Trends and Best Practices in “Best Hospitals”

Interim Unaudited Consolidated Financial Statements and Other Information

For The Period Ended September 30, 2018

The Cleveland Clinic Foundation d.b.a. Cleveland Clinic Health System

CLEVELAND CLINIC HEALTH SYSTEM INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018

Contents Unaudited Consolidated Financial Statements

Unaudited Consolidated Balance Sheets ............................................................................................ 1 Unaudited Consolidated Statements of Operations and Changes in Net Assets .................................. 3 Unaudited Consolidated Statements of Cash Flows ............................................................................ 7

Notes to Unaudited Consolidated Financial Statements ......................................................................... 8

Other Information

Unaudited Consolidating Balance Sheets .......................................................................................... 23 Unaudited Consolidating Statements of Operations and Changes in Net Assets ............................... 24 Unaudited Consolidating Statements of Cash Flows ......................................................................... 28 Utilization........................................................................................................................................... 29 Payor Mix .......................................................................................................................................... 31 Research Support ............................................................................................................................. 32 Key Ratios ......................................................................................................................................... 33

Management Discussion and Analysis of Financial Condition and Results of Operations ..................... 34

CLEVELAND CLINIC HEALTH SYSTEM INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Unaudited Consolidated Balance Sheets ($ in thousands)

September 30 December 31

2018 2017

Assets

Current assets:

Cash and cash equivalents 256,855$ 241,227$

Patient receivables, net 1,132,497 1,012,903

Investments for current use 51,051 154,971

Other current assets 430,968 374,726

Total current assets 1,871,371 1,783,827

Investments:

Long-term investments 7,834,162 7,729,697

Funds held by trustees 40,114 69,234

Assets held for self-insurance 112,723 159,802

Donor restricted assets 752,163 717,410

8,739,162 8,676,143

Property, plant, and equipment, net 4,921,427 4,699,697

Other assets:

Pledges receivable, net 157,430 151,019

Trusts and interests in foundations 94,320 80,643

Other noncurrent assets 443,860 475,010

695,610 706,672

Total assets 16,227,570$ 15,866,339$

CLEVELAND CLINIC HEALTH SYSTEM INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Unaudited Consolidated Balance Sheets (continued) ($ in thousands)

See notes to unaudited consolidated financial statements.

September 30 December 31

2018 2017

Liabilities and net assets

Current liabilities:

Accounts payable 443,876$ 503,691$

Compensation and amounts withheld from payroll 410,725 345,446

Current portion of long-term debt 189,291 457,813

Variable rate debt classified as current 495,685 573,270

Other current liabilities 462,632 438,662

Total current liabilities 2,002,209 2,318,882

Long-term debt:

Hospital revenue bonds 3,254,952 2,861,438

Notes payable and capital leases 97,230 134,840

3,352,182 2,996,278

Other liabilities:

Professional and general insurance liability reserves 148,878 147,327

Accrued retirement benefits 478,705 492,833

Other noncurrent liabilities 521,341 567,566

1,148,924 1,207,726

Total liabilities 6,503,315 6,522,886

Net assets:

Unrestricted 8,677,723 8,346,649

Temporarily restricted 686,307 662,189

Permanently restricted 360,225 334,615

Total net assets 9,724,255 9,343,453

Total liabilities and net assets 16,227,570$ 15,866,339$

CLEVELAND CLINIC HEALTH SYSTEM INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Unaudited Consolidated Statements of Operations and Changes in Net Assets ($ in thousands) Operations

Three Months Ended September 30

2018 2017

Unrestricted revenues

Net patient service revenue before provision for uncollectible accounts $1,916,818

Provision for uncollectible accounts (71,546)

Net patient service revenue 2,025,319 1,845,272

Other 211,935 203,490

Total unrestricted revenues 2,237,254 2,048,762

Expenses

Salaries, wages, and benefits 1,221,888 1,131,857

Supplies 213,744 192,609

Pharmaceuticals 271,289 251,243

Purchased services and other fees 133,655 132,570

Administrative services 61,877 43,800

Facilities 90,047 88,928

Insurance 15,989 6,676

2,008,489 1,847,683

Operating income before interest, depreciation,

and amortization expenses 228,765 201,079

Interest 34,832 35,950

Depreciation and amortization 123,737 124,411

Operating income before special charges 70,196 40,718

Special charges 390 1,035

Operating income 69,806 39,683

Nonoperating gains and losses

Investment return 83,932 231,629

Derivative gains (losses) 6,682 (2,339)

Other, net 363 (41,358)

Net nonoperating gains and losses 90,977 187,932

Excess of revenues over expenses 160,783 227,615

CLEVELAND CLINIC HEALTH SYSTEM INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Unaudited Consolidated Statements of Operations and Changes in Net Assets (continued) ($ in thousands) Changes in Net Assets

See notes to unaudited consolidated financial statements.

Temporarily Permanently

Unrestricted Restricted Restricted Total

Total net assets at July 1, 2017 7,784,092$ 612,900$ 317,062$ 8,714,054$

Excess of revenues over expenses 227,615 - - 227,615

Donated capital and assets released from

restrictions for capital purposes 3,301 (3,301) - -

Gifts and bequests - 20,825 8,441 29,266

Transfer of net assets 15 (15) - -

Net investment income - 13,622 - 13,622

Net assets released from restrictions

used for operations included

in other unrestricted revenues - (9,801) - (9,801)

Retirement benefits adjustment (658) - - (658)

Change in interests in foundations - 474 - 474

Change in value of perpetual trusts - - 462 462

Foreign currrency translation 10,559 - - 10,559

Net change in unrealized losses

on nontrading investments (75) - - (75)

Other 1 - - 1

Increase in net assets 240,758 21,804 8,903 271,465

Total net assets at September 30, 2017 8,024,850$ 634,704$ 325,965$ 8,985,519$

Total net assets at July 1, 2018 8,523,251$ 677,235$ 355,830$ 9,556,316$

Excess of revenues over expenses 160,783 - - 160,783

Donated capital and assets released from

restrictions for capital purposes 5,679 (5,614) - 65

Gifts and bequests - 17,751 4,176 21,927

Transfer of net assets (147) 147 - -

Net investment income - 8,710 - 8,710

Net assets released from restrictions

used for operations included

in other unrestricted revenues - (12,014) - (12,014)

Retirement benefits adjustment (715) - - (715)

Change in interests in foundations - 92 - 92

Change in value of perpetual trusts - - 219 219

Foreign currrency translation (12,662) - - (12,662)

Other 1,534 - - 1,534

Increase in net assets 154,472 9,072 4,395 167,939

Total net assets at September 30, 2018 8,677,723$ 686,307$ 360,225$ 9,724,255$

Net Assets

CLEVELAND CLINIC HEALTH SYSTEM INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Unaudited Consolidated Statements of Operations and Changes in Net Assets ($ in thousands) Operations

Nine Months Ended September 30

2018 2017

Unrestricted revenues

Net patient service revenue before provision for uncollectible accounts 5,838,471$

Provision for uncollectible accounts (243,357)

Net patient service revenue 5,922,299$ 5,595,114

Other 645,648 687,008

Total unrestricted revenues 6,567,947 6,282,122

Expenses

Salaries, wages, and benefits 3,630,603 3,447,398

Supplies 630,785 585,658

Pharmaceuticals 797,858 709,319

Purchased services and other fees 404,408 392,269

Administrative services 157,906 136,594

Facilities 264,600 251,492

Insurance 58,310 47,500

5,944,470 5,570,230

Operating income before interest, depreciation,

and amortization expenses 623,477 711,892

Interest 102,322 107,834

Depreciation and amortization 376,494 368,785

Operating income before special charges 144,661 235,273

Special charges 2,178 4,419

Operating income 142,483 230,854

Nonoperating gains and losses

Investment return 120,205 647,764

Derivative gains (losses) 27,789 (6,522)

Other, net 57,489 (32,639)

Net nonoperating gains and losses 205,483 608,603

Excess of revenues over expenses 347,966 839,457

CLEVELAND CLINIC HEALTH SYSTEM INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Unaudited Consolidated Statements of Operations and Changes in Net Assets (continued) ($ in thousands) Changes in Net Assets

See notes to unaudited consolidated financial statements.

Net Assets

Temporarily Permanently

Unrestricted Restricted Restricted Total

Balances at January 1, 2017 7,088,209$ 627,426$ 310,164$ 8,025,799$

Excess of revenues over expenses 839,457 - - 839,457

Donated capital and assets released from

restrictions for capital purposes 72,007 (72,007) - -

Gifts and bequests - 64,158 14,295 78,453

Transfer of net assets 266 (266) - -

Net investment income - 38,219 - 38,219

Net assets released from restrictions

used for operations included

in other unrestricted revenues - (26,462) - (26,462)

Retirement benefits adjustment (1,975) - - (1,975)

Change in interests in foundations - 3,636 - 3,636

Change in value of perpetual trusts - - 1,506 1,506

Foreign currency translation 27,112 - - 27,112

Net change in unrealized losses

on nontrading investments (505) - - (505)

Other 279 - - 279

Increase in net assets 936,641 7,278 15,801 959,720

Balances at September 30, 2017 8,024,850$ 634,704$ 325,965$ 8,985,519$

Balances at January 1, 2018 8,346,649$ 662,189$ 334,615$ 9,343,453$

Excess of revenues over expenses 347,966 - - 347,966

Donated capital and assets released from

restrictions for capital purposes 7,205 (6,680) - 525

Gifts and bequests - 56,752 11,597 68,349

Transfer of net assets (219) 219 - -

Net investment income - 8,911 - 8,911

Net assets released from restrictions

used for operations included

in other unrestricted revenues - (35,406) - (35,406)

Retirement benefits adjustment (2,147) - - (2,147)

Change in interests in foundations - 38 - 38

Change in value of perpetual trusts - - 1,117 1,117

Foreign currency translation (22,508) - - (22,508)

Member substitution contribution - 284 12,896 13,180

Other 777 - - 777

Increase in net assets 331,074 24,118 25,610 380,802

Balances at September 30, 2018 8,677,723$ 686,307$ 360,225$ 9,724,255$

CLEVELAND CLINIC HEALTH SYSTEM INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Unaudited Consolidated Statements of Cash Flows ($ in thousands)

See notes to unaudited consolidated financial statements.

Nine Months Ended September 30

2018 2017

Operating activities and net nonoperating gains and losses

Increase in net assets 380,802$ 959,720$

Adjustments to reconcile increase in net assets to net cash provided by

operating activities and net nonoperating gains and losses:

Loss on extinguishment of debt - 46,159

Retirement benefits adjustment 2,147 1,975

Net realized and unrealized gains on investments (94,299) (647,545)

Depreciation and amortization 378,089 371,428

Provision for uncollectible accounts 228,458 243,357

Foreign currency translation loss (gain) 22,508 (27,112)

Donated capital (525) -

Restricted gifts, bequests, investment income, and other (78,415) (121,814)

Accreted interest and amortization of bond premiums (4,524) (1,455)

Net gain in value of derivatives (40,128) (17,443)

Member substitution contribution (65,442) -

Changes in operating assets and liabilities:

Patient receivables (327,145) (135,490)

Other current assets (59,253) (42,480)

Other noncurrent assets 34,310 30,333

Accounts payable and other current liabilities 25,745 (32,049)

Other liabilities (11,770) (36,182)

Net cash provided by operating activities and

net nonoperating gains and losses 390,558 591,402

Financing activities

Proceeds from long-term borrowings 427,658 1,108,832

Payments for redemption of long-term debt (420,030) (1,100,815)

Principal payments on long-term debt (81,285) (78,210)

Debt issuance costs (6,382) (8,017)

Change in pledges receivables, trusts and interests in foundations (71) (1,671)

Restricted gifts, bequests, investment income, and other 78,415 121,814

Net cash (used in) provided by financing activities (1,695) 41,933

Investing activities

Expenditures for property and equipment, net (546,917) (413,584)

Net change in cash equivalents reported in long-term investments 202,835 (527,734)

Purchases of investments (2,831,658) (1,783,490)

Sales of investments 2,802,567 1,857,526

Member substitution cash contribution 1,515 -

Net cash used in investing activities (371,658) (867,282)

Effect of exchange rate changes on cash (1,577) 1,162

Increase (decrease) in cash and cash equivalents 15,628 (232,785)

Cash and cash equivalents at beginning of year 241,227 520,628

Cash and cash equivalents at end of period 256,855$ 287,843$

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with

generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do

not include all of the information and footnotes required by GAAP for complete financial statements. In

the opinion of management, all adjustments considered necessary for a fair presentation have been

included and are of a normal and recurring nature. Operating results for the three and nine months ended

September 30, 2018 are not necessarily indicative of the results to be expected for the year ending

December 31, 2018. For further information, refer to the audited financial statements and notes thereto

for the year ended December 31, 2017.

2. Organization and Consolidation

The Cleveland Clinic Foundation (Clinic) is a tax-exempt Ohio nonprofit corporation organized and

operated to provide medical and hospital care, medical research, and education. The accompanying

consolidated financial statements include the accounts of the Clinic and its controlled affiliates, d.b.a.

Cleveland Clinic Health System (System).

The System is the leading provider of healthcare services in northeast Ohio. The System operates 14

hospitals with approximately 4,100 staffed beds. Thirteen of the hospitals are operated in the Northeast

Ohio area, anchored by the Clinic. The System operates 21 outpatient family health centers, 10

ambulatory surgery centers, as well as numerous physician offices located throughout northeast Ohio,

and specialized cancer centers in Sandusky and Mansfield, Ohio. In Florida, the System operates a

hospital and a clinic in Weston, an outpatient family health and surgery center in Coral Springs, an

outpatient family health center in West Palm Beach and numerous physician offices located throughout

southeast Florida. In addition, the System operates a health and wellness center and a sports medicine

clinic in Toronto, Canada and a specialized neurological clinical center in Las Vegas, Nevada. Pursuant

to agreements, the System also provides management services for Ashtabula County Medical Center,

located in Ashtabula, Ohio, with approximately 180 staffed beds, and Cleveland Clinic Abu Dhabi, a

multispecialty hospital offering critical and acute care services that is part of Mubadala Development

Company’s network of healthcare facilities located in Abu Dhabi, United Arab Emirates with approximately

364 staffed beds.

All significant intercompany balances and transactions have been eliminated in consolidation.

3. Business Combinations

Effective April 1, 2018, the Clinic though a subsidiary became the sole member of The Union Hospital

Association (Union Hospital) through a non-cash business combination transaction. The business

combination was recorded under the acquisition method of accounting. The System recorded the fair

value of the assets acquired and the liabilities assumed as of April 1, 2018. The fair value of net assets of

$65.4 million was recognized in the consolidated statement of operations and changes in net assets for

the nine months ended September 30, 2018 as a nonoperating member substitution contribution of $52.2

million, contributions of temporarily restricted net assets of $0.3 million and contributions of permanently

restricted net assets of $12.9 million. There was no goodwill or identifiable intangible assets recorded as

a result of the member substitution.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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3. Business Combinations (continued)

The results of operations for Union Hospital are included in the consolidated statements of operations and

changes in net assets beginning on April 1, 2018. For the six months ended September 30, 2018, Union

Hospital had total unrestricted revenues of $61.9 million, operating loss of $7.2 million and a deficiency

of revenues over expenses of $6.8 million. Union Hospital comprised approximately 0.9% of total

consolidated operating revenues and 1.1% of total consolidated operating expenses in the first nine

months of 2018. The operations of Union Hospital did not have a material impact on temporarily and

permanently restricted net assets.

Pro forma combined results of operations and changes in net assets of the System and Union Hospital

for the nine months ended September 30, 2018 and 2017, as though the business combination

transactions had occurred on January 1, 2017, are not material and accordingly, are not provided.

4. Accounting Policies

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update

(ASU) 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model

for entities to use in accounting for revenue arising from contracts with customers and supersedes most

current revenue recognition guidance, including industry-specific guidance, and requires significantly

expanded disclosures about revenue recognition. The core principle of the revenue model is that an entity

recognizes revenue to depict the transfer of promised goods or services to customers in an amount that

reflects the consideration to which the entity expects to be entitled in exchange for those goods or

services. The guidance in ASU 2014-09, including subsequent amendments, was effective for the System

as of January 1, 2018.

The System adopted ASU 2014-09 on January 1, 2018 using the modified retrospective method of

transition. The System’s process for implementation began with a preliminary evaluation of ASU 2014-09

and considered subsequent interpretations by the FASB Transition Resource Group for Revenue

Recognition and the American Institute of Certified Public Accountants. The System performed an

analysis of revenue streams and transactions under ASU 2014-09. In particular, for net patient service

revenue, the System performed an analysis into the application of the portfolio approach as a practical

expedient to group patient contracts with similar characteristics, such that revenue for a given portfolio

would not be materially different than if it were evaluated on a contract-by-contract basis. Upon adoption,

the majority of what is currently classified as provision for uncollectible accounts and presented as a

reduction to net patient service revenue on the consolidated statements of operations and changes in net

assets is treated as a price concession that reduces the transaction price, which is reported as net patient

service revenue. The new standard also requires enhanced disclosures related to the disaggregation of

revenue and significant judgments made in measurement and recognition. The impact of adopting ASU

2014-09 is not material to total unrestricted revenues, excess of revenues over expenses or unrestricted

net assets.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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4. Accounting Policies (continued)

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to recognize assets

and liabilities on the balance sheet for leases with lease terms greater than twelve months. The

recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee

primarily will depend on its classification as a finance or operating lease. This amends current guidance

that requires only capital leases to be recognized on the lessee balance sheet. ASU 2016-02 will also

require additional disclosures on the amount, timing and uncertainty of cash flows arising from leases.

The guidance is effective for the System for reporting periods beginning after December 15, 2018 with

early adoption permitted. The System is currently evaluating the impact that ASU 2016-02 will have on its

consolidated financial statements and will adopt the provisions upon the effective date.

In August 2016, the FASB issued ASU 2016-14, Presentation of Financial Statements for Not-for-Profit

Entities. This standard intends to make certain improvements to the current reporting requirements for

not-for-profit entities. This standard sets forth changes to net asset classification requirements and the

information presented about a not-for-profit entity’s liquidity, financial performance and cash flows. ASU

2016-14 is effective for the System for annual reporting periods beginning after December 15, 2017, and

interim periods beginning after December 15, 2018. The System is currently evaluating the impact that

ASU 2016-14 will have on its consolidated financial statements and will adopt the provisions upon the

effective date.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General. This standard intends to make minor changes to the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. The amendments in this standard remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 is effective for the System for annual reporting periods beginning after December 15, 2021 with early adoption permitted. Upon adoption, the System is required to apply the new standard retrospectively to all periods presented in the consolidated financial statements. The System is currently evaluating the impact that ASU 2018-14 will have on its consolidated financial statements and will adopt the provisions on or before the effective date. 5. Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally

accepted in the United States 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. Estimates also affect the reported amounts of revenue and

expenses during the reporting period. Actual results could differ from those estimates.

6. Net Patient Service Revenue

Net patient service revenue is reported at the amount that reflects the consideration to which the System

expects to be entitled in exchange for providing patient care. These amounts are due from patients, third-

party payors, and others and includes variable consideration for retroactive revenue adjustments due to

settlement of reviews and audits. Generally, the System bills the patients and third-party payors several

days after the services are performed or shortly after discharge. Revenue is recognized as performance

obligations are satisfied.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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6. Net Patient Service Revenue (continued)

Performance obligations are determined based on the nature of the services provided by the System.

Revenue for performance obligations satisfied over time is recognized based on actual charges incurred

in relation to total expected charges. The System believes that this method provides a faithful depiction

of the transfer of services over the term of the performance obligation based on the inputs needed to

satisfy the obligation. Generally, performance obligations satisfied over time relate to patients receiving

inpatient acute care services. The System measures the performance obligation from admission into the

hospital to the point when it is no longer required to provide services to that patient, which is generally at

the time of discharge. These services are considered to be a single performance obligation and have a

duration of less than one year. Revenue for performance obligations satisfied at a point in time is

recognized when services are provided and the System does not believe it is required to provide additional

services to the patient.

Because all of its performance obligations relate to contracts with a duration of less than one year, the

System has elected to apply the optional exemption provided in FASB ASC 606-10-50-14(a) and,

therefore, is not required to disclose the aggregate amount of the transaction price allocated to

performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The

unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to

inpatient acute care services at the end of the reporting period. The performance obligations for these

contracts are generally completed when the patients are discharged, which generally occurs within days

or weeks of the end of the reporting period.

The System is utilizing the portfolio approach practical expedient in ASC 606 for contracts related to net

patient service revenue. The System accounts for the contracts within each portfolio as a collective group,

rather than individual contracts, based on the payment pattern expected in each portfolio category and

the similar nature and characteristics of the patients within each portfolio. As a result, the System has

concluded that revenue for a given portfolio would not be materially different than if accounting for revenue

on a contract by contract basis.

The System has agreements with third-party payors that generally provide for payments to the System at

amounts different from its established rates. For uninsured patients who do not qualify for charity care,

the System recognizes revenue based on established rates, subject to certain discounts and implicit price

concessions as determined by the System. The System determines the transaction price based on

standard charges for services provided, reduced by contractual adjustments provided to third-party

payors, discounts provided to uninsured patients in accordance with the System’s policy, and implicit price

concessions provided to uninsured patients. Implicit price concessions represent differences between

amounts billed and the estimated consideration the System expects to receive from patients, which are

determined based on historical collection experience, current market conditions and other factors. The

System determines its estimates of contractual adjustments and discounts based on contractual

agreements, discount policies, and historical experience.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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6. Net Patient Service Revenue (continued)

Generally patients who are covered by third-party payors are responsible for patient responsibility

balances, including deductibles and coinsurance, which vary in amount. The System estimates the

transaction price for patients with deductibles and coinsurance based on historical experience and current

market conditions. The initial estimate of the transaction price is determined by reducing the standard

charge by any contractual adjustments, discounts, and implicit price concessions. Subsequent changes

to the estimate of the transaction price are generally recorded as adjustments to patient service revenue

in the period of the change. Adjustments arising from a change in the transaction price were not significant

in the first nine months of 2018 or 2017.

The System is paid a prospectively determined rate for the majority of inpatient acute care and outpatient,

skilled nursing, and rehabilitation services provided (principally Medicare, Medicaid, and certain insurers).

These rates vary according to a patient classification system that is based on clinical, diagnostic, and

other factors. Payments for capital are received on a prospective basis for Medicare and on a cost

reimbursement methodology for Medicaid. Payments are received on a prospective basis for the System’s

medical education costs, subject to certain limits. The System is paid for cost reimbursable items at a

tentative rate, with final settlement determined after submission of annual cost reports by the System and

audits thereof by the Medicare Administrative Contractor.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to

interpretation as well as significant regulatory action, and, in the normal course of business, the System

is subject to contractual reviews and audits, including audits initiated by the Medicare Recovery Audit

Contractor program. As a result, there is at least a reasonable possibility that recorded estimates will

change in the near term. The System believes it is in compliance with applicable laws and regulations

governing the Medicare and Medicaid programs and that adequate provisions have been made for any

adjustments that may result from final settlements.

Settlements with third-party payors for retroactive adjustments due to reviews and audits are considered

variable consideration and are included in the determination of the estimated transaction price for

providing patient care in the period the related services are provided. These settlements are estimated

based on the terms of the payment agreement with the payor, correspondence from the payor and the

System’s historical settlement activity, including an assessment to ensure that it is probable that a

significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty

associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted

in future periods as adjustments become known or as years are settled or are no longer subject to such

reviews and audits. Adjustments arising from a change in estimated settlements increased patient service

revenue by $17.8 million and $7.0 million in the first nine months of 2018 and 2017, respectively.

