities on the consolidated statement of cash flows. The adoption did not have a material impact on the consolidated statement of operations. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities and operating lease liabilities on the consolidated balance sheet. Finance leases are included in other long-term assets (Note 2(k)), other accrued expenses, and other long-term liabilities (Note 2(n)). Lease liabilities are recognized based on the present value, net of the future minimum lease payments over the lease term using the Company’s incremental borrowing rate based on the information available at commencement. The ROU asset is derived from the lease liability and also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Certain lease agreements for real estate include payments based on actual common area maintenance expenses and others include rental payments adjusted periodically for inflation. These variable lease payments are recognized in other operating expenses, net, but are not included in the right-of-use asset or liability balances. Lease agreements may include one or more renewal options which are at the Company’s sole discretion. The Company does not consider the renewal options to be reasonably likely to be exercised, therefore they are not included in ROU assets and lease liabilities. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term for operating leases. In accordance with ASC 842, the Company has elected to not recognize ROU assets and lease liabilities for short-term leases with a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as all other leases. (h) Asset Impairment The Company regularly evaluates whether events or changes in circumstances have occurred that could indicate impairment in the value of long-lived assets. In accordance with the provisions of the ASC Topic 360-10, Impairment or Disposal of Long-Lived Assets, if events or changes in circumstances indicate that the carrying value of an asset is not recoverable, the Company’s management estimates the projected undiscounted cash flows, excluding interest and taxes, of the related individual facilities to determine if an impairment loss should be recognized. The amount of impairment loss is determined by comparing the historical carrying value of the asset to its estimated fair value. Estimated fair value is determined through an evaluation of recent and projected financial performance of facilities using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining lives of its long-lived assets. If estimates are changed, the carrying value of affected assets is allocated over the remaining lives. In estimating the future cash flows for determining whether an asset is impaired and if expected future cash flows used in measuring assets are impaired, the Company groups their assets at the lowest level for which there are identifiable cash flows independent of other groups of assets. 15 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) On January 21, 2020, BSMH announced the decision to close Our Lady of Bellefonte Hospital in Ashland, Kentucky in addition to the related Bellefonte Physician Services. The planned timeline for the closure is by the end of September 2020. The anticipated closure is an impairment indicator and a resulting impairment charge of $50,000 was recorded in nonrecurring operating losses for the year ended December 31, 2019, in the consolidated statement of operations of BSMH. (i) Investments in Unconsolidated Organizations The Company maintains noncontrolling interests in various joint ventures and other companies that do not require consolidation. The majority of these investments are accounted for using the equity method of accounting, as the Company has significant influence over the operating and financial policies of the investee. Investments in unconsolidated organizations are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the investment might not be recoverable. No impairment was recognized for the year ended December 31, 2019. (j) Retirement Assets and Liabilities The Company has several defined benefit pension plans covering the majority of employees who qualify as to age and length of service. The Company funds actuarially determined pension amounts in accordance with a long-term funding policy to ensure the defined benefit pension plans maintain adequate funding over time. In addition, the Company has several defined contribution plans. The Company recognizes in the consolidated balance sheet the funded status of its defined benefit pension and other postemployment plans (collectively, referred to as the Plans), measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for defined benefit pension plans and accumulated benefit obligation for other postemployment benefit plans). (k) Other Long-Term Assets Other long-term assets include goodwill and other identifiable intangible assets. Goodwill is an asset representing the excess of the aggregate purchase price over the fair value of the net assets acquired in a business combination. Goodwill is evaluated for impairment annually using qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Other long-term assets, net consists of the following as of December 31: 2019 Goodwill, net Self insured reinsurance receivable Notes and other long term receivables Other intangibles Right-of-use assets – finance Other Total other long-term assets 16 2018 $ 197,695 15,984 85,876 37,347 185,489 78,921 209,764 23,298 74,045 60,399 — 40,173 $ 601,312 407,679 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The carrying amount and changes in the carrying amount of goodwill and identifiable intangible assets, which are included in other assets in the consolidated balance sheets for the year ended December 31: Goodwill at December 31, 2018 Goodwilll related to acquisitions Goodwilll related to deconsolidation of Ensemble Impairment $ 209,764 41,307 (53,135) (241) Goodwill at December 31, 2019 $ 197,695 (l) Accrued Claims Expense and Related Liabilities Accrued claims expense and related liabilities consist of unpaid healthcare expenses. The estimate for incurred but not reported claims is based on actuarial projections of costs using historical paid claims and other relevant data. Such estimates are subject to the impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts provided. While the ultimate amount of paid claims is dependent on future developments, management is of the opinion that the reserves for claims are adequate to cover such claims. (i) Self-Insurance Under the Company’s self-insurance programs (professional/general liability, workers’ compensation, and employee health benefits), claims are reflected based upon actuarial estimation, including both reported and incurred but not reported claims, taking into consideration the severity of incidents and the expected timing of claim payments. The Company shares certain insurance risks it has underwritten through the use of reinsurance contracts. Amounts that can be claimed from the Company’s reinsurers are valued by an independent actuary and are included in other long-term assets. Should the Company’s reinsurers be unable to reimburse the Company for recoverable claims, the Company would still be liable to pay the claims; however, the Company contracts with various highly rated insurance carriers to mitigate this risk. (ii) Professional Liability and General Insurance The Company’s hospital professional liability (HPL) and hospital general liability (HGL) exposures are covered primarily through the Captives. The Captives are offshore insurance companies domiciled in the Cayman Islands and 100% owned by the Company. In addition to providing HPL and HGL coverage to its insureds, the Captives provide policies for certain employed physician, commercial insurance deductibles, and the Company’s fleet property damage coverage, with excess layers reinsured through commercial carriers under policies written on a claims-made basis. (iii) Workers Compensation Insurance The Company’s workers’ compensation program primarily consists of self-insurance programs in various states with excess coverage through a commercial insurer. 17 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) (iv) Employee Health Insurance Employee health benefits of the Company are principally provided through the Company’s self-insurance program. Accrued claims associated with this program are reported as other accrued expenses in the accompanying consolidated balance sheet. (m) Net Assets The Company classifies net assets based on the existence or absence of donor-imposed restrictions. Net assets without donor restrictions represent contributions, gifts, and grants that have no donor-imposed restrictions or that arise as a result of operations. Net assets with donor restrictions are subject to donor-imposed restrictions that must or will be met either by satisfying a specific purpose, passage of time and/or to be maintained by the Company in perpetuity. Net assets with donor restrictions primarily consist of pledges and funds received for capital projects, various healthcare programs, and community outreach programs. Unconditional promises to give cash and other assets to the Company are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as donor restricted if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction is satisfied, these restricted net assets are reclassified as assets without donor restrictions and reported in the accompanying consolidated statement of operations and statement of changes in net assets as net assets released from restrictions. Such amounts are classified as other revenue or transfers for additions to property and equipment. Donor-restricted contributions whose restrictions are satisfied within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. The consolidated financial statements include all assets, liabilities, revenue and expenses of less than 100% owned entities that the Company controls in accordance with applicable accounting guidance. Accordingly, the Company has reflected a noncontrolling interest for the portion of the Company’s revenue and expenses not controlled by the Company, separately in the consolidated balance sheets and the consolidated statement of operations. (n) Other Long-Term Liabilities Other long-term liabilities consist of the following as of December 31: 2019 Derivative instruments (note 8) Medical office building liabilities SERP liability Lease liabilities – finance Other Total other long-term liabilities 18 2018 $ 95,959 — 54,146 216,889 76,381 67,576 139,352 42,463 — 101,332 $ 443,375 350,723 