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Academic Medicine: The Heart of UNC Health Care The University of North Carolina Health Care System 2014 ANNUAL REPORT


CONTRIBUTING WRITERS MATT ENGLUND AMY FULK ZACH READ

PHOTO CREDITS PAUL BRALY, TARHEEL IMAGES HANNAH CRAIN KIM EDMISTEN MAX ENGLUND NICK GILLESPIE, BLUE BEND PHOTOGRAPHY ROSS GORDON SKIP HAWKINS ALLEN HINNAT DONNA HARWARD DAN SEARS BRIAN STRICKLAND UNC FAMILY MEDICINE


Table of Contents introduction Leading Academic Health Center

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An Anchor in Health Care: Academic Medicine in North Carolina

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Embracing Technology to Maximize Patient Care and Research

Collaboration in Academic Medicine Makes Bench-to-Bedside Research Possible 13 16

Community Benefit Report 2014

financials and statistics Letter of Transmittal

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UNC Health Care System Reporting Structure

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The Board of Directors

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Management’s Discussion and Analysis

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Pro Forma Statement of Net Position

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Pro Forma Statement of Revenues, Expenses, and Changes in Net Position

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Pro Forma Statement of Cash Flows

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UNC Faculty Physicians Statement of Net Assets (Unaudited)

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UNC Faculty Physicians Statement of Revenues and Expenses (Unaudited)

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UNC Faculty Physicians Statement of Cash Flows (Unaudited)

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Pro Forma Selected Statistics and Ratios

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Notes to Financials

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Leading Academic Health Center Over the past year, UNC Health Care has grown faster than any other academic health system in the country. Nash Health Care joined us this year, and we are collaborating overall as a system and preparing ourselves for the rapidly changing landscape of health care. The UNC Medical Center, along with the UNC School of Medicine, provides our patients with excellent care each day. Because of our School of Medicine, patients can expect care that is driven by research and supported by a legacy of excellence. The Medical Center and the School consistently attract some of the best and brightest faculty, staff and students from across the country. Today, UNC Health Care includes eight hospitals and the School of Medicine, and employs 30,000 employees. It generates more than $5 billion in economic benefit for the state each year by serving patients in all 100 North Carolina counties, including underserved and rural populations.

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This Annual Report features stories about how we are working together as a system for the benefit of all North Carolinians. Because we truly believe that collaboration produces the best ideas, we encourage all our coworkers to work together across the state, to exchange ideas, to challenge current processes and to strive to achieve the best results. Through our partnerships with the affiliate hospitals and the School of Medicine, UNC Health Care provides outstanding care, conducts groundbreaking research, trains our state’s future physicians and provides local services across our state.

UNC Hospitals was designated a U.S. News & World Report Best Hospitals top50 facility for cancer (#38) and ear, nose and throat (#25). UNC Hospitals, Rex Healthcare and High Point Regional also were recognized as “high performing” in a number of other specialties.

ACCOMPLISHMENTS

The School of Medicine, with its campuses in Chapel Hill, Asheville and Charlotte, also was recognized nationally as a leader in medical education. The School was ranked

UNC Health Care, its physician networks and the UNC School of Medicine have earned recognition for their hard work.

UNC Hospitals was among 89 facilities—of more than 4,800 hospitals analyzed—to be ranked in at least one of the 10 specialties on the 2014-15 Best Children’s Hospitals list. N.C. Children’s Hospital ranked in seven of the 10 specialties.


#2 in the country for primary care by U.S. News & World Report. In North Carolina, the number of physicians continues to dwindle, particularly in rural and underserved areas. Our state ranks in the lower half of the country, with fewer than five physicians for every 100 residents. The UNC School of Medicine has programs designed to best prepare students who have an interest in family and rural medicine, and many of those students stay in the state to practice once they graduate. The U.S. News & World Report rankings acknowledge those efforts and others at the School of Medicine, which was ranked #22 for research and was recognized for Family Medicine (#2), Rural Medicine (#6) and AIDS (#8). In a time when research dollars are scarce, the School contributed $431 million in research funding, which is more than half of all funding for research at the University of North Carolina at Chapel Hill. Researchers at the UNC School of Medicine found a possible environmental cause of autism. Their work, funded by the NIH, was named a 2013 top advance in autism research by Autism Speaks, a leading autism science and advocacy organization. Other accomplishments across the system include: • Rex Healthcare in Raleigh, Pardee Hospital in Hendersonville and Caldwell Memorial Hospital in Lenoir were each honored with an “A” hospital safety score in 2014 by The Leapfrog Group. This is evidence of our commitment to provide better, safer care to our patients. • Chatham Hospital scored the highest on 5 of 10 HCAHPS patient satisfaction measures among all Triangle hospitals and higher than the national average on those same measures. • Johnston Health and Caldwell Memorial Hospital were named to the 2013 Top Performer on Key Quality Measures list by The Joint Commission for excellence in accountability measure performance shown to improve care for certain conditions.

• Pardee Hospital was among only 178 hospitals recognized with Healthgrades’ 2014 Women’s Health Excellence Award for their outcomes for care provided to women for common conditions and procedures. • Caldwell Memorial Hospital received the 2014 Gold Award from the North Carolina Department of Labor for success in reducing time lost from work. • High Point Regional Health’s Carolina Regional Heart Center was named a Becker’s Hospital Review Top 100 Cardiac Hospitals for 2013. • Nash Health Care was honored with the 2014 Pathway Award from the American Nurses Credentialing Center for incorporating the latest technology with nursing excellence. The Pathway to Excellence program recognizes health care organizations’ dedication to providing a positive nursing practice environment. INCREASING EFFICIENCY IN THE NEW HEALTH CARE ENVIRONMENT

To effectively meet the challenges presented by change, we have adopted a number of innovative solutions to enable our system to grow together. One of the first tasks was to create an electronic medical record platform that will eventually serve the entire system. This spring, we implemented the initial launch of Epic@UNC, our new electronic medical record platform. UNC Hospitals, Rex Healthcare, and UNC Physicians & Associates were the first phase of the project. The Epic project has been an unprecedented opportunity for physicians, other health professionals and staff across the system to collaborate and make mutual decisions that will improve the care we provide to our patients. Our System’s launch was one of the largest to date by Epic. It remained on time—and on budget. As our affiliate hospitals are added to Epic, we will have a platform that will host electronic medical records across UNC Health Care.

bigger; we need to make real changes to continue to be successful. That is why we have partnered with Huron Consulting to roll out a project called Carolina Value. The primary goals of this project are to improve operational efficiency, to enhance the quality of system processes and to strengthen our financial stability. Through Carolina Value, we are taking steps to create an integrated health care system that will be nimble enough to compete in a price-conscious market. LOOKING FORWARD

Despite the uncertainty of the current health care environment, our providers and staff stand ready to set an excellent example for innovation in research, teaching and care. Our patients are benefiting from a collaborative approach to health care that connects communities with the health care resources they need, provided by the hospitals and doctors they trust. On behalf of UNC Health Care, thank you for your support. You make it possible for us to meet our mission and to serve the people of North Carolina.

Sincerely,

William L. Roper, MD, MPH Chief Executive Officer The University of North Carolina Health Care System

Timothy B. Burnett Chairman, Board of Directors (November 2012–Present) The University of North Carolina Health Care System

Another way we are working to adapt to the ever-changing health care environment is by learning to do more with less. It is not enough to merely make our system

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An Anchor in Health Care: Academic Medicine in North Carolina Academic medical centers (AMCs) play a vital role in health care with their threefold missions of training new health professionals, advancing medical discovery and technology through research, and providing quality patient care for even the most complex cases. Cuts in federal research funding, reduced payments for clinical care and other factors have created new challenges for AMCs; however, UNC Health Care continues to meet those challenges. As new hospitals and clinics partner with UNC Health Care to face an evolving market, the benefits of an AMC at the heart of a large health system can be felt across the state. “We are a public institution at our core—founded to serve the people of North Carolina,” said Leslie Burnside vice president of System Affiliations and Network Development for UNC Health Care. “As an academic medical center, our mission to teach the next generation of physicians is critical. It’s one thing to just grow a health care network, but it’s a very different thing to link community and academic physicians together in an innovative and integrated way.” By affiliating and consolidating into a larger health system, physician practices and hospitals are able to improve patient care and operational efficiency while adapting to industrywide changes. Primary among these changes are emerging models of care that represent the nationwide shift from volume-based payment, where providers earn revenue based on the volume of care units they provide, to value-based payment where revenue is based on the size, cost and health of the populations for which they are responsible. These new models of care are focused on improving the overall health of populations. Helping patient populations stay healthy through outreach and education rather than waiting until they are sick enough to seek care is critical to the population health model. Coordinated, high-quality treatment of patients with chronic diseases is also key. The collaborative atmosphere of an AMC like UNC Health Care makes it an ideal anchor for a clinically integrated network that reaches across North Carolina with the goal of improving the health of North Carolinians. In addition to forming provider affiliations and community networks to integrate patient care, UNC is modifying its education and research efforts to adjust to today’s health care marketplace and health care reform.