The System provides care to patients who do not have the ability to pay and who qualify for charity care

pursuant to established policies of the System. Charity care is defined as services for which patients have

the obligation and willingness to pay but do not have the ability to do so. The System does not report

charity care as net patient service revenue.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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6. Net Patient Service Revenue (continued)

Net patient service revenue by major payor source for the nine months ended September 30, 2018 and

2017, are as follows (in thousands):

2018 2017

Medicare $ 2,156,252 36% $ 1,938,536 35%

Medicaid 500,939 9 515,679 9

Managed care and commercial 3,242,091 55 3,119,671 56

Self-pay 23,017 – 21,228 –

$ 5,922,299 100% $ 5,595,114 100%

As a result of certain changes required by ASU 2014-09, the majority of the System’s provision for uncollectible accounts are recorded as a direct reduction to net patient service revenue instead of being presented as a separate line item on the consolidated statements of operations and changes in net assets. The adoption of ASU 2014-09 has no impact on the System’s accounts receivable as it was historically recorded net of allowance for uncollectible accounts and contractual adjustments on the consolidated balance sheets. The impact of adopting ASU 2014-09 on the consolidated statements of operations and changes in net assets for the nine months ended September 30, 2018 was as follows (in thousands):

Nine months ended September 30, 2018

As Reported

Prior to adopting ASU 2014-09

Net patient service revenue before

provision for uncollectible accounts $ 6,150,757

Provision for uncollectible accounts (228,458)

Net patient service revenue $ 5,922,299 $ 5,922,299

7. Fair Value Measurements

Fair value measurements are defined as the price that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market participants at the measurement date.

The framework for measuring fair value is comprised of a three-level hierarchy 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 to the valuation methodology are quoted prices (unadjusted) for identical assets

or liabilities in active markets.

• Level 2 – inputs to the valuation methodology include quoted prices for similar assets or liabilities

in active markets, and inputs that are observable for the asset or liability, either directly or indirectly,

for substantially the full term of the financial instrument.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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7. Fair Value Measurements (continued)

• Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value

measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of

input that is significant to the fair value measurement.

The carrying values of accounts receivable and accounts payable are reasonable estimates of fair value

due to the short-term nature of these financial instruments. Investments, other than alternative

investments, are recorded at their fair value. Other current and noncurrent assets and liabilities have

carrying values that approximate fair value.

The following tables present the financial instruments measured at fair value on a recurring basis as of

September 30, 2018 and December 31, 2017, based on the valuation hierarchy (in thousands):

September 30, 2018 Level 1 Level 2 Level 3 Total

Assets

Cash and investments:

Cash and cash equivalents $ 589,642 $ – $ – $ 589,642

Fixed income securities:

U.S. treasuries 1,338,186 – – 1,338,186

U.S. government agencies – 19,253 – 19,253

U.S. corporate – 21,461 – 21,461

U.S. government agencies

asset-backed securities – 23,920 – 23,920

Corporate asset-backed

securities – 7,173 – 7,173

Foreign – 7,739 – 7,739

Fixed income mutual funds 387,649 – – 387,649

Common and preferred stocks:

U.S. 518,395 – – 518,395

Foreign 320,848 2,870 – 323,718

Equity mutual funds 94,647 – – 94,647

Total cash and investments 3,249,367 82,416 – 3,331,783

Perpetual and charitable trusts – 67,367 – 67,367

Total assets at fair value $ 3,249,367 $ 149,783 $ – $ 3,399,150

Liabilities

Interest rate swaps $ – $ 86,436 $ – $ 86,436

Total liabilities at fair value $ – $ 86,436 $ – $ 86,436

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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7. Fair Value Measurements (continued)

December 31, 2017 Level 1 Level 2 Level 3 Total

Assets

Cash and investments:

Cash and cash equivalents $ 770,609 $ 45 $ – $ 770,654

Fixed income securities:

U.S. treasuries 1,075,486 – – 1,075,486

U.S. government agencies – 18,964 – 18,964

U.S. corporate – 83,383 – 83,383

U.S. government agencies

asset-backed securities – 25,139 – 25,139

Corporate asset-backed

securities – 4,895 – 4,895

Foreign – 21,267 – 21,267

Fixed income mutual funds 391,971 – – 391,971

Common and preferred stocks:

U.S. 473,420 1,721 – 475,141

Foreign 296,025 1,548 – 297,573

Equity mutual funds 262,991 – – 262,991

Total cash and investments 3,270,502 156,962 – 3,427,464

Perpetual and charitable trusts – 53,728 – 53,728

Total assets at fair value $ 3,270,502 $ 210,690 $ – $ 3,481,192

Liabilities

Interest rate swaps $ – $ 123,989 $ – $ 123,989

Total liabilities at fair value $ – $ 123,989 $ – $ 123,989

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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7. Fair Value Measurements (continued)

Financial instruments at September 30, 2018 and December 31, 2017 are reflected in the consolidated

balance sheets as follows (in thousands):

September 30

2018 December 31

2017

Cash, cash equivalents, and investments measured

at fair value $ 3,331,783

$ 3,427,464

Commingled funds measured at net asset value 2,996,665 2,948,317

Alternative investments accounted for under the

equity method 2,718,620

2,481,560

Pending purchases of investments - 215,000

Total cash, cash equivalents, and investments $ 9,047,068 $ 9,072,341

Perpetual and charitable trusts measured at fair value $ 67,367 $ 53,728

Interests in foundations 26,953 26,915

Trusts and interests in foundations $ 94,320 $ 80,643

Interest rate swaps (Note 8) are reported in other noncurrent liabilities in the consolidated balance

sheets.

The following is a description of the System’s valuation methodologies for assets and liabilities measured

at fair value. Fair value for Level 1 is based upon quoted market prices. Fair value for Level 2 is

determined as follows:

Investments classified as Level 2 are primarily determined using techniques that are consistent with

the market approach. Valuations are based on quoted prices for similar instruments in active markets,

quoted prices for identical or similar instruments in markets that are not active, and model-based

valuation techniques for which all significant assumptions are observable in the market or can be

corroborated by observable market data for substantially the full term of the assets. Inputs, which

include broker/dealer quotes, reported/comparable trades, and benchmark yields, are obtained from

various sources, including market participants, dealers, and brokers.

The fair value of perpetual and charitable trusts in which the System receives periodic payments from

the trust is determined based on the present value of expected cash flows to be received from the

trust using discount rates ranging from 2.5% to 5.0%, which are based on Treasury yield curve interest

rates or the assumed yield of the trust assets. The fair value of charitable trusts in which the System

is a remainder beneficiary is based on the System’s beneficial interest in the investments held in the

trust, which are measured at fair value.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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7. Fair Value Measurements (continued)

The fair value of interest rate swaps is determined based on the present value of expected future cash

flows using discount rates appropriate with the risks involved. The valuations include a credit spread

adjustment to market interest rate curves to appropriately reflect nonperformance risk. The credit

spread adjustment is derived from other comparably rated entities’ bonds recently priced in the market.

The System manages credit risk based on the net portfolio exposure with each counterparty.

The methods described above may produce a fair value calculation that may not be indicative of net

realizable value or reflective of future fair values. Furthermore, while the System 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 reporting date.

8. Derivative Instruments

The System has entered into various derivative financial instruments to manage interest rate risk and

foreign currency exposures.

The System’s objective with respect to interest rate risk is to manage the risk of rising interest rates on

the System’s variable rate debt and certain variable rate operating lease payments. Consistent with its

interest rate risk management objective, the System entered into various interest rate swap agreements

with a total outstanding notional amount of $622.7 million and $615.0 million at September 30, 2018 and

December 31, 2017, respectively. During the term of these transactions, the System pays interest at a

fixed rate and receives interest at a variable rate based on the London Interbank Offered Rate (LIBOR)

or the Securities Industry and Financial Markets Association Index (SIFMA). The swap agreements are

not designated as hedging instruments. Net interest paid or received under the swap agreements is

included in derivative gains (losses) in the consolidated statements of operations and changes in net

assets.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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8. Derivative Instruments (continued)

The following table summarizes the System’s interest rate swap agreements (in thousands):

Swap Expiration System Notional Amount at

Type Date Pays System Receives September 30

2018 December 31

2017

Fixed 2021 3.21% 68% of LIBOR $ 30,145 $ 31,725

Fixed 2024 3.42% 68% of LIBOR 26,500 27,200

Fixed 2027 3.56% 68% of LIBOR 120,113 124,303

Fixed 2028 5.12% 100% of LIBOR 36,605 37,730

Fixed 2028 3.51% 68% of LIBOR 28,285 29,125

Fixed 2030 5.07% 100% of LIBOR 59,075 59,075

Fixed 2030 5.06% 100% of LIBOR 59,050 59,050

Fixed 2031 3.04% 68% of LIBOR 46,975 49,850

Fixed 2032 4.32% 79% of LIBOR 2,213 2,279

Fixed 2032 4.33% 70% of LIBOR 4,425 4,557

Fixed 2032 3.78% 70% of LIBOR 2,213 2,279

Fixed 2036 4.90% 100% of LIBOR 49,700 49,700

Fixed 2036 4.90% 100% of LIBOR 76,950 76,950

Fixed 2037 4.62% 100% of SIFMA 59,115 61,165

Fixed 2039 4.62% 68% of LIBOR 21,315 -

$ 622,679 $ 614,988

The System is exposed to fluctuations in various foreign currencies against its functional currency, the

U.S. dollar (USD). The System used foreign currency derivatives including currency forward contracts

and currency options to manage its exposure to fluctuations in the USD – British Pound (GBP) exchange

rate. Currency forward contracts involve fixing the USD – GBP exchange rate for delivery of a specified

amount of foreign currency on a specified date. The currency forward contracts are typically cash settled

in USD for their fair value at or close to their settlement date. The System has also used currency option

contracts to manage its foreign currency exchange risk. The foreign currency contracts were not

designated as hedging instruments. At September 30, 2018 and December 31, 2017, the System has no

outstanding foreign currency forward contracts.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 19

8. Derivative Instruments (continued)

The following table summarizes the location and fair value for the System’s derivative instruments

(in thousands):

Derivatives Liability

September 30, 2018 December 31, 2017

Balance Sheet

Location Fair Value

Balance Sheet

Location Fair Value

Derivatives not

designated as

hedging

instruments

Interest rate swap

agreements

Other noncurrent

liabilities $ 86,436

Other noncurrent

liabilities $ 123,989

The following table summarizes the location and amounts of derivative gains on the System’s interest rate

swap agreements (in thousands):

Derivatives not

designated as

hedging

instruments

Location of Gain (Loss) Recognized

Quarter ended

Nine months ended

September 30 September 30

2018

2017 2018

2017

Interest rate swap agreements

Derivative gains

(losses)

$ 6,682 $ (2,926) $ 27,789 $ (9,526) Foreign currency

contracts Derivative gains

- 587 - 3,004

$ 6,682 $ (2,339) $ 27,789 $ (6,522)

The System has used various derivative contracts in connection with certain prior obligations and

investments. Although minimum credit ratings are required for counterparties, this does not eliminate the

risk that a counterparty may fail to honor its obligations. Derivative contracts are subject to periodic “mark-

to-market” valuations. A derivative contract may, at any time, have a positive or negative value to the

System. In the event that the negative value reaches certain thresholds established in the derivative

contracts, the System is required to post collateral, which could adversely affect its liquidity. At September

30, 2018 and December 31, 2017, the System posted $39.8 million and $69.2 million, respectively, of

collateral with counterparties that is included in funds held by trustees in the consolidated balance sheets.

In addition, if the System were to choose to terminate a derivative contract or if a derivative contract were

terminated pursuant to an event of default or a termination event as described in the derivative contract,

the System could be required to pay a termination payment to the counterparty.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 20

9. Pensions and Other Postretirement Benefits

The System maintains four defined benefit pension plans, including two plans related to Akron General.

The CCHS Retirement Plan is a tax-qualified defined benefit pension plan that provides benefits to

substantially all employees of the System, except those employed by Akron General or Union Hospital.

All benefit accruals under the CCHS Retirement Plan ceased as of December 31, 2012. Akron General

has a tax-qualified defined benefit plan covering substantially all of its employees that were hired before

2004 who meet certain eligibility requirements. In 2009, Akron General ceased benefit accruals for

substantially all nonunion employees, with benefit accruals for remaining employees ceasing at various

intervals through December 31, 2017. The benefits for the System’s tax-qualified defined benefit pension

plans are provided based on age, years of service, and compensation. The System’s policy for its tax-

qualified defined benefit pension plans is to fund at least the minimum amounts required by the Employee

Retirement Income Security Act. The System also maintains two unfunded, nonqualified defined benefit

supplemental retirement plans, which cover certain professional staff and administrative employees.

The System sponsors two noncontributory, defined contribution plans, and three contributory, defined

contribution plans covering System and Akron General employees. The System also assumed three

additional defined contribution plans from the Union Hospital member substitution in April 2018. The

Cleveland Clinic Investment Pension Plan (IPP) is a noncontributory, defined contribution plan, which

covers substantially all of the System’s employees, except employees covered by the Cleveland Clinic

Cash Balance Plan and those employed by Akron General or Union Hospital. The System’s contribution

to the IPP for participants is based upon a percentage of employee compensation that is based on years

of service. The Cleveland Clinic Cash Balance Plan (CBP) is a noncontributory, defined contribution plan

that covers certain professional and administrative employees not covered by the IPP. The System’s

contribution to the CBP is a percentage of employee compensation that is determined according to age.

The System also sponsors three tax-qualified contributory, defined contribution plans, including two plans

related to Akron General, which cover substantially all employees except those employed by Union

Hospital. The plans permit employees to make pre-tax employee deferrals and to become entitled to

certain employer matching contributions that are based on employee contributions.

The components of net periodic benefit cost for defined benefit pension plans are as follows (in

thousands):

Quarter Ended September 30

Nine Months Ended September 30

2018 2017 2018 2017

Amounts related to defined benefit pension plans:

Service cost $ (378) $ 49 $ (1,135) $ 147 Interest cost 16,178 17,836 48,534 53,507 Expected return on assets (18,697) (21,167) (56,090) (63,502) Net amortization and deferral (478) (420) (1,433) (1,261)

Total defined benefit pension plans (3,375) (3,702) (10,124) (11,109) Defined contribution plans 57,833 53,836 187,428 176,245

$ 54,458 $ 50,134 $ 177,304 $ 165,136

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 21

9. Pensions and Other Postretirement Benefits (continued)

The service cost component of net periodic benefit cost is included in salaries, wages and benefits in the

consolidated statement of operations. The components of net periodic benefit cost other than the service

cost component are included in other nonoperating gains and losses in the consolidated statements of

operations.

As September 30, 2018, the System has made contributions of $5.6 million to the defined benefit pension

plans. The System expects to make additional contributions of $1.9 million to the defined benefit pension

plans for the remainder of 2018.

10. Debt

In August 2018, the System through a UK subsidiary entered into a private placement agreement to issue

Guaranteed Senior Notes (2018 Sterling Notes) totaling £665 million. The subsidiary received proceeds

of £300 million and £100 million in August 2018 and November 2018, respectively, and will receive

additional proceeds of £265 million in August 2019. The 2018 Sterling Notes are guaranteed by the

Cleveland Clinic obligated group and another UK subsidiary, mature at various dates through 2068 and

bear interest at an average fixed rate of 2.99%. The proceeds of the 2018 Sterling Notes have been or

will be used to repay a $375.0 million term loan used to acquire a long-term leasehold interest in a building

in London, England, and to partially fund the construction and conversion of the building into a healthcare

facility.

11. Special Charges

The System incurred and recorded special charges of $2.2 million and $4.4 million in the first nine months

of 2018 and 2017, respectively, representing accelerated depreciation expense and other property, plant

and equipment costs related to Lakewood Hospital Association (LHA). The Clinic, LHA and the City of

Lakewood entered into an agreement in December 2015 that outlines the transition of healthcare services

in the City of Lakewood. Participation in the agreement by the City of Lakewood was authorized by an

ordinance adopted by Lakewood City Council. Under the terms of the agreement, the Clinic and LHA will

make contributions over the next 15 years for the creation of a new health and wellness community

foundation to be used to address community health and wellness needs in the City of Lakewood. In

addition, the Clinic constructed an approximately 62,000-square-foot family health center that opened in

July 2018 that is located adjacent to the site of the former hospital. LHA ceased inpatient operations at

the hospital in February 2016, while the current emergency department and several outpatient services

at the hospital continued until the opening of the new family health center and emergency department.

The cessation of inpatient services at the hospital was not considered a discontinued operation since the

System provides inpatient hospital services at the Clinic and its subsidiary hospitals in the Northeast Ohio

area.

CLEVELAND CLINIC HEALTH SYSTEM NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 22

12. Subsequent Events

The System evaluated events and transactions occurring subsequent to September 30, 2018 through

November 29, 2018, the date the consolidated financial statements were issued. During this period, there

were no subsequent events requiring recognition in the consolidated financial statements, and there were

no nonrecognized subsequent events requiring disclosure.

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 23

Unaudited Consolidating Balance Sheets ($ in thousands)

See notes to unaudited consolidated financial statements. Please refer to Management’s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Avon Hospital, which became a member of the Obligated Group in August 2017, is reported in the Obligated Group for all periods presented.

September 30, 2018

Consolidating Consolidating

Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments &

Group Group Eliminations Consolidated Group Group Eliminations Consolidated

Assets

Current assets:

Cash and cash equivalents 148,665$ 108,190$ -$ 256,855$ 27,644$ 213,583$ -$ 241,227$

Patient receivables, net 1,008,347 160,458 (36,308) 1,132,497 904,105 142,450 (33,652) 1,012,903

Due from affiliates 20,136 30,737 (50,873) - 55,942 50 (55,992) -

Investments for current use - 51,051 - 51,051 103,920 51,051 - 154,971

Other current assets 329,592 103,166 (1,790) 430,968 310,960 64,134 (368) 374,726

Total current assets 1,506,740 453,602 (88,971) 1,871,371 1,402,571 471,268 (90,012) 1,783,827

Investments:

Long-term investments 7,319,549 514,613 - 7,834,162 7,289,000 440,697 - 7,729,697

Funds held by trustees 40,090 24 - 40,114 69,234 0 - 69,234

Assets held for self-insurance - 112,723 - 112,723 - 159,802 - 159,802

Donor restricted assets 720,341 31,822 - 752,163 685,292 32,118 - 717,410

8,079,980 659,182 - 8,739,162 8,043,526 632,617 - 8,676,143

Property, plant, and equipment, net 3,993,558 927,869 - 4,921,427 3,819,800 879,897 - 4,699,697

Other assets:

Pledges receivable, net 156,628 802 - 157,430 150,690 329 - 151,019

Trusts and beneficial interests in foundations 72,831 21,489 - 94,320 71,866 8,777 - 80,643

Other noncurrent assets 577,568 63,821 (197,529) 443,860 566,548 60,388 (151,926) 475,010

807,027 86,112 (197,529) 695,610 789,104 69,494 (151,926) 706,672

Total assets 14,387,305$ 2,126,765$ (286,500)$ 16,227,570$ 14,055,001$ 2,053,276$ (241,938)$ 15,866,339$

September 30, 2018

Consolidating Consolidating

Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments &

Group Group Eliminations Consolidated Group Group Eliminations Consolidated Liabilities and net assets

Current liabilities:

Accounts payable 374,815$ 69,251$ (190)$ 443,876$ 432,859$ 71,024$ (192)$ 503,691$

Compensation and amounts withheld from payroll 365,843 44,882 - 410,725 311,159 34,287 - 345,446

Short-term borrowings - - - - 0 0 - -

Current portion of long-term debt 184,114 5,249 (72) 189,291 77,208 380,677 (72) 457,813

Variable rate debt classified as current 438,937 56,748 - 495,685 514,396 58,874 - 573,270

Due to affiliates 14,291 21,275 (35,566) - 50 55,942 (55,992) -

Other current liabilities 386,476 115,227 (39,071) 462,632 358,475 116,352 (36,165) 438,662

Total current liabilities 1,764,476 312,632 (74,899) 2,002,209 1,694,147 717,156 (92,421) 2,318,882

Long-term debt:

Hospital revenue bonds 2,870,448 384,504 - 3,254,952 2,861,438 0 - 2,861,438

Notes payable and capital leases 75,088 215,003 (192,861) 97,230 110,675 171,562 (147,397) 134,840

2,945,536 599,507 (192,861) 3,352,182 2,972,113 171,562 (147,397) 2,996,278

Other liabilities:

Professional and general insurance liability reserves 56,220 92,658 - 148,878 55,875 91,452 - 147,327

Accrued retirement benefits 441,273 37,432 - 478,705 453,710 39,123 - 492,833

Other noncurrent liabilities 484,650 53,311 (16,620) 521,341 526,814 40,752 - 567,566

982,143 183,401 (16,620) 1,148,924 1,036,399 171,327 - 1,207,726

Total liabilities 5,692,155 1,095,540 (284,380) 6,503,315 5,702,659 1,060,045 (239,818) 6,522,886

Net assets:

Unrestricted 7,704,467 975,376 (2,120) 8,677,723 7,397,798 950,971 (2,120) 8,346,649

Temporarily restricted 661,936 24,371 - 686,307 638,208 23,981 - 662,189

Permanently restricted 328,747 31,478 - 360,225 316,336 18,279 - 334,615

Total net assets 8,695,150 1,031,225 (2,120) 9,724,255 8,352,342 993,231 (2,120) 9,343,453

Total liabilities and net assets 14,387,305$ 2,126,765$ (286,500)$ 16,227,570$ 14,055,001$ 2,053,276$ (241,938)$ 15,866,339$

December 31, 2017

December 31, 2017

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 24

Unaudited Consolidating Statements of Operations and Changes in Net Assets ($ in thousands) Operations

Please refer to Management’s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Avon Hospital, which became a member of the Obligated Group in August 2017, is reported in the Obligated Group for all periods presented.

Consolidating Consolidating

Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments &

Group Group Eliminations Consolidated Group Group Eliminations Consolidated

Unrestricted revenues

Net patient service revenue

before uncollectible accounts 1,754,830 227,608 (65,620) 1,916,818

Provision for uncollectible accounts (58,907) (12,639) - (71,546)

Net patient service revenue less provision 1,841,203 253,166 (69,050) 2,025,319 1,695,923 214,969 (65,620) 1,845,272

Other 179,834 73,038 (40,937) 211,935 167,152 75,179 (38,841) 203,490

Total unrestricted revenues 2,021,037 326,204 (109,987) 2,237,254 1,863,075 290,148 (104,461) 2,048,762

Expenses

Salaries, wages, and benefits 1,125,990 176,036 (80,138) 1,221,888 1,062,871 150,051 (81,065) 1,131,857

Supplies 187,227 26,752 (235) 213,744 166,602 26,394 (387) 192,609

Pharmaceuticals 251,723 19,566 - 271,289 226,713 24,530 - 251,243

Purchased services and other fees 114,422 27,024 (7,791) 133,655 107,980 25,330 (740) 132,570

Administrative services 45,107 21,975 (5,205) 61,877 32,204 16,717 (5,121) 43,800

Facilities 71,986 18,859 (798) 90,047 68,955 20,880 (907) 88,928

Insurance 15,945 15,839 (15,795) 15,989 15,058 7,784 (16,166) 6,676

1,812,400 306,051 (109,962) 2,008,489 1,680,383 271,686 (104,386) 1,847,683

Operating income before interest,

depreciation, and amortization expenses 208,637 20,153 (25) 228,765 182,692 18,462 (75) 201,079

Interest 29,958 4,874 - 34,832 32,774 3,176 - 35,950

Depreciation and amortization 108,129 15,633 (25) 123,737 106,634 17,852 (75) 124,411

Operating income (loss) before special charges 70,550 (354) - 70,196 43,284 (2,566) - 40,718

Special charges - 390 - 390 - 1,035 - 1,035

Operating income (loss) 70,550 (744) - 69,806 43,284 (3,601) - 39,683

Nonoperating gains and losses

Investment return 79,118 4,814 - 83,932 214,874 16,755 - 231,629

Derivative gains (losses) 7,070 (388) - 6,682 (1,758) (581) - (2,339)

Other, net 1,855 (1,492) - 363 (43,802) 2,444 - (41,358)

Net nonoperating gains and losses 88,043 2,934 - 90,977 169,314 18,618 - 187,932

Excess of revenues over expenses 158,593 2,190 - 160,783 212,598 15,017 - 227,615

Three Months Ended Septmeber 30, 2017Three Months Ended September 30, 2018

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 25

Unaudited Consolidating Statements of Operations and Changes in Net Assets (continued) ($ in thousands) Change in Net Assets

See notes to unaudited consolidated financial statements. Please refer to Management’s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Avon Hospital, which became a member of the Obligated Group in August 2017, is reported in the Obligated Group for all periods presented.