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Medical office building liabilities as of December 31, 2018 were recognized due to BSMH being the accounting owner under ASC Topic 840, Leases. As of December 31, 2019, these medical office building liabilities have been derecognized and are now included in lease liabilities – finance as a result of the adoption of ASC Topic 842. (o) Other Revenue Other operating revenues includes income from equity investments in joint ventures (note 14), grant revenues, assisted living, revenues from corporate services, earnings on funds held by bond trustees and cafeteria and meal sales. (p) Charity Care The Company exists to benefit the people in the communities it serves. In pursuing its mission, the Company advocates for and provides services to help meet healthcare and related socio-economic needs of poor and disadvantaged individuals and the broader community. The Company provides services in the communities served by holistically ministering to its patients with respect and without regard to their ability to pay. Programs and services for the uninsured and underinsured represent the financial commitment of the Company to everyone in the community. The Company’s financial assistance policy ensures that all members of the community receive this basic human right to access healthcare. Charity care costs are estimated based on multiplying the ratio of costs to gross charges for all payments not attributable to other community benefits programs by the revenue recognized and written-off for health services provided to persons who cannot afford to pay. Charity care amounts are not included in net patient service revenue. The categories included as programs and services for the poor and disadvantaged are as follows: (i) Charitable Services – Financially Disadvantaged Persons The Company provides care to patients regardless of their ability to pay for all or a portion of the charges incurred. This care is classified as charity care based upon the Company’s established policies. In accordance with the Catholic Health Association (CHA) guidelines, charity care represents the unpaid costs of free or discounted health services provided to persons who cannot afford to pay and who meet the Company’s criteria for financial assistance. In assessing a patient’s ability to pay, the Company utilizes generally recognized poverty income levels, financially supporting 100% of the healthcare services provided to patients with annual family income at or below 200% of the federal poverty guidelines. Additional assistance is provided by a reduction in charges for medically necessary services through a community service adjustment. (ii) Charitable Services – State Programs The Company provides services to indigent patients under various state programs, including state Medicaid, that generally pay healthcare providers amounts that are less than the cost of the 19 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) services provided to the recipients. Estimated unreimbursed costs of the care provided to these disadvantaged patients are also reported as charitable services. (iii) Other Community Benefits Other community benefits include community services for the poor and disadvantaged as well as the broader community. The programs cover a broad spectrum of services and are financially supported by the Company:  Primary care access – providing free community-based preventive and primary care services through free-standing clinics and mobile health vehicles;  Health screenings and immunizations – provision of free health screenings and immunizations for a variety of health conditions for women, children, and senior residents;  Child programs – providing oral healthcare, asthma and childhood obesity interventions;  Caregiver and senior programs – focused on support, health screenings, and services to assist older adult populations;  Education – providing medical and other health professional programs;  Leadership activities – a full-time community health leader is provided in each community served who works to expand community capacity, identify community health needs and address social health conditions. (q) Recurring Operating Income Recurring operating income includes financial results of operating entities, but excludes certain nonrecurring activities such as restructuring, asset impairments, gains/losses on operating asset sales/disposals and merger related expenses. (r) Performance Indicator The consolidated statement of operations includes the caption excess of revenues over expenses, which represents the operating (performance) indicator for the Company. Consistent with industry practice, changes in net assets which are excluded from the excess of revenue over expenses may include gain on discontinued operations, change in net unrealized gains on restricted investments, restricted contributions, distributions to noncontrolling interests, certain pension and other postemployment benefit adjustments, and other miscellaneous items as defined under U.S. Generally Accepted Accounting Principles (GAAP). (s) Income Taxes The Company and most of its subsidiaries (including certain joint venture entities) are exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Their related income is exempt from federal income tax under Section 501(A). Some of the subsidiaries are taxable entities, and some of the income of the tax-exempt entities is subject to taxation as unrelated business taxable income. The Company and its subsidiaries file U.S. federal income tax returns, and they also file in various state and foreign jurisdictions. 20 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The Company accounts for uncertain tax positions in accordance with ASC Topic 740, Income Taxes. The Company accounts for uncertainty in income tax positions by applying a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has determined that no significant unrecognized tax benefits or liabilities exist as of December 31, 2019. Accounting for uncertainty in income taxes, ASC Topic 740-10 prescribes a comprehensive model for how an organization should measure, recognize, present and disclose in its financial statements uncertain tax positions that an organization has taken or expects to take on a tax return. The Company is subject to routine audits by taxing jurisdictions. An Internal Revenue Service audit of Mercy for 2016 and 2017 tax periods was completed in July 2019. There are no current audits in progress. The Company believes it is no longer subject to income tax examinations for years prior to 2014. As of December 31, 2019, the Company has no uncertain tax positions. The Company’s taxable subsidiaries had $205,170 and $169,666 of net operating loss carryforwards as of December 31, 2019 and 2018, respectively, which expire in varying periods through 2037 and are available to offset future taxable income. The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect during the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Interest and penalties related to income taxes are accounted for as income tax expense. The Company’s deferred tax assets are fully reserved as of December 31, 2019 and 2018 as the Company considers it more likely than not that these amounts will not be recognized. (t) Medicare and Medicaid Programs The system renders services to patients under contractual arrangements with the Medicare and Medicaid programs. Payment for the majority of Medicare and Medicaid services is based on a prospectively determined fixed price, according to a patient classification, based on clinical and other diagnostic factors. Amounts earned under these contractual arrangements are subject to review and final determination by Medicare and Medicaid intermediaries and other appropriate governmental authorities or their agents and may be adjusted in future periods as settlements are determined. In the opinion of management, adequate provision has been made in the consolidated financial statements for any adjustments resulting from the respective intermediary reviews. The Company received settlements related to prior years’ cost reports and other third-party contracts, which resulted in an increase in net patient service revenue of $18,142 for the year ended December 31, 2019. In the healthcare industry, laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Failure to comply with such laws and regulations can result in significant regulatory action, including fines, penalties and exclusion from the Medicare and Medicaid 21 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) programs. The Company also has certain portions of Medicare payments, which are outside of the Progressive Payment Systems and fee for service payment rates and are based on historical costs. (u) Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (v) Contingencies During the normal course of business, the Company may become involved in litigation. Management assesses the probable outcome of unresolved litigation and records estimated settlements, if applicable. It is not possible to determine the eventual outcome of any presently unresolved litigation. However, after consultation with legal counsel, management believes that these matters will be resolved without material adverse impact to the consolidated financial position or results of operations of the Company. (w) Management’s Assessment and Plans Management is required to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). Management determined that there were no conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern and the Company will continue to meet its obligations through April 2, 2021. (x) New accounting pronouncements In January 2017, FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350). This ASU eliminates Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The provisions of ASU No. 2017-04 are effective for fiscal years beginning after December 15, 2019, and interim periods within those years. The Company did not early adopt and is currently evaluating the impact of this ASU. In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which adds, modifies, and removes certain disclosure requirements on fair value measurement. The provisions of ASU No. 2018-13 are effective for fiscal years beginning after December 15, 2019. The adoption of the additional disclosures required by ASU No. 2018-13 will have no impact on the consolidated financial statements of the Company but will result in changes to the footnote disclosures. On May 30, 2019, the FASB issued ASU No. 2019-06, Intangibles-Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities (the ASU). The ASU