This week help

Stanford Health Care Consolidated Financial Statements and Accompanying Consolidating Information August 31, 2021 and 2020

Stanford Health Care Index August 31, 2021 and 2020

Page(s) Report of Independent Auditors ................................................................................................................ 1 Consolidated Financial Statements: Consolidated Balance Sheets .......................................................................................................... 2

Consolidated Statements of Operations and Changes in Net Assets ............................................. 3

Consolidated Statements of Cash Flows ......................................................................................... 4

Notes to Consolidated Financial Statements .............................................................................. 5-48 Report of Independent Auditors .............................................................................................................. 50 Accompanying Consolidating Information: Consolidating Balance Sheet ......................................................................................................... 51 Consolidating Statement of Operations and Changes in Net Assets ............................................ 52

PricewaterhouseCoopers LLP, 405 Howard St Suite 600, San Francisco, California 94105 T: 415 498 5000, www.pwc.com/us

Report of Independent Auditors

To the Board of Directors Stanford Health Care

We have audited the accompanying consolidated financial statements of Stanford Health Care (“SHC”) and its subsidiaries, which comprise the consolidated balance sheets as of August 31, 2021 and 2020, and the related consolidated statements of operations and changes in net assets and of cash flows for the years then ended.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to SHC's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of SHC’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stanford Health Care and its subsidiaries as of August 31, 2021 and 2020, and the results of their operations and changes in net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

San Francisco, CA December 1, 2021

Stanford Health Care Consolidated Balance Sheets August 31, 2021 and 2020 (in thousands of dollars)

The accompanying notes are an integral part of these consolidated financial statements.

2

2021 2020 Assets Current assets: Cash and cash equivalents 407,044$ 1,642,912$ Assets limited as to use, held by trustee - 92 Short term investments 74,888 -

764,948 654,342 Other receivables 156,168 165,737 Inventories 113,421 125,082 Prepaid expenses and other 133,328 108,587

Total current assets 1,649,797 2,696,752

Investments 2,058,925 689,110 Investments at equity 134,228 116,975 Investments in University managed pools 2,528,927 1,610,737 Property and equipment, net 3,619,451 3,646,012 Right of use lease assets 292,588 341,580 Other assets 61,507 58,533

Total assets 10,345,423$ 9,159,699$

Liabilities and Net Assets Current liabilities: Accounts payable and accrued liabilities 609,021$ 908,249$ Accrued salaries and related benefits 395,637 287,411 Due to related parties 64,063 52,128 Third-party payor settlements 55,659 55,112 Current portion of long-term debt 15,505 116,045 Debt subject to remarketing arrangements 168,200 168,200 Operating lease liabilities, current 79,055 76,066 Self-insurance reserves and other 75,300 58,186

Total current liabilities 1,462,440 1,721,397

Self-insurance reserves and other, net of current portion 218,960 224,858 Swap liabilities 285,654 353,292 Operating lease liabilities, non-current 233,244 287,053 Other long-term liabilities 165,559 180,333 Pension liability - 8,655 Long-term debt, net of current portion 2,135,075 2,056,663

Total liabilities 4,500,932 4,832,251

Net assets: Without donor restrictions:

Stanford Health Care 5,663,080 4,169,459 Noncontrolling interests 30,078 24,446

Total without donor restrictions 5,693,158 4,193,905 With donor restrictions 151,333 133,543

Total net assets 5,844,491 4,327,448

Total liabilities and net assets 10,345,423$ 9,159,699$

Patient accounts receivables, net

Stanford Health Care Consolidated Statements of Operations and Changes in Net Assets Years Ended August 31, 2021 and 2020 (in thousands of dollars)

The accompanying notes are an integral part of these consolidated financial statements.

3

2021 2020

6,052,048$ 5,140,938$ Premium revenue 118,741 116,971

Grants - COVID-19 406,265 124,551 FEMA 4,202 -

179,462 174,293 11,490 10,823

6,772,208 5,567,576

2,813,222 2,548,259 49,496 38,463

968,544 820,403 1,513,638 1,458,959

289,263 257,725 76,903 68,019

448,357 460,483 (50,559) (105,779)

6,108,864 5,546,532

Income from operations 663,344 21,044

Interest and investment income 47,822 43,973 Earnings on equity method investments 41,596 19,592 Change in value of University managed pools and other 784,864 161,720 Swap interest and change in value of swap agreements 46,274 (53,722) Other components of net periodic benefit costs (1,960) (2,070) Loss on extinguishment of debt (2,558) -

1,579,382 190,537

Other changes in net assets without donor restrictions: Transfers to Stanford University (100,386) (98,367) Transfers from Lucile Salter Packard Children's Hospital 99 - Change in net unrealized loss on investments (2,406) (1,249) Net assets released from restrictions used for:

1,016 3,248 18,224 555,219

Change in pension and postretirement liability 9,396 1,042 Noncontrolling capital distribution (1,870) (2,400) Loss from discontinued operations (4,202) -

1,499,253 648,030

Transfers from Stanford University 1,353 162 Contributions and other 34,860 22,084 Investment income 880 929 Gains on University managed pools 11,427 2,885 Net assets released from restrictions used for:

(11,490) (10,823) (1,016) (3,248)

(18,224) (555,219)

17,790 (543,230)

1,517,043 104,800

4,327,448 4,222,648

5,844,491$ 4,327,448$

Increase in net assets

Operations

Net assets, beginning of year

Increase (decrease) in net assets with donor restrictions

Other

Operating revenues and other support: Net patient service revenue

Other revenue Net assets released from restrictions used for operations

Supplies Purchased services

Total operating revenues and other support

Operating expenses:

Purchase of property and equipment - New Stanford Hospital

Salaries and benefits Professional services

Depreciation and amortization Interest

Increase in net assets without donor restrictions

Changes in net assets with donor restrictions:

Expense recoveries from related parties

Total operating expenses

Excess of revenues over expenses

Purchase of property and equipment

Net assets, end of year

Purchase of property and equipment Purchase of property and equipment - New Stanford Hospital

Stanford Health Care Consolidated Statements of Cash Flows Years Ended August 31, 2021 and 2020 (in thousands of dollars)

The accompanying notes are an integral part of these consolidated financial statements.

4

2021 2020 Cash flows from operating activities:

Change in Stanford Health Care net assets 1,511,411$ 107,265$ Change in noncontrolling interests 5,632 (2,465) Total change in net assets 1,517,043 104,800 Adjustments to reconcile change in net assets to net cash provided by operating activities:

Loss on extinguishment of debt 2,558 - Depreciation and amortization 284,583 254,619 Change in fair value of interest rate swaps (67,638) 36,496 Increase in value of University managed pools (606,759) (125,020) Unrealized gains on investments (185,958) (36,916) Excess of income on equity method investees over distributions received (19,630) (20,784) Contributions received for long lived assets or endowment (25,195) (23,055) Net equity transfers to/from related parties 98,934 98,205 Premiums received from bond issuance 17,287 19,885 Changes in operating assets and liabilities:

Patient accounts receivable (110,606) 31,083 Due to related parties (46,455) (8,288) Other receivables, inventory, other assets, prepaid expenses and other (14,725) (145,207) Accounts payable, accrued liabilities and pension liabilities (305,751) 509,198 Accrued salaries and related benefits 108,226 12,312 Third-party payor settlements 547 25,194 Self-insurance reserves 11,216 49,580

Cash provided by operating activities 657,677 782,102

Cash flows from investing activities: Purchases of investments (1,303,116) (50,217) Sales of investments 43,412 464,921 Purchases of investments in University managed pools (301,890) (6,774) Sales of investments in University managed pools 717 1,076 Swap settlement payments, net (21,420) (16,825) Purchases of property and equipment (262,522) (310,641)

Cash (used in) provided by investing activities (1,844,819) 81,540

Cash flows from financing activities: Proceeds from issuance of debt 522,815 470,120 Costs of issuance of debt (3,966) (4,006) Payment of long-term debt and finance lease obligations (552,615) (74,134) Contributions received for long lived assets or endowment 25,164 24,015 Net equity transfers to/from related parties (40,216) (142,153)

Cash (used in) provided by financing activities (48,818) 273,842 Net (decrease) increase in cash and cash equivalents (1,235,960) 1,137,484

Cash and cash equivalents, beginning of year 1,643,004 505,520 Cash and cash equivalents, end of year 407,044$ 1,643,004$

Supplemental data: Cash and cash equivalents as shown on the consolidated balance sheets 407,044$ 1,642,912$

Restricted cash included in assets limited as to use, held by trustee - 92

Total cash and cash equivalents as shown on the statement of cash flows 407,044$ 1,643,004$

Supplemental disclosures of cash flow information: Interest paid, net of amounts capitalized 81,580$ 69,105$

Supplemental disclosures of non cash information: Decrease in payables for property and equipment (1,636)$ (100,190)$ Equity transfers from (to) related parties, net 433 (3,012)

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

5

1. Organization Stanford Health Care (“SHC”) operates a licensed acute care hospital (“Stanford Hospital”) and a cancer center in Palo Alto, California, along with numerous outpatient physician clinics in the San Francisco Bay Area, in community settings, and in association with regional hospitals. Stanford Hospital is a principal teaching affiliate of the Stanford University School of Medicine (“SoM”) and provides primary and specialty health services to adults, including cardiac care, cancer treatment, solid organ transplantation services, neurosciences, and orthopedics services designated by management as SHC’s “Strategic Clinical Services.” SHC, together with Lucile Salter Packard Children’s Hospital at Stanford (“LPCH”), operates the clinical settings through which the SoM educates medical and graduate students, trains residents and clinical fellows, supports faculty and community clinicians and conducts medical and biological sciences research. The Board of Trustees of The Leland Stanford Junior University (the “University”) is the sole corporate member of SHC and LPCH. As part of their ongoing operations, SHC and LPCH engage in certain related party transactions as described further in Note 13. The consolidated financial statements include SHC’s interest in University HealthCare Alliance (“UHA”), The Hospital Committee for the Livermore-Pleasanton Areas (dba Stanford Health Care - ValleyCare) (“SHC-VC”), Stanford Blood Center, LLC (“SBC”), Stanford Emanuel Radiation Oncology Center, LLC (“SEROC”), CareCounsel, LLC (“CareCounsel”), SUMIT Holding International, LLC (“SHI”), Professional Exchange Assurance Company (“PEAC”), and Stanford Health Care Advantage (“SHC Advantage”). UHA, a physician medical foundation, supports SHC’s mission of delivering quality care to the community and conducting research and education. In addition, UHA leads the development of a high quality clinical delivery network, built on collaboration with and sponsorship of community hospitals, on behalf of the SoM, SHC, and UHA physicians. The SoM and SHC are the members of UHA and appoint directors to the governing board. The UHA bylaws afford control to SHC. SHC entered into a sponsorship agreement with UHA whereby SHC agreed to certain funding for the development and operation of UHA and continued additional funding for future or alternative clinical sites of UHA. SHC-VC, a 242 licensed bed community hospital system located in the East Bay’s Tri-Valley region of Pleasanton, Livermore, and Dublin, California offers both inpatient and outpatient services. SHC is the sole corporate member. SHC-VC also owns Tri-Valley Ambulatory Services Center, LLC (“ASC”) organized in October 2019. ASC’s operations are targeted to commence by spring of 2022. SBC is a limited liability company that serves as a community blood center and provides blood products and testing services to hospitals, clinics, companies, and other clients. SHC is the sole member of SBC. SEROC is a joint venture between SHC and the Doctors Medical Center of Modesto, Inc. (“DMC”). SEROC operates an outpatient clinic that provides radiation oncology services to patients in Turlock, California and surrounding communities. SHC’s interest in SEROC was 60% for the years ended August 31, 2021 and 2020. The remaining interest of 40% is recorded as a noncontrolling interest in net assets without donor restrictions on the consolidated balance sheets as of August 31, 2021 and 2020.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

6

1. Organization (Continued) CareCounsel is a leading provider of employer-sponsored health advocacy and health care assistance services with a mission to help employees, retirees and their families navigate the complex health care environment through an employer-sponsored benefit that provides consumer education, advocacy and access to expert health care resources and information. SHI is the sole owner of SUMIT Insurance Company Ltd. (“SUMIT”) and Stanford University Medical Network Risk Authority, LLC (dba The Risk Authority) (“TRA”). SHC and LPCH are the owners of SHI.

SHC’s share of net assets in SUMIT, a captive insurance carrier, was 77.5% and 77.8% for the years ended August 31, 2021 and 2020, respectively. LPCH’s share of net assets in SUMIT was 22.5% and 22.2% for the years ended August 31, 2021 and 2020, respectively, and is recorded as a noncontrolling interest in net assets without donor restrictions on the consolidated balance sheets.

TRA provides risk management services to SHI and serves as attorney-in-fact to PEAC. TRA sold the assets of PHT Services, Ltd., a South Carolina risk management services wholly owned corporation, on August 31, 2020 to Health Care Risk Services South Carolina Ltd. SHC’s share of net assets in TRA is 82% and the remaining 18% is recorded as a noncontrolling interest in net assets without donor restrictions on the consolidated balance sheets as of August 31, 2021 and 2020. PEAC, a captive insurance carrier, provides insurance coverage to UHA, Packard Children’s Health Alliance and other affiliated parties. SHC’s share of net assets in PEAC was 56.9% and 59.4% for the years ended August 31, 2021 and 2020, respectively. The remaining interest of 43.1% and 40.6% for the years ended August 31, 2021 and 2020, respectively, is recorded as a noncontrolling interest in net assets without donor restrictions on the consolidated balance sheets. SHC Advantage, a non-profit public benefit corporation, provides comprehensive healthcare coverage options to elderly and disabled eligible Medicare populations and is controlled solely by SHC. On December 6, 2019, an acquisition agreement was entered into with Essence Plan Holdings, LLC (‘’Essence’’). Upon closing, on August 1, 2021, SHC Advantage became a part of Essence Healthcare Inc, a subsidiary of Essence. SHC retains a 17% ownership interest in Essence. On February 8, 2021, Oncology Solutions Venture, LLC (“OSV”) was formed as a limited liability company to expand access to coordinated, state-of-the-art cancer care services for patients and their families in the East Bay region. SHC and Sutter Bay Hospitals (“Sutter”) are the only members of OSV. SHC will contribute $3,000 as the initial capital contribution with 60% interest and Sutter will contribute $2,000 with 40% interest. No significant activities have occurred during the fiscal year ending August 31, 2021.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

7

2. Summary of Significant Accounting Policies

Principles of Consolidation The consolidated financial statements include the accounts of SHC and its subsidiaries, which are controlled by SHC. All significant inter-company accounts and transactions are eliminated in the consolidation.