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For example, the School of Medicine is developing a new curriculum to include value-based care and population health management. Academic research also is becoming more focused on patients in communities rather than on those receiving specialized care in tertiary-care centers. UNC Health Care’s status as an academic medical center is a vital part of the relationship it has with its affiliates across the state. UNC’s emerging clinically integrated network aids its missions of education and research. Not only do UNC medical students train during their clinical rotations at UNC’s affiliate hospitals, but many stay in the state to serve its population after graduation. Additionally, the enhanced data-sharing capacities made possible by UNC Health Care’s new electronic health record (EHR) Epic provides UNC researchers with a wealth of data. IMPROVING CARE BY SHARING INFORMATION

Part of the challenge is establishing a common data infrastructure that enables more cohesive and effective care for patients, according to Lawrence Marks, MD, chair of the department of Radiation Oncology. To improve data-sharing capabilities, UNC Health Care invested in Epic, an EMR that should make sharing of medical records and billing more efficient and reliable. Epic is already online at UNC Medical Center, Chatham Hospital, Rex Healthcare and across the UNC Physicians Network, with plans to bring it to the rest of the system soon. UNC also is making ongoing improvements to equipment, software and teleconferencing capabilities. Allen Daugird, MD, MBA, UNC’s chief value officer, says technology and infrastructure are necessities for quality patient care, especially as UNC shifts toward population health management. “In population health, a system of health care providers becomes accountable for quality of care, patient outcomes and the total cost of that care. The focus is on the population,” said Dr. Daugird, who is also president of the UNC Physicians Network, comprising all UNC-employed physicians across the UNC system. “You can’t wait for patients to come see you. You need to find those with chronic diseases and actively reach out to them. Having a data warehouse is critical for population health.” With a health data warehouse, Dr. Daugird said, physicians and care managers can retrieve the records of all diabetic patients seen throughout the system, determine which patients have not had their lab tests recently, and try to contact the patient to see the doctor for a checkup. With the help of Epic, UNC Health Care is working to build resources that will better inform providers about their patients’ needs and gaps in care. Additionally, Epic will help UNC Health Care with clinical integration by enabling a specialist in Chapel Hill to consult with doctors or review information about a sick patient at an affiliate site. Integrating care in this way facilitates patient referrals when needed and collaborating on care across UNC sites. It also helps contain costs by allowing patients to

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receive care closer to home without compromising access to specialists in Chapel Hill and preventing repeating tests. UNC HEALTH CARE ACROSS THE STATE

The quality of care that has made UNC Health Care one of the top public academic health systems in the country can now be found in hospitals and clinics across the state. By affiliating with an AMC, regional hospitals and clinics gain access to a wealth of the latest research and training resources. UNC Health Care has ownership or management agreements with Caldwell Memorial Hospital in Lenoir, Chatham Hospital in Siler City, High Point Regional Health in High Point, Johnston Health in Smithfield and Clayton, Nash Health Care in Rocky Mount, Pardee Hospital in Hendersonville and Rex Healthcare in Raleigh. In addition, it owns the UNC Physicians Network, a statewide network of more than 160 physicians and advanced practice practitioners who deliver a full range of primary care and specialty services. This is in addition to UNC Medical Center in Chapel Hill, the integration of UNC Hospitals and UNC Faculty Physicians. Merging these very distinct entities into an integrated network benefits the entire system as well as patients, according to Chris Ellington, executive vice president of UNC Hospitals and president of Network Hospitals. “You get better decisions from a diverse group of talents,” Ellington said. “Bringing the strengths and resources of all our affiliates together into single system adds value and makes us stronger.” Quality care and operational efficiency are shared goals system wide, but UNC’s affiliate relationships center on the specific needs of each individual entity and the community it serves. To help each member entity meet its needs, UNC Health Care relies on a roundtable structure to foster constant dialogue among physicians, hospital executives, School of Medicine department chairs and other stakeholders. The roundtable approach provides opportunities to discuss goals, air concerns, share best practices and begin to standardize care. “Even though everyone may have a different perspective or local vantage point, all the roundtable members work really well as a unit,” Burnside said. “The roundtables enable us to take advantage of the strength of any one entity for the benefit of all the other entities.” Becoming part of a system that is constantly seeking new ways to improve operational efficiency and patient care helped lead Nash Health Care to join UNC Health Care. The benefits to Nash, the most recent hospital to join the UNC system, include optimizing costs, recruiting physicians and expanding care for patients in Nash’s four-county service area. “The fact that UNC is an academic medical center with teaching programs provides access to many specialists who are highly trained and who are helping to develop new guidelines and recommendations for care,” said Meera Kelley, MD, chief medical officer at Nash


General Hospital. “When patients come in our doors, they can expect to be treated in a way that makes them confident in their care and feel respected.” Nash’s agreement with UNC took effect in April 2014, and the hospital’s patients and employees are already feeling the partnership’s impact, Dr. Kelley said. “There has been no shortage of doctors and departments wanting to tap into UNC’s expertise, and there are so many things that they want done,” she said. “Our challenge has been figuring out how to prioritize and strategize everything they want to do, because all of it is worthwhile.” In Johnston County, UNC Health Care and Johnston Health partnered in 2013 with the goal of expanding available care and services. The first and largest project of this partnership was the expansion of Johnston Health Clayton into a full-service, 50-bed hospital. This facility opened in January 2015 and serves Clayton and the fast-growing communities of northern and western Johnston County. Because of Johnston’s proximity to Rex Healthcare, the two have long shared patients and often work closely on clinical programs. In 2012 Rex and Johnston formalized a partnership in radiation oncology that provides access in Smithfield and Clayton to the kind of comprehensive cancer care available at the N.C. Cancer Hospital. Rex Healthcare also now operates Johnston’s Hospitalist service. Coordination of care is one of the most important benefits of a large health care system and integrative partnerships are the key to accomplishing this. “It’s an ongoing process to build a team that includes people with such diverse interests, skill sets and backgrounds,” said Dr. Marks, who works with physicians in Johnston County and communicates regularly with physicians at UNC affiliates. “We are working together with mutual respect to

implement best practices that will enable us to improve the quality of care across the whole system.” Pardee Hospital in Hendersonville also is working to develop new ways to improve care across the system by experimenting with a model that will improve access to and efficiency of care for populations in the western part of the state. Pardee will accomplish this by partnering with its local, federally qualified community health center, Blue Ridge Community Health Services (BRCHS). The agreement with BRCHS includes co-locating clinics and other services, combining some administrative functions and support services, and broadening health care access in a collaborative and innovative way that conserves health care resources. “The whole system hopes to learn from the implementation of this new model,” Burnside said. Pardee and UNC originally signed a 10-year agreement in 2011 but decided to extend it to 25 years in 2013. The partnership has led to improvements in information systems, empowered Pardee as a teaching hospital and allowed the Hospital to offer additional insurance options to patients through economies-ofscale contract negotiating. UNC’s first and longest affiliation is with Rex Healthcare in Raleigh, which joined UNC Health Care in 2000. The two entities care for patients together and jointly conduct research. They also have merged some departments. One of the newer collaborations at Rex is North Carolina Heart & Vascular, a cardiology practice formed at Rex in 2013 when two leading cardiology groups, Rex Heart & Vascular Specialists and Wake Heart & Vascular Associates, joined together. The practice has nearly three dozen physicians spanning a 10-county area

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who collaborate with UNC Medical Center on patient care, new treatments and technology, and research studies. The group will coordinate patient care at the N.C. Heart & Vascular Hospital, which is scheduled to open at Rex Healthcare’s main campus in 2016. Capital improvements also are under way at High Point Regional Health, which joined UNC Health Care in early 2013. As part of the agreement, UNC committed $150 million during five years for capital improvements at High Point and is establishing a new community health fund to award grants supporting health, wellness and prevention. The partnership is helping High Point find efficiencies and save money by negotiating better deals for equipment and streamlining operations. In addition to its hospital facility, High Point Regional has a strong network of 19 physician offices. With services ranging from family medicine to physical medicine and rehabilitation to neurosurgery, UNC Regional Physicians has provided quality patient care for more than a decade and can now offer patients access to UNC expertise and research. Physician practices are crucial in UNC Health Care’s push toward population health management. The UNC Physicians Network (UNCPN) provides operational support to 36 physician practices in nine counties so the physicians can focus on providing quality patient care. Practices affiliated with UNCPN also have access to specialty and subspecialty care providers, the health care system’s Epic system, as well as the revenue cycle and quality improvement services of the UNC Physicians Professional Services Office, which serves all UNC physician practices, both at the Medical Center and affiliates. As UNC School of Medicine’s liaison for affiliates, Matthew Mauro, MD, is tasked with helping integrate the physician side of UNC Health