extends the optional accounting alternatives for goodwill and 22 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) intangible assets acquired in a business combination that were previously only available to private companies to all not-for-profit entities (including conduit bond obligors with publicly traded debt). Upon adoption of the accounting alternative, the entity must make a policy election to test for impairment of goodwill at either the entity level or the reporting unit level, such testing would only occur if an event occurs or circumstances change indicating the fair value of the entity or reporting unit may be below its carrying amount. The guidance was effective upon issuance. Not-for-profit entities have an open-ended effective date. The Company did not elect the alternative to amortize goodwill and continues to test goodwill for impairment. (3) Community Benefits (Unaudited) The following is a summary of the Company’s community service as measured by services to the poor and benefits provided to the broader community. The summary has been prepared in accordance with the Catholic Health Association (CHA) of the United States document, A Guide for Planning and Reporting Community Benefit, 2017 Edition. The following represents unsponsored community benefit expense at cost for the year ended December 31, 2019: Charitable services and other community benefits: Traditional charity care Unpaid costs of public programs Community health services Health professional education and research Subsized health services Financial and in-kind donations Community building activities Community benefit operations Total quantifiable community benefits Percent of total recurring expenses $ 98,253 497,932 30,921 63,637 8,431 8,202 8,008 9,169 $ 724,553 8.6 % Community benefits include the provision of health services to uninsured persons who cannot afford to pay for their care, participation in government programs for low income persons that reimburse services at less than cost, education of healthcare professionals, community health education, activities to identify and manage chronic health conditions and other healthcare and community supportive services. 23 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) (4) Investments and Assets Whose Use is Limited The composition of assets whose use is limited consists of the following as of December 31: 2019 Board-designated funds: Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income mutual funds Fixed income commingled funds U.S. government and agency securities Corporate obligations Alternative investments Other investments Self insurance and trustee held funds: Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income commingled funds U.S. government and agency securities Corporate obligations Alternative investments Other investments 24 2018 $ 128,635 896,406 626,110 568,336 — 143,496 910,796 747,486 1,096,214 82 123,750 568,244 247,448 403,212 99,725 420,995 440,049 232,797 991,996 9,905 $ 5,117,561 3,538,121 2019 2018 $ 133,711 87,690 — — — 50,877 — — — 96,513 23,789 22,666 15,980 50,348 20,789 10,915 41,230 9,204 $ 272,278 291,434 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Donor restricted funds: Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income mutual funds Fixed income commingled funds U.S. government and agency securities Corporate obligations Alternative investments $ Investments: Cash and cash equivalents Equity mutual funds Common and preferred stocks Fixed income commingled funds U.S. government and agency securities Corporate obligations Investments and assets whose use is limited Available for current liabilities Long-term assets limited or restricted as to use $ 109,876 5,856 3,881 3,557 — 249 3,867 2,624 6,518 56,117 7,278 1,500 13,860 1,680 3,261 485 5,775 3,158 136,428 93,114 8,798 — — — — — 4,038 8,100 2,210 1,789 7,259 3,896 8,798 27,292 5,535,065 (157,052) 3,949,961 (191,465) 5,378,013 3,758,496 Interest and dividend earnings (net of expenses), net realized gains and losses on investments and the net change in unrealized gains and losses on investments are considered investment income and are included and primarily recorded in investment gains on the consolidated statement of operations. The following is a summary of nonoperating investment gains (losses), net for the year ended December 31, 2019: Dividends and interest Net realized gains on securities Net change in unrealized gains and losses on securities $ 72,495 253,475 258,656 $ 584,626 The Company’s ability to generate investment income is dependent in large measure on market conditions. The market value of the Company’s investment portfolio, as well as the Company’s investment income, have fluctuated significantly in the past and are likely to continue to fluctuate in the future. The Company’s 25 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) investment portfolio assets are designated as trading securities as discussed in ASC Topic 320, Investments – Debt and Equity Securities. The Company’s entire portfolio is actively managed by third-party investment managers. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price. As required by U.S. GAAP, realized and unrealized gains and losses on an investment portfolio, designated as a trading portfolio, are accounted for as nonoperating investment (losses) income and are included in (deficit) excess of revenues over expenses. Because of this designation as a trading portfolio, management anticipates fluctuations in excess of revenues over expenses. Accordingly, based on this diversification, management does not believe there are any material concentrations of credit as of December 31, 2019, and December 31, 2018. The Company, through its professional investment managers, enters into derivative transactions (primarily in the form of money market, equity index and government futures), which are used in conjunction with the Company’s portfolio of marketable debt securities to economically hedge various investment risks. (5) Fair Value of Financial Instruments The following discussion describes the valuation methodologies used for financial assets and liabilities measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about the Company’s business, its value or consolidated financial position based on the fair value information of financial assets presented below. Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset. In addition, the disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed. Fair values for the Company’s fixed maturity securities are based on prices provided by its investment managers and its custodian bank. Both the investment managers and the custodian bank use a variety of pricing sources to determine market valuations and designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. The Company’s fixed maturity securities portfolio is highly liquid, which allows for a high percentage of the portfolio to be priced through pricing services. Fair values of equity securities have been determined by the Company from observable market quotations, when available. Private placement securities and other equity securities where a public quotation is not available are valued by using broker quotes. Fair values for the Company’s interest rate swaps have been determined using pricing models developed based on the LIBOR swap rate and other observable market data. The values were determined after considering the potential impact of collateralization and netting agreements, adjusted to reflect nonperformance risk of both the counterparty and the Company. 26 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Nonrecurring Fair Value Measurements The Company is required to provide additional disclosures about fair value measurements as part of the consolidated financial statements for each major category of assets and liabilities measured at fair value on a nonrecurring basis. In general, nonrecurring fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to nonfinancial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets, and historical cash payment trends. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows. Nonfinancial assets and liabilities Current assets Inventories Property and equipment, net Other long term assets Identifiable intangible assets Current liabilities Long-term liabilities Contingent consideration 27 Input Valuation methodology Estimate of replacement cost Estimate of replacement cost Estimate of replacement cost Estimate of replacement cost Discounted cash flows Estimate of replacement cost Estimate of replacement cost Discounted cash flows Cost Cost Cost Cost Income Cost Cost Income (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31: Fair value measurements at December 31, 2019 using: Level 1 Level 2 Level 3 Fair value Cash, cash equivalents and investments Investments Assets limited or restricted as to use: Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income commingled funds Government and agency bonds Corporate obligations 453,258 8,798 453,258 8,798 — — — — — — 372,202 989,259 629,995 571,896 143,744 961,728 752,702 372,202 504,976 546,843 571,896 100,721 443,259 — — 484,283 83,152 — 43,023 518,469 752,702 — — — — — — — — — — — — — — 4,883,582 3,001,953 1,881,629 — — 12,688 — 12,688 — — 4,896,270 3,001,953 1,894,317 — — $ 95,959 695 — — — — 95,959 695 — — $ 96,654 — — 96,654 — $ Cash and assets limited or restricted as to use Assets whose use is limited under securities lending arrangements Total cash and assets limited or restricted as to use $ Liabilities: Interest rate swaps Contingent consideration Total liabilities Reported at 1 NAV 28 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Fair value measurements at December 31, 2018 using: Level 3 Level 2 Level 1 Fair value Cash and cash equivalents Assets limited or restricted as to use: Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income mutual funds Fixed income commingled funds Government and agency bonds Corporate obligations 167,535 167,535 — — — 284,166 602,717 182,413 435,262 101,405 476,393 468,582 253,383 284,166 410,459 — 435,262 101,405 68,641 236,195 — — 192,258 182,413 — — 407,752 232,387 253,383 — — — — — — — — — — 89,767 — — — — — 2,971,856 1,703,663 1,268,193 — 89,767 9,179 — 9,179 — — 2,981,035 1,703,663 1,277,372 — 89,767 $ 67,576 31,496 — — — — 67,576 31,496 — — $ 99,072 — — 99,072 — $ Cash and assets limited or restricted as to use Assets whose use is limited under securities lending arrangements Total cash and assets limited $ or restricted as to use Liabilities: Interest rate swaps Contingent consideration Total liabilities 1 Reported