Consolidating

Obligated Non-Obligated Adjustments &

Group Group Eliminations Consolidated

Total net assets at July 1, 2017 7,736,362$ 981,140$ (3,448)$ 8,714,054$

Excess of revenues over expenses 212,598 15,017 - 227,615

Restricted gifts and bequests 28,589 677 - 29,266

Restricted net investment income 12,749 873 - 13,622

Net assets released from restrictions

used for operations included

in other unrestricted revenues (8,802) (999) - (9,801)

Contributions (to) from affiliates (32,371) 32,371 - -

Retirement benefits adjustment (658) - - (658)

Change in restricted net assets related

to interests in foundations 474 - - 474

Change in restricted net assets related

to value of perpetual trusts 361 101 - 462

Foreign currency translation 63 10,496 - 10,559

Net change in unrealized gains

on nontrading investments (75) - - (75)

Other - 1 - 1

Increase in total net assets 212,928 58,537 - 271,465

Total net assets at September 30, 2017 7,949,290$ 1,039,677$ (3,448)$ 8,985,519$

Total net assets at July 1, 2018 8,518,175$ 1,040,261$ (2,120)$ 9,556,316$

Excess of revenues over expenses 158,593 2,190 - 160,783

Donated capital, excluding assets released from

restrictions for capital purposes 54 11 - 65

Restricted gifts and bequests 21,156 771 - 21,927

Restricted net investment income 8,477 233 - 8,710

Net assets released from restrictions

used for operations included

in other unrestricted revenues (11,241) (773) - (12,014)

Transfers from (to) affiliates 323 (323) - -

Retirement benefits adjustment (658) (57) - (715)

Change in restricted net assets related

to interests in foundations 92 - - 92

Change in restricted net assets related

to value of perpetual trusts 183 36 - 219

Foreign currency translation - (12,662) - (12,662)

Other (4) 1,538 - 1,534

Increase in total net assets 176,975 (9,036) - 167,939

Total net assets at September 30, 2018 8,695,150$ 1,031,225$ (2,120)$ 9,724,255$

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 26

Unaudited Consolidating Statements of Operations and Changes in Net Assets ($ in thousands) Operations

Please refer to Management’s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Avon Hospital, which became a member of the Obligated Group in August 2017, is reported in the Obligated Group for all periods presented.

Consolidating Consolidating

Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments &

Group Group Eliminations Consolidated Group Group Eliminations Consolidated

Unrestricted revenues

Net patient service revenue

before uncollectible accounts 5,336,898$ 689,147$ (187,574)$ 5,838,471$

Provision for uncollectible accounts (199,747) (43,610) - (243,357)

Net patient service revenue 5,418,828$ 710,488$ (207,017)$ 5,922,299$ 5,137,151 645,537 (187,574) 5,595,114

Other 545,396 216,290 (116,038) 645,648 579,522 227,175 (119,689) 687,008

Total unrestricted revenues 5,964,224 926,778 (323,055) 6,567,947 5,716,673 872,712 (307,263) 6,282,122

Expenses

Salaries, wages, and benefits 3,371,186 498,594 (239,177) 3,630,603 3,228,052 439,430 (220,084) 3,447,398

Supplies 553,386 78,034 (635) 630,785 509,057 77,450 (849) 585,658

Pharmaceuticals 737,652 60,206 - 797,858 646,303 63,016 - 709,319

Purchased services and other fees 348,498 73,693 (17,783) 404,408 321,490 90,626 (19,847) 392,269

Administrative services 115,220 58,483 (15,797) 157,906 104,451 47,262 (15,119) 136,594

Facilities 211,464 55,543 (2,407) 264,600 200,642 53,642 (2,792) 251,492

Insurance 53,060 52,431 (47,181) 58,310 50,139 45,858 (48,497) 47,500

5,390,466 876,984 (322,980) 5,944,470 5,060,134 817,284 (307,188) 5,570,230

Operating income before interest,

depreciation, and amortization expenses 573,758 49,794 (75) 623,477 656,539 55,428 (75) 711,892

Interest 89,266 13,056 - 102,322 99,302 8,532 - 107,834

Depreciation and amortization 328,502 48,067 (75) 376,494 321,223 47,637 (75) 368,785

Operating income (loss) before special charges 155,990 (11,329) - 144,661 236,014 (741) - 235,273

Special charges - 2,178 - 2,178 - 4,419 - 4,419

Operating income (loss) 155,990 (13,507) - 142,483 236,014 (5,160) - 230,854

Nonoperating gains and losses

Investment return 112,954 7,251 - 120,205 599,482 48,282 - 647,764

Derivative gains (losses) 28,996 (1,207) - 27,789 (4,721) (1,801) - (6,522)

Other, net 5,046 52,443 - 57,489 (38,601) 5,962 - (32,639)

Net nonoperating gains and losses 146,996 58,487 - 205,483 556,160 52,443 - 608,603

Excess of revenues over expenses 302,986 44,980 - 347,966 792,174 47,283 - 839,457

Nine Months Ended September 30, 2018 Nine Months Ended Septmeber 30, 2017

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 27

Unaudited Consolidating Statements of Operations and Changes in Net Assets (continued) ($ in thousands) Change in Net Assets

See notes to unaudited consolidated financial statements. Please refer to Management’s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Avon Hospital, which became a member of the Obligated Group in August 2017, is reported in the Obligated Group for all periods presented.

Consolidating

Obligated Non-Obligated Adjustments &

Group Group Eliminations Consolidated

Total net assets at January 1, 2017 7,143,389$ 885,858$ (3,448)$ 8,025,799$

Excess of revenues over expenses 792,174 47,283 - 839,457

Restricted gifts and bequests 76,976 1,477 - 78,453

Restricted net investment income 35,577 2,642 - 38,219

Net assets released from restrictions

used for operations included

in other unrestricted revenues (24,137) (2,325) - (26,462)

Contributions (to) from affiliates (76,952) 76,952 - -

Retirement benefits adjustment (1,975) - - (1,975)

Change in restricted net assets related

to interest in foundations 3,636 - - 3,636

Change in restricted net assets related

to value of perpetual trusts 1,126 380 - 1,506

Foreign currency translation - 27,112 - 27,112

Net change in unrealized losses

on nontrading investments (505) - - (505)

Other (19) 298 - 279

Increase in total net assets 805,901 153,819 - 959,720

Total net assets at September 30, 2017 7,949,290$ 1,039,677$ (3,448)$ 8,985,519$

Total net assets at January 1, 2018 8,352,342$ 993,231$ (2,120)$ 9,343,453$

Excess of revenues over expenses 302,986 44,980 - 347,966

Donated capital, excluding assets released from

restrictions for capital purposes 514 11 - 525

Restricted gifts and bequests 66,430 1,919 - 68,349

Restricted net investment income 7,991 920 - 8,911

Net assets released from restrictions

used for operations included

in other unrestricted revenues (33,043) (2,363) - (35,406)

Transfers (to) from affiliates (233) 233 - -

Member substitution - 13,180 - 13,180

Retirement benefits adjustment (1,975) (172) - (2,147)

Change in restricted net assets related

to interests in foundations 38 - - 38

Change in restricted net assets related

to value of perpetual trusts 866 251 - 1,117

Foreign currency translation - (22,508) - (22,508)

Other (766) 1,543 - 777

Increase in total net assets 342,808 37,994 - 380,802

Total net assets at September 30, 2018 8,695,150$ 1,031,225$ (2,120)$ 9,724,255$

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Unaudited Consolidating Statements of Cash Flows ($ in thousands)

See notes to unaudited consolidated financial statements. Please refer to Management’s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Avon Hospital, which became a member of the Obligated Group in August 2017, is reported in the Obligated Group for all periods presented.

Nine Months Ended September 30, 2018 Nine Months Ended Septmeber 30, 2017

Consolidating Consolidating

Obligated Non-Obligated Adjustments & Obligated Non-Obligated Adjustments &

Group Group Eliminations Consolidated Group Group Eliminations Consolidated

Operating activities and net nonoperating gains and losses

Increase in total net assets 342,808$ 37,994$ -$ 380,802$ 805,901$ 153,819$ -$ 959,720$

Adjustments to reconcile increase in net

assets to net cash provided by (used in) operating

activities and net nonoperating gains and losses:

Gain on extinguishment of debt - - - - 46,159 - - 46,159

Retirement benefits adjustment 1,975 172 - 2,147 1,975 - - 1,975

Net realized and unrealized gains on investments (88,928) (5,371) - (94,299) (598,361) (49,184) - (647,545)

Depreciation and amortization 328,502 49,662 (75) 378,089 321,223 50,280 (75) 371,428

Provision for uncollectible accounts 187,243 41,215 - 228,458 199,747 43,610 - 243,357

Foreign currency translation loss (gain) - 22,508 - 22,508 - (27,112) - (27,112)

Donated capital (514) (11) - (525) - - - -

Restricted gifts, bequests, investment income, and other (75,325) (3,090) - (78,415) (117,315) (4,499) - (121,814)

Transfers to (from) affiliates 233 (233) - - 76,952 (76,952) - -

Accreted interest and amortization of bond premiums (4,549) 25 - (4,524) (1,464) 9 - (1,455)

Net gain in value of derivatives (37,553) (2,575) - (40,128) (17,443) - - (17,443)

Member substitution - (65,442) - (65,442) - - - -

Changes in operating assets and liabilities:

Patient receivables (291,485) (38,316) 2,656 (327,145) (90,781) (57,566) 12,857 (135,490)

Other current assets 10,098 (65,654) (3,697) (59,253) (33,516) (43,345) 34,381 (42,480)

Other noncurrent assets (11,539) 171 45,678 34,310 39,028 (5,660) (3,035) 30,333

Accounts payable and other current liabilities 43,490 (35,267) 17,522 25,745 (41,218) 41,832 (32,663) (32,049)

Other liabilities (6,815) 11,665 (16,620) (11,770) (18,471) (845) (16,866) (36,182)

Net cash provided by (used in) operating activities and net

nonoperating gains and losses 397,641 (52,547) 45,464 390,558 572,416 24,387 (5,401) 591,402

Financing activities

Proceeds from long-term borrowings 45,000 428,122 (45,464) 427,658 1,108,832 2,099 (2,099) 1,108,832

Payments for advance refunding of long-term debt - (420,030) - (420,030) (1,100,815) - - (1,100,815)

Principal payments on long-term debt (76,452) (4,833) - (81,285) (80,644) (5,066) 7,500 (78,210)

Debt issuance costs - (6,382) - (6,382) (8,017) - - (8,017)

Change in pledges receivable, trusts and interests

in foundations 173 (244) - (71) (1,668) (3) - (1,671)

Restricted gifts, bequests, investment income, and other 75,325 3,090 - 78,415 117,315 4,499 - 121,814

Net cash provided by (used in) financing activities 44,046 (277) (45,464) (1,695) 35,003 1,529 5,401 41,933

Investing activities

Expenditures for property and equipment (476,827) (70,090) - (546,917) (352,088) (61,496) - (413,584)

Member substitution cash contributions - 1,515 - 1,515 - - - -

Net change in cash equivalents reported

in long-term investments 221,328 (18,493) - 202,835 (576,582) 48,848 - (527,734)

Purchases of investments (2,615,737) (215,921) - (2,831,658) (1,623,799) (159,691) - (1,783,490)

Sales of investments 2,550,803 251,764 - 2,802,567 1,748,511 109,015 - 1,857,526

Transfers (to) from affiliates (233) 233 - - (76,952) 76,952 - -

Net cash (used in) provided by investing activities (320,666) (50,992) - (371,658) (880,910) 13,628 - (867,282)

Effect of exchange rate changes on cash - (1,577) (1,577) - 1,162 1,162

Increase (decrease) in cash and cash equivalents 121,021 (105,393) - 15,628 (273,491) 40,706 - (232,785)

Cash and cash equivalents at beginning of year 27,644 213,583 - 241,227 303,102 217,526 - 520,628

Cash and cash equivalents at end of period 148,665$ 108,190$ -$ 256,855$ 29,611$ 258,232$ -$ 287,843$

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 29

Utilization The following table provides selected utilization statistics for The Cleveland Clinic Health System:

(1) Acute and post-acute, including rehabilitative and psychiatric services within post-acute, but

excluding newborns and bassinets. (2) Includes Akron General statistics for November and December 2015. The Clinic became the sole

member of Akron General on November 1, 2015. (3) Includes Union Hospital statistics beginning April 1, 2018, which is the date the Clinic became the

sole member of The Union Hospital Association.

Year Ended December 31 YTD September 30

2015 (2)

2016 2017 2017 2018 (3)

Total Staffed Beds (1)

4,034 3,931 3,847 3,912 4,067

Percent Occupancy (1)

67.9% 69.3% 70.7% 69.5% 69.5%

Inpatient Admissions (1)

Acute 146,990 162,930 169,238 127,640 128,138

Post-acute 11,779 12,424 11,710 8,863 8,167

Total 158,769 175,354 180,948 136,503 136,305

Patient Days (1)

Acute 782,316 846,170 877,891 656,943 671,077

Post-acute 98,268 103,979 93,961 67,828 60,126

Total 880,584 950,149 971,852 724,771 731,203

Average Length of Stay

Acute 5.30 5.20 5.16 5.16 5.24

Post-acute 8.30 8.39 8.04 8.24 7.40

Surgical Facility Cases

Inpatient 56,311 59,802 61,529 46,978 47,069

Outpatient 137,139 147,855 145,825 112,809 115,855

Total 193,450 207,657 207,354 159,787 162,924

Emergency Room Visits 542,768 652,073 644,575 485,065 504,903

Outpatient Observations 49,237 58,384 59,894 45,163 46,921

Outpatient Evaluation and Management Visits 3,742,901 4,235,729 4,403,635 3,319,510 3,426,699

Acute Medicare Case Mix Index - Health System 1.91 1.93 1.91 1.89 1.95

Acute Medicare Case Mix Index - Cleveland Clinic 2.47 2.53 2.59 2.58 2.69

Total Acute Patient Case Mix Index - Health System 1.81 1.84 1.85 1.84 1.89

Total Acute Patient Case Mix Index - Cleveland Clinic 2.36 2.45 2.52 2.51 2.62

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Utilization (continued) The following table provides selected utilization statistics for the Obligated Group:

(1) Acute and post-acute, including rehabilitative and psychiatric services within post-acute, but

excluding newborns and bassinets. Please refer to Management’s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Avon Hospital, which became a member of the Obligated Group in August 2017, is reported in the Obligated Group for all periods presented.

Year Ended December 31 YTD September 30

2015 2016 2017 2017 2018

Total Staffed Beds (1)

3,352 3,412 3,352 3,382 3,412

Percent Occupancy (1)

69.6% 69.6% 70.8% 71.1% 71.0%

Inpatient Admissions (1)

Acute 138,287 139,300 145,479 109,812 109,136

Post-acute 9,740 9,471 8,980 7,338 6,528

Total 148,027 148,771 154,459 117,150 115,664

Patient Days (1)

Acute 747,231 744,296 767,003 577,059 584,194

Post-acute 73,473 76,113 70,567 61,509 47,916

Total 820,704 820,409 837,570 638,568 632,110

Surgical Facility Cases

Inpatient 53,839 54,072 56,030 42,218 42,253

Outpatient 132,800 135,918 133,893 100,990 101,723

Total 186,639 189,990 189,923 143,208 143,976

Emergency Room Visits 493,930 535,478 530,316 399,017 398,907

Outpatient Observations 45,687 50,671 52,506 39,468 39,734

Outpatient Evaluation and Management Visits 3,742,901 4,232,729 4,399,738 3,316,463 3,423,671

Acute Medicare Case Mix Index 1.92 1.98 1.95 1.94 2.00

Total Acute Patient Case Mix Index 1.83 1.89 1.90 1.89 1.95

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Payor Mix The following table shows payor mix as a percentage of gross patient service revenue for the health system and obligated group as a whole:

(1) Includes Akron General payor mix for November and December 2015. The Clinic became the sole

member of Akron General on November 1, 2015. (2) Includes Union Hospital statistics beginning April 1, 2018, which is the date the Clinic became the

sole member of The Union Hospital Association. Please refer to Management’s Discussion and Analysis for a listing of the hospitals in the Obligated Group. Avon Hospital, which became a member of the Obligated Group in August 2017, is reported in the Obligated Group for all periods presented.

CLEVELAND CLINIC HEALTH SYSTEM

Based on Gross Patient Service Revenue

Year Ended December 31 YTD September 30

2015 (1)

2016 2017 2017 2018 (2)

Payor

Managed Care and Commercial 42% 39% 38% 38% 37%

Medicare 43% 44% 46% 46% 47%

Medicaid 12% 14% 14% 14% 14%

Self-Pay & Other 3% 3% 2% 2% 2%

Total 100% 100% 100% 100% 100%

OBLIGATED GROUP

Based on Gross Patient Service Revenue

Year Ended December 31 YTD September 30

2015 2016 2017 2017 2018

Payor

Managed Care and Commercial 42% 40% 39% 39% 38%

Medicare 43% 44% 46% 46% 47%

Medicaid 12% 13% 13% 13% 13%

Self-Pay & Other 3% 3% 2% 2% 2%

Total 100% 100% 100% 100% 100%

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 32

Research Support ($ in thousands) The Clinic funds the annual cost of research from external sources, such as federal grants and contracts and contributions restricted for research, and internal sources, such as contributions, endowment earnings and revenue from operations. The following table summarizes the sources of research support for the Clinic:

2015 2016 2017 2017 2018

External Grants Earned

Federal Sources $103,022 $108,253 $114,942 $87,143 $88,609

Non-Federal Sources 81,796 87,883 92,564 69,734 72,802

Total 184,818 196,136 207,506 156,877 161,411

Internal Support 63,240 59,326 59,873 43,749 49,586

Total Sources of Support $248,058 $255,462 $267,379 $200,626 $210,997

Year Ended December 31 YTD September 30

CLEVELAND CLINIC HEALTH SYSTEM OTHER INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 33

Key Ratios The following table provides selected key ratios for the System as a whole:

2015 2016 2017 2017 2018

Liquidity ratios

Days of cash on hand 347 349 383 377 368

Days of revenue in accounts receivable 47 51 49 47 51

Coverage ratios

Cash to debt (%) 168.9 172.7 197.9 192.9 200.4

Maximum annual debt service coverage (x) 5.7 3.8 5.3 5.0 4.9

Interest expense coverage (x) 10.1 7.5 9.1 8.5 9.3

Debt to cash flow (x) 3.4 4.6 3.5 3.7 3.6

Leverage ratio

Debt to capitalization (%) 36.5 36.4 32.5 33.4 31.8

Profitability ratios

Operating margin (%) 6.7 3.0 3.9 3.7 2.2

Operating cash flow margin (%) 14.7 11.0 11.5 11.3 9.5

Excess margin (%) 8.5 6.2 12.5 12.2 5.1

Return on assets (%) 4.5 3.6 7.3 7.3 2.9

NOTE:

Coverage and liquidity ratios are calculated using a 12-month rolling income statement.

YTD September 30Year Ended December 31

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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CLEVELAND CLINIC HEALTH SYSTEM – NORTHEAST OHIO SERVICE AREA AND FACILITIES

OVERVIEW

he Cleveland Clinic Health System

(System) is a world-renowned provider of

healthcare services and attracted patients from

across the United States and from 135 other

countries in 2017. The System operates 14

hospitals with approximately 4,100 staffed beds

and is the leading provider of healthcare services

in northeast Ohio. Thirteen of the hospitals are

operated in the Northeast Ohio area, anchored

by The Cleveland Clinic Foundation (Clinic). The

System operates 21 outpatient family health

centers and 10 ambulatory surgery centers, as

well as numerous physician offices, which are

located throughout northeast Ohio, and

specialized cancer centers in Sandusky and

Mansfield, Ohio. In Florida, the System operates

a hospital and a clinic in Weston, an outpatient

family health and surgery center in Coral

Springs, an outpatient family health center in

West Palm Beach and numerous physician

offices located throughout southeast Florida. In

addition, the System operates a health and

wellness center and a sports medicine clinic in

Toronto, Canada and a specialized neurological

clinical center in Las Vegas, Nevada. Pursuant to

agreements, the System also provides

management services for Ashtabula County

Medical Center, located in Ashtabula, Ohio, with

approximately 180 staffed beds, and Cleveland

Clinic Abu Dhabi, a multispecialty hospital

offering critical and acute care services that is

part of Mubadala Development Company’s

network of healthcare facilities located in Abu

Dhabi, United Arab Emirates with approximately

364 staffed beds.

Effective April 1, 2018, the Clinic through a

subsidiary became the sole member of The

Union Hospital Association (Union Hospital)

through a non-cash business combination

transaction. Union Hospital operates a hospital

and several off-campus satellite services in

Tuscarawas County and surrounding counties in

Eastern Ohio. For a description of Union

Hospital, refer to “UNION HOSPITAL.”

T

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 35

The following table sets forth the hospitals operated by the obligated issuers and their affiliates, together with each hospital’s staffed bed count as of September 30, 2018:

Staffed Beds

OBLIGATED Cleveland Clinic 1,302 Avon Hospital 126 Euclid Hospital 165 Fairview Hospital 460 Hillcrest Hospital 440 Lutheran Hospital 194 Marymount Hospital 277 Medina Hospital 121 South Pointe Hospital 172 Weston Hospital 155

3,412

NON-OBLIGATED Akron General Medical Center Union Hospital Children’s Rehab Hospital

471 139 25

Lodi Hospital 20

655

HEALTH SYSTEM 4,067

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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AWARDS & RECOGNITION

he Clinic was ranked as the second best

hospital in the United States by U.S.

News and World Report in its 2018-2019 edition

of “America’s Best Hospitals.” For the past 20

years, the Clinic has been ranked among the top

five hospitals in the United States. The Clinic’s

Heart and Vascular Institute, located on the

Clinic’s main campus, was recognized as the

best cardiology and heart surgery program in the

United States, an honor the Clinic has received

annually for twenty-four consecutive years. The

Clinic has additionally received the honor of

being recognized with the best urology program

in the United States for the second straight year.