Basis of Presentation The accompanying consolidated financial statements are prepared on the accrual basis of accounting. Net assets of SHC and changes therein have been classified and are reported as follows:  Net Assets Without Donor Restrictions — Net assets without donor restrictions represent

those resources of SHC that are not subject to donor-imposed stipulations. The only limits on net assets without donor restrictions are broad limits resulting from the nature of SHC and the purposes specified in its articles of incorporation or bylaws and limits resulting from contractual agreements, if any.

 Net Assets With Donor Restrictions — Net assets with donor restrictions represent

contributions, which are subject to donor-imposed restrictions that can be fulfilled by actions of SHC pursuant to those stipulations or by the passage of time or are subject to donor- imposed restrictions that they be maintained permanently by SHC. Generally, the donors of these assets permit SHC to use all or part of the investment return on these assets.

Expenses are generally reported as decreases in net assets without donor restrictions. A restriction expires when the stipulated time period has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both. Net assets with donor restricted contributions are recorded as contributions with donor restrictions when received and when the restriction expires, the net assets are shown as released from restriction on the consolidated statements of operations and changes in net assets. Investment income on net assets with donor restrictions that is restricted by donor or law is recorded in the category of net assets with donor restrictions and when the restriction expires, the net assets are shown as released from restriction. Cash and Cash Equivalents Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. Cash equivalents consist primarily of demand deposits and money market mutual funds. Cash and cash equivalents that are held for investment purpose are classified as investments, as further described in Note 6. SHC has elected the policy to treat cash equivalents as short-term investments, therefore, excluded from cash and cash equivalents on the consolidated statements of cash flows.

Assets Limited as to Use, Held by Trustee Assets limited as to use include various accounts held by a trustee in accordance with indenture requirements. The indenture terms require that the trustee control the expenditure of bond proceeds for capital projects. Assets limited as to use consist of cash. Amounts required to fund current liabilities have been classified as current assets in the consolidated balance sheet at August 31, 2021. There were $0 and $92 assets limited as to use in the consolidated balance sheet at August 31, 2021 and 2020, respectively.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

8

2. Summary of Significant Accounting Policies (Continued) Inventories Inventories, which consist primarily of hospital operating supplies and pharmaceuticals, are stated at the lower of cost or market value determined using the first-in, first-out method. Investments Investments held directly by SHC consist of cash and cash equivalents, mutual funds, and investments in non-public entities and are stated at fair value. Fair value is determined in accordance with current accounting guidance, as further described in Note 7. Investment earnings (including realized gains and losses on investments, interest, and dividends on investment securities) net of investment expenses are included in investment income unless the income or loss is restricted by donor or law. Income on investments of donor restricted funds is added to or deducted from the appropriate net asset category based on the donor’s restriction. Unrealized gains and losses on other than debt securities classified as other-than-trading are reported above the performance indicator.

Investments at Equity Investments at equity consist of investments in which SHC has ownership of 50% or less but is able to exercise significant influence over the investee. These investments include Stanford- StartX Fund, LLC (‘’StartX Fund’’), Stanford PET-CT, LLC (“PET-CT”), Pleasanton Physician Affiliates II, LLC (‘’PPA II’’), and Innovence Augmented Intelligence Medical Systems - Psychiatry, LLC (“AIMS”). All earnings from StartX Fund and PPA II are included in earnings on equity method investments in the consolidated statements of operations and changes in net assets. Earnings from PET-CT and AIMS are included in other revenue in the consolidated statements of operations and changes in net assets. The mission of StartX, a California nonprofit public benefit corporation, is to accelerate the development of students, faculty and alumni of the University identified by StartX as high potential entrepreneurs through an experiential educational program. StartX Fund is a California limited liability company created to support the continued experiential education of participants in the StartX accelerator program. SHC’s interest in StartX Fund was 33% for the years ended August 31, 2021 and 2020.

PET-CT is a California limited liability company which provides radiological services to patients of the community, including patients served by SHC and physicians affiliated with the SoM. SHC and the University each appoint one-half of the members of the governing board of PET-CT and are its only members. SHC’s interest in PET-CT was 50% for the years ended August 31, 2021 and 2020. PPA II is a California limited liability company which owns and operates a medical office building in Pleasanton. SHC-VC’s interest in PPA II was 39% for the years ended August 31, 2021 and 2020. AIMS is a Delaware limited liability company which provides research and development of applications to reduce suicide and self-harm. TRA and Mersey Care NHS Foundation Trust, a United Kingdom based company, each have a 50% interest in AIMS for the year ended August 31, 2021 and 2020. AIMS has ceased operations and effective December 1, 2020 was formally dissolved. East Bay Real Estate Ventures, LLC (“EBREV”) was formed on February 8, 2021 as a limited liability company to develop, construct, and manage a medical office and outpatient services facility on the Alta Bates Summit Medical Center campus at 350 Hawthorne Avenue, Oakland, California. SHC and Sutter are the only members of EBREV and will contribute $1,000 each as the initial capital contribution and for 50% of interest. No significant activities have occurred during the fiscal year ending August 31, 2021.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

9

2. Summary of Significant Accounting Policies (Continued) Investments in University Managed Pools Investments in University managed pools consist of funds invested in the University’s Merged Pool (“MP”) and Expendable Funds Pool (“EFP”) (collectively the “Pools”). Under the terms of SHC’s agreement with the University, the University has discretion to invest the funds in the Pools. SHC may deposit funds in the Pools at its discretion. Withdrawals from the MP and EFP require advance notice to the University. The value of SHC’s share of the Pools is determined by the University and is based on the fair value of the underlying assets in the Pools.

The University allocates investment earnings to SHC from the University managed pools based on SHC’s share of the Pools. Earnings include interest, dividends, distributions, investment gains and losses, and change in the value of SHC’s share of the Pools. All unrestricted investment gains and losses in the MP and change in the MP share value are included in the excess of revenues over expenses. Income on investments of donor restricted funds invested in the University managed pools is added to or deducted from the appropriate net asset category based on the donor’s restriction. Financial Assets and Liquid Resources SHC has put in place a range of policies and measures to actively manage its liquidity and make sure the organization’s financial obligations can be satisfied. To ensure adequate liquidity through the full range of potential operating environments and market conditions, SHC maintains the ability to liquefy certain assets when, and if, requirements warrant. Liquidity is managed within pools known as investment portfolios. The SHC Investment Program has established four distinct investment portfolios into which SHC may invest its cash and operating reserves. These portfolios have been established to address varying degrees of liquidity requirements, return expectations and tolerance levels for risk. The primary sources of liquidity are the Liquidity and Short-term portfolios, which are invested in cash, U.S. Government and Agency securities and short-term fixed income securities. The amount of liquidity held in these portfolios is largely determined by internal liquidity projections which periodically estimate potential funding requirements. Funding requirements include:

 Working capital outflows  Swaps collateral posting, as well as potential capital support required for operations  Repayment of all maturing debt and credit facilities  Other large committed payments

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

10

2. Summary of Significant Accounting Policies (Continued)

Financial Assets and Liquid Resources (continued) Operating liquidity is monitored daily and reported periodically to senior management and the Board. When determining the appropriate allocation of funds across the various investment portfolios, SHC limits the percentage of the investment portfolio that is not readily realizable. Additionally, SHC maintains a cushion of excess liquidity that would be sufficient to fully fund operations and commitments for an extended period during which funding from normal sources is disrupted. The primary measure used to assess SHC’s liquidity is "Days Cash on Hand" during such period of liquidity disruption. This measure assumes that SHC is unable to generate funds from normal business operations or from the issuance of debt while continuing to meet obligations to maintain operations and repayment of contractual principal and interest payments owed. Once a sufficient level of liquidity is established, excess cash is invested in the Long-term Liquidity portfolio or Long-term portfolio. The Long-term Liquidity portfolio is primarily invested in fixed income and equity mutual funds and exchange traded funds, which can be liquidated on short notice, while the Long-term portfolio is invested in shares of the MP. Per SHC’s agreement with the Stanford Management Company (‘’SMC’’), SHC can withdraw annually up to 10% of its investments in the MP after providing a six-month notice. It is not the intention of SHC to utilize the Long-term portfolio for unplanned operating commitments; however, amounts could be made available from these sources if necessary. Financial assets and resources available for general expenditure within one year of the consolidated balance sheet date for general expenditure for years ended at August 31, consist of following:

2021 2020 Financial assets:

Cash and cash equivalents 407,044$ 1,642,912$ Accounts receivable, net 764,948 654,342 Short-term investments 74,888 - Investments in mutual funds 1,417,179 556,960 Separately Managed accounts 489,713 - 10% of long-term investments in Merged Pool 241,110 152,300

3,394,882$ 3,006,514$

Liquid resources:

Revolving line of credit capacity 100,000 200,000

Total financial assets and liquid resources available within one year 3,494,882$ 3,206,514$

Financial assets available to meet cash needs for general expenditure within one year

In November 2020, SHC extended its revolving line of credit facility until November 2021 and reduced its size to $150,000, of which $50,000 is earmarked for the issuance of stand-by letters of credit as described further in Note 9 and Note 17. Property and Equipment Property and equipment are stated at cost except for donated assets, which are recorded at fair market value at the date of donation. Depreciation and amortization of property and equipment is determined using the straight-line method over the estimated useful lives of the assets, which are as follows:

Land improvements 10 to 25 years Buildings and leasehold improvements 7 to 50 years Equipment 3 to 20 years

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

11

2. Summary of Significant Accounting Policies (Continued) Property and Equipment (continued) Significant replacements and improvements are capitalized, while maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to expense as incurred. Leasehold improvements are amortized over the shorter of the estimated useful life or term of the lease. Upon sale or disposal of property and equipment, the cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in the consolidated statements of operations and changes in net assets. Equipment includes medical equipment, furniture and fixtures and computer software and hardware. Interest costs incurred on borrowed funds during the period of construction of capital assets is capitalized, net of any interest earned, as a component of the cost of acquiring those assets. Asset Retirement Obligations Asset retirement obligations (“ARO”) are legal obligations associated with the retirement of long- lived assets. These liabilities are initially recorded at fair value as other long-term liabilities and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets in property and equipment. Asset retirement costs are subsequently accreted over the useful lives of the related assets. Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”. The new guidance was adopted by SHC and its subsidiaries in fiscal year 2020. The ASU and subsequent amendments require lessees to recognize assets and liabilities on the balance sheet for all in-scope leases with a term of greater than twelve months and require disclosure of certain quantitative and qualitative information pertaining to an entity’s leasing arrangements. This replaces the existing lease accounting guidance in accordance with accounting principles generally accepted in the United States of America (“GAAP”) that required only capital leases to be recognized on lessee’s balance sheet. SHC adopted the ASU as of September 1, 2019. SHC elected the transition relief package of practical expedients by applying previous accounting conclusions under Accounting Standard Codification (“ASC”) Topic 840, Leases ("ASC 840"), to all leases that existed prior to the transition date. As a result, SHC did not reassess (i) whether existing or expired contracts contain leases, (ii) lease classification for any existing or expired leases, or (iii) whether lease origination costs qualified as initial direct costs. SHC did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. ASC Topic 842 similarly includes various other practical expedients that can be elected for new leases that are executed after the adoption of the new requirements. SHC elected the practical expedient to not separate lease and non-lease components. SHC also elected to apply the short- term lease recognition exemption which eliminates the requirement to present on the consolidated balance sheets leases with a term of twelve months or less. These two practical expedients were elected for all classes of underlying assets. Adoption of the standard resulted in the recognition of operating lease right-of-use assets and operating lease liabilities of $317,870 and $337,573, respectively, as of September 1, 2019. Refer to Note 14 for additional information related to the SHC’s accounting for leases.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

12

2. Summary of Significant Accounting Policies (Continued)

Other Assets Other assets include long-term portion of contributions receivable, intangible assets, and other long-term assets.

Contributions Receivable Unconditional promises to give (“contributions”) are recorded at fair value at the date the promise is received. Donations for specific purposes are reported as net assets with donor restrictions. Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the risks involved and applicable to the years in which the promises are received and are recorded in the category of net assets with donor restrictions. In accordance with current accounting guidance, the discount rates were determined using the risk free rate adjusted for the risk of donor default. Current and long-term portions of contributions receivable are included in other receivables and other assets in the consolidated balance sheets, respectively, and contribution revenue is included in the consolidated financial statements in the appropriate net asset category. Amortization of the discount is included in contributions and other in the consolidated statements of operations and changes in net assets. Conditional promises to give are recognized when the condition is substantially met. Premiums, Discounts and Deferred Financing Costs on Long-Term Debt Premiums and discounts arising from the original issuance of long-term debt are amortized on either the effective interest method or the straight-line basis, which approximates the effective interest method, over the life of the debt. Deferred financing costs represent costs incurred in conjunction with the issuance of SHC’s long-term debt. These costs are amortized on a straight- line basis, which approximates the effective interest method, over the life of the debt. The unamortized portion of these premiums, discounts and deferred financing costs are included in long-term debt on the consolidated balance sheets.