at 1 NAV Fund investments reported at NAV as practical expedient estimate. The equity commingled investment funds are valued at NAV provided by the respective fund administrators. Management has determined that the NAV is an appropriate estimate of the fair value of the commingled investments funds as of December 31, 2019 and December 31, 2018, since the commingled investment funds are audited and accounted for at fair value by the administrators of the respective commingled investment funds. There are no restrictions on the ability of the Company to redeem any of the commingled investment funds as of December 31, 2019 and December 31, 2018. Alternative investments are not included in the table. Alternative investments are not necessarily readily marketable and may include short sales on securities and trading in future contracts, options, foreign currency contracts, other derivative instruments and private equity investments. However, management has determined an estimate of the fair value of these investments as of December 31, 2019, and December 31, 2018, since the alternative investments are audited and accounted for at fair value by the administrators of the respective alternative investments. Alternative investments can be divested only at specified times in accordance with terms of the partnership agreements. Hedge fund redemptions typically contain restrictions that allow for a portion of the withdrawal proceeds to be held back from distribution while the underlying investments are liquidated. These redemptions are subject to lock-up provisions that 29 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) are generally imposed upon initial investment in the fund. Private equity funds are generally closed-end funds and have significant redemption restrictions that prohibit redemptions during the fund’s life. The following table summarizes the alternative investments and committed capital as of December 31: Alternative investments 2019 2018 Hedge funds Private equity Other Committed capital 2019 2018 $ 563,676 532,643 6,419 529,764 500,587 6,033 — 372,092 — — 287,928 — $ 1,102,738 1,036,384 372,092 287,928 Realized and unrealized interest rate swap agreements gains (losses), including payments to and from a counterparty, are presented net and included in the consolidated statement of operations as nonoperating gains (losses), net. The following table summarizes the activity related to interest rate swap agreements for which fair value measurements are based on significant unobservable inputs (Level 3) as of: Fair value as of December 31, 2018 Unrealized gains Unrealized losses $ (67,576) 745 (29,128) Fair value as of December 31, 2019 $ (95,959) Contingent consideration due to the previous owners/corporate members of certain acquired organizations is required to be recorded at fair value on a recurring basis under applicable accounting guidance. The Company’s contingent consideration payable was $695 and $31,496 as of December 31, 2019 and December 31, 2018, respectively. The reduction of the contingent consideration was due to the Ensemble transaction. Accretion expense related to accrued contingent consideration is included within the excess of revenue over expenses. The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair value. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the consolidated balance sheet date. 30 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Following is the summary of the inputs and valuation techniques utilized to value Level 2 financial instruments as of December 31, 2019 and December 31, 2018: Financial instrument Government and agency bonds Corporate obligations Commingled and mutual funds Input Valuation Matrix Broker/Dealer Matrix Market/Income Market Market/Income For Level 3 measurements, when observable prices are not available, the Company might use one or more valuation techniques such as the cost approach or the income approach for which sufficient and reliable data is available. Within Level 3, the use of the cost approach generally consists of using historical purchase data or similar transaction cost data while the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. Significant increases (decreases) in any of those observable inputs in isolation would result in a significantly lower (higher) fair value measurement. (6) Property and Equipment, Net Property and equipment, net consists of the following as of December 31: Land Land improvements Buildings and fixed equipment Major movable equipment Leasehold improvements $ Less accumulated depreciation Construction in progress $ 2019 2018 260,435 103,777 4,756,299 4,544,127 208,404 261,293 104,735 4,386,607 4,421,433 198,177 9,873,042 9,372,245 (6,363,763) (5,946,119) 3,509,279 3,426,126 212,712 119,586 3,721,991 3,545,712 As of December 31, 2019, the Company is contractually obligated for construction projects totaling $140,995 at current construction cost levels. It is expected that all of these costs will be incurred in the next twelve months. The Company will finance these construction projects through the use of tax-exempt bond obligations proceeds, assets whose use is limited and operating cash flow. Depreciation expense for the Company was $414,938 for the year ended December 31, 2019. 31 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) (7) Long-Term Debt The following is a summary of the Company’s long-term debt as of December 31: Long-term debt 2019 Master trust indenture obligations: Hospital Facilities Revenue and Revenue Refunding and Improvement Bonds: Mercy Health Series 2008 variable rate direct placement bonds payable in installments through October 2031 Mercy Health Series 2010B fixed rate serial bonds payable in installments through September 2020; interest at 4.00% to 5.00% Mercy Health Series 2010C/D variable rate demand and direct placement bonds payable in installments through June 2034 Mercy Health Series 2012A fixed rate serial and term bonds payable in installments beginning May 2019 through May 2042; interest at 2.25% to 5.00% Mercy Health Series 2012B variable rate demand bonds payable in installments beginning May 2034 to May 2036 Bon Secours Series 2013B (VSBFA) variable rate direct placement bonds payable in installments beginning November 2031 through November 2042 Mercy Health Series 2015A fixed rate term bonds payable in installments beginning November 2039 through November 2045; interest at 4.00% to 5.00% Mercy Health Series 2015B floating rate notes payable November 2035 with initial FRN hard put mandatory purchase date of May 2020 Mercy Health Series 2015C Fixed Rate Taxable Bonds payable November 2025; interest at 3.38% Mercy Health Series 2017A fixed rate serial and term bonds payable in installments beginning August 2019 through August 2047; interest at 3.00%-5.00% Mercy Health Series 2017B variable rate bonds payable August 2047 with first longterm mandatory purchase date of May 2022; interest at 5.00% Mercy Health Series 2017C Fixed Rate Taxable Bonds payable August 2027; interest 3.56% Bon Secours Series 2017 (SC) variable rate direct placement bonds payable in installments beginning November 2031 through November 2042 Mercy Health Series 2018A fixed rate taxable bonds payable July 2028; interest at 4.30% Mercy Health Series 2018AB commercial paper notes 2018 TD Bank variable rate taxable term loan payable in December 2026 2018 US Bank variable rate taxable term loan payable in December 2023 2019 Wells Fargo variable rate taxable term loan payable in December 2020 Total master trust indenture obligations 32 $ 2018 300,000 300,000 19,035 41,490 172,400 177,800 266,010 273,620 100,000 100,000 40,740 40,740 159,205 159,205 100,000 100,000 150,000 150,000 476,325 482,665 89,425 89,425 143,150 143,150 69,925 69,925 305,684 100,000 150,000 160,000 240,000 305,684 100,000 150,000 160,000 — 3,041,899 2,843,704 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Long-term debt 2019 Ireland variable rate taxable term loan payable in August 2024 Other debt Capital lease obligations $ Original issue net premium Cost of issuance Less current portion of long-term debt $ 2018 93,045 23,572 — — 13,165 15,854 3,158,516 2,872,723 60,319 (15,950) 71,443 (16,943) 3,202,885 2,927,223 (762,807) (419,994) 2,440,078 2,507,229 The Company’s master trust indenture (the MTI) provides that Mercy is the sole obligor on all outstanding indebtedness incurred under the MTI. All bond obligations of the Company have been evidenced by obligations issued under the MTI. In addition, the Company has issued a master obligation guaranty under the MTI for a bank term loan of its contractual affiliate, Bon Secours Health System Limited by Guarantee, the principal amount of which is $93,045. The Company’s MTI obligations mature at various dates through 2047 and are subject to optional and mandatory redemption features. While only Mercy Health is obligated under the terms of the MTI, Mercy Health has covenanted to cause its controlled affiliates and certain contractual affiliates to transfer such funds to Mercy Health as necessary to pay amounts due under the MTI. Certain controlled affiliates of Mercy Health have entered into agreements obligating them to make these transfers at the request of Mercy Health. The Company is subject to certain restrictive covenants under the MTI, revolving credit agreements, reimbursement agreements and irrevocable letters of credit as of December 31, 2019 and December 31, 2018. The Company was in compliance with all restrictive covenants as of December 31, 2019 or December 31, 2018. 