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Care. At UNC Medical Center in Chapel Hill, all the physicians are employed by UNC, but most of the physicians at affiliate hospitals in the health care system are in the private sector, and many work at other hospitals. UNC is working on ways to better integrate the care provided by private practice physicians at UNC affiliates. “We all have to respect the independent nature of our clinical colleagues, but at the same time we must understand the value of being part of a health care system with an academic medical center and its very powerful research enterprise as an anchor,” Dr. Mauro said. As chair of the department of radiology, Dr. Mauro formed a systemwide imaging consortium that includes all department of radiology heads and professionals to work together in developing common quality metrics and safety goals. The group also will increase its purchasing power with vendors, achieving savings in equipment purchasing and maintenance contracts. “The term ‘consortium’ connotes a group of equals getting together with common goals and a level playing field,” Dr. Mauro said. “It’s important for all of us to be in partnership and to collaborate to make sure the patient always comes first.” Siler City’s close proximity to Chapel Hill creates the opportunity for several collaborations between Chatham Hospital and UNC. Chatham was acquired by UNC Health Care in 2008 after a two-year management agreement. The hospital is home to UNC Specialty Care, a multi-specialty medical practice where specialists and surgeons from the School of Medicine provide a unique combination of academic medical center physicians in a convenient, comfortable and friendly community practice setting. Additionally, UNC Health Care provides outpatient occupational and physical therapy services at Chatham, and opened a surgical clinic at the


Innovation at Work UNC Health Care leaders are embracing innovation to ensure the system will continue to be a health care leader. Three years ago, the organization added innovation as a key focus area in the system’s strategic plan. Examples of innovation abound throughout UNC Health Care, including: • UNC’s new partnership with Alignment Healthcare, a private company with expertise in population health management, to offer a Medicare Advantage program for patients in Wake County. Eventual plans are to roll out the program to multiple counties. • The creation, with Blue Cross Blue Shield of North Carolina, of a jointly owned patient-centered medical home for the chronically ill. Carolina Advanced Health focuses on population health and disease management. • Establishing the Center for Innovation, which allocates grants to help physicians at UNC and external partners try out new approaches or technologies aimed at improving patient care and facility operations. • A $10 million angel fund that invests in early-stage health care companies that offer new ideas for services and patient products. • The increasing use of population health analytics, data warehousing and other technology tools to inform care and research. “We see the need to emphasize innovation in two key areas: first, how we take care of patients differently in an evolving landscape, and second, how to think more creatively in what we do. We’ve done a lot in both these areas,” said Chris Ellington, executive vice president of UNC Hospitals and president of Network Hospitals.

hospital in 2012. Chatham also is involved in helping UNC plan a new medical office building in Pittsboro. Looking to continue the model of collaboration, Caldwell Memorial Hospital is converting the McCreary Cancer Center in Lenoir to a hospital-based practice of UNC Hospitals with radiation oncologist Theodore E. Yaeger, MD, who is a faculty member at the School of Medicine. UNC also will work with Caldwell Memorial to provide medical oncology, chemotherapy infusions, blood administration, laboratory services and on-site CT planning for radiation therapy.

Collaboration has been a cornerstone of UNC Health Care’s efforts to educate tomorrow’s physicians, to promote innovative research and to deliver high-quality care throughout North Carolina. It also is the key ingredient that will ensure success for UNC’s many partnerships across the state. “The value of these partnerships goes both ways,” Dr. Daugird said. “There are certain things that can be done centrally, like providing shared services and efficiencies of scale, but our affiliates also must be thriving so we can take care of a larger part of our state’s population and better serve the people of North Carolina.”

EXPANDING RESEARCH THROUGHOUT THE STATE

In addition to being strong partners in patient care and supporters of UNC’s educational mission, the affiliate entities are playing an increasingly important role in UNC’s research mission as an AMC. Patients at affiliate institutions benefit from having access to clinical trials—trials in which they would not be able to enroll without UNC’s involvement—while researchers benefit from being able to study different types of patients than those who come to Chapel Hill for care of more advanced diseases. UNC is one of the top U.S. recipients of research funding from the National Institutes of Health (NIH), ranking 7th in the nation for NIH funding in 2014. In recent years, the NIH has become more interested in supporting community-based research focusing on population health, Dr. Daugird said. The NIH’s shift in research focus will allow affiliate entities to play a larger role in many UNC research initiatives and will provide new opportunities for collaboration. “Our goal is to continue to expand enrollment in clinical trials at our affiliate sites and look for ways to collaborate on research projects,” Burnside said.

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Embracing Technology to Maximize Patient Care and Research

Provisions in the 2009 Health Information Technology for Economic and Clinical Health Act and the 2010 Patient Protection and Affordable Care Act created incentives for Health care organizations to upgrade existing informatics systems. These provisions were designed to expand the use of health information technology, giving doctors access to the most accurate information about patients and making it possible for patients to be more engaged in their own care.

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“The collection of data is not just good for looking back at what happened, but more importantly, it’s helpful for looking forward. It leads us to ask ourselves, ‘What can we do differently?’” —Javed Mostafa, PhD, director of the Carolina Informatics Health Program at UNC

In order to comply with the provisions of health care reform legislation and to adapt to the growing importance of sophisticated informatics systems in the delivery of care, UNC Health Care replaced its existing electronic health record (EHR) systems with the advanced EHR software designed by Epic Systems. In early 2012, a core group of 200 people worked for 14 months to prepare for the rollout of Epic, with thousands of others assisting in the building, testing and training phases of the project. Epic is now online in all UNC Health Care locations across the triangle. The remaining entities will be added in phases. The investment in manpower and resources put into the new EHR system was necessary not only to comply with federal regulation but because informatics systems like Epic are critical tools for the future of health care. WHAT THE FUTURE HOLDS

Broader access to information makes Epic a powerful tool. The data collected by Epic gives care providers a more comprehensive picture of a patient’s medical history, making it easier to prevent illness through promoting good health habits and to manage chronic illnesses before they cause other health problems.

The improved coordination of data made possible by Epic helps care providers treat patients more efficiently at less cost by reducing the risk of medication errors, limiting unnecessary duplication of tests and helping to reduce the number of readmissions. Epic also can help identify patients with significant health problems who have had difficulty maintaining their care. With this data, doctors can reengage these patients by providing the necessary education and support systems to get serious health problems under control. Along with providing providers with more information to care for patients, EHR systems have patient portals to allow patients to manage aspects of their health care. The Epic patient portal combined with wearable devices and smartphone apps empower patients to become active in their own care by collecting data about health habits and engaging them in their care outside the clinic. Features in the patient portal allow patients not only to schedule appointments and contact their care provider but to more easily and securely access information from their health records, such as lab tests and prescription information. Data in a patient’s medical record also can trigger Epic to provide the patient with access to educational content relevant to their care.

“The majority of a patient’s life is spent outside of the walls of our clinics and hospitals, so harnessing the potential insights from patient-generated health data has incredible promise,” says Arlene Chung, MD, assistant professor of medicine and pediatrics and one of the inaugural School of Medicine clinical informatics faculty hires. The wealth of information that Epic makes available to physicians promises new ways to make care more individualized. Epic can use information gathered during routine visits to identify patients who might need screening tests or other preventive procedures, sending reminders to patients and their doctors that it is time for their mammogram or a needed immunization. Identifying and addressing problems now keeps costs for patients and providers down in the long-term by reducing the risk of more serious complications.

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Health informatics is more than just Epic, and UNC Health Care is a leader across the state in helping providers adapt to the changing culture of care. As clinical director of the Regional Extension Center for Health Information Technology, Sam Cykert, MD, professor of medicine and director of the School of Medicine Program on Health and Clinical Informatics, is helping to implement EHR systems in practices across the state and teaching the doctors how to use them to drive quality and improve care, particularly for chronic diseases. “New concepts in community-based research and modern clinical systems demand cutting-edge informatics tools for clinical support, patient support and robust data acquisition, and that is where we’re heading,” says Dr. Cykert. In order to equip the next generation of health care professional with the training they need to develop these new concepts and informatics tools, UNC recently developed a new Master of Professional Science in Biomedical and Health Informatics. “The program is designed to provide students a remarkable opportunity to gain a real-world understanding of biomedical and health informatics,” says Heidi Harkins, PhD, MPH, and director of the Professional Science Master’s Programs in The Graduate School at the University of North Carolina. “Students will finish the program prepared to use their training, and physicians will have the background to gain board certification in the new subspecialty of clinical informatics from the American Board of Preventive Medicine or the American Board of Pathology.”

BEYOND PATIENT CARE

In addition to patient care, Epic assists researchers. The system can identify patients affected by particular health problems who may respond to a new treatment or service, or who might benefit from a new clinical trial. By helping researchers find larger and more diverse groups of patients for clinical trials, informatics makes research more accurate and efficient. “The more information you have, the more generalizable your predictions can become,” says Javed Mostafa, PhD, director of the Carolina Informatics Health Program at UNC. “You will be able to focus on specific areas—an urban hospital or a rural hospital, for example—compare them and find one consistent solution that seems to be a robust treatment that works across different groups and populations. That’s the type of informatics we want to build. That’s where we want to take health care. The collection of data is not just good for looking back at what happened, but more importantly, it’s helpful for looking forward. It leads us to ask ourselves, ‘What can we do differently?’”