The Clinic was nationally ranked in fourteen

specialties, including twelve in the top five

nationwide, and is one of just twenty hospitals to

earn a place on the U.S. News’ 2018-2019 Honor

Roll. The following table summarizes the Clinic’s

national rankings by medical specialty:

T

In the “HONOR ROLL”

Cleveland Clinic ....................................................... 2nd

Ranked No. 1

Cardiology & Heart Surgery .................................... 1st

Urology ..................................................................... 1st

In America’s Top 5

Gastroenterology & GI Surgery .............................. 2nd

Nephrology ............................................................... 2nd

Rheumatology .......................................................... 2nd

Orthopedics .............................................................. 3rd

Pulmonology ............................................................ 3rd

Diabetes & Endocrinology....................................... 4th

Neurology & Neurosurgery ..................................... 4th

Cancer ....................................................................... 5th

Geriatrics .................................................................. 5th

Gynecology .............................................................. 5th

In America’s Top 20

Ophthalmology ......................................................... 9th

Ear, Nose & Throat ................................................... 11th

2018-19 U.S. NEWS & WORLD REPORT RANKINGS

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 37

Cleveland Clinic Children’s Hospital located on

the Clinic’s main campus ranked as one of the

top pediatric hospitals in the country. The

Children’s Hospital earned national recognition in

ten out of ten medical specialties ranked by U.S.

News and World Report in its 2018-2019 edition

of “Best Children’s Hospitals.” The following table

summarizes the Clinic’s national rankings by

pediatric specialty:

The publication also evaluated hospitals by state

and metropolitan area with a methodology similar

to that used to determine the national rankings.

The Clinic was ranked as the best hospital in both

the State of Ohio and the Cleveland metropolitan

area, which includes the City of Cleveland and its

surrounding suburbs. The report also ranked

three of the System’s regional hospitals in the top

hospitals in the Cleveland metropolitan area and

Ohio: Fairview Hospital ranked third in Cleveland

and fifth in Ohio; Hillcrest Hospital ranked fourth

in Cleveland and sixth in Ohio; and South Pointe

Hospital ranked fifth in Cleveland and thirteenth

in Ohio. Akron General Medical Center, located

in Summit County, was ranked eleventh in the

State of Ohio. Weston Hospital was ranked first

in the Miami-Fort Lauderdale metro area and

fourth out of more than 250 hospitals in the State

of Florida.

In 2018, the Clinic was named one of the World’s

Most Ethical Companies by the Ethisphere

Institute for the sixth consecutive year.

Ethisphere Institute is a global leader in defining

and advancing the standards of ethical business

practices. The award recognizes organizations

that promote ethical business standards and

practices internally, enable managers and

employees to make good choices and shape

future industry standards by introducing best

practices. Companies were evaluated in five

categories: ethics and compliance programs;

corporate citizenship and responsibility; culture

of ethics; governance; and leadership, innovation

and reputation.

The Clinic and Akron General Medical Center

achieved re-designation of Magnet status

recognition from the American Nurses

Credentialing Center in 2018. Magnet status is

the highest national credential for nursing

excellence and serves as the gold standard for

2018-19 U.S. NEWS & WORLD REPORT RANKINGS

Pediatric Ranking by Specialty

Gastroenterology...................................................... 23rd

Cancer ....................................................................... 23rd

Neurology & Neurosurgery ...................................... 24th

Cardiology & Heart Surgery ..................................... 26th

Pulmonology ............................................................. 32nd

Diabetes & Endocrinology ....................................... 39th

Urology ...................................................................... 42nd

Nephrology ............................................................... 49th

Neonatology .............................................................. 50th

Orthopedics .............................................................. 50th

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 38

nursing practice. Organizations that have

achieved Magnet status are recognized for

quality in patient care, nursing excellence and

innovations in professional nursing practice. The

credential can be renewed every five years by

providing evidence of the expansion of

professional knowledge and continued

competence in nursing. Five System hospitals

have achieved the distinguished Magnet status

recognition. The Clinic has been recognized as a

Magnet organization since 2003, Fairview

Hospital has been recognized as a Magnet

organization since 2009 and Akron General

Medical Center has been recognized as a

Magnet organization since 2013. Hillcrest

Hospital achieved Magnet status in 2014 and

South Pointe Hospital achieved Magnet status in

2017

In January 2018, three of the System’s Heart and

Vascular Institute units received the Beacon

Award for Excellence at the gold level. The

Beacon award was created by the American

Association of Critical Care Nurses to recognize

hospital units for demonstrating exceptional care

through improved outcomes, greater overall

satisfaction and a positive and supportive work

environment. Units are recognized at the gold,

silver or bronze level, and the designation

continues for three years. The Orthopedic

Nursing Unit at Euclid Hospital was also honored

in 2018 at the silver level. Other System units that

have received the Beacon award are the main

campus Heart Failure Intensive Care Unit and

Coronary Intensive Care Unit, both at the gold

level in 2015, and the Hillcrest Hospital Coronary

Care Unit at the silver level in 2016.

In August 2018, the Parkinson's Foundation

named the Clinic a Center of Excellence, a

designation that recognizes hospitals and

academic medical centers that provide the latest

medications, therapies and innovations in

Parkinson’s disease. Organizations are required

to meet various clinical, research, professional

education and patient care criteria to be

considered for the Center of Excellence

designation. The Clinic is one of 45 medical

centers in the world and 31 in the U.S. that

received the Center of Excellence designation

from the Parkinson’s Foundation.

In October 2018, Lutheran Hospital received the

Vizient Bernard A. Birnbaum, MD, Quality

Leadership Award for excellence in delivering

safe, patient-centered care that is timely,

effective, efficient and equitable. This is the

second time Lutheran Hospital has received this

award. Award recipients are selected from

member organizations based on performance

data from a variety of sources, including Vizient’s

Clinical Data Base, core measures data, the

Hospital Consumer Assessment of Healthcare

Providers and Systems survey, and the Centers

for Disease Control and Prevention’s National

Healthcare Safety Network.

In October 2018, the Clinic was named to the

2018 HealthCare’s Most Wired list by the College

of Healthcare Information Management

Executives. The “Most Wired” survey assesses

hospitals and health systems on their progress of

technology adoption and implementation and

use of information technology. The survey also

evaluates hospitals and health systems on how

they leverage and implement information

technology to improve clinical and financial

performance for value-based healthcare and

future care delivery systems.

The Clinic was recognized among twenty

Cleveland area employers at the 2018 Smart

Culture Conference by Smart Business

magazine for the second consecutive year.

Honorees were noted for having workplace

cultures that bolster productivity, enhance job

satisfaction and provide a competitive advantage

in the marketplace.

The System was recognized by The Plain Dealer

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newspaper as one of Northeast Ohio’s 150 top

workplaces for 2018, ranking seventeenth in the

category for large local employers. This list was

based on the opinions of employees who

responded to a survey that measured several

aspects of workplace culture, including alignment

with the organization, execution of strategies and

feelings of connection. This is the System’s sixth

time on this list.

The Clinic was recognized for having a positive

impact on its employees and the region with a

NorthCoast 99 award, an annual recognition

program that honors ninety-nine great

workplaces in Northeast Ohio based on results

from employee surveys. The Clinic has received

this recognition thirteen times.

The Clinic’s CEO and President, Tomislav

Mihaljevic, M.D., was named the sixteenth most

influential physician executive in the nation by

Modern Healthcare in its 2018 list of the fifty most

influential physician executives and leaders. The

list honors physicians working in the healthcare

industry who are recognized by their peers and

an expert panel as being influential in terms of

demonstrated leadership and impact. Dr.

Mihaljevic was recognized for his focus on new

initiatives that the organization will pursue in

2018, including improvements in patient safety,

caregiver experience and operational efficiency.

FINANCING DEVELOPMENTS

n August 2018 the System through a UK

subsidiary entered into a private placement

agreement to issue Guaranteed Senior Notes

(2018 Sterling Notes) totaling £665 million. The

subsidiary received proceeds of £300 million and

£100 million in August 2018 and November

2018, respectively, and will receive additional

proceeds of £265 million in August 2019. The

2018 Sterling Notes are guaranteed by the

Cleveland Clinic obligated group and another UK

subsidiary, mature at various dates through 2068

and bear interest at an average fixed rate of

2.99%. The proceeds of the 2018 Sterling Notes

have been or will be used to repay a $375.0

million term loan used to acquire a long-term

leasehold interest in a building in London,

England, and to partially fund the construction

and conversion of the building into a healthcare

facility. The 2018 Sterling Notes were assigned a

rating of AA by Standard & Poor’s (S&P).

At the time the 2018 Sterling Notes were rated,

S&P affirmed its AA rating on the System’s

obligated group outstanding debt and maintained

its stable outlook. S&P cited various reasons to

support the rating, including a unique and very

strong enterprise profile, continued widespread

brand recognition of tertiary and quaternary

services and a stable leadership team that has

executed on its strategy and vision. S&P noted

the System’s robust research program,

increasing emphasis on teaching, and strategic

focus on growth domestically and internationally.

Challenges to the current rating include

northeast Ohio’s unfavorable demographic trend,

the System’s robust capital spending program

and a highly competitive service area in

northeast Ohio.

In July 2018 Moody’s Investor Services

(Moody’s) affirmed its Aa2 rating on the System’s

obligated group outstanding debt and maintained

their stable outlook. Moody’s cited various

factors to support this rating and outlook,

including a national and international clinical

reputation, a leading local market position, high

degree of integration and centralization, strong

liquidity with sustained good operating cashflow

margins and exceptional fundraising abilities. In

its report, Moody’s indicated that these strengths

I

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compensate for challenges such as relatively

high debt levels for the rating category, execution

risks of multiple strategies that require elevated

capital spending and constrained revenue in the

local market due to competition and weak

demographic trends.

CORPORATE GOVERNANCE

he Board of Directors of the Clinic is

responsible for all of its operations and

affairs and controls its property. The Board of

Directors is also responsible for ensuring that the

Clinic is organized, and at all times operated,

consistent with its charitable mission and its

status as an Ohio nonprofit corporation and tax-

exempt charitable organization. The Board of

Directors generally meets five times per year,

including an annual meeting during which the

Clinic’s officers are elected and standing

committees are appointed. The size of the Board

of Directors can range between 15 to 30

Directors (currently there are 29 Directors). The

Board of Trustees serves as an advisor to the

Board of Directors. The Trustees actively serve

on the committees of the Board of Directors. At

present, there are 72 active Trustees and 14

Emeritus Trustees (not including Directors).

Directors and Trustees each serve four-year

terms and are selected on the basis of their

expertise and experience in a variety of areas

beneficial to the Clinic. Directors and Trustees

are not compensated for their service.

The Board of Directors annually appoints certain committees to perform duties that it delegates to them

from time to time, subject to ratification of such action by the Board of Directors. The current committees

are as follows:

T

Audit

Committee

Compensation

Committee

Conflict of Interest and

Managing Innovations

Committee

Philanthropy

Committee

Finance

Committee

Governance

Committee

Government and

Community Relations

Committee

Investment

Committee

Medical Staff

Appointment

Committee

Quality, Safety and

Patient Experience

Committee

Research

and

Education Committee

Board Policy

Committee

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Members of the Committees are chosen based on the interests and skills of individual Board members and the needs of the particular Committee. Most Committees meet three or four times per year, though a few (such as the Audit Committee) meet five or six times per year.

The Clinic and its regional hospitals maintain a

governance model for the regional hospitals that

provides for regional hospital representation on

the Clinic’s Board of Directors while also

maintaining separate boards of trustees for each

hospital. The regional hospital boards meet

quarterly and, among other topics, provide local

input on quality and patient safety and

community health needs. Each regional hospital

has a president, and all hospital presidents report

to the President of Regional Hospitals and

Family Health Centers.

APPOINTMENTS

Tomislav “Tom” Mihaljevic, MD was appointed Chief Executive Officer (CEO) and President

of the Clinic effective January 1, 2018. Dr. Mihaljevic replaced Toby Cosgrove, MD, who

transitioned out of the CEO role in 2017 and now serves in an advisory role. Dr. Mihaljevic joined

the Clinic in 2004 as a cardiothoracic surgeon specializing in minimally invasive and robotically

assisted cardiac surgeries. Since 2015, Dr. Mihaljevic had served as CEO of Cleveland Clinic Abu

Dhabi, overseeing the hospital’s strategy and operations, including directly managing the hospital’s

patient experience and strategy and business development programs. Dr. Mihaljevic’s early

experiences include medical studies and training in Croatia and Switzerland, a surgical residency

at Boston’s Brigham and Women’s Hospital, and leadership and teaching roles at Harvard Medical

School. He is the author or co-author of more than 145 articles in medical and peer-reviewed

scientific journals and is the author of numerous textbook chapters on robotic and minimally

invasive mitral valve surgery and heart valve disease.

Brian Donley, MD was appointed Chief Executive Officer of Cleveland Clinic London in February

2018. As CEO of Cleveland Clinic London, Dr. Donley directs strategy and operations, guides

recruitment and is leading the opening of the new healthcare facility in London. Dr. Donley had

served as Chief of Staff and Chief of Clinical Operations at the Clinic since 2015. He joined the

Clinic’s Orthopaedic and Rheumatologic Institute in 1996 and served in various leadership roles

over the years, including President of the Regional Hospitals and Family Health Centers. He is an

orthopaedic surgeon specializing in foot and ankle surgery and has also served as Professor of

Surgery at the Lerner College of Medicine of Case Western Reserve University. In 2013, Dr. Donley

completed an Advanced Management Program at Harvard Business School.

Rakesh Suri, MD was appointed Chief Executive Officer of Cleveland Clinic Abu Dhabi in January

2018 as Dr. Mihaljevic transitioned into the Clinic CEO role. Dr. Suri joined the Clinic in 2015 and

served as Chief of Staff of Cleveland Clinic Abu Dhabi, where he led the recruitment of more than

400 physicians and participated in the opening and initiation of clinical services through the

hospital. Dr. Suri’s early experiences include medical studies and training in Canada and the United

Kingdom.

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Herbert Wiedemann, MD was appointed Chief of Staff in March 2018. Dr. Wiedemann joined the

Clinic in 1984 and had served as Chairman of the Respiratory Institute since 2007. He also served

as a member of the Board of Governors.

Edmund Sabanegh, MD was appointed to the new role of President – Cleveland Clinic Main

Campus in March 2018. Dr. Sabanegh joined the Clinic in 2006 and had served as Associate Chief

of Staff, Chairman of the Department of Urology and as a member of the Board of Governors. In

March 2018, Dr. Sabanegh was also named President of the Regional Hospitals and Family Health

Centers.

James Young, MD was appointed Chief Academic Officer in March 2018 to oversee education

and research across the System. Dr. Young joined the Clinic in 1995 and had served as Professor

of Medicine and Executive Dean of Cleveland Clinic Lerner College of Medicine of Case Western

Reserve University. Dr. Young also chairs the Endocrinology and Metabolism Institute.

Adam Myers, MD, FACHE was appointed Chief of Population Health and Director of Cleveland

Clinic Community Care in June 2018. Cleveland Clinic Community Care was launched in 2017 to

manage populations of patients rather than just addressing individual patients' needs on a visit-by-

visit basis with a goal of reducing the cost of healthcare while improving quality initiatives and

metrics. Dr. Myers most recently served as Senior Vice President, Chief Medical Officer and

Operations Officer of Texas Health Physicians Group/Enterprise and Chair of the Clinical

Integration team at Southwestern Health Resources.

Josette M. Beran was appointed Chief Strategy Officer in August 2018. Ms. Beran has served in

various leadership roles during her 17-year career at the Clinic, including Executive Administrative

Officer at Cleveland Clinic Abu Dhabi from 2011-2014 and Executive Director in the Clinic’s

Strategy Office since 2014, a position she held until being named Interim Chief Strategy Officer in

January 2018. During her roles in the Strategy Office, Ms. Beran led the integration of Akron

General and Union Hospital into the System and the development of acquisition opportunities in

Florida.

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EXPANSION AND IMPROVEMENT PROJECTS

ue to the anticipated long-term growth

in the demand for services and the

desire to continually upgrade medical facilities,

the System is investing in buildings, equipment

and technology to better serve its patients.

In July 2018, Akron General Medical Center

completed and opened a $49 million emergency

department. The two-story, 73,000 square foot

emergency department triples the size of the

former emergency department space. The first

floor houses the emergency department, and the

second floor contains administrative offices and

a clinical decision unit for patients that need

short-term observation care. The facility is a

Level 1 trauma center and has a total of 60

treatment rooms for patients, including six high-

acuity trauma rooms, an area designated for

patients seeking treatment for sexual assault, an

expanded behavioral health unit, an imaging

department, a separate urgent care area, and an

area for quarantining and treating highly

contagious patients. The second floor houses a

clinical decision unit that has capacity for up to

18 short-term observation patient beds and the

rooftop has a helipad.

In July 2018, the Clinic completed and opened a

new 64,700 square foot, three story family health

center in Lakewood, Ohio on a site adjacent to

the former Lakewood Hospital. The $34 million

facility has an emergency department located on

the first floor with 16 treatment rooms. On the

second and third floors, the facility has 60 exam

rooms. There is also lab and imaging services to

support operations at the facility.

In July 2018, Cleveland Clinic Florida completed

and opened a family health center and surgery

center in Coral Springs, Florida. Coral Springs is

approximately twenty miles northeast of the

Weston campus. This new 74,000 square foot

facility accommodates approximately forty exam

rooms, four operating rooms with shell space for

two additional operating rooms in the future, two

endoscopy rooms and imaging services. The $32

million project was completed through a joint

venture with a local Florida developer. A

construction loan was obtained by the joint

venture for the majority of the construction costs

with a guarantee provided by affiliates of the

Florida developer. Cleveland Clinic Florida is

leasing the building from the joint venture on a

triple net basis for an initial term of fifteen years

and will provide the clinical operations in the

facility.

In September 2018, the Clinic completed and

opened the Cleveland Clinic Children’s

outpatient facility in the former location of the

Taussig Cancer Building on the Clinic’s main

campus. The project consolidated multiple

locations and specialties of Cleveland Clinic

Children’s ambulatory care into the existing

building, including primary and specialty

outpatient services, a children’s retail pharmacy,

pediatric lab services and pediatric radiology

services with x-ray and ultrasound testing. It also

features a family focused education center,

sibling drop-off, pediatric nutrition center, an

expanded front entrance, and new technologies

focused on enhancing the care and experience

for patients, families and caregivers. The

120,000 square foot facility has sixty-five exam

rooms, twenty infusion rooms, and four

procedure rooms. Outpatient services include

adolescent medicine, allergy and immunology,

behavioral health, cardiology and CT Surgery,

dermatology, developmental medicine,

endocrinology/diabetes, fetal care center,

gastroenterology, general surgery, genetics,

gynecology, hematology/oncology, infectious

disease, integrative medicine, maternal fetal

medicine, nephrology, neurology and

D

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neurosurgery, otolaryngology, physical medicine

and rehabilitation, plastic surgery, primary care,

psychiatry, pulmonary medicine, sleep disorders

and urology. The renovation costs including

building infrastructure upgrades were

approximately $36 million.

In October 2018, the System completed and

opened a new tower to expand Weston Hospital.

The new tower hosts a 40-bed emergency

department, a 24-bed observation unit, 26 acute

care beds and 48 intensive care beds, including

23 relocated from the existing hospital. The new

tower also includes a shelled floor for future

expansion. To support this growth, significant

renovation and backfill is planned to increase the

size of existing imaging, laboratory, pharmacy,

sterile processing and food services. A new

endoscopy suite and three new operating rooms

are also included in the renovation and backfill.

The project includes a new central utility plant

and new surface parking to support the campus

expansion. The related backfill construction and

renovation will continue through 2020. Overall,

the project is expected to cost approximately

$230 million.

The System also has the following expansion and improvement projects currently in progress:

Enterprise Administrative Patient Management - The System is currently in the final

stages of a multi-year project to align revenue cycle support services and processes to

support patients as they progress through their continuum of care. The Enterprise

Administrative Patient Management (EAPM) project consolidates thirteen different

technology systems used for scheduling appointments, admissions, electronic medical

records, billing and collections into one technology platform with the goal of improving

patient experiences. Reducing the number of systems is expected to improve patient

service and employee efficiency. Implementation of EAPM began in the first quarter of

2012 at the System facilities in Weston, Florida. The Clinic’s main campus and family

health centers implemented EAPM in the first quarter of 2016, and the System’s

community hospitals excluding Union Hospital implemented EAPM at various phases

throughout 2017 and 2018. EAPM is expected to require capital costs of approximately

$186 million over the entire implementation period, most of which have already been

incurred and paid.

Health Education Campus - In 2013, the Clinic and Case Western Reserve University

(CWRU) School of Medicine reached an agreement to build a health education campus

that will contain CWRU’s medical school program and the Cleveland Clinic Lerner

College of Medicine. The campus includes a facility that will be located on the Clinic’s

main campus and will serve as home for the seminar, lecture, and laboratory curriculum

taught during the first two years of medical school. Students’ clinical training will continue

to take place at area hospitals. This initiative is aligned with the future plans of the Clinic’s

main campus and supports the Clinic’s mission and strategic direction. The facility will

also house the CWRU Nursing School and School of Dental Medicine. The facility is

designed to encourage extensive interaction and collaboration among the professions.

Construction of the facility broke ground on October 1, 2015 and is expected to be

completed in December 2018, with the first students expected to be enrolled in the

summer of 2019. CWRU and the Clinic will share in the construction costs of

approximately $449 million and the ongoing operational costs of the facility, with a portion

of the construction costs expected to be raised through fundraising efforts and donations.

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Plans also include a separate three-story, 126,000 square-foot dental clinic that will be

adjacent to the medical school facility and will cost approximately $66 million. The dental

clinic will provide a space where students can treat patients under dental faculty

supervision. Construction of the dental clinic broke ground in October 2017, and the

facility is expected to open at the same time as the medical school.

Cleveland Clinic London Hospital – In 2015, the Clinic acquired a long-term leasehold

interest in a six-story 198,000 square foot building in London, England. In January 2017,

regulatory approvals were received to convert the building from office space into an

approximately 200-bed hospital with eight operating theatres. Construction on the

London Hospital is expected to be completed in 2020 and open for patients in early 2021.

The System through a UK subsidiary entered into a private placement agreement in

August 2018 to repay a term loan that was used to finance the acquisition costs and to

fund a portion of the construction and conversion costs of the facility. For a description of

the London hospital financing, refer to “FINANCING DEVELOPMENTS.”

PHILANTHROPY CAMPAIGN

he Clinic is currently in the midst of “The

Power of Every One” philanthropic

campaign. The campaign was publicly launched

in 2014 with a goal of raising $2 billion by the

Clinic’s 100th anniversary in 2021. The

campaign will enable the Clinic to transform

patient care, promote health, advance research

and innovation, train caregivers and revitalize

facilities through new construction and

renovation of existing buildings. As of September

30, 2018, the Clinic has received pledges, cash

and other assets of approximately $1.4 billion

toward the goal.

The $2 billion campaign is divided into four

categories: promoting health ($800 million),

advancing discovery ($700 million), training

caregivers ($400 million) and transforming care

($100 million). Promoting health will focus on

improving patient experience and supporting

construction and renovation projects, renovation

of vacated space, new facilities in Florida and

other building projects at its Northeast Ohio

hospitals and family health centers. Training

caregivers will support scholarships, training

programs and the construction of the new health

education campus in collaboration with CWRU.

Advancing discovery will support translational,

basic science and clinical research as well as

endowed chairs. Transforming care will support

the development of new care delivery models,

personalized therapies and information

technology.

INNOVATIONS AND VENTURES

leveland Clinic Innovations promotes

scientific, clinical and administrative

creativity throughout the System into products

that benefit patients around the world.

Specifically, it helps to grow the Clinic’s

innovative capacity, mentors inventors, licenses

technology, secures resources, and establishes

spin-off companies and strategic collaborations

with corporate partners. Since 2000, Cleveland

Clinic Innovations has launched 85 companies,

transacted more than 564 technology licenses,

filed over 4,050 patent applications with over

T

C

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1,450 issued patents, and acted on

approximately 3,600 new inventions. In 2017, the

Clinic executed 43 transactions to provide Clinic

inventions to external organizations for

development and commercialization in various

fields, including orthopaedics, telemedicine,

cardiovascular, immunology and concussion

management.