33 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The following is a schedule of future minimum payments based on scheduled maturities as of December 31: Master trust indenture obligations Period 2020 2021 2022 2023 2024 Thereafter Total minimum payments European group and other debt $ 759,966 41,509 41,560 201,750 35,875 1,961,239 2,832 4,975 1,568 129 107,085 28 $ 3,041,899 116,617 Interest payments for the year ended December 31, 2019 were $96,641. Unamortized debt issuance cost of $15,950 and $16,943 as of December 31, 2019, and December 31, 2018, respectively, represents costs related to the issuance of bond obligations and is being amortized over the terms of the related bond obligations at amounts approximating the effective interest method. As of December 31, 2019, the Company had a taxable term loan in the amount of $240,000 and $175,000 in variable direct placement agreements due to expire in the next year, as well as $100,000 of the Series 2015 Adjustable Rate Bonds (“Series 2015B bonds”). The Series 2015B bonds were sold in the Floating Rate Note (“FRN”) mode in 2015. The initial period for these Series 2015B FRN bonds have a tender on April 30, 2020. At that time the Corporation may choose to remarket these bonds for another segment in FRN mode or may choose to change the mode one of several other options available within the Series 2015 bond indenture. Management will choose the appropriate mode at the time of the tender depending upon appropriate capital market conditions. Additionally, the Company has $100,000 adjustable rate demand bonds supported by the Company’s own liquidity and $100,000 commercial paper notes supported by the Company’s own liquidity as of December 31, 2019. These amounts are included in the current portion of long-term debt. The Company has $88,700 of variable rate bond obligations with letter of credit support, a total of $494,365 adjustable rate bonds held under direct purchase agreements with certain financial institutions, $550,000 taxable term loan agreements with certain financial institutions, and $100,000 floating rate notes. The Company’s dedicated liquidity facilities and direct placement agreements on variable rate demand bonds have expiration dates that extend from July 2019 to November 2027, and their respective term-out repayment provisions extend beyond the subsequent fiscal year. The Company maintains a revolving credit agreement for purposes of working capital support or capital asset acquisition. This revolving credit agreement has a commitment amount of $150,000 and is secured by the MTI. This agreement expires on December 11, 2020, with an intention to extend the agreement beyond this period. No amounts were outstanding under the revolving credit agreement as of December 31, 2019 or December 31, 2018. 34 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) (8) Derivatives and Interest Rate Swap Agreements The following table includes the notional and valuation amounts (parenthetical amounts represent liabilities) of the Company’s interest rate swap agreements as of December 31: Interest rate swap agreement December 2006 JPM December 2018 Barclays December 2018 Citi December 2018 JPM December 2018 PNC December 2007 JPM August 2018 JPM Credit valuation adjustment Transaction type Pay fixed Pay fixed Pay fixed Pay fixed Pay fixed Constant maturity Constant maturity Payment rate/basis Termination date 3.63 % 3.98 3.84 3.72 3.45 N/A N/A 2033 2042 2032 2047 2042 2027 2037 $ Notional amount 2019 2018 Valuation amount 2019 2018 269,200 50,000 25,000 80,000 69,925 250,000 150,000 (38,695) (17,438) (5,767) (18,100) (20,885) 3,963 (377) 1,340 (32,905) (10,346) (3,374) (10,120) (15,172) 3,492 (651) 1,500 (95,959) (67,576) 269,200 50,000 25,000 80,000 69,925 250,000 150,000 $ All changes in the fair value of the Company’s interest rate swap agreements are recognized in nonoperating gains (losses), net in the consolidated statement of operations. The differences between settlement payments made and settlement payments received on all interest rate swap agreements are included in nonoperating gains (losses), net on the consolidated statement of operations. The net payments were $9,167 for the year ended December 31, 2019. The Company’s interest rate swap agreements include certain collateralization requirements based on the market value of these transactions. The amount required for collateral is determined daily based on the current market value of the interest rate swap agreements. The Company has posted collateral with designated custodians of $64,373 as of December 31, 2019 ($40,401 as of December 31, 2018) commensurate with the valuation of the interest rate swap agreements. All collateral posted is in the form of cash and cash equivalents and is included within donor restricted on the consolidated balance sheet. Interest earned while collateralized funds are held by the custodian is shown in nonoperating gains, net on the consolidated statement of operations. (9) Pension Plans The Company recognizes in the consolidated balance sheets the funded status of its defined benefit pension and other postemployment plans (collectively, referred to as the Plans), measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for defined benefit pension plans and accumulated benefit obligation for other postemployment benefit plans). Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a component of unrestricted net assets. 35 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The following is a summary of the components of the change in benefit obligation and plan assets for the Plans as of December 31, 2019: Pension Plans Change in benefit obligation: Net projected benefit obligation at beginning of year Service cost Interest cost Actuarial loss/(gain) Plan amendments Curtailments Settlement Gross benefits paid and expenses $ Postemployment 2,739,089 29,891 109,567 358,259 616 (52,281) (60,557) (137,925) 18,306 548 681 (201) — — — (1,646) Projected benefit obligation at end of year 2,986,659 17,688 Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Gross benefits paid Settlement 2,275,964 521,731 28,194 (137,926) (60,557) — — 1,646 (1,646) — Fair value of plan assets at end of year 2,627,406 Under funded status $ (359,253) — (17,688) Settlements of $60,557 were recognized during the year ended December 31, 2019. During 2019 and 2018, the Company updated the mortality projection assumptions used to determine the Plans’ projected benefit obligation. The change to the MP-2019 and MP-2018 mortality improvement scales in 2019 and 2018 respectively, resulted in a decrease in the Plans’ projected benefit obligation and an increase in the funded status of $13,633 and $5,530 at December 31, 2019 and 2018, respectively. 36 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Amounts recognized in the consolidated financial statements consist of the following as of December 31, 2019: Pension Plans Retirement assets Current liabilities Retirement liabilities Net amount recognized Postemployment $ 125,015 — (484,268) — (1,694) (15,994) $ (359,253) (17,688) Amounts recognized in the consolidated financial statements consist of the following as of December 31, 2018: Pension Plans Retirement assets Current liabilities Retirement liabilities – long term Net amount recognized Postemployment $ 40,663 — (503,787) — (1,603) (16,703) $ (463,124) (18,306) In addition to amounts recognized in the consolidated financial statements related to the Plans, retirement liabilities on the consolidated balance sheets includes other retirement liabilities, consisting primary of accrued contributions to defined contribution plans, of $650 and $635 at December 31, 2019 and 2018, respectively. Included in unrestricted net assets are the following amounts that have not yet been recognized in net periodic benefit cost (income) for the year ended December 31, 2019: Pension Plans Postemployment 16,442 (669,434) — 2,171 Net amount unrecognized (652,992) 2,171 Cumulative excess (shortfall) of employer contributions over net periodic benefit cost 293,739 (19,859) (359,253) (17,688) Net prior service credit Net actuarial (loss) gain $ $ 37 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Net actuarial (loss) gain is amortized as a component of net periodic benefit cost (income), only if the losses exceed 10% of the greater of the projected benefit obligation or the fair value of plan assets. Net prior service credit (cost) is amortized on a straight-line basis over the estimated life of the Plans’ participants. The net prior service credit (cost) and net actuarial (loss) gain included in unrestricted net assets expected to be recognized as a (loss) gain in net periodic benefit cost (income) during the year ended December 31, 2020 is ($16,442) and $667,263, respectively. The following amounts related to pension and other postemployment benefit activity has been recognized as the change in unrestricted net assets for the year ended December 31, 2019: Pension Plans Amortization of prior service cost Net actuarial gain Amortization of net actuarial loss Unrecognized prior service cost Other postemployment benefit changes $ $ 3,179 78,085 43,266 (616) — 123,914 Postemployment — — — — (110) (110) The following amounts are a summary of the components of net periodic benefit cost for the Plans for the year ended December 31, 2019: Pension Plans Service cost Interest cost Expected return on plan assets Curtailment/settlement cost Amortization of: Actuarial loss/(gain) Prior service cost $ 29,891 109,567 (137,667) 22,700 24,291 (547) Net periodic benefit cost $ 38 48,235 Postemployment 548 681 — — (13) (79) 1,137 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The following weighted average assumptions were used to determine the benefit obligation as of December 31, 2019: Discount rate-ERISA Discount rate-Church pension and postretirement benefit plan Rate of compensation increase Mortality table Generational scale Pension Plans Postemployment 3.07 % N/A 3.17 2.50 Pri-2012 MP-2019 3.17 N/A Pri-2012 MP-2019 The following weighted average assumptions were used to determine the benefit obligation as of December 31, 2018: Discount rate-ERISA Discount rate-Church pension and postretirement benefit plan Rate of compensation increase Mortality table Generational scale Pension Plans Postemployment 3.02 % N/A 4.18 2.50 RP-2014 MP-2018 4.18 N/A RP-2014 MP-2018 The following healthcare cost trend rate assumptions were used in determining the benefit obligation of the post-employment healthcare benefits as of December 31: Healthcare cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (ultimate trend rate) Year the rate reaches the ultimate trend rate 39 2019 2018 5.3%-7.8% 6.2%-6.8% 4.5 % 2029 4.5 % 2028 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The healthcare cost trend rate assumptions can have a significant effect on the amounts reported. A one-percentage-point change in assumed healthcare cost trend rate assumptions would have the following effects: Onepercentagepoint increase Effect on total of service and interest cost Effect of post-employment benefit obligation $ Onepercentagepoint decrease 58 724 49 637 In selecting the expected long-term return on plan assets, the Company considered the average rate of earnings on the assets invested or to be invested to provide the benefits for the defined benefit pension plans. This included considering the target asset allocation and the expected returns likely to be earned over the life of the defined benefit pension plans. The Company’s defined benefit pension plans targeted asset allocations, by asset category, are as follows as of December 31: 2019 Asset category: Equity mutual and commingled funds and securities Fixed income mutual funds and securities Alternative investments Cash Total 2018 29 % 47 20 4 47 % 37 14 2 100 % 100 % The Company maintains diversification in its plan assets by allocating assets to various asset classes and market segments and retaining multiple professional investment firms with different philosophies, styles and approaches. Accordingly, based on this diversification, management does not believe there are any concentrations of credit at the measurement date. The marketable debt securities within plan assets, including mortgage-backed and asset-backed obligations, are actively traded and the fair value reflects current market conditions. 