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As medical students begin to take advantage of the varied expertise available to them across campus, Dr. Cykert expects the MPS in Biomedical and Health Informatics to become as valuable to medical students as the Masters of Public Health. Thirty-four students received a dual MD/MPH degree in 2014. “By giving our medical students the opportunity to get their MPH at the best public health school in the country, we offer them an experience they can’t get anywhere else,” says Dr. Cykert. “I expect the same to be true for the MPS in Biomedical and Health Informatics. By tying the informatics systems that create new models of care to clinical and population health, we will push the needle in terms of care improvement and better health outcomes for North Carolinians.”


Collaboration in Academic Medicine Makes Bench-to-Bedside Research Possible

The UNC School of Medicine anchors the UNC Health Care system through its large research enterprise, which is encouraged by many opportunities for partnerships between researchers and clinicians. By supporting the efforts of the School, UNC Health Care makes significant Contributions to the quality of health care in North Carolina and throughout the country by making the practice of translational medicine a priority.

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Translational medicine is a cooperative research enterprise that brings the traditionally discrete fields of biomedical research and clinical care closer together, making it easier for research performed at the lab bench to reach the patient’s bedside. According to Jean Cook, PhD, associate dean of graduate education at the School of Medicine, the School’s comprehensiveness contributes greatly to this process. “We have a hospital, clinical trials, clinical research and researchers that try to turn basic research discoveries into clinical research,” says Dr. Cook. “That’s what I think of when I think of translation: Figuring out how our bodies work, how they go wrong when they go wrong and coming up with ways to intervene in that process. The fact that it’s all in one physical place creates the opportunity for a lot of collaborations.” One such collaboration recently led to the discovery of potential environmental causes for autism. Ben Philpot, PhD, professor of cell biology and physiology, and Mark Zylka, PhD, associate professor of cell biology and physiology, were investigating possible therapies for the neuro-genetic disorder Angelman syndrome when they discovered that the inhibition of a particular enzyme could lead to impairment in the expression of genes that have been associated with autism. The discovery was named one of the top 10 autism research breakthroughs of 2013 by Autism Speaks, a research and advocacy group. Other examples within UNC Health Care include The Carolina Breast Cancer Study and the Johnston County Osteoarthritis Project. The Carolina Breast Cancer Study is a population-based study coordinated by the UNC Lineberger Comprehensive Cancer Center and the School of Public Health, and funded by the

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University Cancer Research Fund. Data from across the state has been gathered since the project began in 1993. It is now the largest population-based breast cancer study in North Carolina and one of the largest in the world. The implementation of UNC Health Care’s new electronic health record will enhance the data collection and information sharing that makes studies like this and the Cancer Survivorship Cohort such powerful tools. The Johnston County Osteoarthritis Project, led by Thurston Arthritis Research Center Director Joanne Jordan, MD, has offices in Smithfield, North Carolina, where, since 1991, they have gathered information on the causes and consequences of arthritis. Results of their studies have been the source of more than 30 supplementary and ancillary studies, which were made possible by the thousands of participants in Johnston County. THE OTHER SIDE OF TRANSLATIONAL RESEARCH

Bob Duronio, PhD, assistant dean for research in the School of Medicine, says that the translational process works in both directions. “Bench to bedside—moving discoveries made in the lab to the clinic,” he says, “that’s what everyone thinks about translation. But there’s also bedside to bench—asking basic scientists to help understand the mechanistic basis of observations first made in the clinic. Research in both directions is facilitated by the clinicians and scientists that we have at the School of Medicine working shoulder to shoulder.” Communication between clinicians and scientists can help guide research. Physicians have long suspected, for example, that chemotherapy can accelerate the aging process in patients treated for cancer. Using a test developed at UNC Lineberger Comprehensive Cancer Center, researchers led by Hanna Sanoff, MD, MPH,


UNC Lineberger member and assistant professor with the School of Medicine, have directly measured the effects of anti-cancer chemotherapy on biological age. The results, published in March in The Journal of the National Cancer Institute, will help physicians and their patients make better decisions about treatment based on the most accurate information possible. The School of Medicine’s Office of Research encourages the kinds of interactions that can lead to translational breakthroughs and help turn basic science into effective treatment. One of the programs the Office of Research has in place for this purpose is the Translational Team Science Award (TTSA), a research grant awarded to teams that include both clinicians and basic science researchers.

ready to begin trials with human subjects, a process that can be complicated and requires a great deal of preparation, says Christine Nelson, director of the Office of Clinical Trials.

According to Terry Magnuson, PhD, vice dean of research at the School of Medicine, the TTSA is a focused direct effort to foster translational science by pairing basic scientists with clinicians. “We are trying to create an environment that encourages interdisciplinary dialogue.” The program distributed its first awards in January of 2014 to teams that included clinicians and researchers with promising research projects.

“We’re not here to look over their shoulder,” she says. “We’re here to watch their back. We make sure they are compliant with regulations. We help them negotiate contracts. We consult on budget development. There are so many things involved, and we are here to help with all of the things that are necessary to research that aren’t the research itself.”

The Office of Research also works to ensure that students entering the field of biomedical research understand the importance of interdisciplinary collaboration to the translational process. The School of Medicine offers an MD/PhD program to medical students so they can gain the lab experience necessary to become physician scientists.

Often to secure funding for the trial phase, a researcher with a promising result must spin out a company to commercialize their breakthrough. Carolina Kickstart, a service of NC TraCS, is a venture development program focused on launching biomedical startup companies out of research at the University. To date, Carolina Kickstart has launched 38 companies based on research at the School of Medicine and more than 100 from across UNC. In 2014 alone, Carolina Kickstart helped launch 11 companies born out of research at UNC Health Care.

More recently, a graduate certificate in translational medicine has been created for biomedical researchers hoping to learn more about the clinical experience. The program also has been beneficial to the collaborative environment at the School says Dr. Cook. “A student in the program working toward a PhD in cell biology, for example, will have exposure to the clinical side, while the clinician mentoring that student learns more about the basic science of cell biology. This is how these training programs break down what were the historical barriers between the clinic and basic research.” FINDING FUNDING FOR TRANSLATIONAL BREAKTHROUGHS

The North Carolina Translational and Clinical Sciences (NC TraCS) Institute also works to break down these barriers. Created in 2008, NC TraCS is the home of UNC’s Clinical and Translational Science Awards (CTSA) program, which is led by the National Center for Advancing Translational Science of the National Institutes of Health to support the translational research process. With the Pilot Grant Program, NC TraCS supports the translational process by offering funding grants designed to assist researchers gather enough preliminary data to submit with extramural funding applications. Securing funding can be one of the biggest obstacles to conducting research. UNC’s Office of Clinical Trials is a resource for researchers

Even when research is done as part of a project like The Cancer Genome Atlas project that involves several institutions, it can still require outside investment to distribute tests and treatments to the general public. In October 2013 Nanostring Technologies released a test called Prosigna designed to estimate the risk of breast cancer relapse in spite of anti-hormone treatment. The test is based on a gene signature originally discovered at UNC Lineberger by Chuck Perou, PhD, May Goldman Shaw Distinguished Professor of Molecular Oncology and UNC Lineberger member. “This test is the result of data coming from modern, innovative genomic technologies, and thus it is exciting to see the bench-tobedside story fulfilled,” says Dr. Perou. From conception through testing to bringing the product to market, UNC Health Care supports its researchers at the School of Medicine every step of the way in order to provide the best care to North Carolinians. “People want to be treated at a hospital that’s innovating,” says Dr. Cook, “and that’s what you’re getting when you come to UNC: scientists on the leading edge of research helping doctors provide the latest and most effective treatments.”

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38,000

10,000

MallWalker miles walked

Items collected for Stuff the Bus

Community Benefit Report 2014

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1

Hillsborough Habitat for Humanity Homes built

500+

Students who attended National Youth Leadership Forum

UNC Health Care Helps North Carolinians Sign up for Health Insurance Several organizations within UNC Health Care partnered with local, state and national groups to organize enroll-athons, which are events designed to help North Carolinians select a health insurance plan offered through the health insurance marketplace that was created under the Affordable Care Act (ACA).

584

$750,000

People seen by the mobile kidney screening unit

Amount given to Piedmont Health

100

Students invited to UNC Med School experience

6,800 lbs

Weight of truck pulled in the Healthiest You Challenge (an F150)

30

Media and community events participated in by UNC Family Medicine

52

Participants who completed Healthiest You Challenge

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These events, held in January and March 2014, were sponsored by UNC Family Medicine and UNC General Internal Medicine. They were supported by the Orange County Health Department, the Student Health Action Coalition, Piedmont Health Services, Legal Aid, the UNC Law Program, the League of Women Voters and Enroll America.