Cleveland Clinic Ventures operates in tandem

with Cleveland Clinic Innovations to turn medical

breakthrough inventions into products and

companies. The strategy of Cleveland Clinic

Ventures is to maximize the success and

sustainability of spin-offs and to raise funds that

help get ideas to market through funding

strategies and business model development.

Cleveland Clinic Innovations manages the

Healthcare Innovations Alliance, a collaborative

network of healthcare systems, academic

institutions and industry partners from around the

nation. Alliance partners utilize the Clinic’s

comprehensive technology and

commercialization experience to turn medical

ideas into marketable inventions and commercial

ventures. The integration of capabilities between

organizations is focused on discovery,

development and rapid deployment of new

technologies with the goal of improving patient

care. In October 2017, Cleveland Clinic

Innovations announced a partnership between

the Clinic, Jumpstart Inc., and Plug & Play, a

Silicon Valley-based accelerator. The first cohort

of companies completed the three-month Plug &

Play Cleveland program in June 2018. The

accelerator connects innovative healthcare

companies from all over the nation with investors

and corporate partners.

In October 2018, Cleveland Clinic Innovations

hosted the annual Medical Innovation Summit in

downtown Cleveland for industry leaders,

investors, and entrepreneurs looking to expand

their understanding of the healthcare market and

the future of medical innovation. The 2018

Medical Innovation Summit and its affiliated

events hosted approximately 2,000 attendees,

who discussed the future of healthcare and the

latest opportunities and challenges in the

healthcare industry with various keynote

addresses from authors and business leaders in

healthcare. In addition to the keynotes, other

highlights included a panel discussion featuring

members of the care team that completed the

face transplant at the Clinic in 2017 as well as the

unveiling of the Top 10 Medical Innovations for

2019, which highlights the potential for medical

breakthroughs in the coming year. The “Top 10”

has been led by Cleveland Clinic Innovations

since its debut in 2007. Each year, Cleveland

Clinic Innovations interviews over 75 Clinic

experts to elicit more than 150 nominations,

which are presented, debated, and ranked in a

series by two separate committees of clinical

experts that vote on the combined lists to

establish the Top 10 Medical Innovations.

Cleveland Clinic Innovations operates a 50,000-

square-foot Global Cardiovascular Innovation

Center (GCIC) on the Clinic’s main campus,

which is home to its operations, as well as an

incubator facility for approximately 30

companies. GCIC has supported the

development of over 50 technologies and the

creation of over 1,000 new jobs.

CLINICAL AFFILIATIONS

he Clinic has entered into various

affiliations with national and regional

partners that are seeking to improve clinical

quality, patient care, medical education and T

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research. The goal of clinical affiliations is to

provide value-added, high quality clinical care to

patients through the support, expansion and

development of Institute-driven integrated care

strategies. In addition, the Clinic has partnered

with educational institutions with the goal of

improving medical education and research.

In January 2018, the Clinic entered into a

cardiovascular affiliation agreement with Martin

Health System based in Florida. Martin Health

System is a regional not‐for-profit, community‐

based healthcare provider with three acute‐care

hospitals and a network of outpatient services.

The Clinic’s Sydell and Arnold Miller Family

Heart and Vascular Institute and Martin Health

System’s Frances Langford Heart Center plan to

share best practices in cardiology and heart

surgery while focusing on providing high quality,

safe care and improved outcomes. The Clinic will

also provide management services, such as

clinical direction, quality assurance and access

to technologies and techniques. Subsequent to

the affiliation agreement, the two organizations

entered into a definitive agreement whereby

Martin Health System would become a full

member of the System. For a description of the

agreement, refer to “FLORIDA GROWTH.”

In January 2018, the Clinic entered into a clinical

management and professional services

agreement with Avita Health System based in

Ohio. Avita Health System is a regional not‐for-

profit, community‐based healthcare provider with

two critical access hospitals, one acute care

hospital and a network of outpatient services.

The Clinic’s Taussig Cancer Institute and Avita

Health System plan to share best practices in

medical oncology while focusing on providing

high quality, safe care and improved outcomes.

The Clinic will also provide certain professional

and management services, such as clinical

direction, quality assurance and access to

technologies and techniques.

In July 2018, the Clinic and CWRU unveiled

plans to work together to advance research and

education in biomedical engineering. The goal is

to create a portfolio of laboratory breakthroughs

that improve treatments for patients and to

establish a framework for creating more joint

efforts between the organizations with increased

opportunities for trainees to study with scientists,

physicians and engineers. The current alliance

includes more than 50 researchers with primary

appointments in biomedical engineering and

another 80 CWRU researchers appointed in

such disciplines as cardiology, ophthalmology,

orthopedics and precision medicine.

JOINT VENTURES

nder a joint venture agreement with

Select Medical, one of the nation’s

largest providers of post-acute care services, the

Clinic and Select Medical operate three

rehabilitation hospitals in Northeast Ohio. The

first hospital opened in December 2015 in Avon,

Ohio. A second facility opened in Beachwood,

Ohio in October 2017 and a third-facility opened

in Bath Township, Ohio in November 2017. Each

facility has 60 beds and features private rooms

and the latest rehabilitation equipment to care for

patients with stroke, spinal cord injury, brain

injury, and a variety of medical and surgical

conditions. These facilities expand inpatient

rehabilitation services in Northeast Ohio and

improve access for patients with complex

rehabilitation needs. The Clinic is a minority

member in the joint venture.

U

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The Clinic and Select Medical also operate four

existing long-term acute care (LTAC) facilities

through a joint venture agreement. The LTAC

facilities have a total of 230 beds and are located

in northeast Ohio. The joint venture expands the

Clinic’s relationship with Select Medical and

combines the experience of both organizations in

the treatment of LTAC patients.

ACCOUNTABLE CARE ORGANIZATION

leveland Clinic Medicare ACO, LLC is

an Accountable Care Organization

(ACO) that includes participation from Clinic

physicians and independent Quality Alliance

physicians that come together with hospitals and

other providers to provide coordinated, high

quality care to Medicare patients as part of the

Medicare Shared Savings Program. The Shared

Savings Program rewards ACOs that lower their

growth in healthcare costs while meeting

performance standards on quality of care.

Initiatives of the Cleveland Clinic Medicare ACO

include decreased utilization of inpatient and

skilled nursing beds, better blood pressure

control, improved management of diabetes and

a significant decrease in admissions for

asthma/COPD, chronic heart failure and 30-day

readmissions. Cleveland Clinic Medicare ACO

received more than $36 million in shared savings

payments since 2015, which was its first year of

operation.

In 2018, Cleveland Clinic Medicare ACO

transitioned to a new payment model for its

approximately 105,000 beneficiaries that

increases its opportunity for performance-based

savings, while assuming limited performance

based downside risk if it does not reach a specific

savings benchmark. The downside risk is a fixed

30% loss-sharing rate, and in exchange the

Clinic will be able to share higher savings based

on quality performance.

CO-BRANDED INSURANCE

n June 2017, the Clinic entered into a

collaboration with Oscar Health, a health

insurance technology company based in New

York City, to offer co-branded health insurance

plans to consumers in five counties across

northeast Ohio. The new Cleveland Clinic Oscar

individual health plans are available through the

Ohio health insurance exchange or directly

through Oscar Health. Enrollment in the plans

began in the 2018 open enrollment period with

coverage beginning on January 1, 2018. More

than 11,000 members enrolled during the open

enrollment period, which was higher than original

expectations and accounted for about 15% of the

individual health insurance market in the five-

county northeast Ohio area. Plan participants are

matched with teams from both organizations that

work together across the continuum of care to

ensure that participant’s health and wellness

needs are proactively met. Participants have

access to various technology to analyze and

manage their health needs, including the option

of telehealth virtual visits through Cleveland

Clinic Express Care Online and Oscar’s Virtual

Visits.

In November 2017, Humana Inc., a leading

health and well-being company, and the Clinic

announced the creation of two new $0 premium

Medicare Advantage health plans. The Humana

Cleveland Clinic Preferred Medicare Plans will

offer patient-centered, affordable access to

expert doctors, nurses and facilities for people

with Medicare in Cuyahoga County. The

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collaboration integrates Humana’s Medicare

Advantage experience with the Clinic’s clinical

expertise. The plans offer a $0 monthly premium,

$0 primary care physician office visit copay, $0

copay for a 30-day supply of Tier-1 prescription

drugs and require no referrals to see in-network

specialists. Plan members will have access to

the System’s physicians, specialties and

facilities, as well as independent physicians who

are part of the Cleveland Clinic Quality Alliance.

LAKEWOOD HOSPITAL ASSOCIATION

he Lakewood Hospital Association (LHA)

is a non-obligated affiliate of the System.

The Clinic, LHA and the City of Lakewood

entered into an agreement in December 2015

that outlines the transition of healthcare services

in the City of Lakewood and how the Clinic can

be a leader in meeting those healthcare needs.

Participation in the agreement by the City of

Lakewood was authorized by an ordinance

adopted by Lakewood City Council. Under the

terms of the agreement, the Clinic and LHA will

make contributions over the next 15 years for the

creation of a new health and wellness community

foundation to be used to address community

health and wellness needs in the City of

Lakewood. In addition, the Clinic constructed an

approximately 62,000-square-foot family health

center that opened in July 2018 that is located

adjacent to the site of the former hospital. LHA

ceased inpatient operations at the hospital in

February 2016, while the emergency department

and several outpatient services at the hospital

continued until the opening of the new family

health center and emergency department.

Prior to the signing of the agreement, a lawsuit

was filed against the Clinic, LHA, the City of

Lakewood and others (Defendants) by a few

Lakewood residents (Plaintiffs) seeking to stop

the closure of the hospital and money

damages. The trial court dismissed the case on

July 10, 2017, but the Plaintiffs appealed the

dismissal. On May 10, 2018, the Court of

Appeals affirmed the decision of the trial court.

The deadline for Plaintiffs to appeal the case to

the Ohio Supreme Court has expired, and no

appeal was filed.

In November 2015, Lakewood voters defeated a

proposed charter amendment that would have

required voter approval on any Lakewood City

Council ordinance that would have caused the

hospital to no longer be a full time and full service

hospital. As a result of duly signed petitions, a

referendum vote to repeal the ordinance

occurred in November 2016. The results upheld

the ordinance adopted by Lakewood City

Council.

AKRON GENERAL HEALTH SYSTEM

he Clinic became the sole member of

Akron General Health System (Akron

General) in November 2015. As part of the

affiliation agreement, the Clinic and Akron

General committed to funding for the capital

expenditure needs to support Akron General’s

capital plan for at least the first five years after

the member substitution. Recent initiatives

include a new emergency department at Akron

General Medical Center that opened in July 2018

and replacement of Akron General’s electronic

medical records system in the third quarter of

2017.

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During the operational integration process in

early 2016, a compliance review conducted by

the System of contractual relationships between

Akron General and its independent physician

practice groups identified a group of physician

arrangements that were potentially non-

compliant with the Federal Anti-Kickback Statute

and the Limitations on Certain Physician

Referrals regulation (commonly referred to as the

Stark Law). Any noncompliance may have

resulted in false claims to federal and/or state

healthcare programs beginning in 2010 and

could result in liability of Akron General under the

Federal Anti-Kickback Statute, Stark Law, False

Claims Act and/or other laws and regulations.

The System voluntarily disclosed its concerns

about these physician arrangements to the U.S.

Department of Justice (DOJ) in May 2016. Akron

General and the System have produced

information to, engaged in discussions with, and

are cooperating with the DOJ and related

government authorities in connection with this

matter.

Although corrective actions have been taken by

Akron General related to all of the physician

arrangements at issue, and the Clinic has

implemented its compliance programs at Akron

General, there is a probable liability associated

with the matters described above. Preliminary

discussions with the DOJ and related

government authorities about the physician

arrangements are ongoing, and thus neither a

timeframe for completion of the inquiry by the

government authorities nor the ultimate amount

of any fines, penalties and other potential

financial liability, if any, that may arise under the

Federal Anti-Kickback Statute, Stark Law, False

Claims Act and/or other related laws and

regulations can be estimated at this time. The

outcome of the ongoing dialogue with the DOJ,

as well as an adverse outcome in any future

proceedings arising from the physician

arrangements at issue, could require a material

payment from the System and could negatively

impact the operations and/or financial condition

of Akron General and/or the System.

UNION HOSPITAL

n April 2018, the Clinic through a subsidiary

became the sole member of Union Hospital

located in Dover, Ohio. Union Hospital operates

a hospital and several off-campus satellite

services. Union Hospital has more than 100

patient beds, 300 healthcare providers on staff,

and 1,100 employees. In addition to Union

Hospital, Union Hospital operates Tuscarawas

Ambulatory Surgery Center and Union Physician

Services, a hospital-owned physician network

with several offices and approximately 30

providers.

All services, programs and locations managed

and operated by Union Hospital are continuing

as the organizations begin the integration

process. The integration process will examine

the operating processes and procedures at the

various entities and look for ways to improve the

quality and delivery of care. The Clinic previously

maintained an existing relationship for the past

several years with Union Hospital through the

Telestroke Network, which connects patients to

the Clinic’s Cerebrovascular Center.

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FLORIDA GROWTH

n January 2018, Indian River Medical Center

(IRMC), located in Southeast Florida

approximately 130 miles north of Weston,

selected the Clinic as its potential acquisition

partner. In October 2018, the IRMC board of

directors and the Indian River County Hospital

District Trustees both voted to approve a series

of agreements for IRMC to join the System.

Under the terms of the transaction, the Clinic is

committing to invest at least $250 million in IRMC

over the next decade and will maintain certain

clinical services at IRMC for at least ten years.

The acquisition is now pending the review of

federal and state regulatory agencies. IRMC is a

not-for-profit medical center with over 330 patient

beds and is focused on providing healthcare to

Indian River and surrounding counties in Florida.

IRMC will continue to lease the hospital facilities

and the land on which they stand under an

amended and restated agreement with the Indian

River County Hospital District for a term of up to

75 years.

In October 2018, the Clinic and Martin Health

System, located in Southeast Florida

approximately 100 miles north of Weston, signed

a definitive agreement for Martin Health System

be become a full member of the System. As part

of the agreement, the Clinic plans to commit

$500 million into Martin Health System over five

years. The funds will support strategic and

capital needs, as well as other programs and

services. The acquisition is now pending the

review of federal and state regulatory

agencies. Martin Health System is a regional not-

for-profit, community-based healthcare provider

comprising three acute-care hospitals with 521

beds, a 150-member employed physician group

and a network of outpatient services.

INTERNATIONAL GROWTH

n October 2015, the Clinic through a

subsidiary acquired all of the share capital of

33 Grosvenor Place Limited (Grosvenor Place).

Grosvenor Place is a limited liability company

existing under Luxembourg law and a private

company incorporated under Jersey law that has

a long-term leasehold interest in a six-story

198,000 square-foot building in London,

England. The System is converting the building

from office space into an advanced healthcare

facility that is expected to open in early 2021. For

a description of the London hospital project, refer

to “EXPANSION AND IMPROVEMENT

PROJECTS.”

In addition to the London project, the System

operates a health and wellness center and a

sports medicine clinic in Toronto, Canada, and

provides management services to Cleveland

Clinic Abu Dhabi, a multispecialty 364-staffed

bed hospital offering critical and acute care

services that opened in March 2015.

In 2017, the Clinic established Cleveland Clinic

Connected, an international program that aims to

improve patient care delivery around the world by

enabling international health care providers to

access the Clinic's best practices. The Clinic

entered into its first Cleveland Clinic Connected

relationship with Luye Medical Group for the

general hospital in the Shanghai New Hong Qiao

International Medical Center currently under

development in Shanghai, China. Patients will

experience the same model of care through the

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Clinic’s collaboration and guidance in the areas

of quality and patient safety, best practices and

guidelines for patient care and engagement,

distance health and second opinions, clinical and

executive education and continuous

improvements as well as the provision of

advisory services across a spectrum of clinical

and non-clinical areas.

These international activities have increased the

diversity of the System’s healthcare operations

while promoting the Clinic’s clinical expertise in

new markets.

STRATEGY

he U.S. healthcare industry is

undergoing unprecedented change with

the intersection of economic pressure, insurance

reform, technological breakthroughs, and

demographic shifts. At the center of this change

is an accelerating shift in reimbursement models

from volume- to value-based and/or risk-based

payment. Contributing to the reformation of

healthcare is a new level of consumerism

spurred by the continued growth of high-

deductible health insurance products and

expectations for transparency, customization,

and on-demand solutions. As these changes

evolve, the combination of consolidation, a

blurring of traditional roles, and new entrants with

innovative business models and compelling

customer value propositions are reordering the

healthcare landscape.

The System has set forth a strategy that

embraces these fundamental shifts and positions

the organization for continued leadership and

success in meeting its mission and goals in a

vastly changing environment. The strategy

focuses on the principle of Patients First and

contains the following themes designed to

transform value and provide for continued

growth:

 Continue to thrive as a national and global referral center for the most complex care

 Master community-based care in a framework of population management

 Innovate medical education to prepare the next generation of caregivers

 Leverage the unique assets and capabilities of the System to grow and extend services to other hospitals and health systems

The organization has been pursuing a roadmap of transformation referred to as the Strategic Agenda.

The Strategic Agenda calls for fundamental changes in the System’s care, operating and business models

over several years. The specific roadmap is guided by the strategy and five overarching goals:

Patients First – continuously improve quality, safety and patient experience Caregivers – make the System the best place to work Affordability – steward resources Growth – responsibly develop to sustain the Clinic’s mission Impact – make a difference through research, education, innovation and community health

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The centerpiece of the Strategic Agenda is a set of key performance indicators and priority initiatives

established by leadership and formalized in a strategic agenda management (SAM) system. The purpose

of the SAM is to enable leadership to systematically translate the strategy and goals to the priority work

of the enterprise. The goal of the SAM is that every clinical and non-clinical area and every individual

caregiver will work to align their respective efforts and initiatives to the System’s highest priorities.

Enterprise priorities for 2018 include the following:

 Improve access to care for patients

 Use of digital technologies to change business models and the delivery of care

 Caregiver engagement

 High reliability through consistently high performance in quality, safety and patient experience

 Population health and management of financial risk for populations of patients

 System development and integration and standardization of operating practices and functions

In 2017, the System launched Cleveland Clinic

Community Care, a unit created to better enable

healthcare providers and teams to take care of

patient populations. Cleveland Clinic Community

Care is designed to bring primary care providers

together under one umbrella — internal

medicine, family medicine, hospital medicine,

general pediatrics, wellness, home care and

Express Care all report to the same unit. Primary

care physicians are joined by advanced practice

providers and medical assistants, who are

supported by nurses, patient service

representatives and care coordinators, working

together to meet the needs of a specific group, or

panel of patients.

As a major element of delivering value, an

important thread through all of the priority

initiatives of the clinical enterprise is care

affordability – reducing the cost structure so that

the System can be price competitive and render

care more affordable for patients. In 2013, the

System commissioned a Care Affordability Task

Force to perform an enterprise-wide cost

structure analysis and propose

recommendations for transformational cost and

efficiency opportunities. The System is

structured to monitor continually its use of

resources in all clinical, operational and

administrative areas. Since the inception of the

program in 2014, management estimates that

Care Affordability initiatives and other localized

efforts enabled approximately $1 billion of

improvements in the cost structure. The System

continues to develop and implement cost

management and containment plans for a more

affordable care model and to enable investments

in key strategic initiatives. This work is expected

to be an ongoing effort.

In parallel with efforts to transform the care

model, the System is redefining its relationships

with payors/employers and the payment system

to match the broader industry trend toward risk-

shifting and redesigned payment. The goal of

these efforts is to address the changing demands

of payors/employers, while preserving the

financial security of the System during the

transition. This involves increased forms of risk-

taking in payor contracts (from pay-for-value to

bundled payment to shared savings) and narrow

network arrangements with payor partners. This

is evidenced with the recent launching of co-

branded insurance products with payor partners

in 2018.

Leadership also is executing a focused growth

strategy, domestically and internationally. A

major emphasis of the domestic agenda is

focused on developing relationships with

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selected physician groups and hospitals

throughout Northeast Ohio and partnering with

community physicians in aligned, yet different,

models. The Cleveland Clinic Florida leadership

team has begun implementation of a multi-year

growth plan that includes expansion of services

at current facilities, new ambulatory facilities in

surrounding communities and development of

clinically integrated networks with other hospitals

in South Florida, which has resulted in cascading

opportunities for clinical expansion. For a

description of recent growth activity in Florida,

refer to “EXPANSION AND IMPROVEMENT

PROJECTS” and “FLORIDA GROWTH.”

Meanwhile, leadership continues to execute its

international strategy to extend its unique model

and capabilities more broadly and to meet its

organizational goals through the establishment

of new facilities and a network of patient outreach

offices located in several countries across the

world.

Caregivers throughout the System continue to

identify and pursue ways to improve on every

dimension of the organization’s performance:

relentless pursuit of quality and safety,

organization and delivery of care, effectuation of

research and education, and the clearly

conveyed message of the organization’s value to

the market. The System is committed to a path

not only to respond to the changes in the

environment, but also to lead the field with novel

approaches that preserve excellence in care

while offering sustainable models for others to

adopt.

COMMUNITY BENEFIT AND ECONOMIC IMPACT

Community Benefit

he Clinic and its hospital affiliates within

the System are comprised of charitable,

tax-exempt healthcare organizations. The

System’s mission includes addressing health

service needs and providing benefits to the

communities it serves. The tax-exempt members

of the System must satisfy a community

benefit standard to maintain their tax-

exempt status. Community benefit

reporting for the System conforms to

Internal Revenue Service (IRS)

requirements and is reported on the

IRS Form 990, the information return

required to be filed annually with the

IRS by exempt organizations.

Community benefit includes activities

or programs that improve access to

health services, enhance public health,

advance generalizable knowledge and relieve

government burden. The primary categories for

assessing community benefit include financial

assistance, Medicaid shortfall, subsidized health

services, outreach programs, education and

research.

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Cleveland Clinic Children’s Cleveland, OH

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In 2017, the System provided $906.5 million in benefits to the communities it serves. The following chart

summarizes community benefits for the System:

Cleveland Clinic Health System*

Breakdown of Community Benefit (2017) $906.5 Million

* Includes all System operations in Ohio, Florida and Nevada

** Includes net Hospital Care Assurance Program assessment of $8.3 million

*** Research and Education are reported net of externally sponsored funding of

$159.7 million.

Financial Assistance: Financial Assistance represents the cost of providing free or discounted medically

necessary care to patients unable to pay some or all of their medical bills. The System’s financial

assistance policy provides free or discounted care to uninsured patients with incomes up to 400 percent

of the federal poverty level and who meet certain other eligibility criteria by state. This policy covers both

hospital care and services provided by the System’s employed physicians. As a result of the Affordable

Care Act implementation over the last few years, which previously required individuals to obtain

healthcare insurance, nonprofit hospitals across the United States saw an increase of individuals covered

by Medicaid or health exchange policies.

Medicaid Shortfall: The System is a leading provider of Medicaid services in Ohio. The Medicaid program

provides healthcare coverage for low-income families and individuals and is funded by both the state and

federal governments. Medicaid shortfall represents the difference between the costs of providing care to

Medicaid beneficiaries and the reimbursement received by the System.

Subsidized Health Services: Subsidized health services yield low or negative margins, but these

programs are needed in the community. Subsidized health services provided in the System include

pediatric programs, psychiatric/behavioral health programs, obstetrical services, chronic disease

management and outpatient clinics.