Interest Rate Swap Agreements SHC entered into several interest rate swap agreements to reduce the effect of interest rate fluctuation on its variable rate bonds. All swaps are recognized on the consolidated balance sheets at their fair value in accordance with current accounting guidance. Changes in the fair value of interest rate swaps are included in excess of revenues over expenses. In fiscal year 2021 and 2020, the swap settlements (net cash payments less receipts) under the interest rate swap agreements have been recorded as an increase (decrease) to swap interest and change in value of swap agreements in the consolidated statements of operations and changes in net assets. Excess of Revenues over Expenses (Performance Indicator) The consolidated statements of operations and changes in net assets include excess of revenues over expenses. Changes in net assets without donor restrictions which are excluded from excess of revenues over expenses, include transfers of assets to and from affiliates for other than goods and services, change in unrealized gains and losses on debt securities classified as other-than- trading, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets), changes in pension and postretirement liability and other changes related to noncontrolling interests. Net Patient Service Revenue Net patient service revenue is reported at the amount that reflects the consideration to which SHC expects to be entitled for providing patient care. These amounts are due from patients, third- party payors, and others and include variable consideration for retroactive revenue adjustments due to settlement of reviews and audits. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods, as final settlements are determined. Contracts, laws, and regulations governing the Medicare and Medi- Cal programs are complex and subject to interpretation.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

13

2. Summary of Significant Accounting Policies (Continued) Net Patient Service Revenue (continued) Thus, there is at least a reasonable possibility that recorded estimates may change by a material amount in the near term. Generally, SHC 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. Performance obligations are determined based on the nature of the services provided by SHC. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected or actual charges. SHC believes that this method provides a reasonable depiction of the transfer of services over the term of the performance obligations based on the inputs needed to satisfy the obligation. Generally, performance obligations are satisfied over time related to patients receiving inpatient acute care services. SHC measures the performance obligations 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. Revenue for performance obligations satisfied at a point in time is recognized when services are provided and SHC 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, SHC has elected to apply the optional exemption provided in the 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 transaction price is based on standard charges for services provided to patients, reduced by applicable contractual adjustments, discounts to under and uninsured patients, and implicit pricing concessions. The estimates of contractual adjustments and discounts are based on contractual agreements, discount policy, and historical collection experience. The process for estimating the ultimate collectability of patient accounts receivable involves historical collection experience, changes in contracts with payors, and significant assumptions and judgment. SHC has elected to apply the practical expedient allowed under FASB ASC 606-10-10-4 for applying to a portfolio of contracts with similar characteristics. SHC 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. The portfolios consist of major payor classes for inpatient revenue and outpatient revenue. Based on historical collection trends and other analysis, SHC has concluded that revenue for a given portfolio would not be materially different than if accounting for revenue on a contract-by-contract basis. SHC has elected to apply the practical expedient allowed under FASB ASC 606-10-32-18 for the financing component, as the period of time between the service being provided and the time that the patient pays for service is typically one year or less.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

14

2. Summary of Significant Accounting Policies (Continued)

Charity Care and Community Benefits SHC provides either full or partial charity care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Amounts determined to qualify as charity care are not reported as net patient service revenue. SHC also provides services to other indigent patients under Medi-Cal and other publicly sponsored programs, which reimburse at amounts less than the cost of the services provided to the recipients. The difference between the cost of services provided to these indigent persons and the expected reimbursement is included in the estimated cost of charity care. Such amounts are considered community benefits. Premium Revenue UHA has capitated agreements with various Health Maintenance Organizations (“HMOs”) to provide medical services to enrollees. Under these agreements, monthly payments are received based on the number of health plan enrollees. These receipts are recorded as premium revenue in the consolidated statements of operations and changes in net assets. Costs are accrued when services are rendered under these contracts, including cost estimates of incurred but not reported (“IBNR”) claims. The IBNR accrual, which is included in accounts payable and accrued liabilities in the consolidated balance sheets, includes an estimate of the costs of services for which UHA is responsible, including referrals to outside healthcare providers. SHC Advantage receives premium revenue from the Centers for Medicare & Medicaid Services (“CMS”) to provide Medicare services to members. Premium revenue is recognized in the month in which the member is eligible for Medicare services. Costs are accrued when services are rendered, including cost estimates of IBNR claims.

Income Taxes SHC, UHA, SHC-VC and SHC Advantage are not-for-profit corporations and tax-exempt pursuant to Section 501(c)(3) of the Internal Revenue Code. EBREV, OSV, SBC, SEROC, CareCounsel and SHI are limited liability companies and taxable income flows through to the individual members. SUMIT is currently exempt from all taxes until March 31, 2035. TRA is a limited liability company, but has elected to be taxed as a corporation. PEAC is a taxable corporation. SHC Advantage was acquired by Essence on August 1, 2021 and converted to a for-profit entity. SHC now owns 17% of Essence. SHC and its subsidiaries have no uncertain tax positions pertaining to unrelated business income. The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. Under the Act, SHC is subject to a 21% excise tax on executive compensation in excess of one million dollars paid to certain covered employees. The University is subject to a 1.4% excise tax on its net investment income as defined under the Internal Revenue Code which, among other things, includes net investment income of certain related entities such as SHC. SHC is also subject to the computation of Unrelated Business Taxable Income (“UBTI”) separately for each unrelated trade or business. Self-Insurance Plans SHC, SHC-VC and SBC self-insure for professional liability risks, postretirement medical benefits, workers’ compensation and health and dental benefits. These liabilities are reflected as self- insurance reserves in the consolidated balance sheets.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

15

2. Summary of Significant Accounting Policies (Continued) Self-Insurance Plans (continued)  Professional Liability — SHC, SHC-VC and SBC are self-insured through SUMIT for

medical malpractice and general liability losses under claims-made coverage. SHC, SHC-VC and SBC also maintain professional liability reserves for claims not covered by SUMIT which total $11,287, $970, and $72 as of August 31, 2021, respectively. As of August 31, 2020, this coverage was $10,513, $831, and $67 for SHC, SHC-VC and SBC, respectively. Since September 1, 2005, SUMIT has retained 100% of the risk related to the first $15,000 per occurrence. The next $165,000 is transferred to various reinsurance companies. Prior to September 1, 2005, SHC maintained various coverage limits.

 Postretirement Medical Benefits — Liabilities for postretirement medical claims for current and retired employees are actuarially determined.

 Workers’ Compensation — SHC, SHC-VC and SBC purchase insurance for workers’

compensation claims with a $750 deductible per occurrence. Workers’ compensation insurance provides statutory limits for the State of California. An actuarial estimate of retained losses (or losses retained within the deductible) has been used to record a liability.

 Health and Dental — Liabilities for health and dental claims for current employees are actuarially determined.

Fair Value of Financial Instruments Due to the short-term nature of cash and cash equivalents, accounts payable and accrued liabilities, and accrued salaries and related benefits, their carrying value approximates their fair value. The fair value of the amounts payable under third-party reimbursement contracts is not readily determinable. Concentration of Credit Risk Financial instruments, which potentially subject SHC to concentrations of credit risk, consist principally of cash and cash equivalents, patient accounts receivable, and investments in University managed pools. SHC’s concentration of credit risk relating to patient accounts receivable is limited by the diversity and number of patients and payors. Patient accounts receivable consist of amounts due from commercial insurance companies, governmental programs, private pay patients and other third- party payors. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to patient accounts receivable, ARO, amounts due to third-party payors, retirement plan obligations, and self-insurance reserves. Actual results could differ from those estimates. Expense Recoveries from Related Parties Expense recoveries from related parties have been reclassified during the current year and may not be comparable to prior year consolidated financial statements.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

16

2. Summary of Significant Accounting Policies (Continued) Recent Pronouncements – effective in fiscal years 2021 and 2020 The FASB ASC is the sole source of authoritative non-governmental GAAP. Pension service costs – In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that an employer report the service cost component of pension costs in the same line item as employee compensation costs within income from operations. The other components of net benefit cost are required to be presented in the statement of operations and changes in net assets separately from the service cost component and outside a subtotal of income from operations and will not be eligible for capitalization. The guidance was effective for SHC during the fiscal year ending August 31, 2020 and it did not materially impact SHC’s consolidated financial statements. Leases – In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. The guidance was effective for SHC during the fiscal year ending August 31, 2020, and applied on a modified retrospective basis. Statement of cash flows – In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which intends to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance was adopted and did not materially impacted on SHC’s consolidated financial statements. In November 2016, the FASB issued an ASU 2016-18, Clarify Guidance on the Classification and Presentation of Restricted Cash in the Statement of Cash Flows. This update requires the amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of- period total amounts shown on the statement of cash flows. The guidance was adopted retrospectively in fiscal year 2020 and it did not materially impact SHC’s consolidated financial statements. Fair value disclosures – In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which adds, modifies, and removes some fair value measurement disclosure requirements. The portion of this guidance that modified and removed fair value disclosure requirements was early adopted in fiscal year 2019. The remaining guidance was adopted in fiscal year 2021 and it did not materially impact SHC’s consolidated financial statements. Intangibles - goodwill and other – In May 2019, the FASB issued ASU 2019-06, Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities. This ASU allows Not-for-Profit Entitles to amortize goodwill on a straight line basis over 10 years or less than 10 years if appropriate and option to test impairment. The guidance is effective for SHC during the fiscal year ending August 31, 2021 and it did not materially impact SHC’s consolidated financial statements. Collections – In March 2019, the FASB issued ASU 2019-03, Updating Definition of Collections. This ASU specifically addresses the use of proceeds from sales of collections and related disclosures. The guidance is effective for SHC during the fiscal year ending August 31, 2021 and it did not materially impact SHC’s consolidated financial statements.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

17

2. Summary of Significant Accounting Policies (Continued) Recent Pronouncements – effective in future periods Defined benefit plan disclosures – In August 2018, the FASB issued ASU 2018-14, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which adds, removes, and clarifies disclosure requirements related to defined benefit pension and other postretirement plans. The guidance is effective for SHC during the fiscal year ending August 31, 2022. SHC is currently evaluating the impact that this guidance will have on its consolidated financial statements. Cloud computing arrangements – In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to allow capitalization of implementation costs incurred in a cloud computing arrangement in a manner that is consistent with the capitalization of implementation costs incurred to develop or obtain internal-use software. The guidance is effective for SHC during the fiscal year ending August 31, 2022. SHC is currently evaluating the impact that this guidance will have on its consolidated financial statements. Accounting for certain equity method investments – In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the accounting treatment of certain equity securities upon application or discontinuation of the equity method of accounting and clarifies accounting of forward contracts and purchased options for securities that will be accounted for under the equity method of accounting upon settlement or exercise. The guidance is effective for SHC during the fiscal year ending August 31, 2022. SHC is currently evaluating the impact that this guidance will have on its consolidated financial statements. Reference rate reform – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The guidance is effective for SHC during the fiscal year ending August 31, 2022. SHC is currently evaluating the impact that this guidance will have on its consolidated financial statements. Contributed nonfinancial assets – In September 2020, the FASB issued ASU 2020-07, Contributed nonfinancial assets. This ASU provides enhanced presentation and disclosure requirements for contributed nonfinancial assets for not-for-profit entities including additional disclosure requirements for recognized contributed services. Contributed nonfinancial assets should be presented in a separate line item in the consolidated statement of operations and changes in net assets, apart from cash contributions. Additional disclosures are required about qualitative information, policy (if any) on monetizing rather than utilizing, donor-imposed restrictions and fair value measurement of contributed nonfinancial assets. The guidance is effective for SHC during the fiscal year ending August 31, 2022. SHC is currently evaluating the impact that this guidance will have on its consolidated financial statements.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

18

3. Net Patient Service Revenue

SHC has agreements with third-party payors that provide for payments at amounts different from SHC’s established rates. A summary of payment arrangements with major third-party payors follows:  Medicare — Inpatient acute care services rendered to Medicare program beneficiaries are

paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Medicare reimburses hospitals for covered outpatient services rendered to its beneficiaries by way of an outpatient prospective payment system based on ambulatory payment classifications.

Inpatient non-acute services, certain outpatient services and medical education costs related to Medicare beneficiaries are paid based, in part, on a cost reimbursement methodology. SHC is reimbursed for cost reimbursable items at a tentative rate with final settlement of such items determined after submission of annual cost reports and audits thereof by the Medicare administrative contractor. The estimated amounts due to or from the program are reviewed and adjusted annually based on the status of such audits and any subsequent appeals. Differences between final settlements and amounts accrued in previous years are reported as adjustments to net patient service revenue in the year examination is substantially completed. SHC’s Medicare cost reports have been audited by the Medicare administrative contractor through August 31, 2010. Professional services are reimbursed based on a fee schedule.

 Medi-Cal — Inpatient services rendered to Medi-Cal program beneficiaries are reimbursed at a prospectively determined rate per discharge. Outpatient services are reimbursed based upon prospectively determined fee schedules. Professional services are reimbursed based on a fee schedule.

 Managed Care Organizations — SHC entered into agreements with numerous third-party payors to provide patient care to beneficiaries under a variety of payment arrangements. These include arrangements with:  Commercial insurance companies, including workers’ compensation plans, which

reimburse SHC at negotiated charges.

 Managed Care contracts such as those with HMOs and Preferred Provider Organizations (“PPOs”), which reimburse SHC at contracted or per diem rates, which are usually less than full charges. PPOs give their members multiple choices in health care and health care providers.

 Counties in the State of California, which reimburse SHC for certain indigent patients

covered under county contracts.