“When people don’t have health insurance, they delay getting care, and this can have serious consequences for their long-term health,” says Hay. “We care about our patients, and we want them to be educated about how the ACA can positively impact their health. These enroll-a-thons are just one of the ways we can accomplish that.”

Community partnerships were important to offering the enroll-athons, according to Sherry Hay, MPA, director of community health initiatives at UNC Family Medicine. The partners helped get event information out to the community through traditional channels such as fliers, patient letters, radio and news articles. The community organizations also provided on-site support during the events with counselors and navigators. “If someone had questions about the ACA and didn’t want to meet with a counselor,” says Hay, “they could still come to one of the enrolla-thons. We were also able to connect people with other community and health resources. A person with diabetes, for example, could learn about classes that can help them self-manage their condition.” Approximately 230 North Carolinians from Wake, Johnston, Alamance, Durham and Orange counties attended the events. Overall, during the open enrollment period for 2014, Orange County enrolled 46 percent of the county’s 10,729 people who were estimated to be eligible for health insurance through the Affordable Care Act. This was significant compared to North Carolina’s overall average of approximately 33 percent. More enroll-a-thons are planned for 2015 and UNC Health Care’s role as a CMS-certified application counselor organization should help reduce the number of uninsured North Carolinians.

27

3,800

Free screenings done by Kidney Education Outreach Program

Miles the Kidney Vehicle travelled

6,285

Participants in Safe Kids Orange County programs

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5,908

Students taught with High School Mock Crashes

140

High school students that attended the Health Careers Symposium


Financials and Statistics CHAPEL HILL, NORTH CAROLINA For the year ending June 30, 2014


Letter of Transmittal DECEMBER 31, 2014

To the Governor, the State Auditor, members of the General Assembly, members of the UNC Board of Governors, UNC Chapel Hill Board of Trustees, members of the UNC Health Care System Board of Directors, supporters of the University of North Carolina Health Care System, and William L. Roper, CEO.

INTRODUCTION This Annual Report includes a compilation of the operating results and financial position of the University of North Carolina Health Care System (UNC Health Care) as established by N.C.G.S 116-37. The financial reports as presented represent a summary of data generated by the various entities under the control of the Board of Directors of UNC Health Care. The University of North Carolina Hospitals (UNC Hospitals), Rex Healthcare, Inc. (Rex), Chatham Hospital, Inc. (Chatham), High Point Regional Health (High Point), Caldwell Memorial (Caldwell) and UNC Physicians Network (UNCPN) prepare and publish their own separate audit reports on an annual basis. University of North Carolina Faculty Physicians (UNCFP), the clinical patient care programs of the University of North Carolina School of Medicine, is included in the audit report for The University of North Carolina at Chapel Hill (UNCCH). Additional information regarding the organization structure can be found in the Notes to Financials section of the Annual Report. The Annual Report is compiled to provide useful information about the entity’s operations and programs and to ensure its accountability to the citizens of North Carolina. While UNC Health Care’s management believes this information to be accurate, it should be noted that these documents are unaudited and not intended to be used for any financial decisions. The Financials and Statistics section presents Management’s Discussion and Analysis and pro-forma financial statements for UNC Health Care and UNCFP. This section includes selected statistical and financial ratio information. Management’s Discussion and Analysis provides a review of the financial operations and the Notes to Financials section provides additional explanations for the reader.

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FINANCIAL INFORMATION

Internal Control Structure UNC Health Care’s management establishes and maintains an internal control structure to achieve the objectives of effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. Management applies the internal control standards to meet each of the internal control objectives and to assess internal control effectiveness. When evaluating the effectiveness of internal control over financial reporting and compliance with financial-related laws and regulations, management follows the assessment process to assure to the state of North Carolina and the public that UNC Health Care is committed to safeguarding its assets and is providing reliable financial information. One objective of an internal control structure is to provide management with reasonable, although not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition. Another objective is to ensure that transactions are executed in accordance with appropriate authorization and recorded properly in the financial records to permit the preparation of financial statements in accordance with generally accepted accounting principles. Annually, management provides assurances on internal control in its Performance and Accountability Report, including a separate assurance on internal control over financial reporting along with a report on identified material weaknesses and corrective actions. As a recipient of federal and state funds, UNC Health Care is responsible for ensuring compliance with all applicable laws and regulations. A combination of state and UNC Health Care policies and procedures, integrated with a system of internal controls, provides for this compliance. The accounts and operations of UNC Hospitals and UNCFP (as a part of UNC-CH) are subject to an annual examination by the Office of the State Auditor. Rex, Chatham, High Point, Caldwell and UNCPN are audited annually by independent third-party CPA firms. All seven entities are an integral part of the state’s reporting entity represented in the state’s Comprehensive Annual Financial Report and the state’s Single Audit Report. The audit procedures are conducted in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards issued by the Comptroller General of the United States.

Budgetary Controls On an annual basis, UNC Health Care’s Board of Directors approves budgets for UNC Hospitals, UNCFP, Rex, Chatham, High Point, Caldwell and UNCPN. The budget for UNCFP is also subject to approval by UNC-CH. Each entity of UNC Health Care produces monthly reports that compare budget and actual operating results. Department heads are expected to review the reports and identify significant variances from their budget. If necessary, action plans are implemented that will improve negative variances. In addition to the monthly reports, an encumbrance system is maintained by UNC Hospitals and UNCFP to track open purchase orders and commitments made to vendors. N.C.G.S. 116-37 granted UNC Health Care flexibility for management of UNC Hospitals in regard to its policies for personnel and salary management; purchasing of goods, services and property; and property construction. On an annual basis, UNC Health Care submits a report on its activity under this flexibility. The report is sent to the Educational Planning, Policies, and Programs Committee of the UNC Board of Governors and to the Joint Legislative Commission on Governmental Operations on or before Sept. 30 each year. UNC Health Care is subject to the provisions of the Executive Budget Act, except for trust funds identified in N.C.G.S. 116-36.1 and 116-37.2. These two statutes primarily apply to the receipts generated by patient billings and other revenues from the operations of UNC Hospitals and UNCFP. UNC Hospitals submits monthly reports to the Office of State Budget and Management that reflect its overall operations. UNC Health Care receives no appropriation from the state. In the past, appropriated funds from the General Fund covered a portion of operating expenses, including the portion of expenses attributable to the cost of providing (i) care to indigent patients and (ii) graduate medical education.

Debt Administration UNC Health Care’s entities did not enter into new long-term debt-financing arrangements. UNC Hospitals issues debt through the UNC Board of Governors. Rex, Chatham and High Point issue debt through the North Carolina Medical Care Commission.

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Standard & Poor’s and Moody’s ratings services classify UNC Hospitals’ bonds as AA and Aa3 respectively. Standard & Poor’s, Moody’s and Fitch classify Rex’s bonds as AA-, A1, and AA- respectively. Standard & Poor’s classifies Chatham’s bonds as AA-.

Cash and Investment Management UNC Health Care continues to work with the Office of the State Treasurer and the University of North Carolina Management Company (UNCMC) to maximize the investment earnings for UNC Hospitals based on changes in the General Statutes that were made during the 2005, 2008 and 2011 sessions of the General Assembly. In addition, UNC-CH has allowed UNCFP to invest a portion of their funds in an intermediate fund beginning in fiscal year 2008. Investment earnings subsidize operating income and enable UNC Health Care to provide more services to the citizens of the state of North Carolina. The cash management policy includes all areas of receipts and disbursements so that investment earnings are maximized and vendor relations are maintained.

Risk Management Exposures to loss are handled by a combination of methods, including participation in state-administered insurance programs, purchase of commercial insurance and self-retention of certain risks. The key to managing risk is to ensure that programs are in place that educate and guide employees to the best practices for our industry. We have a responsibility to safeguard our patients so that no additional harm comes to them while under our care. We are similarly committed to ensure a safe workplace for our employees. In addition to the typical litigation risks with which we are faced, we have to recognize the risk and rewards associated with the health care industry. Continual evaluation of existing programs and new service development is the only way to maintain or increase our competitive advantage.

ACKNOWLEDGEMENTS Preparation for this Annual Report in a timely manner would not have been possible without the coordinated efforts of the various financial staffs within UNC Health Care, with special assistance from the CEO’s office and Public Affairs office.