Research*** $70.6 M

Financial Assistance

$90.0 M Medicaid Shortfall** $406.9 M

Subsidized Health Services

$22.0 M

Outreach Programs $36.1 M

Education*** $280.9 M

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Outreach Programs: The System is actively engaged in a broad array of community outreach programs,

including numerous initiatives designed to serve vulnerable and at-risk populations in the community.

Outreach programs typically fall into three categories: community health services; cash and in-kind

donations; and community building. The System’s outreach programs include wellness initiatives, chronic

disease management, clinical services, free health screenings, and enrollment assistance for government

funded health programs. A few of the System’s community outreach initiatives are highlighted below:

 The System provided no-cost clinical care to under- and uninsured families at

community sites. For example, the Langston Hughes Health and Education

Center, a Fairfax neighborhood site, provided multigenerational prevention and

wellness services.

 Health fairs provided thousands of people with free screenings for diabetes, heart

disease, cancer and other health conditions. The Cleveland Clinic Minority Men’s

Health Fair, Celebrating Sisterhood, Tu Familia and dozens of other community

health fairs educated community members on the benefits of preventive

healthcare.

 Wellness initiatives and community education classes were provided to schools,

faith-based organizations and community centers in the areas of prevention,

chronic disease management and behavioral change, including tobacco cessation,

weight management, teen parenting, family violence and child safety.

 Collaborative initiatives with community nonprofits and local governments

addressed critical population issues, including the opioid epidemic and infant

mortality.

 Physical education, training and concussion awareness were provided to high

school students by the Clinic’s Orthopaedic and Rheumatology Institute. The

Pediatric Mobile Unit provided wellness services to local elementary schools.

 The Clinic’s Robert J. Tomsich Pathology & Laboratory Medicine Institute donated

services to area safety-net providers.

Education: The System provides a wide range of high-quality medical education, including accredited

training programs for residents, physicians, nurses and other allied health professionals. The System

maintains one of the largest graduate medical education programs in the nation. At the postgraduate level,

the System’s Center of Continuing Education has developed one of the largest and most diverse

continuing medical education programs in the world. The System also operates Cleveland Clinic Lerner

College of Medicine of Case Western Reserve University, dedicated to the teaching of physician-

scientists.

Research: From a community benefit perspective, medical research includes basic, clinical and

community health research, as well as studies on healthcare delivery. Community benefits include

research activities supported by government and foundation sources; corporate and other grants are

excluded from community benefits. The System uses internal funding to cover shortfalls in outside

resources for research.

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Community Health Needs Assessment

The System completes comprehensive

community health needs assessments (CHNA)

once every three years for each hospital. Internal

Revenue Code Section 501(r)(3) requires

nonprofit hospital organizations to conduct a

CHNA every three years and adopt an

implementation strategy to identify the

community health needs that each hospital will

address.

To obtain an in-depth understanding of the community risk indicators, population trends and healthcare

needs, the System has gathered and will gather various data, including:

 demographic and health statistical data;

 information on socio-economic barriers to care, including income, culture, language, education, insurance and housing;

 national, state and local disease prevalence;

 health behavior; and

 medical research and health professional education.

Information is also gathered from persons representing the broad interests of the community, including

those with special knowledge or expertise in public health. Key CHNA needs identified throughout the System include:

 chronic disease (heart disease, cancer, diabetes, asthma, obesity);

 health conditions (mental health, poor birth outcomes, aging, chemical dependency);

 wellness (nutrition, exercise, tobacco cessation, preventative care);

 access to affordable healthcare;

 education (physician shortage); and

 medical research.

Hospital implementation strategies that

address the health needs identified in the

assessments have been developed by

individual hospital leadership teams and have

been added to the Clinic’s website in

compliance with the regulatory requirements.

The current CHNA reports and implementation

strategies for the System hospitals are

available on the Clinic’s website

(www.clevelandclinic.org/CHNAReports).

Economic Impact

According to the System’s most recent Economic

and Fiscal Impact Report, the System is the

largest employer in Northeast Ohio and the

second largest employer in the State of Ohio.

The current report was released in 2018 and was

based on 2016 data, the most current data

available at that time. In 2016 the System

generated $17.8 billion of the total economic

activity in Ohio and has directly and indirectly

supported more than 119,000 jobs generating

approximately $7.5 billion in wages and

earnings. The System’s economic activity was

accountable for $2.25 billion in federal income

taxes paid by employees and vendors and $987

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million in total state and local taxes. System-

supported households spent $5 billion on goods

and services. The System has purchased almost

$1.8 billion of goods and services from Ohio

businesses. Between 2014 and 2016, the

System’s construction projects have invested

almost $808 million in real property

improvements, including renovating existing

structures, building new facilities, and improving

properties in Ohio. The System continues to

contribute significant economic and fiscal value

to the State of Ohio and support businesses and

professional services across the state. In

addition to Ohio, the System contributed $1.2

billion in total economic output in the State of

Florida and $47 million of total economic output

in the State of Nevada.

The System’s Economic and Fiscal Impact

Report is the result of an economic analysis

completed by the Silverlode Consulting Corp.

The report was completed in part using the

IMPLAN® economic impact model, which is used

by more than 1,000 universities and government

agencies to estimate economic and fiscal

impacts. Additional information regarding the

System’s economic impact is available on the

Clinic’s website

(www.clevelandclinic.org/economicimpact).

SUSTAINABILITY

he System supports healthy

environments for healthy communities,

recognizes the link between environmental and

human health and strives to responsibly address

and mitigate its environmental impacts. As a

national leader in healthcare, the System is in a

position to lead by example in the adoption of

environmental best practices. With a built

environment portfolio of more than 22 million

square feet and more than 52,000 caregivers,

the impact of the System on the community and

ecosystem, both positive and negative, is

substantial.

The System’s Office for a Healthy Environment

acknowledges its obligation and opportunity to

minimize the health impacts of climate change.

The System is working to enhance the resilience

of its facilities and communities, engaging its

stakeholders to personalize climate action and

embedding sustainability into its healthcare

delivery model.

As a leader in the healthcare industry, the

System has publically committed to compiling an

annual sustainability report for its patients,

caregivers, communities and global stakeholders

through two leading international frameworks:

The United Nations Global Compact and the

Global Reporting Initiative. The compilation, titled

“Serving Our Present, Caring for Our Future,”

includes performance metrics and stories,

highlights accomplishments and communicates

challenges as the System strives to reach its

goals. The complete report is available on the

Clinic’s website (www.clevelandclinic.org/ungc).

The Clinic is a member of Practice Greenhealth,

the nation’s leading healthcare community that

empowers its members to increase their

efficiencies and environmental stewardship while

improving patient safety and care through tools,

best practices and knowledge. In 2017, the Clinic

was awarded the prestigious “Greening the OR”

environmental achievement award offered by

Practice Greenhealth for the second year in a

row. This award is given to only one healthcare

system in the country for its performance in

energy efficiency, materials efficiency and

recycling in the operating room. In 2018, the

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Clinic won the Top 25 Environmental Excellence

Award for the fourth straight year. This award

recognizes healthcare facilities that exemplify

environmental excellence and are setting the

highest standards for environmental practices in

healthcare. Award winners are chosen from

hospitals that have the highest scores using

Practice Greenhealth's thorough scoring and

evaluation system. The Clinic was also

recognized for being in the top ten in the nation

in four Circles of Excellence: Green Building,

Greening the OR, Climate and Leadership. The

Leadership Circle represents the high-

performing hospitals that have a strong

infrastructure supporting a long term

commitment to healthier environments through

leadership vision, committee structure, reporting,

data tracking, communication and education.

Other System entities and facilities were honored

with additional Practice Greenhealth

Environmental Excellence Awards for

outstanding performance in healthcare

sustainability in 2018.

The System’s energy program is designed to

enhance patient outcomes and the patient

experience while reducing operating expenses.

As the model of healthcare evolves, the System

is committed to reducing environmental,

economic and human impact by reducing energy

intensity. The System’s commitments to both

affordable care and external partnerships with

ENERGY STAR and the Better Buildings

Challenge have created goals of becoming 20%

more energy efficient by 2020 from a 2010

baseline on more than 20 million square feet of

facilities. Initiatives include a combination of

critical energy efficiency projects and broad

occupant education and engagement

campaigns. From the December 2010 baseline,

the System has realized a 15% reduction in

weather normalized source energy use intensity

for in-scope and reportable facilities.

A central component of the Systems’ ongoing

commitment to responsible energy management

is to construct buildings that conform to the U.S.

Green Building Council’s Leadership in Energy

and Environmental Design (LEED). LEED is a

third-party certification program and the

nationally accepted benchmark for design,

construction and operation of environmentally

responsible and energy-efficient buildings. All

new major construction projects for the System

follow LEED standards, with a goal of achieving

gold certification. Construction projects also

emphasize recycling of debris, with current

diversion rates of up to 98% in recent years.

The System currently has sixteen LEED-certified

buildings, with additional buildings pending

certification. The System has four buildings that

are certified LEED-Gold, including the Global

Cardiovascular Innovations Center, Marymount

Hospital Surgical Expansion, Twinsburg Health

and Family Surgery Center and the Tomsich

Pathology Laboratories building.

In 2018, the Clinic’s Center for Functional

Medicine suite located on the Clinic’s main

campus achieved WELL certification, a new

building standard that integrates human health

into building design and operation. The WELL

Certification process involves rigorous testing

and a final evaluation carried out by the Green

Business Certification Inc., which is the third-

party certification body for the WELL Building

Standard. WELL certification focuses on seven

main concepts: air quality, water quality, healthy

foods, light quality, integration of fitness,

comfortable and productive workspaces,

cognitive and emotional health and support for

innovative features that impact the interaction

between building and human health. The Center

for Functional Medicine is one of the first medical

offices to be awarded this certification.

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DIVERSITY

he System provides healthcare services

to patients and families from a global

community. The Office of Diversity and Inclusion

(Diversity), created in 2007, makes diversity,

inclusion and cultural competence a critical part

of the System’s mission. Diversity’s mission is to

provide strategic direction that builds cultural

competence, cultivates an inclusive organization,

promotes health equity, develops talent, and

supports a diverse population of caregivers and

patients. Its programs include cultural

competence training, diversity councils,

employee resource groups, language

enrichment, consultation, and internally and

externally focused pipeline development

programs.

In 2018, the System was ranked number six on

the list of the country’s top eleven healthcare

organizations for diversity management

practices by DiversityInc. The System has made

this list for the ninth consecutive year. Rankings

are empirically driven and assess performance

based on a number of factors including CEO

commitment, equitable talent development,

talent pipeline and supplier diversity.

Additionally, the Clinic was recognized as a

“2018 Leader in LGBTQ Healthcare Equality,” by

the Human Rights Campaign for the fourth

consecutive year. This distinction was received

by meeting criteria for LGBTQ workforce and

patient non-discrimination in policy, training,

patient care, and access.

The System’s Employee Resource Groups

(ERG) have received national recognition and

rank among the top 25 ERGs in the country. In

2017 ClinicPride (LGBT) ERG ranked 4th and

SALUD (Hispanic/Latino) ERG ranked 24th in a

national evaluation of the Association of ERGs

and Diversity Councils. This annual national

award recognizes, honors, and celebrates the

outstanding contribution and achievements of

ERGs, business groups, and diversity councils.

In 2018, the System was named one of the Top

50 STEM Workplaces by the American Indian

Science and Engineering Society for the sixth

consecutive year and was also recognized in

Forbes first ever list of “America’s Best

Employer’s for Diversity,” which included 250

employers across various industries.

CONFLICT OF INTEREST

he System maintains policies that require

internal reporting of outside financial and

fiduciary interests to ensure that potential

conflicts of interests do not inappropriately

influence research, patient care, education,

business or professional decision making. In

connection with these policies, the System

developed the Innovation Management and

Conflict of Interest Program, which is designed to

promote innovation while at the same time

reducing, eliminating or managing real or

perceived bias either due to System personnel

consulting with pharmaceutical, medical device

and diagnostic companies (industry) or the

commercialization efforts undertaken by the

System to develop discoveries and make them

accessible to patients. The Program works with

physicians, managers and other employees who

interact with industry to manage any conflicts.

Provisions related to whether or not “compelling

circumstances” are required to justify conducting

research in the presence of related financial

T

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interests have been modified in policies that went

into effect in 2013, consistent with the value the

System places on beneficial relationships with

industry. The System is committed to a process

that maintains integrity in innovation and places

the interests of our patients first. The Innovation

Management and Conflict of Interest Program

reviews situations in which a physician or other

clinician prescribes or uses products of a

company in their practice and has a financial

relationship with that company. When

appropriate, the Program will put management in

place to address any conflict (for example, by

disclosure). The goal of this policy is not to

interfere with the practice of medicine.

An initiative to bring transparency to the

System’s relationships with industry has been in

place since 2008 in which the specific types of

interactions that individual physicians and

scientists have with industry were disclosed on

publicly-accessible web pages on the System’s

internet site. Information can be accessed by

patients that describes the training, type of

practice and accomplishments of a specific

doctor or scientist, as well as the names of

companies with which the doctor has financial or

fiduciary relations as an inventor, consultant,

speaker or board member. These disclosures

are updated regularly. The System was the first

academic medical center in the country to have

made these interactions public. Many other

academic medical centers have followed the

System’s lead by providing similar disclosures.

The System maintains a Conflict of Interest in

Education Policy to reflect its values and

represent its and its employees’ best interests.

This policy is responsive to guidelines from the

Association of American Medical Colleges, the

Institute of Medicine and other organizations. It

places restrictions on outside speaking activities

that are not Accreditation Council for Continuing

Medical Education approved and are generally

considered marketing. Speakers must present

content that is data-driven and balanced;

speakers must create their own slides or use only

unbranded slides created by industry. This policy

puts the System in step with other top academic

medical centers that have already banned

speaker’s bureaus. In addition, the policy

requires instructors to disclose relevant financial

interests with companies to trainees.

The Innovation Management and Conflict of

Interest Committee of the System has also

established processes with cross-membership

and seamless interactions and communications

with the Board of Directors’ Conflict of Interest

and Managing Innovations Committee.

Board members of the Clinic and the regional

hospitals in the System are required to complete

annual disclosure questionnaires. These

questionnaires are designed to identify possible

conflicts of interest that may exist and ensure that

any such conflicts do not inappropriately

influence the operations of the System. The

information obtained from these questionnaires

is used to respond to the related-party

transactions and other disclosures required by

the Internal Revenue Service on Form 990. The

Form 990 for the Clinic and for the System are

available on the Clinic’s website, as well as

additional information regarding the Clinic’s

Board of Directors and any business

relationships the Directors may have with the

System.

ENTERPRISE RISK MANAGEMENT

he System maintains a multi-phase

enterprise risk management (ERM)

process to develop a formal and systematic

approach to the identification, assessment, T

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prioritization, and reporting of risks. The process

is closely linked with the System’s strategic and

annual planning. The ultimate objective is to

create an enterprise-wide risk management

model that contains sustainable reporting and

monitoring processes and embeds risk

management into the System’s culture, in order

to more effectively mitigate risks. The System

established an ERM Steering Committee and

engaged a consulting firm to support this

process.

In the ERM process, risk identification is

conducted resulting in a System risk profile that

categorizes individual risks based on their impact

upon the System’s ability to meet its strategic

objectives. During this process, certain risks are

identified as top risks and then further separated

into sub-risks and individual risk components.

The most recent comprehensive evaluation of

top risks was concluded in the third quarter of

2016. Following this evaluation of top risks,

extensive risk assessments and mitigation

analyses have been prepared whereby risk

components are evaluated according to their

likelihood of occurring and potential impact

should they occur. Risk mitigation activities,

including risk response effectiveness, are

examined, reviewed and updated as part of this

process. ERM is an on-going program, with

regular reporting to senior management,

including the Audit Committee of the Board of

Directors, the body with oversight responsibility

for ERM.

INTERNAL CONTROL OVER FINANCIAL REPORTING

he System regularly evaluates its internal

control environment over the System’s

financial reporting processes through an initiative

based upon concepts established in the

Sarbanes-Oxley Act of 2002. The goals of the

initiative are to ensure the integrity and reliability

of financial information, strengthen internal

control in the reporting process, reduce the risk

of fraud and improve efficiencies in the financial

reporting process. The initiative reviews all

aspects of the financial reporting process,

identifies potential risks and ensures that they

have been mitigated utilizing a management self-

assessment process. As a result of this initiative,

management of the System issued a report on

the effectiveness of its internal control over

financial reporting as part of the issuance of its

consolidated financial results for 2017, which is

the ninth year the management report was

issued. As part of the internal control evaluation

process, certifications are completed by 125

members of System management, including top

leadership. The System is one of the first not-for-

profit hospitals to issue a management report on

the effectiveness of internal control over financial

reporting, a step that further increases the

transparency of the organization. System

management updates the certification on a

quarterly basis. There were no changes in

internal controls over financial reporting during

the nine months ended September 30, 2018 that

have materially affected, or are likely to

materially affect, the internal controls over

financial reporting for the System.

T

Richard E. Jacobs Health Center Avon, OH

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INDUSTRY OUTLOOK

oody’s issued a negative outlook for

the U.S. not-for-profit healthcare and

hospital sector for 2018. Moody’s revised its

outlook from stable, which it had maintained

since August 2015. Moody’s expects operating

cash flow to contract by 2%-4% over the next 12-

18 months. The not-for-profit healthcare sector

experienced a larger than expected drop in cash

flow in 2017, and there is uncertainty about

federal healthcare policy. The negative outlook

also reflects Moody’s expectation that hospital

bad debt will continue to rise. Hospitals are

experiencing rising co-pays and high deductibles

in health plans, which are increasing bad debt. In

February 2018, Moody’s stated that it expected

not-for-profit hospitals to face a risk of volume

declines and margin erosion due to commercial

insurers acquiring physician practices. Moody’s

predicts that insurers will be able to provide

preventative, outpatient and post-acute care to

their members through these providers at a lower

cost than hospitals. Moody’s also notes that

hospitals are facing pressure from insurers

moving to value-based payment options with

likely lower rate increases that could result in

renegotiation or termination of contracts between

insurers and hospitals. Moody’s expects that

hospital mergers, acquisitions and affiliations will

remain prevalent as an attempt for hospitals to

regain leverage with insurers. In August 2018,

Moody’s released medians for the U.S. not-for-

profit healthcare and hospital sector that showed

operating cash flow decreased to 8.1% for fiscal

year 2017, which is the lowest level seen since

the 2008/2009 recession.

In January 2018, S&P maintained its stable

outlook for the U.S. not-for-profit healthcare

sector. S&P based its rating on the strength of

the balance sheets in the sector being close to

historical highs, combined with the long-term

trend of market consolidation, physician

integration and expanded ambulatory presence,

which has helped improve the business positions

and prospects for many healthcare

organizations. S&P does acknowledge that

operating risks for some organizations will

increase due to changes in the municipal bond

market that will increase the cost of capital and

recent legislation to eliminate the Affordable

Care Act individual mandate, which will likely put

financial pressure on hospitals and health

systems. S&P stated that the number of

downgrades of its rated nonprofit hospitals and

health systems exceeded the number of

upgrades in 2017 for the first time since 2014 and

the number of downgrades is expected to grow

in 2018 for organizations already under pressure.

The System continues to anticipate, and remains

alert to, changes in the healthcare market and is

committed to formulating and implementing

financial and strategic plans necessary to meet

the System’s strategic objectives and to enable

the System to remain a recognized world leader

in healthcare. To that end, System management

continually monitors the environment in which it

operates and evaluates the ways in which it

conducts business.

M

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PATIENT VOLUMES

he following table summarizes patient volumes for the System. The table includes Union Hospital activity beginning April 1, 2018, and includes pro forma information for corresponding periods in 2017 for comparative purposes:

Inpatient acute admissions for the System

increased less than 1% in the third quarter of

2018 and decreased 1% during the first nine

months of 2018 compared to the same period in

2017. In the first nine months of 2018, acute

admissions for the System in the Cleveland

metro area decreased 1%. According to data

from the Center for Health Affairs, acute

discharges excluding newborns in the Northeast

Ohio service area decreased slightly during the

first nine months of 2018 compared to the same

period in 2017. Akron General and Union

Hospital also experienced a decrease in acute

admissions in the first nine months of 2018

compared to the same period in 2017, while the

Florida facilities experienced a 3% increase in

acute admissions over the same period.

Total surgical cases for the System increased

6% in the third quarter of 2018 and were flat

during the first nine months of 2018 compared to

the same period in 2017. For the first nine

months of 2018, total surgical cases for the

System in the Cleveland metro area increased

For the quarte r e nde d For the nine months e nde d

Se pte mbe r 30 Se pte mbe r 30

2018 2017 Variance % 2018 2017 Variance %

Inpatient admissions (1)

Acute admissions 43,302 43,131 171 0.4% 128,138 130,004 -1,866 -1.4%

Post-acute admissions 2,723 2,899 -176 -6.1% 8,167 8,932 -765 -8.6%

46,025 46,030 -5 0.0% 136,305 138,936 -2,631 -1.9%

Patient days (1)

Acute patient days 223,704 221,280 2,424 1.1% 671,077 666,140 4,937 0.7%

Post-acute patient days 20,554 22,238 -1,684 -7.6% 60,126 68,815 -8,689 -12.6%

244,258 243,518 740 0.3% 731,203 734,955 -3,752 -0.5%

Surgical cases

Inpatient 15,874 15,556 318 2.0% 47,069 47,385 -316 -0.7%

Outpatient 39,827 37,198 2,629 7.1% 115,855 115,685 170 0.1%

55,701 52,754 2,947 5.6% 162,924 163,070 -146 -0.1%

Emergency department visits 173,914 172,708 1,206 0.7% 504,903 507,320 -2,417 -0.5%

Observations 16,323 15,184 1,139 7.5% 46,921 46,407 514 1.1%

Clinic outpatient evaluation

and management visits 1,142,102 1,074,267 67,835 6.3% 3,426,699 3,319,510 107,189 3.2%

(1) Excludes newborns

Utilization Statis tics

T

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1%. According to data from the Center for Health

Affairs, total surgical cases in northeast Ohio

increased slightly during the first nine months of

2018 compared to the same period in 2017.

Akron General and Union Hospital facilities

experienced decreases in total surgical cases

over the same period, while the Florida facilities

were flat over the same period. The surgical mix

of total surgical cases for the System for the first

nine months of 2018 was 29% inpatient and 71%

outpatient, which represents a slight shift from

inpatient to outpatient compared to the surgical

mix for the same period in 2017.

The following charts summarize selected statistical information for Northeast Ohio hospitals for the nine

months ended September 30, 2018:

Source: The Center for Health Affairs Volume Statistics

(1) “System Hospitals” excludes Florida, Akron General, and Union Hospital facilities and includes Ashtabula County Medical Center.

(2) “Other Hospitals” includes all other hospitals in northeast Ohio reported by the Center for Health Affairs that are not included in System hospitals.

 System Hospitals (1)

 Other Hospitals (2)

53% 47%

Acute discharges

52%

48%

Total surgical cases

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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LIQUIDITY

Cash and Investments

he System’s objectives for its investment

portfolio are to target returns over the

long-term that exceed the System’s capital costs

so as to optimize its asset/liability mix and

preserve and enhance its strong financial

structure. The asset allocation of the portfolio is

broadly diversified across global equity and

global fixed income asset classes and alternative

investment strategies and is designed to

maximize the probability of achieving the long-

term investment objectives at an appropriate

level of risk while maintaining a level of liquidity

to meet the needs of ongoing portfolio

management. This allocation is formalized into a

strategic policy benchmark that guides the

management of the portfolio and provides a

standard to use in evaluating the portfolio’s

performance.