Uninsured — For uninsured patients that do not qualify for charity care, SHC recognizes revenue on the basis of its standard rates for services less an uninsured discount applied to the patient’s account and implicit pricing concession that approximates the average discount for Managed Care payors.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

19

3. Net Patient Service Revenue (Continued) Patient service revenue, net of price concessions, by major payor for the years ended August 31, is as follows:

2021 2020

Medicare 1,019,262$ 921,709$ Medi-Cal 131,372 108,751 Managed Care - Discounted Fee For Services 4,720,044 3,957,801 Self pay and other 140,074 114,470 Related party 41,296 38,207

Net patient service revenue 6,052,048$ 5,140,938$

SHC recognized net patient service revenue adjustments of $9,791 and $10,750 as a result of prior years unfavorable developments related to reimbursement for the years ended August 31, 2021 and 2020, respectively. SHC also recognized revenues of $54 and $0 as a result of prior years appeals settled during the year ended August 31, 2021 and 2020.

Amounts due from Blue Cross, Medicare, Aetna, Blue Shield and United Health as a percentage of net patient accounts receivable at August 31 are as follows:

2021 2020 Blue Cross 31% 28% Medicare 13% 16% Aetna 13% 12% Blue Shield 12% 11% United Health 10% 8%

SHC does not believe significant credit risks exist with these payors. Excluding these payors, no one payor represents more than 10% of the SHC's patient receivables or net patient service revenue. The adoption of ASU 2014-09 has no impact on the SHC’s patient receivables as it was historically recorded net of allowance for uncollectible accounts and contractual adjustments on the consolidated balance sheets.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

20

3. Net Patient Service Revenue (Continued) California Hospital Quality Assurance Fee Program The State of California enacted Senate Bill 239 in October 2013 which established the Hospital Quality Assurance Fee (“HQAF”) for January 1, 2014 through December 31, 2021. CMS has approved, and SHC has recognized as revenue on the date of approval, supplemental payments related to the following programs and periods:

 Fee-For-Service (“FFS") programs for January 1, 2014 through December 31, 2021.

For the years ended August 31, 2021 and 2020, respectively, SHC recognized $46,008 and $66,459 in net patient service revenue for Medi-Cal FFS and Managed Care supplemental payments provided for under the California provider fee programs. For the years ended August 31, 2021 and 2020, respectively, SHC recognized $41,674 and $54,914 in other expense for HQAF paid to the California Department of Health Care Services. Expenses were paid for the same CMS approved programs noted above. California’s participation in the provider fee program, as authorized under federal regulations, has been made permanent by the passage of Proposition 52, an initiative on the November 2016 ballot. The first iteration and second iteration of the hospital provider fee program under the permanent legislation covering the period from January 1, 2017 to June 30, 2019 and July 1, 2019 to December 31, 2021, respectively, has been approved by CMS for the FFS program and only the first six months of Managed Care pass-through program of the first iteration. Accordingly, any potential activity under the Managed Care program related to July 1, 2017 through December 31, 2021 has not been recorded in the consolidated financial statements. SHC recorded $103,480 and $53,510 in deferred revenue as of August 31, 2021 and 2020, respectively, pending CMS approval. SHC also recorded $54,639 and $30,402 as prepaid expense for the years ended August 31, 2021 and 2020 respectively, pending CMS approval. Deferred revenue and prepaid expenses associated with unapproved HQAF will be recognized as revenue and expense respectively, upon CMS approval.

4. Charity Care, Uncompensated Costs and Community Benefits

SHC engages in numerous community benefit programs and services. These services include health research, education and training and other benefits for the larger communities that are excluded from the information below.

Uncompensated charity care is provided to vulnerable populations. Additionally, Medi-Cal and Medicare program reimbursements do not cover the estimated costs of services provided. Information related to SHC’s charity care for the years ended August 31 are as follows:

2021 2020

Charity care at established rates 92,465$ 105,591$

Estimated cost of charity care, net 19,239$ 23,432$

The estimated cost of providing charity care is based on a calculation which applies a ratio of costs to charges to the gross uncompensated charges associated with providing care to charity patients. The ratio of cost to charges is calculated based on SHC’s total expenses divided by gross patient service charges. SHC received $444 and $825 during the years ended August 31, 2021 and 2020, respectively, from contributions that were restricted for the care of indigent patients.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

21

4. Charity Care, Uncompensated Costs and Community Benefits (Continued)

Estimated cost of services in excess of reimbursement for the years ended August 31 are as follows:

2021 2020

Charity care 19,239$ 23,432$ Medi-Cal 426,352 382,437 Medicare 1,062,545 988,809

Total 1,508,136$ 1,394,678$

5. Contributions Receivable

Contributions are recorded at the discounted net present value of the future cash flows, adjusted for the risk of donor default, using a discount rate of 1.05% for new receivables recorded in fiscal year 2021 and 0.64% for receivables recorded in fiscal year 2020.

Contributions receivable at August 31 are expected to be realized in the following periods:

2021 2020

In one year or less 29,398$ 29,932$ Between one year and five years 19,755 18,116 More than five years 4,000 4,687

53,153 52,735 Less: discount/allowance (4,293) (5,339)

Total contributions receivable, net 48,860 47,396 Less: current portion (26,595) (26,944)

Contributions receivable, net of current portion 22,265$ 20,452$

Contributions receivable at August 31 are to be utilized for the following purposes:

2021 2020

Plant replacement and expansion 51,800$ 51,765$ Other patient and clinical services 1,353 970

Total 53,153$ 52,735$

There were no conditional pledges at August 31, 2021 and 2020.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

22

6. Investments and Investments in University Managed Pools

The composition of investments held directly by SHC at August 31 is as follows:

Cost Fair Value Cost Fair Value

Short term investments: Fixed income 74,851$ 74,888$ -$ -$

Investments:

Cash and cash equivalents 60,003$ 60,003$ 55,522$ 55,522$ Fixed income 754,646 766,210 562,784 624,910

Public equity 996,208 1,211,571 - -

Other - 21,141 2,208 8,678

Total 1,810,857$ 2,058,925$ 620,514$ 689,110$

2021 2020

The composition of investments in University managed pools at August 31 is as follows:

2021 2020

Investments in University managed pools: Merged Pool 2,521,834$ 1,604,095$

Expendable Funds Pool 7,093 6,642

Total 2,528,927$ 1,610,737$

Fair Value

The MP is the primary investment pool in which funds are invested. The MP is invested with the objective of maximizing long-term total return. It is a unitized pool in which the fund holders purchase investments and withdraw funds based on a monthly share value. The MP's investments at August 31 consist of the following:

2021 2020 Cash and cash equivalents 2% 5% Fixed income 8% 7% Public equities 25% 23% Real estate 6% 8% Natural resources 4% 4% Absolute return 16% 19% Private equities 39% 34%

Total 100% 100%

Allocation

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

23

7. Fair Value Measurements

Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.

The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk. Accounting guidance expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the measurement date. Level 2: Pricing inputs are based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in inactive markets, 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 or liabilities. Financial assets and liabilities in this category generally include asset-backed securities, corporate bonds and loans, municipal bonds, and interest rate swap instruments. Level 3: Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of the fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities.

Investments in University Managed Pools are measured at Net Asset Value (‘’NAV’’) since the managed pool assets are invested on behalf of SHC by SMC, according to the terms of an Investment Management Agreement. These assets are part of a diversified portfolio of actively managed public and private equity, absolute return, natural resources, and real estate. The NAV is reported to SHC by the University in accordance with their policies.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

24

7. Fair Value Measurements (Continued)

The following table summarizes SHC’s assets and liabilities measured at fair value on a recurring basis as of August 31, based on the inputs used to value them:

Level 1 Level 2 Level 3 Total

Assets Cash and cash equivalents 467,047$ -$ -$ 467,047$ Fixed income 766,210 74,888 - 841,098 Public equities 1,211,571 - - 1,211,571 Other - - 21,141 21,141

Total assets in the fair value hierarchy 2,444,828$ 74,888$ 21,141$ 2,540,857

Investments measured at NAV practical expedient: Investments in University managed pools 2,528,927

Total assets at fair value 5,069,784$

Liabilities

Interest rate swap instruments -$ 285,654$ -$ 285,654$

Level 1 Level 2 Level 3 Total

Assets Cash and cash equivalents 1,698,526$ -$ -$ 1,698,526$ Mutual funds 207,265 - - 207,265 Public equities 362,683 - - 362,683 Other 54,962 - 8,678 63,640

Total assets in the fair value hierarchy 2,323,436$ -$ 8,678$ 2,332,114

Investments measured at NAV practical expedient: Investments in University managed pools 1,610,737

Total assets at fair value 3,942,851$

Liabilities

Interest rate swap instruments -$ 353,292$ -$ 353,292$

2021

2020

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

25

7. Fair Value Measurements (Continued)

The table below sets forth a summary of the changes in the fair value of the Level 3 investments for the years ended August 31:

2021 2020

Balance, beginning of year 8,678$ 6,517$ Purchases 1,600 2,000 Transfers out to Level 1 - (1,721) Unrealized gain 10,863 1,882

Balance, end of year 21,141$ 8,678$

During the year ended August 31, 2021, SHC made $1,600 investments to a Level 3 security and there was no transfer between Level 3 and Level 1. SHC made $2,000 investments to a Level 3 security and $1,721 was transferred from Level 3 to Level 1 for the year ended August 31, 2020. The following table summarizes the significant unobservable inputs and valuation methodologies for Level 3 investments as of August 31, 2021 and 2020. For each investment category and respective valuation technique, the range of the significant unobservable input is dependent on the nature and characteristics of the investment and may vary at each balance sheet date.

Impact to Investment Valuation Significant Weighted valuation from Categories Fair Value Technique unobservable inputs Min Max Average increase in input 2021 Other 21,141$ Market Comparables Recent transactions N/A N/A N/A N/A

2020

Other 8,678$ Market Comparables Recent transactions N/A N/A N/A N/A

Range

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

26

8. Property and Equipment

Property and equipment consist of the following as of August 31:

2021 2020

Land and improvements 77,368$ 76,495$

Buildings and leasehold improvements 3,817,842 3,799,636

Equipment 1,650,865 1,546,599

5,546,075 5,422,730

Less: Accumulated depreciation (2,314,043) (2,069,898)

Construction-in-progress 387,419 293,180

Property and equipment, net 3,619,451$ 3,646,012$

Depreciation and amortization expense totaled $289,263 and $257,725 for the years ending August 31, 2021 and 2020, respectively, and is included in the consolidated statements of operations and changes in net assets.

Interest expense on debt issued for construction projects and income earned on the funds held pending use are capitalized until the projects are placed in service and depreciated over the estimated useful life of the asset. SHC has no capitalized interest expense as of August 31, 2021 since new hospital was capitalized in fiscal year 2020. Capitalized interest expense net of capitalized investment income was $4,710 for the year ended August 31, 2020.

ARO are capitalized and recorded in buildings and leasehold improvements. SHC recorded current period accretion expense of $3,591 and $3,469 in the consolidated statements of operations and changes in net assets of the years ended August 31, 2021 and 2020, respectively. ARO liability of $107,652 and $104,061 is included in other long-term liabilities on the consolidated balance sheets as of August 31, 2021 and 2020, respectively.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

27

9. Debt Obligations

SHC’s outstanding debt at August 31 is summarized below:

Effective Face Fiscal Years Interest Rates Value of Maturity 2021 / 2020 2021 2020

Fixed Rate Obligations

Tax-Exempt 2008 Series A-1 Refunding Revenue Bonds 70,360$ 2021 3.84% -$ 675$

2008 Series A-2 Refunding Revenue Bonds 104,100 2022 3.81%/3.76% 450 1,450

2008 Series A-3 Refunding Revenue Bonds 84,165 2022 3.81%/3.76% 375 1,175

2010 Series A Refunding Revenue Bonds 149,345 2021 3.84% - 6,760

2012 Series A Revenue Bonds 340,000 2028-2051 3.98% - 340,000

2012 Series B Refunding Revenue Bonds 68,320 2022-2023 2.52%/2.48% 14,985 21,795

2015 Series A Revenue Bonds 100,000 2052-2054 4.10% 100,000 100,000

2017 Series A Refunding Revenue Bonds 454,200 2022-2041 2.85%/2.84% 454,200 454,200

2020 Series A Revenue Bonds 170,120 2050 2.70% 170,120 170,120

2021 Series A Revenue Bonds 157,715 2025 0.42% 157,715 -

Taxable 2018 Series Bonds 500,000 2049 3.80% 500,000 500,000

2020 Series Bonds 300,000 2030 3.31% 300,000 300,000

2021 Series Bonds 365,100 2051 3.03% 365,100 -

Variable Rate Obligations

Tax-Exempt 2008 Series B Refunding Revenue Bonds 168,200 2042-2046 0.07%/0.19% 168,200 168,200

2012 Series D Revenue Bonds 100,000 2021 0.67% - 100,000

2015 Series B Revenue Bonds 75,000 2024 0.65% - 75,000

Total principal amounts 2,231,145 2,239,375

Unamortized original issue premiums/discounts, net 102,257 115,728

Unamortized costs of issuance (14,622) (14,195)

Current portion of long-term debt (15,505) (116,045)

Debt subject to remarketing arrangements (168,200) (168,200)

Long-term portion, net of current portion 2,135,075$ 2,056,663$

Outstanding Principal

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

28

9. Debt Obligations (Continued)

Debt Issuance Activity SHC borrows at tax-exempt rates through the California Health Facilities Financing Authority (“CHFFA”), a conduit issuer. Although CHFFA is the issuer, these tax-exempt securities are the obligation of, and payable solely by, SHC.