40 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The following is a summary of the plan assets measured at fair value on a recurring basis based on the fair value hierarchy as of December 31, 2019: Fair value measurements Level 1 Level 2 Level 3 Fair value Cash and cash equivalents $ Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income commingled funds Government and agency bonds Corporate obligations Other Total investments Due to broker/custodian for investment activity, net Total plan assets 51,612 353,613 612,573 261,784 25,316 200,900 678,451 16,535 51,612 196,268 579,970 249,959 25,316 177,475 — — — 157,345 32,603 11,825 — 23,425 678,451 16,535 — — — — — — — — 2,200,784 1,280,600 920,184 — — (2,333) $ 2,198,451 1,280,600 — (2,333) — 917,851 The following is a summary of the plan assets measured at fair value on a recurring basis based on the fair value hierarchy as of December 31, 2018: Fair value Cash and cash equivalents Equity mutual funds Equity commingled funds Common and preferred stocks Fixed income mutual funds Fixed income commingled funds Government and agency bonds Corporate obligations Other $ Total investments Due from broker/custodian for investment activity, net Total plan assets $ Level 1 Fair value measurements Level 2 Level 3 39,683 573,265 191,147 289,395 9,042 189,796 72,786 473,183 3,826 39,683 445,158 — 288,777 9,042 27,448 67,084 — — — 128,107 191,147 618 — 162,348 5,702 473,183 3,826 — — — — — — — — — 1,842,123 877,192 964,931 — 12,692 — 12,692 — 1,854,815 877,192 977,623 — 41 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The following table summarizes the alternative investments and committed capital as of December 31: Alternative investments 2019 2018 Hedge funds Private equity Committed capital 2019 2018 $ 200,277 228,674 196,634 224,515 — 84,081 — 72,795 $ 428,951 421,149 84,081 72,795 The projected benefit payments for the Plans are as follows: Pension Plans 2020 2021 2022 2023 2024 2025–2029 $ 168,387 159,384 162,649 162,597 163,178 819,453 Postemployment 1,694 1,798 1,847 1,896 1,339 6,037 The Company expects to contribute $3,100 to the defined benefit pension plans and $2,093 to the post-employment benefit plans in 2020. The Company has several defined contribution benefit plans to assist eligible employees in providing for retirement. Under such plans, the company recognized expense of $151,309 for the year ended December 31, 2019, related to employer contributions, which is included in employee benefits expense in the consolidated statement of operations. (10) Other Commitments and Contingent Liabilities (a) General and Professional Liability Insurance The provision for claims and related funding levels for the HPL/GL Program is established annually based upon the recommendations of consulting actuaries. The Company has accrued claims including liabilities for incidents incurred but not reported of approximately $246,987 and $235,575 as of December 31, 2019, and December 31, 2018, respectively. The current portion of such accruals, $71,556 and $58,196 as of December 31, 2019 and December 31, 2018, respectively, is included in other accrued expenses, and the remainder, $175,431 and $177,379 as of December 31, 2019 and December 31, 2018, respectively is included within self-insurance liabilities in the accompanying consolidated balance sheets. Amounts recorded for unpaid claims are based upon the estimated present value of future claim payments and such amounts are undiscounted and based upon an actuarial estimate. 42 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) (b) Workers’ Compensation Insurance Accrued workers’ compensation claims of $79,919 and $87,590, of which the current portion, $8,700 as of December 31, 2019 and December 31, 2018, respectively, is reported as other accrued expenses. The remainder, $71,218 and $78,890, is reported within self-insurance liabilities in the accompanying consolidated balance sheets, include estimates for incidents incurred but not reported as of December 31, 2019 and December 31, 2018, respectively. Amounts recorded for unpaid claims are based upon the estimated present value of future claim payments and such amounts are undiscounted and based upon an actuarial central estimate. (c) Employee Health Insurance Accrued claims associated with this program, which are reported as other accrued expenses in the accompanying consolidated balance sheet, of approximately $47,070 and $46,453, include estimates for claims incurred but not reported as of December 31, 2019 and December 31, 2018. (d) Litigation The healthcare industry is subject to numerous laws and regulations from federal, state, and local governments. The Company’s compliance with these laws and regulations can be subject to periodic governmental review and interpretation, which can result in regulatory action unknown or unasserted at this time. Management is aware of certain asserted and unasserted legal claims and regulatory matters arising in the ordinary course of business but cannot reasonably predict any particular outcomes or operational or financial effects from these matters at this time. (e) Leases The Company’s leases primarily consist of real estate leases for medical and administrative office buildings. The leases have remaining lease terms of 1 year to 100 years, some of which include options to extend the leases for up to 30 years, and some of which include options to terminate the leases within 1 year. Lease expense for the year ended December 31, 2019 is as follows: Finance lease expense: Amortization of ROU assets Interest on lease liabilities Operating lease expense Short-term lease expense Variable lease expense Total lease cost 43 $ 9,913 5,743 102,176 31,283 13,287 $ 162,402 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Commitments related to non-cancellable operating and finance leases for each of the next five years and thereafter as of December 31, 2019 are as follows: Operating 2020 2021 2022 2023 2024 Thereafter $ Total Less: Present value discount Acquired lease liabilities Lease liabilities $ Finance 89,381 70,592 53,014 39,411 28,658 76,253 15,913 16,118 15,108 14,261 12,735 482,949 357,309 557,084 (40,322) 7,218 (339,913) 7,361 324,205 224,532 The commitment analysis and other information above for acquired leases at December 31, 2019 was provisional pending receipt of the final valuation report for those assets from a third-party valuation specialist. Other information is as follows Weighted average remaining lease terms (in years): Finance leases Operating leases Weighted average discount rate: Finance leases Operating leases 44 51.46 6.06 3.69 % 4.46 % (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The following is a schedule of aggregate future minimum payments for leases as of December 31, 2018: Operating 2019 2020 2021 2022 2023 Thereafter Finance $ 79,217 73,318 58,554 43,409 31,815 71,055 2,255 2,201 2,250 2,258 2,376 4,514 $ 357,368 15,854 (11) Net Assets with Donor Restrictions The Company’s endowments consist of 283 and 278 individual funds established for a variety of purposes as of December 31, 2019 and December 31, 2018, respectively. Net assets associated with endowment funds, including board-designated funds, are classified and reported based on the existence or absence of donor or board-imposed restrictions and the nature of the restrictions, if any. The Company’s endowment net assets are comprised of permanently restricted funds, which were $90,617 and $74,959 as of December 31, 2019 and December 31, 2018, respectively. The Company does not hold any board-designated endowment funds within assets without donor restrictions or temporarily restricted net assets (assets with donor restrictions). From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or Uniform Prudent Management of Institutional Funds Act requires the Company to retain as a fund of perpetual duration. Deficiencies of this nature are reported in net assets without donor restrictions. There were no deficiencies as of December 31, 2019 or December 31, 2018. The Company has investment and spending policies for endowment assets that 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. Endowment assets include those assets of donor-restricted funds that the Company must hold in perpetuity or for a donor-specified period as well as board-designated funds. The practice allows the endowment assets to be invested in a manner that is intended to produce investment returns that exceed the price and yield the results of the allocation index while assuming a moderate level of investment risk. The Company expects its endowment funds to provide a rate of return that preserves the gift and generates earnings to achieve the endowment purpose. To satisfy its long-term rate-of-return objectives, the Company relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and interest and dividend income. The Company uses diversified asset allocation to achieve its long-term return objectives within prudent risk constraints to preserve capital. 