Investments are primarily maintained in a master

trust fund administered using a bank as trustee.

In 2017, the System completed the transition of

the management of its investment portfolios from

a third-party external advisor to the Cleveland

Clinic Investment Office (the “CCIO”). These

portfolios include the System’s general long-term

investment portfolio, its defined benefit pension

fund and the captive insurance fund. Investment

professionals in the CCIO are charged with the

day-to-day management of these investments

and their strategic direction. The System has

established formal investment policies that

support the System’s investment objectives and

provide an appropriate balance between return

and risk.

The following table sets forth the allocation of the System’s cash and investments at September 30, 2018

and December 31, 2017:

Cash and Investments (Dollars in thousands)

September 30, 2018 December 31, 2017

Cash and cash equivalents $ 589,642 6% $ 770,654 8% Fixed income securities* 2,502,115 28% 2,412,477 27% Marketable equity securities* 3,236,691 36% 3,192,650 35% Alternative investments 2,718,620 30% 2,696,560 30%

Total cash and investments $ 9,047,068 100% $ 9,072,341 100% Less restricted investments** (956,051) (1,101,417)

Unrestricted cash and investments $ 8,091,017 $ 7,970,924

Days cash on hand 368 383

* Fixed income securities and marketable equity securities include mutual funds and commingled investment funds within each investment allocation category.

** Restricted investments include funds held by trustees, assets held for self-insurance and donor restricted assets.

T

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The following chart summarizes days cash on hand for the System at December 31 for the last four years

and at September 30, 2018:

At September 30, 2018, total cash and

investments for the System (including restricted

investments) were $9.0 billion, a decrease of $25

million from $9.1 billion at December 31, 2017.

Cash inflows consist of cash provided by

operating activities and related investment

income of $485 million, a net increase in

restricted gifts and income of $78 million, and

$40 million of cash and investments received by

the System from the Union Hospital member

substitution business combination. Cash inflows

were offset by net capital expenditures of $547

million and principal payments on debt of $81

million.

Included in the System’s cash and investments

are investments held for self-insurance. These

investments totaled $163.8 million at September

30, 2018, with an asset mix of 6% cash and

short-term investments, 42% fixed-income

securities, 31% equity investments and 21%

alternative investments. The asset mix reflects

the need for liquidity and the objective to maintain

stable returns utilizing a lower tolerance for risk

and volatility consistent with insurance regulatory

requirements.

Also included in the System’s cash and

investments at September 30, 2018 are $40.1

million of funds held by trustees. Funds held by

trustees include $39.8 million of posted collateral

related to the System’s interest rate swap

contracts. The swap contracts require that

collateral be posted when the market value of a

contract in a liability position exceeds a certain

threshold. The collateral is returned as the

liability is reduced. Investment objectives of

funds held by the trustees are designed to

preserve principal by investing in highly liquid

cash or fixed-income investments. At September

30, 2018, the asset mix of funds held by trustees

was substantially all fixed-income securities.

The System invests in alternative investments to

increase the portfolio’s diversification. Alternative

investments are primarily limited partnerships

that invest in marketable securities, privately held

securities, real estate, and derivative products

and are reported using the equity method of

accounting based on information provided by the

respective partnership.

377 347 349

383 368

0

100

200

300

400

2014 2015 2016 2017 2018 Sep

Days Cash on Hand

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Alternative investments at September 30, 2018 and December 31, 2017 consist of the following:

Alternative Investments

(Dollars in thousands)

September 30, 2018 December 31, 2017

Hedge funds $ 1,337,235 49% $ 1,357,932 50%

Private equity/venture capital 971,273 36% 854,632 32%

Real estate 410,112 15% 483,996 18%

Total alternative investments $ 2,718,620 100% $ 2,696,560 100%

Alternative investments have varying degrees of

liquidity and are generally less liquid than the

traditional equity and fixed income classes of

investments. Over time, investors may earn a

premium return in exchange for this lack of

liquidity. Hedge funds typically contain

redeemable interests and offer the most liquidity

of the alternative investment classes. These

investment funds permit holders periodic

opportunities to redeem interests at frequencies

that can range from daily to annually, subject to

lock-up provisions that are generally imposed

upon initial investment in the fund. It is common,

however, that a small portion (5-10%) of

withdrawal proceeds are held back from

distribution pending the fund’s annual audit,

which can be up to a year away. Private equity,

venture capital, and real estate funds typically

have non-redeemable partnership interests. Due

to the inherent illiquidity of the underlying

investments, the funds generally contain lock-up

provisions that prohibit redemptions during the

fund’s life. Distributions from the funds are

received as the underlying investments in the

fund are liquidated. These investments have an

initial subscription period, under which

commitments are made to contribute a specified

amount of capital as called for by the general

partner of the fund. The System periodically

reviews unfunded commitments to ensure

adequate liquidity exists to fulfill anticipated

contributions to alternative investments.

Investment Return

Return on investments, including equity method

income on alternative investments, is reported as

nonoperating gains and losses except for

earnings on funds held by bond trustees and

interest and dividends earned on assets held by

the captive insurance subsidiary, which are

included in other unrestricted revenues. Donor

restricted investment return on temporarily and

permanently restricted investments is included in

temporarily restricted net assets.

The System’s long-term investment portfolio,

which excludes assets held for self-insurance,

reported investment gains of 0.4% for the third

quarter of 2018, which is lower than the

portfolio’s benchmark gains of 0.7% and lower

than investment gains of 2.9% experienced in the

third quarter of 2017. For the first nine months of

2018, the System experienced investment gains

of 1.2%, which is higher than the portfolio’s

benchmark gains of 1.1% but lower than the

investment gains of 9.3% experienced for the

first nine months of 2017.

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Total investment return for the System is comprised of the following:

Investment Return

(Dollars in thousands)

For the quarter ended September 30

For the nine months ended September 30

2018 2017 2018 2017 Other unrestricted revenue:

Interest income and dividends $ 477 $ 638 $ 1,638 $ 2,111 Nonoperating gains and losses, net:

Interest income and dividends 15,685 16,862 52,251 51,174 Net realized gains on sales of investments 44,889 50,074 184,166 146,823 Net change in unrealized gains (losses) on investments (12,087) 127,637

(207,250) 388,158

Equity method income on alternative investments 43,013 41,644 112,795 78,821 Investment management fees (7,568) (4,588) (21,757) (17,212)

83,932 231,629 120,205 647,764 Other changes in net assets:

Investment income on restricted investments and other 8,710 13,547 8,911 37,714

Total investment return $ 93,119 $ 245,814 $ 130,754 $ 687,589

Independence Family Health Center Independence, OH

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Long-term Debt

At September 30, 2018, outstanding long-term

bonds and notes for the System totaled $3.682

billion, comprised of $2.965 billion (81%) of fixed-

rate debt and $717 million (19%) of variable-rate

debt. The System utilizes various interest rate

swap derivative contracts to manage the risk of

increased debt service resulting from rising

market interest rates on variable-rate bonds and

certain variable-rate operating lease payments.

The total notional amount on the System’s

interest rate swap contracts at September 30,

2018 was $623 million. Using an interest rate

benchmark, these contracts convert variable-rate

debt to a fixed-rate, which further reduces the

System’s exposure to variable interest rates. The

interest rate swap contracts can be unwound by

the System at any time, whereas the

counterparty has the option to unwind the

contracts only upon an event of default as

defined in the contracts.

Approximately $348 million of the variable-rate

debt is secured by irrevocable direct pay letters

of credit or standby bond purchase agreements,

and another $16 million is directly placed with a

financial institution. Debt supported by letters of

credit or standby bond purchase agreements that

expire within one year, require repayment of a

remarketing draw within one year, or contain a

subjective clause that would allow the lender to

declare an event of default and cause immediate

repayment of such bonds are classified as

current liabilities.

The remaining $353 million variable-rate debt is

supported by the System’s self-liquidity program.

Debt supported by self-liquidity includes the

Series 2014A CP Notes and certain variable-rate

bonds that are remarketed in commercial paper

mode. Bonds and notes in the self-liquidity

program are structured with various term dates

so that no more than $50 million of debt mature

within a five-day period. Debt supported by self-

liquidity are classified as current liabilities.

The System maintains the Cleveland Clinic

Health System Obligated Group Commercial

Paper Program (CP Program), which provides

for the issuance of the Series 2014A CP Notes.

The CP Program was established in November

2014 and will terminate no later than January

2044. The Series 2014A CP Notes may be

issued from time to time in a maximum

outstanding face amount of $100 million and are

supported by the System’s self-liquidity program.

At September 30, 2018, the System has $71.0

million of outstanding Series 2014A CP Notes.

In August 2018 the System through a UK

subsidiary entered into a private placement

agreement to issue the 2018 Sterling Notes

totaling £665 million. The subsidiary received

proceeds of £300 million and £100 million in

August 2018 and November 2018, respectively,

and will receive additional proceeds of £265

million in August 2019. The outstanding 2018

Sterling Notes have been converted to U.S.

dollars in the consolidated balance sheet using

the exchange rate at September 30, 2018. For a

description of the 2018 Sterling Notes, refer to

“FINANCING DEVELOPMENTS.”

Stephanie Tubbs Jones Family Health Center Cleveland, OH

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Outstanding hospital revenue bonds and other long-term debt for the System as of September 30, 2018

and December 31, 2017 consist of the following:

Hospital Revenue Bonds and Notes

(Dollars in thousands)

Final September 30 December 31

Series Type Maturity 2018 2017

2018 Sterling Notes1 Fixed 2068 $ 391,008 $ -

2017A Revenue Bonds Fixed 2043 818,775 818,775

2017B Revenue Bonds Fixed 2043 169,255 169,255

2017C Revenue Bonds Fixed 2032 8,945 9,305

2016 Private Placement Fixed 2046 325,000 325,000

2016 Term Loan Variable 2026 16,270 16,270

2014 Taxable Bonds Fixed 2114 400,000 400,000

2014A CP Notes CP 2044 70,955 70,955

2013A Revenue Bonds Fixed 2042 62,650 73,150

2013B Revenue Bonds Variable 2039 201,160 201,160

2013 Keep Memory Alive Bonds Variable 2037 59,115 61,165

2012A Revenue Bonds Fixed 2039 439,925 451,135

2011A Revenue Bonds Fixed 2032 148,645 160,605

2011B Revenue Bonds Fixed 2031 26,380 27,785

2011C Revenue Bonds Fixed 2032 157,945 157,945

2009B Revenue Bonds Fixed 2039 16,135 31,640

2008A Revenue Bonds Fixed 2043 - 7,930

2008B Revenue Bonds Variable 2043 327,575 327,575

2003C Revenue Bonds Variable 2035 41,905 41,905

$ 3,861,643 $ 3,351,555

1 Converted to U.S. dollars using foreign exchange rates at the period end date

At September 30, 2018, the System has notes

payable and capital leases totaling $221.8

million. Notes payable and capital leases are

comprised of $0.1 million of notes payable,

$105.0 million outstanding on a revolving credit

facility and $116.7 million of capital lease

liabilities primarily related to property and

equipment.

The Clinic has a $300.0 million revolving credit

facility with multiple financial institutions. The

revolving credit facility expires in 2019 with

provisions allowing the Clinic to extend the term

annually for a one-year period. The facility allows

the Clinic to enter into short-term loans that

automatically renew throughout the term of the

facility. The revolving credit facility bears interest

at a variable rate based on the LIBOR index plus

an applicable spread. Amounts outstanding on

the revolving credit facility as of September 30,

2018 and December 31, 2017 totaled $105.0

million and $60.0 million, respectively. The Clinic

drew $45.0 million in the second quarter of 2018

to extinguish debt that was assumed in the Union

Hospital member substitution. The outstanding

balance at September 30, 2018 is recorded in

current portion of long-term debt based on the

expiration of the facility. The outstanding balance

at December 31, 2017 was recorded in long-term

notes payable.

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 72

The following charts summarize cash-to-debt and debt-to-capitalization ratios for the System at

December 31 for the last four years and at September 30, 2018:

36.1 36.5 36.4

32.5 31.8

-

10.0

20.0

30.0

40.0

50.0

2014 2015 2016 2017 2018 Sep

Debt to Capitalization %

177 169 173

198 200

-

50

100

150

200

250

2014 2015 2016 2017 2018 Sep

Cash to Debt %

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 73

BOND RATINGS

he obligated group’s outstanding bonds

have been assigned ratings of Aa2

(stable outlook) and AA (stable outlook) by

Moody’s and S&P, respectively. In July 2018,

Moody’s and S&P affirmed their respective

ratings and outlooks. According to reports issued

by Moody’s and S&P, the ratings reflect a unique

and strong enterprise profile, a strong leadership

team and a national and international clinical

reputation.

The following table lists the various bond rating categories for Moody’s and S&P:

Bond Ratings

Rating category

Definition Moody’s S&P Strongest Aaa AAA Prime

Aa AA High grade/high quality A A Upper medium grade

Baa BBB Lower medium grade Ba BB Non-investment grade/speculative B B Highly speculative

Caa/Ca CCC Extremely speculative Weakest C D Default or bankruptcy

Cleveland Clinic Aa2 AA Within each rating category are the following modifiers

Moody’s ratings: 1 indicates higher end, 2 indicates mid-range, 3 indicates lower end S&P ratings: + indicates higher end, - indicates lower end

Based on recent ratings summary reports obtained from Moody’s and S&P, no healthcare organizations were rated in the prime category.

CONSOLIDATED RESULTS OF OPERATIONS

For the Quarters Ended September 30, 2018 and 2017

he following narrative describes the

consolidated results of operations for the

System for the third quarters of 2018 and 2017.

The consolidated results of operations for the

third quarter of 2018 includes the financial

operations of Union Hospital, which became a

consolidated entity of the System in April 2018.

Union Hospital comprised approximately 1.4% of

total consolidated operating revenues and 1.6%

of total consolidated operating expenses in the

third quarter of 2018. No adjustments have been

made in the following narrative to exclude Union

Hospital operations except where indicated as

same facility basis, which excludes Union

Hospital activity in the third quarter of 2018 for

comparative purposes.

Operating income for the System in the third

quarter of 2018 was $69.8 million, resulting in an

operating margin of 3.1%, as compared to

T

T

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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operating income of $39.7 million and an

operating margin of 1.9% in the third quarter of

2017. The higher operating income resulted from

a 9.2% increase in total unrestricted revenues

that outpaced total operating expense growth of

7.9% in the same period. Nonoperating gains for

the System were $91.0 million in the third quarter

of 2018 compared to nonoperating gains of

$187.9 million in the third quarter of 2017. The

decrease from the prior year was primarily due to

changes in the financial markets. Overall, the

System reported an excess of revenues over

expenses of $160.8 million in the third quarter of

2018 compared to an excess of revenues over

expenses of $227.6 million in the third quarter of

2017.

The System’s net patient service revenue

increased $180.0 million (9.8%) in the third

quarter of 2018 compared to the same period in

2017. The System experienced a 3.1% increase

in inpatient acute admissions (1.0% increase on

a same facility basis). In addition, patient service

revenue was favorably impacted by a strong

case mix due to efforts that focused on accurate

documentation of patient care and higher acuity

patients, which has resulted in more inpatient

revenue per patient. Total surgical cases

increased 8.8% (same facility increase of 5.9%)

in the third quarter of 2018 compared to the third

quarter of 2017, and outpatient evaluation and

management visits increased 6.3% over the

same period. Net patient revenue has also

benefited from rate increases on the System’s

managed care contracts that became effective in

2018. Offsetting the patient volume and rate

increases is a shift in the gross revenue payor

mix that has negatively impacted the revenue

realization of the System. The System has

experienced an increase in Medicare revenue

primarily as a result of demographic trends in the

service area and other industry trends. On a

combined basis, governmental and self-pay

revenue as a percentage of total gross patient

revenue has increased 1.1% in the third quarter

of 2018 compared to the same period in 2017.

The System has experienced a corresponding

decrease in managed care and commercial

gross revenues as a percentage of total gross

patient revenues. Over the last few years, the

System has initiated national, regional and local

revenue management projects designed to

improve patient care access throughout the

System.

Other unrestricted revenues increased $8.4

million (4.2%) in the third quarter of 2018

compared to the same period in 2017. The

increase in other unrestricted revenues was

primarily due to a $6.2 million increase in

outpatient pharmacy revenue and a $3.3 million

increase in research and education grant

revenue. These increases were offset by a $1.6

million decrease in unrestricted gifts and assets

released from restriction.

Total operating expenses increased $158.4

million (7.9%) in the third quarter of 2018

compared to the same period in 2017. Excluding

Union Hospital expenses in the third quarter of

2018, total operating expenses increased $123.4

million (6.1%) compared to the same period in

2017. Notable increases in expenses were

experienced in salaries, wages and benefits,

supplies expenses and pharmaceutical costs.

The System has implemented Care Affordability

initiatives to address the growth in expenses

caused by inflationary pressures in many

expense categories such as salaries, benefits

and specialized pharmaceuticals. Care

Affordability initiatives are designed to transform

patient care and business models in an effort to

provide quality, affordable patient care. The

System identifies, quantifies and implements

these initiatives through an extensive analysis of

the cost structure. The System continues to

develop and implement cost management and

containment plans designed to make a more

affordable care model for patients and to enable

investments in key strategic initiatives.

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Salaries, wages and benefits increased $90.0

million (8.0%) in the third quarter of 2018

compared to the same period in 2017. Salaries,

excluding benefits, increased $74.3 million

(7.5%) due to annual salary adjustments

averaging 2-3% across the System that were

awarded in the third quarter of 2018 and a 4.4%

increase (2.6% same facility increase) in average

full-time equivalent employees in the third

quarter of 2018 compared to the same period in

2017. Benefit costs increased $15.7 million

(10.9%) during the same period. The System

experienced a $7.6 million increase in employee

healthcare costs primarily due to increased

activity in the health plan, a $4.0 million increase

in defined contribution expenses and a $3.8

million increase in FICA expenses primarily due

to the increase in salaries and full-time

equivalent employees.

Supplies expense increased $21.1 million

(11.0%) in the third quarter of 2018 compared to

the same period in 2017. The System

experienced a $20.0 million increase in

implantables and other medical supplies

primarily due to increased patient volumes and a

$1.2 million increase in non-medical supplies

primarily due to increased minor equipment

purchases.

Pharmaceutical costs increased $20.0 million

(8.0%) in the third quarter of 2018 compared to

the same period in 2017. The increase is

primarily due to higher costs and increased

utilization in the oncology departments. In

addition, the System operates a specialty

pharmacy that is used to treat chronic illnesses

and complex conditions. Specialty pharmacy

expenses increased $6.5 million in the third

quarter of 2018 compared to the same period in

2017. The System has also experienced a

corresponding increase in outpatient pharmacy

revenues related to specialty pharmaceuticals.

Purchased services and other fees increased

$1.1 million (0.8%) in the third quarter of 2018

compared to the same period in 2017. The

System experienced a $1.4 million increase in

purchased medical services offset by a $0.4

million decrease in purchased non-medical

service costs.

Administrative services increased $18.1 million

(41.3%) in the third quarter of 2018 compared to

the same period in 2017. The increase in

administrative services was primarily due to

consulting fees and professional services for

certain System projects and initiatives.

Facilities expense increased $1.1 million (1.3%)

in the third quarter of 2018 compared to the same

period in 2017. The increase in facilities expense

was primarily due to a $3.2 million increase in

utility costs and a $1.4 million increase in rent

expenses offset by a $2.0 million decrease in

facility costs associated with 33 Grosvenor Place

as the building was vacated in 2017.

Insurance expense increased $9.3 million

(>100%) in the third quarter of 2018 compared to

the same period in 2017. The increase in

insurance expense was primarily due to a $9.2

million increase in professional malpractice

expense related to the timing of recording

favorable developments of outstanding prior year

claims based on actuarial estimates of expected

loss claims for each period. The System

experienced favorable developments in both

2018 and 2017. However, the amount recorded

in the third quarter of 2017 was greater than the

amount recorded in the third quarter of 2018. The

System utilizes an independent actuarial firm to

review professional malpractice loss experience

and establish estimated funding levels to the

System’s captive insurance subsidiary. Over the

last several years, the System has undertaken

numerous initiatives to manage its medical

malpractice insurance expense that resulted in

reducing the number of claims and lawsuits and

associated costs. These initiatives include hiring

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 76

additional staff devoted to clinical risk

management, promoting patient safety to

prevent untoward events, and expanding

education programs geared to enhance quality

throughout the organization. The System has

also taken, where appropriate, a more proactive

approach to expedite the settlement of claims,

which has reduced claim expenses and has

resulted in more favorable settlements.

Interest expense decreased $1.1 million (3.1%)

in the third quarter of 2018 compared to the same

period in 2017. The decrease is primarily due the

issuance of the Series 2017A Bonds and the

Series 2017B Bonds in the third quarter of 2017

that refunded $1.1 billion of fixed-rate bonds at a

lower interest rate. The System has also made

$81.3 million of net principal payments on bonds,

notes and capital leases in 2018 that has

reduced the amount of outstanding debt.

Offsetting these decreases is an increase in

interest expense related to the issuance of the

2018 Sterling Notes in the third quarter of 2018.

The proceeds of the 2018 Sterling Notes

received in the third quarter were used to repay

a $375 million term loan.

Depreciation and amortization expenses

decreased $0.7 million (0.5%) in the third quarter

of 2018 compared to the same period in 2017.

Changes in depreciation include property, plant

and equipment that was fully depreciated in

2017, offset by depreciation for property, plant

and equipment that was acquired and placed into

service in 2018.

Special charges decreased $0.6 million (62.3%)

in the third quarter of 2018 compared to the same

period in 2017. The System incurred and

recorded $0.4 million and $1.0 million of special

charges in the third quarters of 2018 and 2017,

respectively, related to Lakewood Hospital and

the agreement between the City of Lakewood,

LHA and the Clinic that outlines the transition of

healthcare services in the City of Lakewood. For

a description of the terms of the agreement, refer

to “LAKEWOOD HOSPITAL ASSOCIATION.”

Special charges incurred and recorded for LHA

primarily relate to accelerated depreciation

expense and other property, plant and

equipment costs on LHA assets. The hospital

building was fully depreciated in the second

quarter of 2018.

Gains and losses from nonoperating activities

are recorded below operating income in the

statement of operations. These items resulted in

a net gain to the System of $91.0 million in the

third quarter of 2018 compared to a net gain of

$187.9 million in the third quarter of 2017,

resulting in an unfavorable variance of $96.9

million. Investment returns were unfavorable by

$147.7 million in the third quarter of 2018

compared to the same period in 2017. The

System’s long-term investment portfolio reported

investment gains of 0.4% for the third quarter of

2018, which is lower than the portfolio’s

benchmark gain of 0.7% and lower than

investment gains of 2.9% experienced in the third

quarter of 2017. Derivative gains and losses

were favorable by $9.0 million in the third quarter

of 2018 compared to the same period in 2017.

Derivative gains and losses result from changes

in the interest rate benchmark associated with

the System’s interest rate swap contracts,

including net interest paid or received under the

swap agreements. The System also had

derivative gains and losses resulting from

changes in foreign currency exchange rates

associated foreign currency derivative contracts

that matured in September 2017. Other

nonoperating gains and losses were favorable by

$41.7 million in the third quarter of 2018

compared to the same period in 2017 primarily

due to a $46.2 million loss on extinguishment of

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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debt recorded in 2017 that related to bonds that

were refunded in connection with the issuance of

the Series 2017 Bonds offset by a $2.9 million

unfavorable variance in foreign currency

transaction gains and losses primarily due to the

remeasurement of assets and liabilities from the

British Pound to the U.S. Dollar.