John P. Lewis

Chief Financial Officer The University of North Carolina Health Care System

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UNC Health Care System Reporting Structure Board of Directors Audit and Compliance

Executive Council

William L. Roper

William L. Roper

CEO

Governmental Affairs

Communication

John Lewis

Gary Park

Allen Daugird

Chief Financial Officer

President, UNC Hospitals

President

Chief Information Officer UNC Health Care

Chief Operating Officer, UNC Health Care System Affiliations President, Rex Healthcare

Managed Care Strategic Planning & Network Development

Marschall Runge Executive Dean, UNC School of Medicine

David Strong

UNC Hospitals (Chapel Hill) Rex Hospital (Raleigh) Chatham Hospital (Siler City)

UNC Faculty Physicians Shared Services UNC Physicians Network

Facility Planning Human Resources Legal Services Quality & Patient Safety Risk Management

High Point Regional Health (High Point) Caldwell Memorial Hospital (Lenoir) Nash Health Care (Rocky Mount) Johnston Health (Smitheld) Pardee Hospital (Hendersonville)

Management Contract

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UNC Health Care System Board of Directors

Timothy Burnett

Allen J. Daugird, MD, MBA

Gary Park

(Chair) President, Bessemer Improvement Company Greensboro, NC

President, UNC Faculty Physicians President, UNC Physicians Network Chapel Hill, NC

President, UNC Hospitals Chapel Hill, NC

A. Dale Jenkins

Matthew Fajack

(Vice Chair) CEO, Medical Mutual Insurance Company of North Carolina Raleigh, NC

CFO, The University of North Carolina at Chapel Hill Chapel Hill, NC

President, East-West Partners Chapel Hill, NC

Anne H. Bernhardt

Vicar, The Episcopal Church of the Advocate Chapel Hill, NC

Dean, UNC School of Medicine Vice Chancellor for Medical Affairs CEO, UNC Health Care System Chapel Hill, NC

Carol Folt, PhD

Thomas W. Ross

Physician-in-Chief, NC Children’s Hospital Chapel Hill, NC

Chancellor, The University of North Carolina at Chapel Hill Chapel Hill, NC

President, The University of North Carolina Chapel Hill, NC

G. Hadley Callaway, MD

Ernest J. Goodson, DDS

Raleigh Orthopaedic Clinic Raleigh, NC

Orthodontist Fayetteville, NC

Ward and Smith, PA New Bern, NC

William H. Cameron

M. Andrew Greganti, MD

President, Cameron Management, Inc. Wilmington, NC

Vice Chair, Department of Medicine Chapel Hill, NC

Business Advisor, A&G Associates and Partners, LLC Davidson, NC

Michael A. Crabb III (Trey)

Barbara Jessie-Black

D. Jordan Whichard III

Managing Director B.C. Ziegler and Company Nashville, TN

Executive Director, PTA Thrift Shop, Inc. Carrboro, NC

Susan B. Culp

Retired Publisher and CEO, Cox North Carolina Publications, Inc. Private Investor Greenville, NC

President and Principal Engineer, William G. Lapsley & Associates, P.A. Hendersonville, NC

Vice Chair, Bernhardt Furniture Company Lenoir, NC

Wesley Burks, MD

Past Chair, High Point Regional Health System High Point, NC

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The Rev. Lisa G. Fischbeck

William G. Lapsley

Roger Perry

William L. Roper, MD, MPH

J. Troy Smith Jr.

Greg Wessling

Edward Willingham President, First Citizens Bank Raleigh, NC


Management’s Discussion and Analysis INTRODUCTION

Management’s Discussion and Analysis provides an overview of the financial position and activities of the University of North Carolina Health Care System (UNC Health Care) for the fiscal years ending June 30, 2014, and June 30, 2013. The financial statements included for UNC Health Care— Statement of Net Position; Statement of Revenues, Expenses, and Changes in Net Position; and Statement of Cash Flows—are labeled “pro forma” to demonstrate that they are an aggregation of assets and liabilities and results of financial activities and not the result of an overall audit of UNC Health Care by an independent auditor and, as a result, should not be relied on as such. UNC Health Care was established Nov. 1, 1998, by N.C.G.S. 116-37. The original legislation included only the University of North Carolina Hospitals (UNC Hospitals) and the clinical patient care programs of the University of North Carolina at Chapel Hill (UNC-CH). UNC Health Care is governed by a Board of Directors and is administered as an affiliated enterprise of the University of North Carolina. UNC Health Care and UNC-CH are sister entities. UNC Faculty Physicians (UNCFP) represents the clinical patient care programs of the UNC School of Medicine. Rex Healthcare, Inc. (Rex), Chatham Hospital, Inc. (Chatham), High Point Regional Health (High Point), Caldwell Memorial Hospital (Caldwell), UNC Physicians Network (UNCPN) and UNC Physicians Network Group Practices (UNCPNGP) have been added to the organization since its inception. On March 31, 2013, UNC Health Care became the sole corporate member of High Point Regional Health (High Point), a North Carolina not-for-profit corporation organized to own and operate a 351bed general acute care hospital facility located in High Point, North Carolina, to promote and advance charitable, educational and scientific purposes, and to provide and support health care services. On May 1, 2013, UNC Health Care became the sole corporate member of Caldwell Memorial Hospital (Caldwell), a private, not-for-profit community hospital in Lenoir, North Carolina. Caldwell is a 110-bed acute care hospital with a provider network of more than fifty primary and specialty care physicians and advanced practice professionals. Effective Feb. 1, 2014, UNC Health Care and Johnston Memorial Hospital Authority (JMHA) entered into a Master Agreement to form Johnston Health Services Corporation (JHSC), a joint venture to provide health care services to the residents of Johnston County. Oversight and governance of the joint venture is controlled by a Board of Directors consisting of appointees from both JMHA and UNC Health Care. UNC Health Care manages the day-to-day operations of JHSC. As illustrated in the Reporting Structure on page 23, UNC Health Care owns and/or controls the net assets and financial operations of UNC Hospitals, Rex, Chatham, High Point, Caldwell, UNCPN and UNCPNGP. In contrast, UNC-CH owns and controls the net assets and financial operations of UNCFP. The UNC Health Care Board of Directors governs and oversees physician credentialing, quality

and patient safety, resident training and acts to advise and review the financial activities of UNCFP. Final direct control of the monetary operations of UNCFP remains within UNC-CH. The physicians who provide patient care at UNC Hospitals and in UNC-CH clinics are employees of UNC-CH. Most non-physician employees who assist in providing patient care and the associated administrative, billing and collection services are employees of UNC Health Care. For purposes of these financial statements, UNCFP serves as a financial proxy for the “clinical patient care programs of the School of Medicine.” The financial statements for the entities directly controlled by UNC Health Care (UNC Hospitals, Rex, Chatham, High Point, Caldwell, UNCPN and UNCPNGP) are separately audited on an annual basis and have received unqualified opinions for their prior year reports. The financial activities of UNCFP are included in the financial statements and audit report of UNC-CH. Since an unqualified audit opinion on the aggregation of financial information for these entities cannot be efficiently obtained, we have used the term “pro forma” to describe fairly the full financial scope and worth of UNC Health Care. In the interest of being concise, we have included pro forma consolidated financial statements for UNC Health Care, which includes UNC Hospitals, Rex, Chatham, High Point, Caldwell, UNCPN, UNCPNGP and UNCFP. Since UNCFP’s financial activities are not separately disclosed elsewhere, we are also presenting UNCFP’s Statement of Net Position, and Statement of Revenues, Expenses, and Changes in Net Position for the fiscal years ending June 30, 2014, and 2013.

USING THE FINANCIAL STATEMENTS UNC Health Care’s financial statements provide information regarding its financial position and results of operations as of June 30, 2014, and 2013 and the years then ended. The Statement of Net Position; the Statement of Revenues, Expenses and Changes in Net Position; and the Statement of Cash Flows comprise the basic financial statements required by the Governmental Accounting Standards Board (GASB). In accordance with GASB, the pro forma financial statements are presented and follow reporting concepts consistent with those required of a private business enterprise. The financial statement balances reported are presented in a classified format to aid the reader in understanding

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the nature of the operations. The Notes to Financials section provides information relative to the significant accounting principles applied in the financial statements and further detail concerning the organization and its operations. These disclosures provide information to better understand details, risk and uncertainty associated with the amounts reported and are considered an integral part of the financial statements.

Analysis of Overall Financial Position and Results of Operations

The pro forma Statement of Net Position provides information relative to the assets (resources), deferred outflows of resources, liabilities (claims to resources), deferred inflows of resources and net position (equity). Assets and liabilities on this Statement are categorized as either current or noncurrent. Current assets are those that are available to pay for expenses in the next fiscal year, and it is anticipated that they will be used to pay for current liabilities. Current liabilities are those payable in the next fiscal year. Management estimates are necessary in some instances to determine current or noncurrent categorization. The pro forma Statement of Net Position provides information relative to the financial strength of the organization and its ability to meet current and long-term obligations.

Liabilities increased $154.1 million or 13.8 percent during fiscal year 2014. The largest increases occurred as changes in estimated third party settlements, primarily due to the Upper Payment Limit (UPL) reserve at UNC Hospitals and Medicare and Medicaid Reserves at Rex Healthcare. Accrued salaries increased with FTE growth, salary growth and an increase in the employee incentive accrual.