Payments of principal and interest on all SHC debt obligations (taxable and tax-exempt) are collateralized by a pledge against the revenues of SHC and secured under a master trust indenture between SHC and the master trustee. SHC is currently the only member of the Obligated Group. None of the related entities listed in Note 1 is a member of the obligated group or is otherwise obligated with respect to debt obligations. The master trust indenture includes, among other things, limitations on additional indebtedness, liens on property, restrictions on the disposition or transfer of assets, and maintenance of certain financial ratios. SHC may redeem some of its bonds, in whole or in part, prior to the stated maturities. Total debt outstanding under the master trust indenture is in the aggregate principal amounts of $2,231,145 and $2,239,375 as of August 31, 2021 and 2020, respectively. In April 2021, CHFFA, on behalf of SHC, issued fixed rate 2021 Series A Revenue Bonds (“2021 Series A”) in the aggregate principal amount of $157,715 plus an original issue premium of $17,287. The bonds have a mandatory put date on August 15, 2025. Proceeds of the 2021 Series A bonds were used to refund the 2012 Series D and 2015 Series B bonds previously issued by CHFFA for the benefit of SHC. In April 2021, SHC issued the 2021 Taxable Bonds in the amount of $365,100. The bonds bear interest at a coupon rate of 3.027% and mature on August 15, 2051. Proceeds were used to advance refund the 2012 Series A bonds previously issued by CHFFA for the benefit of SHC. All advance refunded bonds are considered extinguished. In April 2021, SHC established a $150,000 taxable commercial paper facility to be used for general corporate purposes. No amount was outstanding as of August 31, 2021. In November 2020, SHC extended its revolving line of credit facility until November 2021 and reduced its size to $150,000, of which $50,000 is earmarked for the issuance of stand-by letters of credit. Drawdowns from the revolving credit facility bear interest at a floating rate equal to the applicable London Interbank Offered Rate (“LIBOR”) plus a specified spread. No amounts were outstanding as of August 31, 2021 or August 31, 2020. After August 31, 2021, SHC extended its revolving line of credit facility, as described in Note 17. In April 2020, CHFFA, on behalf of SHC, issued fixed rate 2020 Series A Revenue Bonds (“2020 Series A”) in the aggregate principal amount of $170,120 plus an original issue premium of $19,885. Proceeds of the 2020 Series A bonds were used to finance certain costs of the New Stanford Hospital project and refund the 2012 Series C bonds previously issued by CHFFA for the benefit of SHC. In April 2020, SHC issued the 2020 Taxable Bonds in the amount of $300,000. The bonds bear interest at a coupon rate of 3.31% and mature on August 15, 2030. Proceeds were issued for general corporate purposes.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

29

9. Debt Obligations (Continued)

Variable Rate Debt The 2008 Series B bonds are supported by SHC’s self-liquidity and are classified as current liabilities. In the event SHC receives an optional tender notice of any of the 2008 Series B bonds, or if any bonds become subject to mandatory tender, the purchase price of the bonds will be paid from the remarketing of such bonds. However, if the remarketing proceeds are insufficient, SHC has an obligation to purchase any remaining bonds. SHC maintains sufficient liquidity to provide for the full and timely purchase price of any bonds tendered in the event of a failed remarketing. Scheduled principal payments on long-term debt are summarized below:

Scheduled Maturities

Debt subject to Remarketing

Debt subject to Mandatory Tender Total

2022 15,505$ 168,200$ -$ 183,705$

2023 17,065 - - 17,065

2024 13,475 - - 13,475

2025 17,615 - 157,715 175,330

2026 18,480 - - 18,480

Thereafter 1,823,090 - - 1,823,090

Total 1,905,230$ 168,200$ 157,715$ 2,231,145$

The scheduled principal payments above represent the annual payments required under debt repayment schedules. The current portion of long-term debt includes debt subject to mandatory tender coming due in the next fiscal year and payments scheduled to be made in 2022. Debt subject to remarketing includes long-term debt obligations subject to short-term remarketing. In 1998, SHC advance refunded its 1993 bonds in the amount of $89,520 by issuing the 1998 Series B bonds. In 2017, SHC advance refunded a portion of its 2008 Series A and 2010 Series A and B bonds in the amount of $481,185 by issuing the 2017 Series A bonds. In 2021, SHC advance refunded its 2012 Series A bonds through the issuance of the aforementioned $365,100 Series 2021 taxable bonds. All advance refunded bonds are considered extinguished. Any outstanding 2008 Series A bonds will be redeemed at par by the trustee on November 15, 2021. Any outstanding 2012 Series A bonds will be redeemed at par by the trustee on August 15, 2022. The following table summarizes the amounts of refunded bonds that remain outstanding:

Amount Advance Refunded

Total 2021 2020

1993 Series 89,520$ -$ 2,220$ 2008 Series A-1 65,610 - 65,610 2008 Series A-2 96,625 96,625 96,625 2008 Series A-3 78,090 78,090 78,090 2010 Series A 94,150 - 94,150 2010 Series B 146,710 - 146,710 2012 Series A 340,000 340,000 -

Total 910,705$ 514,715$ 483,405$

Amount Outstanding as of August 31,

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

30

9. Debt Obligations (Continued) Interest Rate Swap Agreements SHC originally entered into various interest rate swap agreements to manage fluctuations in cash flows resulting from variable rate debt interest risk. Under the terms of the current agreements, SHC pays a fixed interest rate, determined at inception, and receives a variable rate on the underlying notional principal amount based on a percentage of One Month LIBOR. SHC currently has nine outstanding interest rate exchange agreements. The following is a summary of the outstanding positions under these interest rate swap agreements at August 31, 2021:

Description Current Notional

Maturity Date

Rate Paid Rate Received

2003 Series B 48,800$ 11/15/2036 3.365% 70% 1-month LIBOR 2003 Series C 48,700 11/15/2036 3.365% 70% 1-month LIBOR 2003 Series D 52,500 11/15/2036 3.365% 70% 1-month LIBOR Subtotal LIBOR Swaps 150,000

2008 Series A-1 65,750 11/01/2040 3.691% 70% 1-month LIBOR 2008 Series A-2 102,775 11/15/2051 3.999% 67% 1-month LIBOR 2008 Series A-3 84,600 11/15/2051 3.902% 67% 1-month LIBOR Subtotal LIBOR Swaps 253,125

2012 Series A 68,350 11/15/2045 4.081% 67% 1-month LIBOR 2012 Series B 68,375 11/15/2045 4.077% 67% 1-month LIBOR 2012 Series C 34,175 11/15/2045 4.008% 67% 1-month LIBOR Subtotal Forward Swaps 170,900

Total 574,025$

SHC designates its interest rate swaps that are used to minimize the variability in cash flows of interest-bearing liabilities or forecasted transactions as hedging instruments at the inception of each contract, with the intention of maintaining hedge accounting treatment over the term of the agreement. However, circumstances may arise whereby the representations made at the inception of the agreement become invalid, or the structure of the bonds has changed, resulting in de-designation of the hedge. Over the years, the underlying bonds that were being hedged were refinanced or paid down and as a result, none of the outstanding swap contracts are treated as a hedging instrument for accounting purposes. The fair value of interest rate swaps (all of which are designated as non-hedging instruments) is shown on the balance sheets as of August 31 as follows:

Description 2021 2020 Balance Sheet Location

Fixed Payment Swaps 285,654$ 353,292$ Swap liabilities

Fair Value

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

31

9. Debt Obligations (Continued) Interest Rate Swap Agreements (continued) The change in fair value of the interest rate swaps (all of which are designated as non-hedging instruments) is shown on the consolidated statements of operations and changes in net assets for the years ended August 31 as follows:

Description 2021 2020 Statement of Operations Location

Fixed Payment Swaps 67,638$ (36,496)$ Swap interest and change in value of swap agreements

Unrealized Gain (Loss)

SHC has two swap agreements which require mutual posting of collateral by SHC and the counterparties if the termination values exceed a predetermined threshold dollar amount. There was $21,154 and $52,254 of cash collateral posted by SHC at August 31, 2021 and 2020, respectively. Upon the occurrence of certain events of default or termination events identified in the swap contracts, either SHC or the counterparty could terminate the contracts in accordance with their terms. Termination results in the payment of a termination amount by one party that attempts to compensate the other party for its economic losses. If interest rates at the time of termination are lower than those specified in the contract, SHC will make a payment to the counterparty. Conversely, if interest rates at such time are higher, the counterparty will make a payment to SHC.

Bond Interest Expense Total bond interest expense was $73,309 and $64,545 for the years ended August 31, 2021 and 2020, respectively. Interest capitalized as a cost of construction was $0 and $4,710 for the years ended August 31, 2021 and 2020, respectively.

Since fiscal year 2018, SHC has been recording all swap net settlements in swap interest and change in value of swap agreements on the consolidated statements of operations and changes in net assets.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

32

10. Retirement Plans SHC provides retirement benefits through defined benefit and defined contribution retirement plans covering substantially all benefit eligible employees. Defined Contribution Retirement Plan Employer contributions to the defined contribution retirement plan are based on a percentage of participant annual compensation. Employer contributions to this plan for SHC employees, excluding LPCH employees, totaling $130,865 and $114,075, UHA employer contributions totaling $4,382 and $4,420 and SHC-VC employer contributions totaling $5,981 and $5,695, for the years ended August 31, 2021 and 2020, respectively, are included in salaries and benefits expense in the consolidated statements of operations and changes in net assets. Defined Benefit Pension Plan Certain employees of SHC are covered by a noncontributory defined benefit pension plan (“Staff Pension Plan”). Benefits are based on years of service and the employee’s compensation. Contributions to the plans are based on actuarially determined amounts sufficient to meet the benefits to be paid to plan participants. As of August 31, 2004, SHC assumed the pension liability of the LPCH employees. SHC received $135 and $143 in cash for the years ending August 31, 2021 and 2020, respectively, which represented the current year pension expense related to LPCH employees. Postretirement Medical Benefit Plan SHC currently provides health insurance coverage for SHC employees upon retirement as early as age 55, with years of service as defined by specific criteria. The health insurance coverage for retirees who are under age 65 is the same as that provided to active employees. A Medicare supplement option is provided for retirees over age 65. The following tables present information on plan assets and obligations, costs, and actuarial assumptions for the Staff Pension Plan and the Postretirement Medical Benefit Plan for the years ended August 31, 2021 and 2020, respectively. The tables for the Postretirement Medical Benefit Plan include SHC and LPCH employees. The total postretirement medical benefit liability was $116,620 and $113,212 as of August 31, 2021 and 2020, respectively. SHC recorded a liability within self-insurance reserves in the consolidated balance sheets of $86,856 and $84,772 as of August 31, 2021 and 2020, respectively, which represents the liability for SHC employees excluding LPCH employees.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

33

10. Retirement Plans (Continued)

The change in pension and other postretirement plan assets and the related change in benefit obligations, using a measurement date of August 31, as of and for the years ended August 31 are as follows: :9

2021 2020 2021 2020 Change in plan assets:

Fair value of plan assets at beginning of year 210,752$ 193,642$ -$ -$ Actual return on plan assets 13,438 26,157 - - Employer contributions - 1,917 5,632 4,430 Participants contributions - - 1,251 1,284 Benefits paid (10,375) (10,270) (6,989) (5,839) Medicare subsidies received - - 106 125 Expenses paid (449) (694) - -

Fair value of plan assets at end of year 213,366$ 210,752$ -$ -$

Change in benefit obligation: Benefit obligation at beginning of year 219,407$ 210,690$ 113,212$ 101,093$

Service cost 1,083 1,546 4,829 3,829 Interest cost 4,978 5,907 2,388 2,704 Participants contributions - - 1,251 1,284 Benefits paid (10,375) (10,270) (6,989) (5,839) Medicare subsidies received - - 106 125 Expenses paid (449) (694) - - Plan amendments - - - 5,148 Actuarial (gain) loss (1,508) 12,228 1,823 4,868

Benefit obligation at end of year 213,136$ 219,407$ 116,620$ 113,212$

Plan assets minus benefit obligation 230$ (8,655)$ (116,620)$ (113,212)$

Net benefit asset (liability) recognized 230$ (8,655)$ (116,620)$ (113,212)$

Noncurrent assets 230$ -$ -$ -$ Current liabilities - - (7,231) (7,266) Noncurrent liabilities - (8,655) (109,389) (105,946)

Net benefit asset (liability) recognized 230$ (8,655)$ (116,620)$ (113,212)$

Prior service cost -$ -$ (17,316)$ (20,292)$ Net (loss) (50,625) (58,709) (2,861) (1,106)

Net assets without donor restrictions (50,625)$ (58,709)$ (20,177)$ (21,398)$

Amounts recognized in net assets without donor restrictions:

Amounts recognized in consolidated balance sheets:

Amounts recognized in consolidated balance sheets:

Obligations Part D Subsidy

Postretirement Staff Pension Medical Benefits

Plan Net of Medicare

The estimated net loss for the Staff Pension Plan that will be amortized from net assets without donor restrictions into net periodic benefit cost over the next fiscal year is $2,027.