45 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) The Company has a practice of distributing the major portion of current year earnings on the endowment funds if the restrictions have been met. This is consistent with the Company’s objective to maintain the purchasing power of the endowment assets held in perpetuity, as well as to provide additional real growth through new gifts and investment return. (12) Functional Expenses The functional breakdown of expenses incurred by the Company in fulfilling its mission for the year ended December 31, 2019 is as follows: Healthcare services Employee compensation $ Purchased services and other Supplies Depreciation and amortization Interest Total recurring expenses $ Program activities Ancillary services and other Supporting activities Total General and administrative Total 3,020,965 1,222,675 1,362,322 270,279 2,835 926,418 387,231 87,066 87,220 78,593 3,947,383 1,609,906 1,449,388 357,499 81,428 448,705 307,528 163,569 75,326 14,205 4,396,088 1,917,434 1,612,957 432,825 95,633 5,879,076 1,566,528 7,445,604 1,009,333 8,454,937 (13) Liquidity and Capital Resources Financial assets available for general expenditure within one year of the balance sheet date consist of the following: 2019 Cash, cash equivalents and investments Accounts receivable, net Assets whose use is limited: Board designated funds Self-insurance and trustee held funds Restricted funds $ $ 2018 462,056 1,017,577 167,535 976,269 4,021,347 88,927 17,060 2,450,498 236,950 89,956 5,606,967 3,921,208 The Company has certain board-designated and donor-restricted assets whose use is limited, which are available for general expenditure within one year in the normal course of operations. Accordingly, these assets have been included in the qualitative information above. The Company has other assets whose use is limited for donor-restricted purposes, debt service, and for the professional and general liability captive insurance program. Additionally, certain other board-designated assets are designated for future capital expenditures and an operating reserve. These assets whose use is limited are not available for general 46 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) expenditure within the next year and are not reflected in the amounts above. However, the board-designated amounts could be made available, if necessary. As part of the Company’s liquidity management plan, cash in excess of daily requirements is invested in short-term investments and money market funds. Occasionally, the Board designates a portion of any operating surplus to an operating reserve, which was $4,021,347 and $2,450,498 as of December 31, 2019 and December 31, 2018, respectively. The fund established by the board of directors may be drawn upon, if necessary, to meet unexpected liquidity needs. (14) Investments in Unconsolidated Organizations The Company has invested in a number of joint ventures, limited liability corporations and other entities to provide specialty healthcare services or engage in other activities. These investments range from minority investments with no control to majority investments or investments with control. The most significant of these investments are presented below. The Company accounts for its interest in these entities under the equity method of accounting and includes its interest in the excess of revenues over expenses of these entities in its consolidated statement of operations and changes in net assets as other revenue. None of these entities are otherwise affiliated with BSMH. (a) Ensemble Ensemble is a Delaware limited liability company providing revenue cycle management and consulting services to hospitals and health systems. Ensemble was a wholly owned subsidiary of BSMH and 52% was sold on August 1, 2019, as disclosed in Note 1(b). An additional 1% of BSMH ownership interest in Ensemble was sold to another non-affiliated party on November 1, 2019. As of December 31, 2019, BSMH ownership interest in Ensemble was 47%. (b) Summa Health System Summa Health System (Summa), located in Akron, Ohio, is a tax-exempt integrated health care delivery system and provides health services and insurance to communities in Northeast Ohio. Healthspan Partners (HSP) has an ownership interest of 30% in Summa and does not manage or control the operations. In September 2018, the Company entered into an agreement to redeem HSP’s ownership interest in Summa and has reduced HSP’s investment in Summa to HSP’s estimated realizable value of the investment. No future Summa earnings (losses) will be recognized on the investment in the consolidated statement of operations and changes in net assets until resolution of the redemption agreement. (c) Roper St. Francis Healthcare – South Carolina BSHSI, The Medical Society of South Carolina and the Carolinas Health Company, Inc. are members of Care Alliance Health Services (d/b/a Roper St. Francis Healthcare). Roper St. Francis Healthcare is the sole member of and operates Bon Secours – St. Francis Xavier Hospital, Roper Hospital, a supporting foundation and physician practices located in Charleston, South Carolina. The Company is obligated to provide 27% of any capital contribution to Roper St. Francis Healthcare and is entitled to 27% of any surplus capital. Refer to Note 15 for subsequent events related to the investment. 47 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) (d) Other Other joint ventures mainly include Bon Secours Charity Health System, Inc. (Charity), Sentara Princess Anne, and Premier, Inc. The Company, the Sisters of Charity and Westchester Medical Center, are members of Charity. The Company owns 40% of Charity. The Company and Sentara Healthcare are members of a Virginia not-for-profit, nonstock, corporation that owns and operates Sentara Princess Anne Hospital. The Company owns 30% of Sentara Princess Anne. The following is a summary of the investments in unconsolidated organizations as of December 31: 2019 Ensemble Summa Health System Roper St. Francis Healthcare Other 2018 $ 836,038 250,000 114,616 142,561 — 250,000 107,880 162,340 $ 1,343,215 520,220 The following is a summary of the income from unconsolidated organizations, which is included in other revenue, net for year ended December 31, 2019: Ensemble (equity method investment as of July 31, 2019) Roper St. Francis Healthcare Other $ 25,052 2,798 14,481 $ 42,331 The following is a summary of assets, liabilities, net assets, revenues and expenses as of and for the years ended December 31, 2019 (from their unaudited consolidated financial statements): Ensemble Total assets Total liabilities Unrestricted net assets Restricted net assets Total revenues Total expenses Non operating gains (losses) $ 48 1,989,185 667,967 1,321,219 — 247,571 209,663 — Roper 1,166,763 745,344 383,240 38,179 958,181 955,519 12,793 (Continued) BON SECOURS MERCY HEALTH Notes to Consolidated Financial Statements Year ended December 31, 2019 (In thousands) Summa has not been included in the summary of assets, liabilities, net assets, revenues and expenses as the investment was impaired to realizable value as of December 31, 2018 and no income was recognized for the year ended December 31, 2019. Ensemble revenues and expenses are from date of deconsolidation. Ensemble operations from January 1, 2019 to July 31, 2019 are included in the consolidated statement of operations. The income from Ensemble as an unconsolidated organization from the date of deconsolidation is included in other operating revenue within the consolidated statement of operations. (15) Subsequent Events The Company has evaluated and disclosed any subsequent events through April 2, 2020, which is the date the consolidated financial statements were issued and made publicly available. Effective January 1, 2020, Mercy Health was dissolved and consolidated into Bon Secours Mercy Health, thereby, the Master Trust Indenture (Amended and Restated) Dated as of December 1, 2017 now resides in Bon Secours Mercy Health, Inc. On January 2, 2020, Bon Secours Mercy Health completed an agreement with the Medical Society of South Carolina to restructure the Roper St. Francis Healthcare joint venture, increasing BSMH’s ownership interest in the joint venture from 27% to 51% equity. Roper St. Francis Healthcare, which includes four Charleston, SC-area hospitals, will be a fully consolidated subsidiary. On January 21, 2020, BSMH announced the decision to close Our Lady of Bellefonte Hospital in Ashland, Kentucky in addition to the related Bellefonte Physician Services. The planned timeline for the closure is by the end of September 2020. The anticipated closure is an impairment indicator and a resulting impairment charge of $50,000 was recorded in nonrecurring operating losses for the year ended December 31, 2019, in the consolidated statement of operations of BSMH. The Company is in the process of evaluating the projected impact to the consolidated financial statements as a result of the coronavirus (COVID-19) including the potential impacts to patient volumes, net operating revenue and operating income. Additionally, subsequent to December 31, 2019, there has been instability in the global financial markets. BSMH has a diverse investment portfolio, including in its defined benefit pension plan portfolio. The diversified investment allocation strategy employed by BSMH serves to reduce volatility and negativity in performance. As of April 2, 2020, BSMH is not currently able to measure or predict the overall impact that this pandemic, and the related financial market volatility, may have on its future financial results. No other recognized or nonrecognized subsequent events were identified for recognition or disclosure in the consolidated financial statements. 49 BON SECOURS MERCY HEALTH Consolidating Schedule – Balance Sheet Information December 31, 2019 (In thousands) Atlantic Group Assets Current assets: Cash and investments: Cash and cash equivalents Investments Board designated funds Self-insurance and trustee held funds Donor restricted funds $ Total cash and investments 1,129,178 — 3,885 — 15,859 Great Lakes Group 336,603 976 — — 144 Mid-American Group 89,575 — — — 1,241 European Group 10,777 — — — — BSMH Shared Services BSMH Captives Consolidating Eliminations (72,447) 7,822 37,830 30,994 57 598 — — 58,244 — (1,041,026) — — — — 4,256 Bon Secours Mercy Health 453,258 8,798 41,715 89,238 17,301 1,148,922 337,723 90,816 10,777 58,842 (1,041,026) 610,310 407,648 16,550 75,553 10,039 322,162 23,847 68,289 9,571 237,153 38,116 53,242 5,287 57,822 332 8,235 3,252 (7,208) 330,861 4,258 114,878 — 13,069 — 3,950 — (312,440) — — 1,017,577 110,335 209,577 146,977 1,658,712 761,592 424,614 80,418 447,045 75,861 (1,353,466) 2,094,776 785,878 29 24,703 1,215,866 6,031 — 329,119 — 2,940 — — — 2,129,127 (1) 91,483 96,125 176,981 — 519,732 — — 5,075,847 183,040 119,126 810,610 1,221,897 332,059 — 2,220,609 273,106 519,732 5,378,013 974,135 58,769 138,048 — 314,251 1,140,409 2,900 67,748 — 61,185 1,047,405 11,955 61,418 — 88,485 174,632 4,719 8,917 — 100,248 385,410 1,283,313 34,187 125,015 1,643,265 — — — — — — (18,441) — — (1,606,122) 3,721,991 1,343,215 310,318 125,015 601,312 $ 3,954,525 3,255,731 1,965,936 368,934 6,138,844 348,967 (2,458,297) 13,574,640 $ 149,409 2,841 105,465 42,466 304,454 60,625 104 31,907 13,373 308,480 55,640 — 36,634 16,298 233,941 34,867 — 12,399 346 542 151,001 759,862 313,205 6,362 (294,602) 166 — — — 68,572 (3,012) — — — (309,748) 448,696 762,807 499,610 78,845 