The pro forma Statement of Revenues, Expenses, and Changes in Net Position provides information relative to the results of the organization’s operations, non-operating activities and other activities affecting net assets. Non-operating activities include noncapital gifts and grants, investment income (net of investment expenses), unrealized gains and losses on investments, and loss realized on the disposition of capital assets. Under GASB, bond interest expense is considered a nonoperating activity; but for these pro forma statements it is presented as operating. The pro forma Statement of Revenues, Expenses, and Changes in Net Position provides information relative to the management of the organization’s operations and its ability to maintain its financial stability. The pro forma Statement of Cash Flows provides information relative to the cash receipts, cash disbursements and net changes in cash resulting from operating activities, non-capital financing activities, capital and related financing activities, and investing activities. The Statement provides a reconciliation of beginning cash balances to ending cash balances and is representative of the activity reported on the pro forma Statement of Revenues, Expenses, and Changes in Net Assets as adjusted for changes in the beginning and ending balances of noncash accounts on the pro forma Statement of Net Assets. The Notes to Financials section provides information relative to the significant accounting principles applied in the financial statements, authority for and associated risk of deposits and investments, information on long-term liabilities, accounts receivable, accounts payable, revenues and expenses, pension plans and other post-employment benefits, insurance against losses, commitments and contingencies, accounting changes, and a discussion of adjustments to prior periods and events subsequent to the enterprise’s financial statement period when appropriate. These disclosures provide information to better understand details, risk and uncertainty associated with the amounts reported and are considered an integral part of the financial statements.

COMPARISON OF TWO-YEAR DATA FOR 2014 TO 2013 Data for 2014 and 2013 are presented in this report and discussed in the following sections. Discussion in the following sections is pertinent to fiscal year 2014 results and changes relative to ending balances in fiscal year 2013.

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UNC HEALTH CARE

STATEMENT OF NET POSITION

Total assets increased overall by $201.1 million or 6.1 percent during fiscal year 2014, with much of this growth occurring in noncurrent assets. Asset growth was attributable to increases to patient accounts receivable, increases to capital assets and the investment in JHSC.

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION

As a result of nonrecurring operating costs related to the implementation of the Epic electronic medical record, UNC Health Care incurred an operating loss of $(31.2) million or (1.1) percent in fiscal year 2014. Net operating revenue increased by 17.0 percent, or $420.4 million, primarily attributable to volume growth, increased payments from negotiated payor contracts and the full year impact of the acquisitions of High Point Regional Health and Caldwell Memorial. Operating expenses grew at a 22.9 percent rate, driven by acquisition, the opening of the new facilities and operating expenses related to the Epic implementation. Operating expenses specific to the Epic implementation were $52.4 million during fiscal 2014. Aggressive cost containment efforts continue in non-growth areas. In order to remain financially strong, to reinvest in new facilities and to retain the most highly trained work force, UNC Health Care’s goal is to average an annual operating margin of at least 4 percent. Non-operating performance was positive, attributable to positive investment performance during the year. Net income was $60.6 million, a 2.1 percent margin.

Discussion of Capital Asset and Long-Term Debt Activity CAPITAL ASSETS

In addition to the investment in Epic, which included $84.2 million of costs capitalized during fiscal year 2015, UNC Health Care continued to improve and modernize its facilities during the past year. UNC Hospitals expended $81.5 million on the acquisition and construction of buildings, infrastructure, and renovations. An additional $15.5 million was paid during the year for capital equipment throughout the facilities and $8 million on software. Total capital investment was just under $100 million for the year. Commitments of $53 million were outstanding on construction contracts at June 30, 2014. Rex continued growth seen in prior fiscal years. Capital investments in fiscal year 2014 consisted primarily of costs incurred in connection with a new bed tower, and technology and imaging assets. LONG-TERM DEBT ACTIVITY

UNC Health Care has no borrowing authority. UNC Hospitals, Rex and Chatham have issued revenue bonds in the past and may issue additional debt in the future should the need arise to finance construction projects and if the market rates are favorable. UNCFP issues its bonds through UNC-CH. As such, its revenues and assets are a part of the bond covenants of UNC-CH.


UNC Hospitals, Rex and Chatham did not enter into new debtfinancing arrangements during the past fiscal year. Standard & Poor’s and Moody’s ratings services classify UNC Hospitals’ bonds as AA and Aa3 respectively. Standard & Poor’s and Fitch classify Rex’s bonds as AA- and Moody’s reaffirmed Rex’s credit rating at A1. Additional information about debt activity can be found in the Notes to Financials section.

Discussion of Conditions that May Have a Significant Effect on Net Assets or Revenues and Expenses

UNC Health Care derives the vast majority of its operating revenues from patient care services. In recent years, the largest entities of UNC Health Care experienced strong operating performance. That performance has enabled investments made in support of the clinical, education and research programs of UNCFP and the UNC School of Medicine. These investments have yielded positive results as measured by growth in needed services, expansion of the medical school class and increased research funding. The health care sector continues to face tumultuous change. Pressure on health care providers has come in the form of expectations to provide greater value at a lower cost, to have fully interoperable electronic health records, to care for the uninsured, to integrate care for individual patients, and to improve wellness across populations. UNC Health Care has sought to remain a leader in evolving to meet the demands of the changing environment. We are making infrastructure investments to modernize our patient care. The inpatient census at the academic medical center in Chapel Hill is regularly near maximum capacity. Further, many of our facilities, especially in procedural areas, were designed for the way care was delivered five decades ago. To address these needs, we are developing our Hillsborough Campus as an extension of the academic campus and a perioperative tower on the Chapel Hill campus. These facilities are being designed to optimize efficiency and the patient experience. During fiscal year 2014, we implemented an integrated medical record across all of our Triangle service area. UNC Health Care long operated with electronic medical records. However, the system used at the academic medical center was distinct from the system at Chatham Hospital, the system at Rex Hospital, or the several systems used in our community physician practices and new affiliates. These systems did not “talk” well with one another and any form of data transfer between them was limited and cumbersome. Therefore, we established a vision for one patient to have one record everywhere within UNC Health Care. We implemented the Epic medical record at UNC Medical Center, Rex, Chatham and the UNCPN physician practices in fiscal year 2014. The phased rollout will continue across our remaining entities in fiscal years 2015 and 2016. This is a pervasive endeavor requiring organizational focus and resources. The fiscal state of health care across the nation is in the midst of rapid change. Increasingly, third-party payors, including government sponsored programs, are migrating from fee-for-service to fee-forvalue. Traditional payment mechanisms have paid providers for each intervention. As a result, providers have been paid more for providing more care, not necessarily for providing better care. UNC Health Care is seeking ways to shift to a new model that shifts risk and accountability to UNC Health Care. UNC Health Care is positioning itself to be a leader in the new health care environment that will ultimately reimburse less

for services currently provided to our patients. We are testing a number of different programs aimed at learning how to continue to prosper in this new healthcare environment. We have implemented programs aimed at different aspects of population health management at each of our medical institutions. These programs include an operational and strategic partnership with Alignment Healthcare for population management. This partnership launched in the fall of 2014 with the offering of a new Medicare Advantage HMO plan for seniors in Wake County, North Carolina. This is but one example among several that we are pursuing as we embrace the long-term view that to increase the value of our clinical services, we must accept—and be rewarded for accepting—increased accountability and risk. We are engaging with new partners as the provider community consolidates. Of the more than 100 hospitals in North Carolina today, fewer than 25 remain unaffiliated with larger systems. Nationally and in North Carolina, the increasing demands on providers, both physician groups and hospitals, has caused many to seek partners in larger systems. Several of these—High Point Regional Health System, Caldwell Memorial Hospital and Johnston Health Services Corporation—have joined UNC Health Care. With our help, these hospitals will be able to provide more of the care needed in local communities, they will be able to access our state-of-the-art information systems (e.g. Epic) that are otherwise unaffordable, and they will become more efficient by leveraging UNC Health Care’s scale. We are responding to the state’s needs and the needs of underserved populations. UNC Health Care has proudly cared for underserved patients as a safety net provider. In recent years, the cost we incur for those unable to pay for their care has exceeded $300 million. We also serve North Carolina in other ways such as providing much of the specialty and hospital care for the Department of Public Safety. We have found multiple cost-saving measures that will preserve taxpayer resources. In early 2013, we also extended our psychiatric services in Wake County. We have opened new inpatient acute psychiatric beds, but also operate two levels of step down care that can be a model for better care that integrates psychiatric services with the patients’ other medical needs. UNC Health Care System agreed to provide, enhance and expand all services offered in the past at Wake County’s WakeBrook facility. Pursuant to agreements with Wake County and Alliance Behavioral Health, the System began with the operation of WakeBrook Crisis and Assessment services on February 1, 2013. WakeBrook is now fully operational, providing behavioral health and medical services in the areas of crisis and assessment, acute inpatient psychiatric services, addiction treatment and through their Assertive Community Treatment Team. WakeBrook was included in UNC Hospital’s accreditation survey by The Joint Commission in December 2013. UNC Health Care committed to invest $40 million in behavioral health services in Wake County, including the operation of 28 inpatient beds, over the next five to 10 years. Successfully managing in the future requires tighter integration of administrative functions across the entities of UNC Health Care, caring for patients in lower-cost delivery settings and comprising sufficient scale to spread the cost of major investments across a broad base. UNC Health Care continues to plan for these changes through a health system-wide planning and implementation process.