The estimated net loss and prior service cost for the Postretirement Medical Benefit Plan that will be amortized from net assets without donor restrictions into net periodic benefit cost over the next fiscal year are $167 and $2,415, respectively.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

34

10. Retirement Plans (Continued) The accumulated benefit obligation for the Staff Pension Plan was $211,330 and $217,551 as of August 31, 2021 and 2020, respectively. Net benefit expense related to the plans for the years ended August 31 includes the following components:

2021 2020

Service cost: 1,083$ 1,546$ Periodic benefit expense 1,083 1,546

Non-operating: Interest cost 4,978 5,907 Expected return on plan assets (9,270) (9,692) Amortization of net loss 2,408 2,277 Non-operating periodic benefit cost (1,884) (1,508)

Total net periodic benefit cost (801)$ 38$

2021 2020

Service cost: 4,829$ 3,829$ Periodic benefit expense 4,829 3,829

Non-operating: Interest cost 2,388 2,704 Amortization of prior service cost 2,976 2,560 Amortization of net loss (gain) 68 (251) Non-operating periodic benefit cost 5,432 5,013

Total net periodic benefit cost 10,261$ 8,842$

Postretirement Medical Benefits

Obligations Staff Pension Plan

Changes recognized in net assets without donor restrictions for the years ended August 31 include the following components:

2021 2020 2021 2020 Net (gain) loss arising during period (5,676)$ (4,237)$ 1,823$ 4,868$ New prior service cost - - - 5,148 Amortizations

Prior service cost - - (2,976) (2,560) (Loss) gain (2,408) (2,277) (68) 251

Total recognized in net assets without donor restrictions (8,084)$ (6,514)$ (1,221)$ 7,707$

(8,885)$ (6,476)$ 9,040$ 16,549$ Total recognized in net periodic benefit cost and net assets without donor restrictions

Postretirement Medical Benefits

Staff Pension Plan Obligations

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

35

10. Retirement Plans (Continued) Actuarial Assumptions The weighted-average assumptions used to determine benefit obligations are as follows for the years ended August 31:

2021 2020 2021 2020 Weighted-average assumptions Discount rate 2.46% 2.33% 2.39% 2.18% Rate of compensation increase 3.00% 3.00% N/A N/A

Plan Medical Obligations Benefits

Staff Pension Postretirement

The discount rate, expected rate of return on plan assets, and the projected covered payroll growth rates used in determining the above net benefit expense are as follows for the years ended August 31:

2021 2020 2021 2020 Weighted-average assumptions Discount rate 2.33% 2.88% 2.18% 2.77% Expected return on plan assets 5.00% 5.50% N/A N/A Rate of compensation increase 3.00% 3.00% N/A N/A

Obligations Benefits

Staff Pension Postretirement Plan Medical

To develop the assumption for the expected rate of return on plan assets, SHC considered the historical and future expected returns. An independent investment consulting firm provided SHC with an estimate of the future expected returns for each asset class based on SHC’s asset allocation targets. The evaluation of the historical returns and the future expected returns resulted in the use of 5.0% as the assumption for the expected return on plan assets. To determine the accumulated postretirement benefit obligation as of August 31, 2021, a 7.35% for Post-65 and a 5.80% for Pre-65 annual rate of increase in the per capita cost of covered health care were assumed for calendar year 2021, declining gradually to 4.0% for both Post-65 and Pre-65, by 2038, and remaining at this rate thereafter.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement medical benefit plan. Increasing the health care cost trend rate by 1% in each future year would increase the accumulated postretirement benefit obligation by $1,708 and the aggregate service and interest cost by $103. Decreasing the health care cost trend rate by 1% in each future year would decrease the accumulated postretirement benefit obligation by $1,707 and the aggregate service and interest cost by $109.

Staff Pension Plan Assets SHC’s Staff Pension Plan (‘’Plan’’) weighted-average asset allocations as of the measurement date August 31, 2021 and 2020, respectively, by asset category are as follows: Asset Category 2021 2020

Debt securities 90% 63% Equity securities 10% 37%

Total 100% 100%

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

36

10. Retirement Plans (Continued) Staff Pension Plan Assets (continued) The following table summarizes SHC’s Plan assets measured at fair value on a recurring basis as of August 31, based on the inputs used to value them as defined in Note 7:

Level 1 Level 2 Level 3 Total

Cash and cash equivalents 426$ -$ -$ 426$ Mutual funds 212,940 - - 212,940

Total Plan assets at fair value 213,366$ -$ -$ 213,366$

Level 1 Level 2 Level 3 Total

Cash and cash equivalents 673$ -$ -$ 673$ Mutual funds 210,079 - - 210,079

Total Plan assets at fair value 210,752$ -$ -$ 210,752$

2020

2021

Staff Pension Plan Investments The investment objective of the Plan is to meet its pension obligations as promised by the Plan. The Plan is managed within the limits of Section 404 of the Employee Retirement Income Security Act. The Plan’s investment portfolio is governed by an investment policy statement outlining the appropriate level of risk which is defined as funded status volatility. This portfolio is managed by an investment manager hired on behalf of the Plan and its beneficiaries. The focus of the asset allocation is on funded status stabilization, with a secondary objective of improving the funded status over time. Based on the current funded status of the Plan, the Plan has adopted a static asset allocation and allowable range as seen below.

Return Seeking Assets Liability Hedging Assets (Equity) (Fixed Income)

Target 10% 90%

Allowable Range 0% - 15% 85% - 100%

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

37

10. Retirement Plans (Continued) Staff Pension Plan Investments (continued) Engaging in investment strategies that have the potential to amplify or distort the risk of loss beyond a level that is reasonably expected given the objectives of the portfolio is prohibited. Accordingly, Plan assets are strategically allocated across broadly defined financial asset classes. These asset classes are equity (domestic and international), fixed income (of various durations, credit quality, and ability to hedge pension liability), and cash. Except for fixed income investments explicitly guaranteed by the United States government, no single (i.e. non-pooled) investment security shall represent more than 5% of total Plan assets. At the time of purchase, the minimum average credit quality of fixed income investments shall be Standard & Poor’s BBB rating or Moody’s Baa rating or higher. Cash investments, if any, are used to fund liquidity needs or to facilitate a planned transition into a particular investment within an asset class. The investment policy prohibits the purchasing of securities on margin, executing short sales or purchasing or selling derivative securities for speculation or leverage. Concentration of Risk SHC manages a variety of risks, including market, credit, and liquidity risks, across Plan assets through investment managers. Concentration of risk is defined as an undiversified exposure to one of the risks mentioned above that increases the exposure of the loss of Plan assets unnecessarily. As of August 31, 2021, SHC did not have concentrations of risk. Expected Contributions SHC expects to make no contributions to the Plan for both SHC and LPCH employees during the fiscal year ending August 31, 2022. SHC expects to contribute $5,479 to its Postretirement Medical Benefit Plan for only SHC employees during the fiscal year ending August 31, 2022.

Expected Benefit Payments The following benefit payments, which reflect expected future service, are expected to be paid for the fiscal years ending August 31:

Pension Net of Medicare Excluding Medicare Benefits Part D Subsidy Part D Subsidy

2022 11,899$ 7,231$ 7,486$ 2023 12,101 7,581 7,700 2024 12,268 7,783 7,897 2025 12,405 7,938 8,046 2026 12,487 8,051 8,152 2027- 2031 61,043 40,846 41,245

Postretirement Medical Benefits

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

38

11. Net Assets Without Donor Restrictions

The changes in consolidated net assets without donor restrictions attributable to the controlling financial interest of SHC and the noncontrolling interests, for the years ended August 31, are as follows:

Total Controlling

Interest Noncontrolling

Interests Balance as of September 1, 2019 3,545,875$ 3,518,964$ 26,911$

Excess of revenues over expenses 190,537 190,929 (392) Noncontrolling capital distribution (2,400) - (2,400) Other changes in net assets without donor restrictions 459,893 459,566 327

Balance as of August 31, 2020 4,193,905 4,169,459 24,446 Excess of revenues over expenses 1,579,382 1,572,009 7,373 Noncontrolling capital distributions (1,870) - (1,870) Other changes in net assets without donor restrictions (78,259) (78,388) 129

Balance as of August 31, 2021 5,693,158$ 5,663,080$ 30,078$

12. Net Assets With Donor Restrictions

Net assets with donor restrictions consist of the following at August 31:

2021 2020

Subject to expenditure for specified purpose: Other 49,442$ 49,534$ Pledges receivable 48,860 47,396 Plant facilities 10,353 5,364

Total subject to expenditure for specified purpose 108,655 102,294 Subject to restriction in perpetuity:

Accumulated appreciation 27,305 16,616 Endowment 15,373 14,633

Total subject to restriction in perpetuity 42,678 31,249

Total net assets with donor restrictions 151,333$ 133,543$

Endowments In 2009, California adopted a version of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”). SHC has interpreted UPMIFA as requiring the preservation of the original gift as of the gift date of donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, SHC classifies as endowments (a) the original value of gifts donated, (b) the original value of subsequent gifts, and (c) accumulations to the endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

39

12. Net Assets With Donor Restrictions (Continued) Endowments (continued)

In accordance with UPMIFA, SHC considers the following factors in making a determination to appropriate or accumulate endowment funds:

1. The duration and preservation of the fund. 2. The purposes of SHC and the donor restricted endowment fund.

3. General economic conditions.

4. The possible effect of inflation and deflation.

5. The expected total return from income and the appreciation of investments.

6. Other resources of the organization.

7. The investment policies of the organization.

Changes in SHC’s endowment for the years ended August 31, 2021 and 2020 are as follows:

2021 2020

Endowment net assets, beginning of year 31,249$ 24,353$ Investment return: Investment income 770 748 Mark to market adjustments 10,258 1,465

Total investment return 11,028 2,213 Transfer 153 - Contributions 740 5,202 Expenditures (492) (519)

Endowment net assets, end of year 42,678$ 31,249$

The portion of endowment funds that is required to be retained either by explicit donor stipulation or by California UPMIFA, as of August 31, 2021 and 2020 are as follows:

2021 2020

Clinical services 7,906$ 6,048$ Education 10,854 7,983 Indigent care and other 23,918 17,218

Total endowment classified as net assets with donor restrictions 42,678$ 31,249$

All of SHC’s endowment, totaling $42,678 and $31,249 at August 31, 2021 and 2020, respectively, are invested in the MP. The original funds are held in perpetuity and invested to generate income to support operating and strategic initiatives. Return Objectives and Risk Parameters The return objective for the endowment assets is to generate optimal total return while maintaining an appropriate level of risk established by the University.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

40

12. Net Assets With Donor Restrictions (Continued)

Strategies Employed for Achieving Investment Objectives SHC relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized gain) and current yield (interest and dividend) managed by the MP.

13. Related-Party Transactions

Transactions with the University and SoM SHC has various transactions with the University and the SoM. SHC records expense transactions where direct and incremental economic benefits are received by SHC. Expenses paid to the University and the SoM are reported as operating expenses in the consolidated statements of operations and changes in net assets and are management’s best estimates of SHC’s arms-length payments of such amounts for its market specific circumstances. To the extent that payments to the University and the SoM exceed an arms-length estimated amount relative to the benefits received by SHC, they are recorded as transfers to the University and the SoM in other changes in net assets. SHC purchases certain services from the University and the SoM. Payment for these services is based on management’s best estimate of its market specific circumstances. Services provided by the SoM include physician services that benefit SHC, such as emergency room coverage, physicians providing medical direction to SHC, and physicians providing service to the clinical practice, which are covered by the Professional Services Agreement (“PSA”). Such expenses are reflected as purchased services in the consolidated statements of operations and changes in net assets, and total $958,119 and $875,369 for the years ended August 31, 2021 and 2020, respectively. Services provided by the University and other SoM non-physician services include telecommunications, transportation, utilities, and certain administrative services, such as legal and internal audit. Total costs incurred by SHC were $150,869 and $131,791 for the years ended August 31, 2021 and 2020, respectively, and are reflected in various categories in the consolidated statements of operations and changes in net assets.

SHC paid service fees to the University in the amount of $957 and $1,598 for the years ended August 31, 2021 and 2020, respectively. The service fees represent costs for the utilization of infrastructure owned by the University such as road improvements and parking garages and are reflected in the consolidated statements of operations and changes in net assets as other expense. Expected payments over the next 12 years total $11,275. Annual service fees range from approximately $957 for the year ending August 31, 2022 to $646 for the year ending August 31, 2033. SHC also received payments for services provided to the University including primarily building maintenance, housekeeping, security, and information technology (‘’IT’’). Costs incurred by SHC in providing these services are reflected in the respective categories in the consolidated statements of operations and changes in net assets. Reimbursement from the University totaled $85,065 and $77,545 for the years ended August 31, 2021 and 2020, respectively, and is reflected in various categories in the consolidated statements of operations and changes in net assets.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

41

13. Related-Party Transactions (Continued)

Transactions with the University and SoM (continued) In addition, SHC received certain grant monies for clinical trials from the University. Grant revenue totaled $8,838 and $5,443 for the years ended August 31, 2021 and 2020, respectively, and is reflected in the consolidated statements of operations and changes in net assets as net patient service revenue and various categories in the consolidated statements of operations and changes in net assets. During the year ended August 31, 2004, SHC paid $5,500 to the University. The amount represented a prepayment of a 51 year lease for property owned by the University. The short- term portion of $108 is included in prepaid expenses and other in the consolidated balance sheets as of August 31, 2021 and 2020. The remaining amount included in other assets in the consolidated balance sheets is $3,271 and $3,379 as of August 31, 2021 and 2020, respectively. For the years ended August 31, 2021 and 2020, SHC transferred $100,386 and $98,367, respectively, to the University. These funds are used by the University to support the academic mission of the SoM and its initiatives as well as the general support of the academic community and physical plant. Total transfers of $100,386 and $98,367 for the years ended August 31, 2021 and 2020, respectively, are included in other changes in net assets without donor restrictions in the consolidated statements of operations and changes in net assets. SHC also received equity transfers of $1,353 and $162 during the years ended August 31, 2021 and 2020, respectively, which represented restricted gifts originally donated to the University. These gifts were subsequently re-designated mostly for SHC patient care services and the New Stanford Hospital and are included in changes in net assets with donor restrictions in the consolidated statements of operations and changes in net assets.

Transactions with Companies of University Board Members Certain Board Members of the University are executives of companies doing business with SHC. Material transactions are with Goldman Sachs and primarily relate to interest rate swap agreements. As of August 31, 2021 and 2020, SHC had an interest rate swap liability to Goldman Sachs of $71,203 and $86,160, respectively, and there is no posted collateral for the years ended August 31, 2021 and $16,810 for the year ended August 31, 2020, for the same interest rate swap agreement. Additionally, SHC made net swap payments to Goldman Sachs of $4,025 and $3,247 for the years ended August 31, 2021 and 2020, respectively.