311,639 Total current liabilities 604,635 414,489 342,513 48,154 935,828 68,738 (312,760) 2,101,597 Long-term debt, less current portion Retirement liabilities Self-insurance liabilities Operating lease liabilities Other long-term liabilities 6,166 281,949 92,480 100,729 1,004,292 100 13,422 — 54,206 316,418 90 39,050 9,706 53,147 714,609 106,560 414 — 8,570 128,225 2,327,162 166,089 108,993 28,708 258,408 — — 176,980 — — — — (141,510) — (1,978,577) 2,440,078 500,924 246,649 245,360 443,375 2,090,251 798,635 1,159,115 291,923 3,825,188 245,718 (2,432,847) 5,977,983 1,589,887 227,722 2,358,041 4,341 753,530 1,426 77,011 — 2,222,008 89,438 103,249 — (25,450) — 7,078,276 322,927 1,817,609 2,362,382 754,956 77,011 2,311,446 103,249 (25,450) 7,401,203 46,665 94,714 51,865 — 2,210 — 1,864,274 2,457,096 806,821 77,011 2,313,656 103,249 (25,450) 7,596,657 3,954,525 3,255,731 1,965,936 368,934 6,138,844 348,967 (2,458,297) 13,574,640 Net patient receivables Other receivables Inventories Prepaid expenses and other current assets Total current assets Assets whose use is limited, less current portion: Board designated funds Self-insurance and trustee held funds Donor restricted funds Total assets whose use is limited, less current portion Property, plant and equipment, net Investments in unconsolidated organizations Operating lease right-of-use assets Retirement assets Other long-term assets, net Total assets Liabilities and Net Assets Current liabilities: Accounts payable Current portion of long-term debt Accrued salaries, wages and benefits Current portion of operating lease liabilities Other accrued expenses Total liabilities Net assets without donor restrictions: Controlling interest Noncontrolling interest Total net assets without donor restrictions Net assets with donor restrictions Total net assets Total liabilities and net assets $ See accompanying independent auditors’ report. 50 — 195,454 BON SECOURS MERCY HEALTH Consolidated Schedule – Operating Information Year Ended December 31, 2019 (In thousands) Atlantic Group Revenues: Net patient service revenue Other revenue, net $ Total operating revenues Expenses: Employee compensation Purchased services and other Supplies Depreciation and amortization Interest expense Total operating expenses Recurring operating income Nonrecurring operating losses, net Operating income Excess of revenue over expenses $ Mid-American Group European Group BSMH Shared Services Ensemble BSMH Captives Consolidating Eliminations Bon Secours Mercy Health 3,132,578 69,227 2,770,611 88,711 2,203,131 49,160 168,332 3,589 (138,560) 1,651,584 — 344,894 — 64,505 — (1,690,123) 8,136,092 581,547 3,201,805 2,859,322 2,252,291 171,921 1,513,024 344,894 64,505 (1,690,123) 8,717,639 1,308,959 1,034,860 594,945 85,225 330 1,356,669 844,649 494,475 115,280 81 1,048,502 691,871 410,687 105,730 1,081 86,764 26,568 49,905 4,885 273 756,591 546,455 61,654 119,225 91,866 163,098 65,566 1,284 2,518 — 4,383 70,771 7 133 25 (328,878) (1,363,306) — (171) 1,977 4,396,088 1,917,434 1,612,957 432,825 95,633 3,024,319 2,811,154 2,257,871 168,395 1,575,791 (1,690,378) 8,454,937 177,486 48,168 (9,370) Nonoperating gains (losses) , net: Investment gains Realized and unrealized interest rate swap agreements loss Gain on sale of Ensemble, net Inherent contribution on Ireland acquisition Other nonoperating activities, net Great Lakes Group (546) 232,466 75,319 (5,580) 3,526 (62,767) 112,428 (10,814) 255 (53,637) (1,723) (40,095) — (63) — 1,803 (102,862) 112,428 (10,877) 255 276,479 (37,772) 1,890,636 77,667 (34,902) — — — — 11 32,211 — — — — 112,439 21,334 168,116 47,622 (59,217) 98,643 — — — (32,079) 139,841 — — — (5,331) 37,457 — — — (6,837) 234,680 182,132 (28,597) See accompanying notes to consolidated financial statements. 51 (5) — — — (78) 1,720 2,069,246 — — — — (6) 249 262,702 (105,434) 157,268 584,626 (37,772) 1,890,636 77,667 (79,222) 2,593,203 BON SECOURS MERCY HEALTH Consolidating Schedule – Balance Sheet Information December 31, 2018 (In thousands) Atlantic Group Assets Current assets: Cash and investments: Cash and cash equivalents Investments Board designated funds Self-insurance and trustee held funds Donor restricted funds $ Consolidating Eliminations Bon Secours Mercy Health (917,366) — — — — 251,738 63,167 (152,018) 120,255 37,548 (917,366) 359,000 334,413 20,119 69,691 15,376 269,943 33,219 53,124 12,994 (3,686) 49,277 467 115,569 — 15,347 — 3,407 — 250 — 2,576 — (34,319) — (65,604) 976,269 97,963 181,926 121,097 1,440,768 691,337 432,447 139,009 40,374 (1,017,289) 1,736,255 674,398 21 22,516 1,067,491 4,631 — 288,104 — 2,623 3,289,860 (1) 53,201 — — — 69,859 181,880 — (1,896,087) — — 3,493,625 186,531 78,340 696,935 1,072,122 290,727 3,343,060 — 251,739 (1,896,087) 3,758,496 847,742 216,296 — 227,276 1,149,067 3,277 — 59,606 1,123,240 11,309 — 73,081 444,442 307,778 40,662 1,963,661 10,158 — — 857 — — — 7,383 (28,937) (18,440) — (1,924,185) 3,545,712 520,220 40,662 407,679 $ 3,429,017 2,975,409 1,930,804 6,109,212 150,024 299,496 (4,884,938) 10,009,024 $ 137,449 — 3,665 112,856 48,113 186,435 — 37,414 94,583 18,877 146,702 — 30,033 76,115 28,158 (87,912) 9,238 414,488 170,002 155,226 (15,075) — — 18,349 1,588 1,326 — — — 48,468 (1,978) (59) (65,606) 304 (32,585) 366,947 9,179 419,994 472,209 267,845 Total assets whose use is limited, less current portion Property, plant and equipment, net Investments in unconsolidated organizations Retirement assets Other long-term assets, net 375,599 14,070 58,644 36,779 BSMH Captives (10,920) — — 48,468 — Total current assets 955,676 Ensemble 120,255 — — — — Assets whose use is limited, less current portion: Board designated funds Self-insurance and trustee held funds Donor restricted funds 250,868 870 — — — BSMH Shared Services (276,373) 26,219 41,701 56,435 — Total cash and investments 938,107 — 2,795 — 14,774 Mid-American Group 62,964 203 — — — Net patient receivables Other receivables Inventories Prepaid expenses and other current assets Total assets Great Lakes Group 9,609 167,535 27,292 44,496 104,903 14,774 Liabilities and Net Assets Current liabilities: Accounts payable Payable under securities lending arrangements Current portion of long-term debt Accrued salaries, wages and benefits Other accrued expenses Total current liabilities 302,083 337,309 281,008 661,042 4,862 49,794 (99,924) 1,536,174 Long-term debt, less current portion Retirement liabilities Self-insurance liabilities Other long-term liabilities 9,686 219,418 96,373 986,034 324,382 13,647 — 39,511 653,644 41,043 9,706 117,281 2,740,465 246,630 112,210 2,565,543 — — — 499 — — 179,500 9,763 (1,220,948) — (141,520) (3,367,908) 2,507,229 520,738 256,269 350,723 1,613,594 714,849 1,102,682 6,325,890 5,361 239,057 (4,830,300) 5,171,133 1,444,384 328,067 2,171,583 4,790 777,257 1,441 (218,070) — 144,663 — 60,439 — (135,785) 81,147 4,244,471 415,445 1,772,451 2,176,373 778,698 (218,070) 144,663 60,439 (54,638) 4,659,916 42,972 84,187 49,424 — — 1,815,423 2,260,560 828,122 144,663 60,439 (54,638) 4,837,891 3,429,017 2,975,409 1,930,804 150,024 299,496 (4,884,938) 10,009,024 Total liabilities Net assets: Unrestricted-controlling interest Unrestricted-noncontrolling interest Total net assets without donor restrictions Net assets with donor restrictions Total net assets Total liabilities and net assets $ See accompanying independent auditors’ report. 52 1,392 (216,678) 6,109,212 — 177,975 BON SECOURS MERCY HEALTH Utilization Statistics For the Twelve-Month Period Ended December 31, 2019 and 2018 Consolidated Utilization Statistics (Unaudited) Twelve Months Ended December 31, 2018 2019 Utilization Statistics Admissions - Acute Admissions - Post-acute 294,985 5,029 309,032 5,061 Equivalent Inpatient Admissions 689,215 737,618 25,265 25,414 Patient days - Acute Patient days - Post-acute 1,229,779 346,774 1,285,601 337,976 Emergency Room Visits Other Outpatient Visits *** Inpatient Surgeries Outpatient Surgeries 1,370,506 #NAME? 64,282 154,121 1,375,240 #NAME? 76,210 208,552 Newborn Deliveries Full Time Equivalent Employees 48,101 46,818 NOTE: The utilization statitics above represent relative volumes to be compared to the financial period upon upon which these are presented. Other statistics that would normally be presented are being reviewed for consistency between between healthcare entities and from time period to time period. Copy of 2019_12_31 DEC Financial Analysis and Utilization for Disclosure - final for BSMH.xls 4 Utilization Statistics BON SECOURS MERCY HEALTH Financial Ratios Analyses For the Twelve-Month Periods Ended December 31, 2019 and 2018 Consolidated Financial Analyses (Unaudited) (Dollars in Thousands) Twelve Months Ended December 31, 2018 2019 Financial Analyses Operating Margin (Recurring) Excess Margin (excluding Ensemble and Ireland) Debt Service Coverage (1) based on Maximum Annual Debt Service ("MADS") (2) of: Operating EBIDA Operating EBIDA Margin Total unrestricted cash (3) Days Cash on Hand Total Debt to Capitalization (5) Total Community Benefit (TCB) Cost TCB Cost as a percent of Total Expense (5) Net Patient Revenue by Payor Type (reported on annual basis only): Medicare - Traditional Medicare -Managed Medicaid - Traditional Medicaid - Managed Other Governmental Commercial Self Pay & Other Total Net Patient Revenue by Payor Type 3.4% 3.0% (0.8%) 6.8% 4.03 5.24 $199,464 $188,925 $813,618 10.0% $805,038 9.2% $3,732,948 $5,579,618 183 254 40.8% 31.2% $712,438 9.1% $724,553 8.6% 25% 13% 2% 9% 2% 48% 1% 100.0% 23% 14% 3% 9% 2% 48% 1% 100.0% Note: All financial ratios above reflect the accounting effects for discontinued operations and changes in accounting principle. See footnotes to the financial statements for further details. (1) Debt Service Coverage Ratio as defined in the Master Trust Indenture (Amended and Restated) dated as of December 1, 2017. (2) MADS represents the greatest annual period of debt service (principal repayment plus interest payments). MADS is determined on the debt service of Indebtedness as defined in the Bon Secours Mercy Health Master Trust Indenture. (3) Cash excludes trustee held funds and donor restricted funds. (4) Includes the unpaid cost of public programs for the treatment of Medicaid and indigent beneficiaries, as well as other costs provided to the broader community. This does not include the unpaid cost for the treatment of Medicare beneficiaries nor does it include bad debts. See Note 3 of the consolidated audited financial statements for further discussion of Unsponsored Community Benefit cost. Copy of 2019_12_31 DEC Financial Analysis and Utilization for Disclosure - final for BSMH.xls 5 Financial Analysis