For the Nine Months Ended September 30, 2018 and 2017

The following narrative describes the

consolidated results of operations for the System

for the first nine months of 2018 and 2017. The

consolidated results of operations for the first

nine months of 2018 includes the financial

operations of Union Hospital, which became a

consolidated entity of the System in April 2018.

Union Hospital comprised approximately 0.9% of

total consolidated operating revenues and 1.1%

of total consolidated operating expenses in the

first nine months of 2018. No adjustments have

been made in the following narrative to exclude

Union Hospital operations except where

indicated as same facility basis, which excludes

Union Hospital activity in the first nine months of

2018 for comparative purposes.

Operating income for the System in the first nine

months of 2018 was $142.5 million, resulting in

an operating margin of 2.2%, as compared to

operating income of $230.9 million and an

operating margin of 3.7% in the first nine months

of 2017. The lower operating income resulted

from a 6.2% increase in operating expenses that

outpaced total unrestricted revenue growth of

4.5% in the same period. Operating income in the

first nine months of 2017 benefited from a one-

time $70.0 million non-patient payment from a

payor. Excluding the one-time payment, total

unrestricted revenues increased 5.7%.

Nonoperating gains for the System were $205.5

million in the first nine months of 2018 compared

to nonoperating gains of $608.6 million in the first

nine months of 2017. The decrease from the prior

year was primarily due to changes in the financial

markets. Overall, the System reported an excess

of revenues over expenses of $348.0 million in

the first nine months of 2018 compared to an

excess of revenues over expenses of $839.5

million in the first nine months of 2017.

The System’s net patient service revenue

increased $285.8 million (4.5%) in the first nine

months of 2018 compared to the same period in

2017. The System experienced a 0.4% increase

in inpatient acute admissions (1.2% decrease on

a same facility basis). In addition, patient service

revenue was favorably impacted by a strong

case mix due to efforts that focused on accurate

documentation of patient care and higher acuity

patients, which has resulted in more inpatient

revenue per patient. Total surgical cases

increased 2.0% (same facility increase of 0.1%)

in the first nine months of 2018 compared to the

first nine months of 2017, and outpatient

evaluation and management visits increased

3.2% over the same period. Net patient revenue

has benefited from rate increases on the

System’s managed care contracts that became

effective in 2018. Offsetting the patient volume

and rate increases is a shift in the gross revenue

payor mix that has negatively impacted the

revenue realization of the System. The System

has experienced an increase in Medicare

revenue primarily as a result of demographic

trends in the service area and other industry

trends. On a combined basis, governmental and

self-pay revenue as a percentage of total gross

patient revenue has increased 1.1% in the first

nine months of 2018 compared to the same

period in 2017. The System has experienced a

corresponding decrease in managed care and

commercial gross revenues as a percentage of

total gross patient revenues. Over the last few

years, the System has initiated national, regional

and local revenue management projects

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 78

designed to improve patient care access

throughout the System.

Other unrestricted revenues decreased $41.4

million (6.0%) in the first nine months of 2018

compared to the same period in 2017. The

decrease in other unrestricted revenues was

primarily due to a one-time $70.0 million non-

patient payment from a provider received from a

payor in the first nine months of 2017. This

decrease was offset by a $24.1 million increase

in outpatient pharmacy revenue and a $6.8

million increase in research and education grant

revenue.

Total operating expenses increased $374.2

million (6.2%) in the first nine months of 2018

compared to the same period in 2017. Excluding

Union Hospital expenses in the first nine months

of 2018, total operating expenses increased

$305.1 million (5.0%) compared to the same

period in 2017. Notable increases in expenses

were experienced in salaries, wages and

benefits, pharmaceutical costs and supplies. The

System has implemented Care Affordability

initiatives to address the growth in expenses

caused by inflationary pressures in many

expense categories such as salaries, benefits

and specialized pharmaceuticals. Care

Affordability initiatives are designed to transform

patient care and business models in an effort to

provide quality, affordable patient care. The

System identifies, quantifies and implements

these initiatives through an extensive analysis of

the cost structure. The System continues to

develop and implement cost management and

containment plans designed to make a more

affordable care model for patients and to enable

investments in key strategic initiatives.

Salaries, wages and benefits increased $183.2

million (5.3%) in the first nine months of 2018

compared to the same period in 2017. Salaries,

excluding benefits, increased $170.7 million

(5.8%) due to annual salary adjustments

averaging 2-3% across the System that were

awarded in the second quarter of 2018 and a

3.7% increase (2.4% same facility increase) in

average full-time equivalent employees in the

first nine months of 2018 compared to the same

period in 2017. Benefit costs increased $12.5

million (2.5%) during the same period. The

System experienced an $11.2 million increase in

defined contribution expenses and a $10.3

million increase in FICA expenses primarily due

to the increase in salaries and full-time

equivalent employees.

Supplies expense increased $45.1 million (7.7%)

in the first nine months of 2018 compared to the

same period in 2017. The System experienced a

$38.0 million increase in implantables and other

medical supplies primarily due to increased

patient volumes and a $7.1 million increase in

non-medical supplies primarily due to increased

minor equipment purchases and dietary

expenses.

Pharmaceutical costs increased $88.5 million

(12.5%) in the first nine months of 2018

compared to the same period in 2017. The

increase is primarily due to higher costs and

increased utilization in the oncology

departments. In addition, the System operates a

specialty pharmacy that is used to treat chronic

illnesses and complex conditions. Specialty

pharmacy expenses increased $23.9 million in

the first nine months of 2018 compared to the

same period in 2017. The System has also

experienced a corresponding increase in

outpatient pharmacy revenues related to

specialty pharmaceuticals.

Purchased services and other fees increased

$12.1 million (3.1%) in the first nine months of

2018 compared to the same period in 2017. The

System experienced a $16.6 million increase in

purchased non-medical service costs primarily

related to $13.0 million increase in software and

hardware technology costs and other various

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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costs associated with certain System projects

and initiatives. This increase was offset by a $4.4

million decrease in purchased medical services

primarily related to lab services that have shifted

from external providers to providers that are

within the System.

Administrative services increased $21.3 million

(15.6%) in the first nine months of 2018

compared to the same period in 2017. The

increase in administrative services was primarily

due to a $15.4 million increase in consulting fees

and professional services for certain System

projects and initiatives, a $3.7 million increase in

expenses related to research projects that

corresponds to the increase in research grant

revenue and a $2.3 million increase in travel and

education costs primarily related to the System’s

expanding international strategy.

Facilities expense increased $13.1 million (5.2%)

in the first nine months of 2018 compared to the

same period in 2017. The increase in facilities

expense was primarily due to a $7.9 million

increase in utility costs, a $5.1 million increase in

repairs and maintenance expenses, and a $3.9

million increase in rent expenses. These

increases were offset by a $3.8 million decrease

in facility costs at Grosvenor Place related to

costs incurred before the building was vacated in

early 2017.

Insurance expense increased $10.8 million

(22.8%) in the first nine months of 2018

compared to the same period in 2017. The

increase in insurance expense was primarily due

to a $9.2 million increase in professional

malpractice expense related to the timing of

recording favorable developments of outstanding

prior year claims based on actuarial estimates of

expected loss claims for each period. The

System experienced favorable developments in

both 2018 and 2017. However, the amount

recorded in the first nine months of 2017 was

greater than the amount recorded in the first nine

months of 2018. The System utilizes an

independent actuarial firm to review professional

malpractice loss experience and establish

estimated funding levels to the System’s captive

insurance subsidiary. Over the last several

years, the System has undertaken numerous

initiatives to manage its medical malpractice

insurance expense that resulted in reducing the

number of claims and lawsuits and associated

costs. These initiatives include hiring additional

staff devoted to clinical risk management,

promoting patient safety to prevent untoward

events, and expanding education programs

geared to enhance quality throughout the

organization. The System has also taken, where

appropriate, a more proactive approach to

expedite the settlement of claims, which has

reduced claim expenses and has resulted in

more favorable settlements.

Interest expense decreased $5.5 million (5.1%)

in the first nine months of 2018 compared to the

same period in 2017. The decrease is primarily

due the issuance of the Series 2017A Bonds and

the Series 2017B Bonds in the third quarter of

2017 that refunded $1.1 billion of fixed-rate

bonds at a lower interest rate. The System has

also made $81.3 million of net principal

payments on bonds, notes and capital leases in

2018 that has reduced the amount of outstanding

debt. Offsetting these decreases is an increase

in interest expense related to the issuance of the

2018 Sterling Notes in the third quarter of 2018.

The proceeds of the 2018 Sterling Notes

received in the third quarter were used to repay

a $375 million term loan.

Depreciation and amortization expenses

increased $7.7 million (2.1%) in the first nine

months of 2018 compared to the same period in

2017. Changes in depreciation include property,

plant and equipment that was fully depreciated in

2017, offset by depreciation for property, plant

and equipment that was acquired and placed into

service in 2018.

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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Special charges decreased $2.2 million (50.7%)

in the first nine months of 2018 compared to the

same period in 2017. The System incurred and

recorded $2.2 million and $4.4 million of special

charges in the first nine months of 2018 and

2017, respectively, related to Lakewood Hospital

and the agreement between the City of

Lakewood, LHA and the Clinic that outlines the

transition of healthcare services in the City of

Lakewood. For a description of the terms of the

agreement, refer to “LAKEWOOD HOSPITAL

ASSOCIATION.” Special charges incurred and

recorded for LHA primarily relate to accelerated

depreciation expense and other property, plant

and equipment costs on LHA assets. The

hospital building was fully depreciated in the

second quarter of 2018.

Gains and losses from nonoperating activities

are recorded below operating income in the

statement of operations. These items resulted in

a net gain to the System of $205.5 million in the

first nine months of 2018 compared to a net gain

of $608.6 million in the first nine months of 2017,

resulting in an unfavorable variance of $403.1

million. Investment returns were unfavorable by

$527.6 million in the first nine months of 2018

compared to the same period in 2017. The

System’s long-term investment portfolio reported

investment gains of 1.2% for the first nine months

of 2018, which is higher than the portfolio’s

benchmark gain of 1.1% but lower than

investment gains of 9.3% experienced in the first

nine months of 2017. Derivative gains and losses

were favorable by $34.3 million in the first nine

months of 2018 compared to the same period in

2017. Derivative gains and losses result from

changes in the interest rate benchmark

associated with the System’s interest rate swap

contracts, including net interest paid or received

under the swap agreements. The System also

had derivative gains and losses resulting from

changes in foreign currency exchange rates

associated foreign currency derivative contracts

that matured in September 2017. Other

nonoperating gains and losses were favorable by

$90.1 million in the first nine months of 2018

compared to the same period in 2017 primarily

due to a $52.3 million Union Hospital member

substitution contribution recorded in the second

quarter of 2018 and a $46.2 million loss on

extinguishment of debt recorded in 2017 that

related to bonds that were refunded in

connection with the issuance of the Series 2017

Bonds offset by a $6.2 million unfavorable

variance in foreign currency transaction gains

and losses primarily due to the remeasurement

of assets and liabilities from the British Pound to

the U.S. Dollar.

BALANCE SHEET – SEPTEMBER 30, 2018 COMPARED TO DECEMBER 31, 2017

atient accounts receivable increased

$119.6 million (11.8%) from

December 31, 2017 to September 30, 2018. The

increase in patient receivables is partially due to

the increase in net patient service revenue

resulting from rate increases on the System’s

managed care contracts that became effective in

January 2018. The Union Hospital member

substitution transaction added approximately

$20.9 million of patient accounts receivable to

the balance sheet. The System has various

initiatives to enhance cash collection efforts and

create efficiencies in the revenue cycle process,

including the implementation of EAPM. EAPM

was implemented at the Clinic in 2016 and at four

other System hospitals in 2017. Five additional

System hospitals have implemented or will be

implementing EAPM in 2018. Days revenue

outstanding for the System increased from 49

P

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 81

days at December 31, 2017 to 51 days at

September 30, 2018.

Investments for current use decreased $103.9

million (67.1%) from December 31, 2017 to

September 30, 2018. Investments for current use

includes funds held by the bond trustee that are

used to pay current debt service payments. The

System paid $103.9 million in debt service

payments in January 2018 that had been funded

to the bond trustee in 2017. There were no funds

held by the bond trustee reported in investments

for current use at September 30, 2018.

Investments for current use also includes assets

held for self-insurance that will be used to pay the

current portion of estimated claim liabilities.

There was no change in these investments in the

first nine months of 2018.

Other current assets increased $56.2 million

(15.0%) from December 31, 2017 to September

30, 2018. The increase in other current assets

was primarily due to a $37.1 million increase in

management fee receivables, a $19.9 million

increase in inventory balances and a $17.0

million increase in prepaid expenses driven by

annual maintenance and insurance contracts.

These increases were offset by a $6.9 million

decrease in the current portion of pledge

receivables and the collection of other various

receivables that had been recorded in a prior

period.

Unrestricted long-term investments increased

$104.5 million (1.4%) from December 31, 2017

to September 30, 2018. The increase was

primarily due to a $50.0 million dividend received

from the System’s captive insurance subsidiary,

$37.4 million added to the balance sheet as a

result of Union Hospital member substitution

transaction and $29.4 million of derivative

contract collateral returned to the System.

Capital expenditures totaled $546.9 million in the

first nine months of 2018, which was partially

offset by positive cash provided by operating

activities and net nonoperating gains and losses.

The System’s long-term investment portfolio

experienced slightly positive results for the first

nine months of 2018.

Funds held by trustees decreased $29.1 million

(42.1%) from December 31, 2017 to September

30, 2018. The decrease in funds held by trustees

is primarily due to a $29.4 million decrease in

collateral posted with the counterparties on the

System’s derivative contracts.

Assets held for self-insurance decreased $47.1

million (29.5%) from December 31, 2017 to

September 30, 2018. The decrease in self-

insurance assets is primarily due to the payment

of a $50.0 million dividend from the System’s

captive insurance subsidiary to the Clinic. The

dividend was declared in 2017. This decrease

was offset by insurance premiums received by

the captive insurance subsidiary and slightly

positive gains experienced in the System’s

captive insurance investment portfolio.

Donor restricted assets increased $34.8 million

(4.8%) from December 31, 2017 to September

30, 2018. The increase in donor restricted assets

was primarily from investment gains on restricted

investments and the receipt of donor restricted

gifts in excess of expenditures from restricted

funds.

Net property, plant and equipment increased

$221.7 million (4.7%) from December 31, 2017

to September 30, 2018. The System had net

expenditures for property, plant and equipment

of $546.9 million, offset by depreciation expense

of $377.6 million, which includes $1.6 million of

accelerated depreciation expense recorded in

special charges. The System also acquired

$41.2 million of property, plant and equipment in

Union Hospital member substitution transaction

and $0.5 million of donated capital. These

increases were partially offset by $12.7 million of

foreign currency translation losses. Capital

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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expenditures in 2018 include amounts paid on

retainage liabilities recorded at December 31,

2017 and exclude assets acquired through

capital leases and other financing arrangements.

Retainage liabilities decreased $5.8 million, and

new capital leases and other financing

arrangements totaled $29.2 million.

Expenditures for property, plant and equipment

were incurred at numerous facilities across the

System and include expenditures for strategic

construction, expansion and technological

investment as well as replacement of existing

facilities and equipment. For a description of

many of System’s current projects, refer to

“EXPANSION AND IMPROVEMENT

PROJECTS.”

Other noncurrent assets decreased $11.1 million

(1.6%) from December 31, 2017 to September

30, 2018. The decrease in noncurrent assets

was primarily due to a $36.3 million reduction in

receivables related to joint fundraising efforts by

the Clinic and CWRU for the health education

campus offset by perpetual trusts totaling $12.9

million acquired in the Union Hospital member

substitution transaction and a $6.4 million

increase in long-term pledge receivables.

Accounts payable decreased $59.8 million

(11.9%) from December 31, 2017 to September

30, 2018. The decrease in accounts payable was

primarily attributable to the timing of payment

processing for trade payables, an $18.8 million

decrease in outstanding checks and a $5.8

million decrease in retainage liabilities on current

construction projects.

Compensation and amounts withheld from

payroll increased $65.3 million (18.9%) from

December 31, 2017 to September 30, 2018. The

change was primarily attributable to the timing of

payroll and the growth in employee benefit

accruals.

Current portion of long-term debt decreased

$268.5 million (58.7%) from December 31, 2017

to September 30, 2018. The System refinanced

a $375.0 million term loan that was due within

one year with the proceeds of the 2018 Sterling

Notes, which are recorded as long-term debt.

The term loan was used to finance the System’s

international business strategy. Offsetting this

decrease was a reclassification of $105.0 million

from long-term debt to current related to amounts

outstanding on the revolving credit facility. The

current portion of bonds payable also increased

$3.1 million due to the reclassification of regularly

scheduled principal payments from long-term to

current that are due within one year, offset by

principal payments made in the first nine months

of 2018.

Variable rate debt classified as current

decreased $77.6 million (13.5%) from December

31, 2017 to September 30, 2018. Long-term debt

classified as current consists of variable-rate

bonds supported by the System’s self-liquidity

program and bonds with letters of credit or

standby bond purchase agreements that expire

within one year, require repayment of a

remarketing draw within one year or contain a

subjective clause that would allow the lender to

declare an event of default and cause immediate

repayment of such bonds. The decrease in

variable rate debt classified as current is

primarily due to the reclassification of debt from

current to long-term resulting from the renewal of

a standby bond purchase agreement supporting

the Series 2013B bonds that was previously set

to expire in 2018.

Other current liabilities increased $24.0 million

(5.5%) from December 31, 2017 to September

30, 2018. The increase in other current liabilities

is primarily due to a $20.9 million increase in

liabilities associated with a patient loan program,

a $19.9 million increase in state franchise fee

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liabilities primarily related to the timing of

payments to the State of Ohio, a $5.0 million

increase in self-insurance general liability

accruals and a $3.4 million increase in deferred

revenue related to the international management

contracts. These increases were offset by a

$20.9 million decrease in accrued interest

payable related to bonds that pay interest semi-

annually in January and July of each year and a

$15.0 million reduction in the current portion of

pledge liabilities for payments made in 2018.

Hospital revenue bonds increased $393.5 million

(13.8%) from December 31, 2017 to September

30, 2018. The increase is primarily due to the

issuance of the 2018 Sterling Notes. The 2018

Sterling Notes outstanding at September 30,

2018 were valued at $391.0 million. Other

changes in hospital revenue bonds include the

reclassification of variable rate debt classified as

current to long-term related to the renewal of a

standby bond purchase agreement offset by the

reclassification of regularly scheduled principal

payments from long-term to current for bond

payments due within one year.

Notes payable and capital leases decreased

$37.6 million (27.9%) from December 31, 2017

to September 30, 2018. In June 2018, the

System drew an additional $45.0 million on its

revolving credit facility for the purpose of

extinguishing Union Hospital bonds that were

acquired in the Union Hospital member

substitution transaction. The revolving credit

facility, which has a balance of $105.0 million as

of September 30 2018, was reclassified to

current portion of long-term debt based on the

expiration of the facility. The System expects the

facility to be renewed prior to the expiration date.

The System also entered into $41.1 million in

new capital leases in the first nine months of

2018 offset by the reclassification regularly

scheduled principal payments from long-term to

current.

Professional and general insurance liability

reserves increased $1.6 million (1.1%) from

December 31, 2017 to September 30, 2018. The

increase is due to expenses recorded for the

accrual of current year claim estimates in excess

of claim liability payments.

Accrued retirement benefits decreased $14.1

million (2.9%) from December 31, 2017 to

September 30, 2018. The change in accrued

retirement benefits is comprised of a $14.4

million decrease in the System’s defined benefit

pension plan liabilities and a $0.2 million

increase in other postretirement benefit liabilities.

The decrease in defined benefit pension plan

liabilities was primarily due to net periodic benefit

that is based on actuarial estimates resulting

from the expected return on plan assets in

excess of interest cost incurred on plan

obligations.

Other noncurrent liabilities decreased $46.2

million (8.1%) from December 31, 2017 to

September 30, 2018. The decrease in other

noncurrent liabilities is primarily due to a $37.6

million decrease in derivative liabilities

associated with changes in the fair value of the

System’s interest rate swap derivative contracts

and an $11.9 million reduction in liabilities related

to joint venture construction projects.

Total net assets increased $380.8 million (4.1%)

from December 31, 2017 to September 30, 2018.

Unrestricted net assets increased $331.1 million

(4.0%) primarily due to an excess of revenues

over expenses of $348.0 million and donated

capital and assets released from restriction for

capital purposes of $7.2 million offset by foreign

currency translation losses of $22.5 million and

retirement benefits adjustment of $2.1 million.

Temporarily restricted net assets increased

$24.1 million (3.6%), primarily due to $56.8

million in temporarily restricted gifts and $8.9

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

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million in temporarily restricted investment

income offset by $42.1 million in assets released

from restrictions for operations and capital

purposes. Permanently restricted net assets

increased $25.6 million (7.7%) primarily due to

$11.6 million of permanently restricted gifts and

$12.9 million of perpetual trusts acquired in

Union Hospital member substitution transaction.

Cleveland, OH Skyline

CLEVELAND CLINIC HEALTH SYSTEM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED SEPTEMBER 30, 2018

11/29/2018 Page 85

FORWARD-LOOKING STATEMENTS

orward-looking statements contained in this report and other written reports and oral statements

are made based on known events and circumstances at the time of release, and as such, are

subject in the future to unforeseen uncertainties and risks. All statements regarding future performance,

events or developments are forward-looking statements. It is possible that the System’s future

performance may differ materially from current expectations depending on economic conditions within the

healthcare industry and other factors. Among other factors that might affect future performance are:

 Changes to the Medicare and Medicaid reimbursement systems resulting in reductions in payments

and/or changes in eligibility of patients to qualify for Medicare and Medicaid;

 Legislative reforms or actions that reduce the payment for, and/or utilization of, healthcare services,

such as the Patient Protection and Affordable Care Act and/or draft legislation to address

reimbursement cuts related to the Sustainable Growth Rate Formulas;

 Possible repeal and/or replacement of the Patient Protection and Affordable Care Act, and repeal of

the individual mandate;

 Adjustments resulting from Medicare and Medicaid reimbursement audits, including audits initiated by

the Medicare Recovery Audit Contractor program;

 Future contract negotiations between public and private insurers, employers and participating

hospitals, including the System’s hospitals, and other efforts by these insurers and employers to limit

hospitalization costs and coverage;

 Increased competition in the areas served by the System and limited options to respond to the same

in part due to uncertainty in the enforcement of antitrust laws;

 Assuming the completion of the pending transactions in Florida, the ability of the System to integrate

those hospitals into a regional health system in Florida;

 The ability of the System to access capital for the funding of capital projects;

 Availability of malpractice insurance at reasonable rates, if at all;

 The System’s ability to recruit and retain professionals;

 The ability of the Clinic to develop the London Hospital and establish relationships with payors in that

market;

 General economic and business conditions, internationally, nationally and regionally, including the

impact of interest rates, foreign currencies, financial market conditions and volatility and increases in

the number of self-pay patients;

 The increasing number and severity of cyber threats and the costs of preventing them and protecting

patient and other data;

 The declining population in the Greater Cleveland area;

 Impact of federal and state laws on tax-exempt organizations relating to exemption from income taxes,

sales taxes, real estate taxes, excise taxes and bond financing, including the Tax Cuts and Jobs Act;

 Management, utilization and increases in the cost of medical drugs and devices as technological

advancement progresses without concurrent increases in federal reimbursement;

 Ability of the System to adjust its cost structure and reduce operating expenses; and

 Changes in accounting standards or practices.

The System undertakes no obligation to update or publicly revise these forward-looking statements to

reflect events or circumstances that arise after the date of this report.

F