Transactions with LPCH SHC and LPCH share certain departments, including facilities design and construction, materials management, Managed Care contracting, compliance and general services. Shared service costs are included in the respective categories on the consolidated statements of operations and changes in net assets, and are allocated between SHC and LPCH based on negotiated rates. Reimbursement received from LPCH totaled $48,826 and $38,157 for the years ended August 31, 2021 and 2020, respectively, and is reflected in various categories in the consolidated statements of operations and changes in net assets. SHC provides various services to LPCH. These services include operating room, cardiac catheterization, interventional radiology, radiation oncology and laboratory. The cost of these services is charged back to LPCH based on a percentage of charges intended to approximate cost or a cost per procedure. Costs of these purchased services are reflected in the appropriate category in the consolidated statements of operations and changes in net assets. Reimbursement of purchased services from LPCH totaled $41,296 and $38,207 for the years ended August 31, 2021 and 2020, respectively, and is reflected in the consolidated statements of operations and changes in net assets as net patient service revenue.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

42

13. Related-Party Transactions (Continued)

Transactions with LPCH (continued) Other services provided by SHC include services provided by interns and residents, building maintenance, IT and utilities. Reimbursement of these services totaled $44,362 and $41,418 for the years ended August 31, 2021 and 2020, respectively, and is reflected in various categories in the consolidated statements of operations and changes in net assets. During the year ended August 31, 2021, SHC received $99 from LPCH which represented reimbursement for a capital equipment. There was no reimbursement from LPCH for the year ended August 31, 2020.

14. Leases Leasing Activities-Lessee

SHC’s lease portfolio primarily consists of operating and finance leases for real estate, personal property, and equipment under non-cancelable lease agreements expiring at various dates. The amounts in the tables below do not reflect payments for leases that have not yet commenced in the amount of $437.

For the years ended August 31, 2021 and 2020, the components of SHC lease expenses and the classification of such expenses in SHC consolidated statements of operations and changes in net assets are as follows:

Component of Lease Cost

Classification on Consolidated Statements of Operations and Changes in Net Assets 2021 2020

Operating lease costs Other 85,098$ 79,979$ Short term lease costs Other 11,864 9,048 Variable lease costs Other 16,023 17,937 Finance lease expense: Amortization of leased assets Depreciation and amortization 70 70 Interest on lease liabilities Interest 2 4 Sublease income Other revenue (5,323) (5,732)

Total 107,734$ 101,306$

For the years ended August 31, 2021 and 2020, the supplemental cash flow information related to leases are as follows:

2021 2020

Operating cash flows from operating leases 86,352$ 82,180$ Operating cash flows from finance leases 2 4 Financing cash flows from finance leases 75 73

Total 86,429$ 82,257$

For the years ended August 31, 2021 and 2020, the right-of-use assets obtained in exchange for new lease obligations are as follows:

2021 2020

Operating leases 30,858$ 96,491$

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

43

14. Leases (Continued) Leasing Activities-Lessee (continued) For the years ended August 31, 2021 and 2020, the weighted-average lease terms and discount rates for operating and finance leases are as follows:

Weighted-average remaining lease term: 2021 2020 Operating leases 5.73 years 5.77 years Finance leases 1.17 years 2.17 years

Weighted-average discount rate: 2021 2020 Operating leases 2.02% 2.08% Finance leases 1.79% 1.79% The following table includes the future maturities of lease payments for operating leases and finance leases for periods subsequent to August 31, 2021:

Year Ending August 31, Operating Finance Total

2022 84,593$ 77$ 84,670$ 2023 78,038 13 78,051 2024 53,571 - 53,571 2025 33,517 - 33,517 2026 24,607 - 24,607 Thereafter 56,847 - 56,847

Total lease payments 331,173 90 331,263 Less Interest (18,963) (1) (18,964)

Total lease liabilities 312,210 89 312,299

Less current lease liabilities (78,979) (76) (79,055)

Total non-current lease liabilities 233,231$ 13$ 233,244$

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

44

14. Leases (Continued) Leasing Activities-Lessor SHC leases space in its medical office buildings to others under non-cancelable operating lease arrangements.

The following table includes the future maturities of lease payments for operating leases that will be received for periods subsequent to August 31, 2021: Year Ending August 31,

2022 3,640$ 2023 2,480 2024 1,706 2025 681 2026 162 Thereafter 8,750

Total 17,419$

15. Commitments and Contingencies

SHC is aware of certain asserted and unasserted legal claims. While the outcome cannot be determined at this time, management is of the opinion that the liability, if any, from these actions will not have a material effect on SHC’s financial position.

SHC has irrevocable standby letters of credit in the amount of $23,167, which are required as security for the workers’ compensation self-insurance arrangements and $2,210 to serve as a security deposit for certain construction projects being undertaken by SHC. No amounts have been drawn on these letters of credit as of August 31, 2021. At August 31, 2021, SHC had contractual obligations of approximately $253,238 primarily related to hospital renovations and other capital projects and approximately $522,986 to support SHC’s operations, such as maintenance, food services, valet services and other purchased services.

Effective December 23, 2014, SHC entered into a five-year agreement with a global technology services and outsourcing company, pursuant to which SHC will receive certain information technology services. Under the terms of the agreement, SHC will be charged fixed fees for one- time transition services, ongoing recurring and event-based fees for information technology services, and additional fees plus expenses for project work agreed upon pursuant to work orders agreement. Effective April 1, 2019, SHC extended this contract for an additional five-year term through March 31, 2024, with no limit on renewals. SHC anticipates it will spend approximately $36,000 over the extended term of the agreement.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

45

15. Commitments and Contingencies (Continued) Effective May 30, 2019, SHC entered into an agreement for the option to purchase land and buildings (“Block E”) from the University. Block E consists of approximately six acres of land and office buildings located in Redwood City, California. The total purchase price was $75,000. Under the terms of the agreement, SHC may exercise options up to four years to purchase Block E and the option price will be four equal installments of $2,250 non-refundable deposits with the first being due three days after the effective date of the agreement, and the last on September 1, 2021. In fiscal year 2019, SHC paid the first $2,250 non-refundable deposit. In fiscal year 2020, SHC exercised its option to purchase Block E and paid the remaining three deposits, plus the final balance due to the University. In accordance with ASC 805-50-30-5, SHC recorded the difference between proceeds transferred of $75,000 and the University’s carrying amount of Block E of $17,400 as an equity transfer to the University in the amount of $57,600. SHC intends to initially develop a 228,000 square foot medical clinic on Block E. The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. Compliance with these laws and regulations can be subject to future government review and interpretation, as well as to regulatory actions unknown or unasserted at this time. Government activity with respect to investigations and allegations concerning possible violations of regulations by healthcare providers could result in the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. SHC is subject to similar regulatory reviews, and while such reviews may result in repayments and/or civil remedies that could have a material effect on SHC’s financial results of operations in a given period, management believes that such repayments and/or civil remedies would not have a material effect on SHC’s financial position. As with many medical centers across the country, information security and privacy is a growing risk area based on developments in the law and expanding mobile technology practices. SHC has policies, procedures, and training in place to safeguard protected information, but select incidents have occurred in the past and may occur in the future involving potential or actual disclosure of such information (including, for example, certain identifiable information relating to patients or research participants). In most cases, there has been no evidence of unauthorized access to, or use/disclosure of, such information, yet laws may require reporting to potentially affected individuals and federal and state governmental agencies. Governmental agencies have the authority to investigate and request further information about an incident or safeguards, to cite SHC for a deficiency or regulatory violation, and/or require payment of fines, corrective action, or both. California law also allows a private right to sue for a breach of medical information. The cost of such possible consequences has not been material to date to SHC, and management does not believe that any future consequences of these incidents will be material to the consolidated financial statements.

The percentage of SHC employees that are covered by collective bargaining arrangements is approximately 31%. There are currently no expired agreements. California's Hospital Seismic Safety Act requires licensed acute care functions to be conducted only in facilities that meet specified seismic safety standards for structural performance. Facilities classified by the State of California as non-compliant in the event of an earthquake must be retrofitted, replaced or removed from acute care service by applicable deadlines between 2020 and 2030. SHC remains in compliance with all applicable deadlines.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

46

15. Commitments and Contingencies (Continued) The California Office of Statewide Health Planning and Development has classified a substantial portion of Stanford Hospital as compliant with seismic safety structural standards through 2030 and beyond. Certain patient care activities are located in three existing buildings that can be used for inpatient care only until January 1, 2026, at which time, they must be removed from general acute care service. However, these three buildings have utility system configurations that must be modified to support inpatient functions until they are removed from acute care service. Work has been completed to remedy the utility infrastructure deficiencies. The opening of the New Stanford Hospital in 2019 will allow a substantial reduction in the number of inpatient beds occupying non-compliant structures. Work is in progress to construct additional inpatient beds by 2026 to completely relocate all inpatients from non-compliant structures. SHC also has buildings that do not meet the structural seismic safety standards for 2020 compliance, but none of those buildings have any direct inpatient care. SHC received approval from the State of California via Senate Bill 90 to extend the structural compliance deadline for these buildings through the end of 2019, and subsequently to remove those buildings from the roster of hospital structures by January 1, 2020. All required work was completed and SHC is working with the State to formalize the re-classification of the non-compliant structures as non- hospital buildings. In June 2011, the Palo Alto City Council certified the Final Environmental Impact Report, land use changes, permits and a Development Agreement with SHC, LPCH and the University as part of a Renewal Project. In July 2011, the Palo Alto City Council provided final approval for the Renewal Project at the second reading of the Development Agreement. The Renewal Project will rebuild Stanford Hospital and expand LPCH to assure adequate capacity, meet State-mandated earthquake safety standards, and provide modern, technologically-advanced hospital facilities. The Renewal Project also includes replacement of outdated laboratory facilities at the SoM and remodeling of Hoover Pavilion. As of August 31, 2021, SHC has capitalized $2,100 million, exclusive of $181 million in capitalized interest, related to this project. SHC’s portion of the Renewal Project construction was completed in fall 2019. Commencing in October 2020, major renovations (“300P Renewal”) began on the D Pod patient care unit, which over the next two years, will modernize the four floors for all private patient rooms, enlarged bathrooms, and accommodation for rooming-in of family. In fall 2020, renovation commenced on the former adult emergency department to convert a large portion of it for a dedicated pediatric emergency service. Other major renovations that started in 2021 include an overall modernization of the 300P operating room suite, expansion of the post-anesthesia care to double in size, and significant upgrades to various areas of public spaces. Over the course of the next six years, additional renovations are planned for the E Pod and F Pod patient care units, and new construction of 58 beds in extension towers. These improvements will enable the complete relocation of inpatient units that remain in the 1959-era portion of the hospital, and fulfill the seismic safety mandate to have all inpatient beds located in compliant structures. As of August 31, 2021, approximately $127 million, which was primarily for design and construction, was recorded to construction in progress. Estimated cost of the 300P Renewal program is approximately $1.2 billion.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

47

15. Commitments and Contingencies (Continued) Coronavirus Disease (“COVID-19”) In response to the economic impact of COVID-19, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted by Congress and was subsequently signed into law on March 27, 2020. The CARES Act included a variety of economic assistance provisions for businesses and individuals. SHC suspended non-emergent or non-critical surgeries, procedures and appointments beginning in mid-March 2020 through early May 2020 and various times in fiscal year 2021 due to COVID-19. Under certain provisions in the CARES Act, other provider relief funding, and Federal Emergency Management Agency (“FEMA”), SHC recognized benefits totaling $410 million and $135 million in its consolidated statement of operations for the years ended August 31, 2021 and August 31, 2020, respectively. The $410 million benefit is comprised of $393 million of Provider Relief Funds, $8.5 million for employee retention tax credit, $4.5 million of other grants and credits, and $4 million of funding from FEMA, all of which are reported in operating revenue. The $135 million benefit is comprised of $123 million in Provider Relief Funds and $2 million of other grants received, all of which are reported in operating revenue and $10 million for the employee retention tax credit, which is recorded as a reduction of salaries, wages, and benefit expenses. The CARES Act provides for deferred payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. As of August 31, 2021, deferred payments are $56 million, of which $28 million are current and are reported as accrued salaries and benefits and $28 million are non-current and are reported as other long-term liabilities on the accompanying consolidated balance sheet as of that date. As of August 31, 2020, deferred payments of $46.3 million were reported as other long-term liabilities on the accompanying consolidated balance sheet as of that date. As of August 31, 2021, SHC recorded $17 million of additional FEMA funding as deferred revenue on the accompanying consolidated balance sheet as of that date. SHC recognized revenue related to the CARES Act provider relief funding based on information contained in laws and regulations, as well as interpretations issued by the Department of Health and Human Services (“HHS”), governing the funding that was publicly available at August 31, 2021 and August 31, 2020. CARES Act provider relief funds are subject to future audit adjustments based on compliance audits and potential changes to statutes. Under the CARES Act, SHC also received $397 million in advanced payments from CMS in fiscal year 2020 which is on the accompanying consolidated balance sheet as of August 31, 2020. CMS had indicated that it would begin recouping these advance payments against future Medicare claims for services that are provided during the recoupment period. By August 31, 2021, $397 million in advance payments were recouped by CMS. There are other government funding and relief sources, in addition to other components of the CARES Act not mentioned, that SHC continues to assess for eligibility. The possible impact of these funding and relief sources are not reflected in the financial performance through August 31, 2021.

Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars)

48

16. Functional Expenses

Expenses are reported in their natural classification in the functional expense categories. All expenses that are not determined to be management and general or fundraising are classified as patient services. Certain cost centers are purely administrative and not directly related to patient care; therefore, the expenses from these cost centers are categorized as management and general. Fundraising expenses include cost centers solely dedicated to fundraising as well as allocation of employees who are involved with fundraising activities. Certain IT costs support more than one functional expense category. A percentage of their expenses are allocated to management and general based on the most recent audited annual Office of Statewide Health Planning and Development Report.

Expenses, including other components of net periodic benefit costs, are categorized on a functional basis for the years ended August 31 are as follows:

Patient services Management and general Fundraising Total

Salaries and benefits 2,573,917$ 240,173$ 1,092$ 2,815,182$ Professional services 16,696 32,800 - 49,496 Supplies 960,520 8,024 - 968,544 Purchased services 1,436,942 63,901 12,795 1,513,638 Depreciation and amortization 267,791 21,472 - 289,263 Interest 76,900 3 - 76,903 Other 348,798 99,559 - 448,357 Expense recoveries from related parties (49,417) (1,142) - (50,559) Total 5,632,147$ 464,790$ 13,887$ 6,110,824$

Patient services Management and general Fundraising Total

Salaries and benefits 2,314,529$ 234,959$ 841$ 2,550,329$ Professional services 13,636 24,827 - 38,463 Supplies 810,600 9,803 - 820,403 Purchased services 1,358,977 86,753 13,229 1,458,959 Depreciation and amortization 236,553 21,172 - 257,725 Interest 68,014 5 - 68,019 Other 354,580 105,903 - 460,483 Expense recoveries from related parties (80,782) (24,997) - (105,779) Total 5,076,107$ 458,425$ 14,070$ 5,548,602$

2021

2020

17. Subsequent Events

SHC has evaluated subsequent events occurring between the end of the most recent fiscal year and December 1, 2021, the date the consolidated financial statements were issued.

In November 2021, SHC extended its revolving line of credit facility until November 2024 and kept its size to $150,000, of which $50,000 is earmarked for the issuance of stand-by letters of credit. Drawdowns from the revolving credit facility bear interest at the Bloomberg Short-Term Bank Yield Index plus a specified spread.

[THIS PAGE INTENTIONALLY LEFT BLANK]

PricewaterhouseCoopers LLP, 405 Howard St Suite 600, San Francisco, California 94105 T: 415 498 5000, www.pwc.com/us

Report of Independent Auditors To the Board of Directors Stanford Health Care We have audited the consolidated financial statements of Stanford Health Care and its subsidiaries as of and for the years then ended August 31, 2021 and 2020 and our report thereon appears on page one of this document. That audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves and other additional procedures, in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated, in all material respects, in relation to the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and changes in net assets and cash flows of the individual companies and is not a required part of the consolidated financial statements. Accordingly, we do not express an opinion on the financial position, results of operations and changes in net assets and cash flows of the individual companies. San Francisco, CA December 1, 2021

Stanford Health Care Consolidating Balance Sheet August 31, 2021 and 2020 (in thousands of dollars)

51

FY 2020

SHC UHA SHC-VC SBC SHI SEROC PEAC Care

Counsel SHC

Advantage Eliminations Total Aug 31, 2020

323,001$ 35,008$ 472$ -$ 31,216$ 9,397$ 7,950$ -$ -$ -$ 407,044$ 1,642,912$

Assets limited as to use, held by trustee - - - - - - - - - - - 92

74,888 - - - - - - - - - 74,888 -

696,541 26,777 39,410 - - 2,220 - - - - 764,948 654,342

106,876 14,524 2,494 1,456 22,053 1,490 9,046 55 - (1,826) 156,168 165,737

103,720 771 7,359 1,571 - - - - - - 113,421 125,082

106,761 13,537 11,067 368 144 501 887 92 - (29) 133,328 108,587

13,597 4,933 69,655 47,803 43 - - 8 - (136,039) - -

1,425,384 95,550 130,457 51,198 53,456 13,608 17,883 155 - (137,894) 1,649,797 2,696,752

1,982,444 - 5,593 - 62,954 - 7,934 - - - 2,058,925 689,110

126,947 - 7,281 - - - - - - - 134,228 116,975

2,458,322 - - - 70,605 - - - - - 2,528,927 1,610,737

3,399,734 35,247 176,765 4,925 - 2,750 - 30 - - 3,619,451 3,646,012

Right of use lease assets 249,884 42,751 25,226 11,447 - 914 - 777 - (38,411) 292,588 341,580

111,805 1,638 3,792 - - 42 128 17 - (55,915) 61,507 58,533

573,638 4,056 - - - - - - - (577,694) - -

Total assets 10,328,158$ 179,242$ 349,114$ 67,570$ 187,015$ 17,314$ 25,945$ 979$ -$ (809,914)$ 10,345,423$ 9,159,699$

547,749$ 22,281$ 32,109$ 4,293$ 623$ 56$ 1,891$ 51$ -$ (32)$ 609,021$ 908,249$

333,559 42,530 19,706 (234) - - - 76 - - 395,637 287,411

187,675 - 7,517 1,718 678 365 43 2,106 - (136,039) 64,063 52,128

56,229 - (570) - - - - - - - 55,659 55,112

15,505 - 1,823 - - - - - - (1,823) 15,505 116,045

168,200 - - - - - - - - - 168,200 168,200

63,795 13,473 7,633 3,309 - 732 - 254 - (10,141) 79,055 76,066

42,800 2,333 3,026 831 26,310 - - - - - 75,300 58,186

1,415,512 80,617 71,244 9,917 27,611 1,153 1,934 2,487 - (148,035) 1,462,440 1,721,397

129,194 - 3,797 72 69,013 - 16,884 - - - 218,960 224,858

285,654 - - - - - - - - - 285,654 353,292

202,826 31,578 19,254 8,458 - 185 - 546 - (29,603) 233,244 287,053

156,454 2,044 61,658 (15) - - - - - (54,582) 165,559 180,333

- - - - - - - - - - - 8,655

2,135,075 - - - - - - - - - 2,135,075 2,056,663

4,324,715 114,239 155,953 18,432 96,624 1,338 18,818 3,033 - (232,220) 4,500,932 4,832,251

Stanford Health Care 5,857,960 65,003 187,249 49,138 69,774 9,586 4,056 (2,054) - (577,632) 5,663,080 4,169,459

Noncontrolling interests - - - - 20,617 6,390 3,071 - - - 30,078 24,446

5,857,960 65,003 187,249 49,138 90,391 15,976 7,127 (2,054) - (577,632) 5,693,158 4,193,905

145,483 - 5,912 - - - - - - (62) 151,333 133,543

Total net assets 6,003,443 65,003 193,161 49,138 90,391 15,976 7,127 (2,054) - (577,694) 5,844,491 4,327,448

Total liabilities and net assets 10,328,158$ 179,242$ 349,114$ 67,570$ 187,015$ 17,314$ 25,945$ 979$ -$ (809,914)$ 10,345,423$ 9,159,699$

Total net assets without donor restrictions Net assets with donor restrictions

The supplemental information has been prepared in a manner consistent with GAAP and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The supplemental combining information is presented only for purposes of additional analysis and not as a presentation of the financial position and results of the individual entities.

Due to related parties

Third-party payor settlements

Current portion of long-term debt

Debt subject to remarketing arrangements

Self-insurance reserves and other

Total current liabilities

Self-insurance reserves and other, net of current portion Swap liabilities

Operating lease liabilities, non-current

Other long-term liabilities

Pension liability

Long-term debt, net of current portion

Total liabilities

Net assets:

Net assets without donor restrictions:

Operating lease liabilities, current

Accrued salaries and related benefits

Total current assets

Investments

Investments at equity

Investments in University managed pools

Property and equipment, net

Other assets

Investments in related entities

Liabilities and Net Assets

Current liabilities:

Accounts payable and accrued liabilities

Due from related parties

Assets

Current assets:

Cash and cash equivalents

Short term investments

Patient accounts receivables, net

Other receivables

Inventories

Prepaid expenses and other

FY2021

Stanford Health Care Consolidating Statement of Operations and Changes in Net Assets Years Ended August 31, 2021 and 2020 (in thousands of dollars)

52

FY 2020

SHC UHA SHC-VC SBC SHI SEROC PEAC Care

Counsel SHC

Advantage Eliminations Total Aug 31, 2020

5,439,074$ 296,143$ 347,184$ -$ -$ 9,761$ -$ -$ -$ (40,114)$ 6,052,048$ 5,140,938$ 3,046 75,823 - - - - - - 53,198 (13,326) 118,741 116,971

Grants - COVID-19 396,551 3,544 6,170 - - - - - - - 406,265 124,551 FEMA 4,202 - - - - - - - - - 4,202 -

142,233 25,257 3,560 77,438 34,971 97 2,487 2,166 - (108,747) 179,462 174,293 11,353 - 137 - - - - - - - 11,490 10,823

5,996,459 400,767 357,051 77,438 34,971 9,858 2,487 2,166 53,198 (162,187) 6,772,208 5,567,576

2,415,370 140,769 207,319 38,005 5,374 2,433 - 3,415 681 (144) 2,813,222 2,548,259 39,635 5,648 2,870 21 793 1,102 618 52 120 (1,363) 49,496 38,463

871,333 56,878 49,185 15,581 2 97 - 5 5,748 (30,285) 968,544 820,403 1,280,855 252,153 34,975 5,054 403 1,127 - 37 73,924 (134,890) 1,513,638 1,458,959

259,445 10,175 17,725 1,375 - 525 - 18 - - 289,263 257,725 76,766 2 2,062 3 - - - - - (1,930) 76,903 68,019

365,015 34,858 37,709 8,163 20,727 1,600 2,417 519 292 (22,943) 448,357 460,483 (50,559) (26,263) - - - - - (709) - 26,972 (50,559) (105,779)

5,257,860 474,220 351,845 68,202 27,299 6,884 3,035 3,337 80,765 (164,583) 6,108,864 5,546,532

738,599 (73,453) 5,206 9,236 7,672 2,974 (548) (1,171) (27,567) 2,396 663,344 21,044

48,369 145 76 - 1,091 - 70 - 1 (1,930) 47,822 43,973 41,327 - 269 - - - - - - - 41,596 19,592

766,891 (26) - - 18,023 - (50) - - 26 784,864 161,720 46,274 - - - - - - - - - 46,274 (53,722) (1,960) - - - - - - - - - (1,960) (2,070)

Loss on extinguishment of debt (2,558) - - - - - - - - - (2,558) - Excess (deficiency) of revenues over expenses 1,636,942 (73,334) 5,551 9,236 26,786 2,974 (528) (1,171) (27,566) 492 1,579,382 190,537

Other changes in net assets without donor restrictions:

Transfers to Stanford University (100,386) - - - - - - - - - (100,386) (98,367) Transfer from Lucile Packard Children's Hospital 99 - - - - - - - - - 99 - Transfers between SHC and SHC-VC (16,793) - 16,793 - - - - - - - - - Change in net unrealized (loss) gain on investments (2,406) (1) - - - - - - - 1 (2,406) (1,249) Net assets released from restrictions used for: Purchase of property and equipment 927 - 89 - - - - - - - 1,016 3,248 Purchase of property and equipment - New Stanford Hospital 18,224 - - - - - - - - - 18,224 555,219 Change in pension and postretirement liability 9,396 - - - - - - - - - 9,396 1,042 Noncontrolling capital contribution (distribution), net - 106,150 - - (1,164) (4,674) - - 28,600 (130,782) (1,870) (2,400) (Loss) income from discontinued operations (72,689) - - - 715 - - - (4,917) 72,689 (4,202) - Increase (decrease) in net assets without donor restrictions 1,473,314 32,815 22,433 9,236 26,337 (1,700) (528) (1,171) (3,883) (57,600) 1,499,253 648,030

Changes in net assets with donor restrictions:

Transfers from Stanford University 1,353 - - - - - - - - - 1,353 162 Contributions and other 28,737 - 6,123 - - - - - - - 34,860 22,084 Investment income 880 - - - - - - - - - 880 929 Gains on University managed pools 11,427 - - - - - - - - - 11,427 2,885 Net assets released from restrictions used for: Operations (11,353) - (137) - - - - - - - (11,490) (10,823) Purchase of property and equipment (927) - (89) - - - - - - - (1,016) (3,248) Purchase of property and equipment - New Stanford Hospital (18,224) - - - - - - - - - (18,224) (555,219) Increase (decrease) in net assets with donor restrictions 11,893 - 5,897 - - - - - - - 17,790 (543,230)

Increase (decrease) in net assets 1,485,207 32,815 28,330 9,236 26,337 (1,700) (528) (1,171) (3,883) (57,600) 1,517,043 104,800

4,518,236 32,188 164,831 39,902 64,054 17,676 7,655 (883) 3,883 (520,094) 4,327,448 4,222,648

Net assets, end of year 6,003,443$ 65,003$ 193,161$ 49,138$ 90,391$ 15,976$ 7,127$ (2,054)$ -$ (577,694)$ 5,844,491$ 4,327,448$

FY2021

Premium revenue

Operating revenues and other support:

Net patient service revenue

Expense recoveries from related parties

Other revenue Net assets released from restrictions used for operations

Total operating revenues and other support

Operating expenses:

Salaries and benefits Professional services Supplies Purchased services Depreciation and amortization Interest Other

Net assets, beginning of year

Total operating expenses

Income (loss) from operations

Interest and investment income Earnings on equity method investments Change in value of University managed pools and other Swap interest and change in value of swap agreements Other components of net periodic benefit costs

The supplemental information has been prepared in a manner consistent with GAAP and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The supplemental combining information is presented only for purposes of additional analysis and not as a presentation of the financial position and results of the individual entities.