2014 ANNUAL REPORT

27


THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM

Pro Forma Statement of Net Position For the Years Ended June 30, 2014, and June 30, 2013

2014

2013 *

CURRENT ASSETS

Cash and Investments Patient Accounts Receivable - Net Inventories

$203,118,000

$361,143,000

372,621,000

325,337,000

53,009,000

42,532,000

323,973,000

194,716,000

Assets Whose Use Is Limited or Restricted

82,009,000

70,370,000

Prepaid Expenses

35,343,000

33,914,000

1,070,073,000

1,028,012,000

1,344,731,000

1,227,502,000

994,206,000

971,811,000

95,182,000

75,756,000

Other Assets and Receivables

Total Current Assets NONCURRENT ASSETS

Property, Plant and Equipment - Net Assets Whose Use Is Limited or Restricted Other Assets Total Noncurrent Assets

2,434,119,000

2,275,069,000

3,504,192,000

3,303,081,000

Accounts and Other Payables

263,465,000

229,908,000

Accrued Salaries and Benefits

128,493,000

123,180,000

Estimated Third-Party Settlements

169,227,000

82,628,000

75,070,000

58,627,000

4,203,000

4,886,000

Other

108,779,000

47,076,000

Total Current Liabilities

749,237,000

546,305,000

434,513,000

480,154,000

86,267,000

89,463,000

520,780,000

569,617,000

1,270,017,000

1,115,922,000

NET POSITION

$2,234,175,000

$2,187,159,000

TOTAL LIABILITIES AND NET ASSETS

$3,504,192,000

$3,303,081,000

Total Assets CURRENT LIABILITIES

Notes and Bonds Payable Interest Payable

NONCURRENT LIABILITIES

Notes and Bonds Payable Compensated Absences Total Noncurrent Liabilities Total Liabilities

* 2013

28

UNC HEALTH CARE

as restated


THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM

Pro Forma Statement of Revenues, Expenses, and Changes in Net Position For the Years Ended June 30, 2014, and June 30, 2013

2014

2013 *

OPERATING REVENUE

Net Patient Service Revenue

$2,689,374,000

$2,353,867,000

205,086,000

120,170,000

2,894,460,000

2,474,037,000

1,695,653,000

1,432,046,000

Medical and Surgical Supplies

479,040,000

395,481,000

Contracted Services

386,681,000

237,936,000

Other Supplies and Services

164,255,000

136,151,000

43,554,000

38,483,000

6,906,000

10,707,000

118,868,000

98,067,000

Bond and Other Interest Expense

18,630,000

18,929,000

Medical School Trust Fund (MSTF)

12,062,000

11,993,000

2,925,649,000

2,379,793,000

(31,189,000)

94,244,000

Interest and Investment Activity

120,101,000

69,935,000

Nonoperating Income (Expense)

461,000

(19,240,000)

(42,357,000)

(47,780,000)

78,205,000

2,915,000

$47,016,000

$97,159,000

Other Operating Revenue Net Operating Revenue OPERATING EXPENSES

Salaries and Fringe Benefits

Communications and Utilities Medical Malpractice Costs Depreciation

Total Operating Expenses OPERATING INCOME (LOSS)

NONOPERATING GAINS (LOSSES)

Grants Total Nonoperating Gains NET INCOME * 2013

as restated

2014 ANNUAL REPORT

29


THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM

Pro Forma Statement of Cash Flows For the Years Ended June 30, 2014, and June 30, 2013

2014

2013 *

CASH FLOWS FROM OPERATING ACTIVITIES

Received from Patients and Third Parties

$2,728,688,538

$2,393,827,560

Payments to Employees and Fringe Benefits

(1,693,535,900)

(1,435,285,654)

Payments to Vendors and Suppliers

(1,020,227,776)

(734,868,339)

(8,422,460)

(9,736,677)

Other Receipts

100,622,230

103,584,483

Net Cash Provided (Used)

107,124,632

317,521,373

Payments for Medical Malpractice

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES

Health Care System Grants Paid to UNC

(35,581,614)

(34,528,486)

Net Cash Provided (Used)

(35,581,614)

(34,528,486)

CASH FLOWS FROM CAPITAL FINANCING AND RELATED FINANCING ACTIVITIES

Proceeds from Issuance of Long-Term Debt

-

1,899,000

Principal and Arbitrage Paid on Outstanding Debt

(29,198,000)

(63,601,738)

Interest and Fees Paid on Debt

(19,313,393)

(13,165,098)

-

-

Acquisition and Construction of Capital Assets

(236,097,208)

(165,688,273)

Net Cash Provided (Used)

(284,608,601)

(240,556,109)

Capital Grants

CASH FLOWS FROM INVESTING ACTIVITIES

Investment Income and Other Activity

120,100,558

18,860,892

Purchase and Sale of Investments, Net of Fees

(34,034,000)

(14,189,324)

Investments in and Loans to Affiliated Enterprises - Net

(31,026,456)

(23,893,115)

Net Cash Provided (Used)

55,040,102

(19,221,547)

$(158,025,481)

$23,215,231

$361,143,000

$322,214,912

NET INCREASE (DECREASE) BEGINNING CASH AND CASH EQUIVALENTS

Cash Acquired Through Acquisitions ENDING CASH AND CASH EQUIVALENTS * 2013

30

UNC HEALTH CARE

as restated

-

$15,712,396

$203,117,519

$361,142,539


THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM // UNC FACULTY PHYSICIANS

Statement of Net Assets (Unaudited) For the Years Ended June 30, 2014, and June 30, 2013

2014

2013

$83,955,138

$109,286,936

50,869,379

35,831,603

-

-

53,594,973

44,950,305

Other Assets and Receivables

6,457,233

6,501,315

Assets Whose Use Is Limited or Restricted

8,371,000

-

-

-

203,247,723

196,570,159

Property, Plant and Equipment - Net

-

-

Assets Whose Use Is Limited or Restricted

-

-

Other Assets

-

-

Total Noncurrent Assets

-

-

203,247,723

196,570,159

Accounts and Other Payables

33,600,919

24,869,103

Accrued Salaries and Benefits

8,799,449

7,538,121

Estimated Third-Party Settlements

7,773,576

7,289,557

-

-

CURRENT ASSETS

Cash and Investments Patient Accounts Receivable - Net Inventories Estimated Third-Party Settlements

Prepaid Expenses Total Current Assets NONCURRENT ASSETS

Total Assets CURRENT LIABILITIES

Notes and Bonds Payable Interest Payable

-

-

811,015

1,489,949

50,984,959

41,186,730

-

-

29,995,362

27,317,112

-

-

29,995,362

27,317,112

80,980,321

68,503,842

NET ASSETS

$122,267,402

$128,066,317

TOTAL LIABILITIES AND NET ASSETS

$203,247,723

$196,570,159

Other Total Current Liabilities NONCURRENT LIABILITIES

Notes and Bonds Payable Compensated Absences Estimated Third-Party Settlements Total Noncurrent Liabilities Total Liabilities

2014 ANNUAL REPORT

31


THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM // UNC FACULTY PHYSICIANS

Statement of Revenues and Expenses (Unaudited) For the Years Ended June 30, 2014, and June 30, 2013

2014

2013

$314,008,158

$298,614,149

-

-

OPERATING REVENUE

Net Patient Service Revenue State Appropriations Other Operating Revenue

112,256,539

79,466,629

Net Operating Revenue

426,264,697

378,080,778

371,522,789

323,060,954

Medical and Surgical Supplies

15,713,936

14,739,811

Contracted Services

57,487,760

24,430,533

Other Supplies and Services

25,424,164

23,628,007

Communications and Utilities

2,875,688

2,642,048

Medical Malpractice Costs

1,776,923

3,223,094

OPERATING EXPENSES

Salaries and Fringe Benefits

Bond and Other Interest Expense Medical School Trust Fund (MSTF) Total Operating Expenses OPERATING INCOME (LOSS)

-

1,691,292

12,061,664

11,992,433

486,862,924

405,408,172

(60,598,227)

(27,327,394)

NONOPERATING GAINS (LOSSES)

Interest and Investment Income

2,181,482

3,361,981

Nonoperating Income (Expense)

-

-

Gain (Loss) on Investment in Affiliates

-

-

Realized and Unrealized Investment Activity

-

-

(17,264,882)

(20,684,562)

Transfers to HCS Enterprise Fund Transfers from HCS Enterprise Fund

69,882,740

46,569,425

Total Nonoperating Gains (Losses)

54,799,340

29,246,844

$(5,798,887)

$1,919,450

NET INCOME (LOSS)

32

UNC HEALTH CARE


THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM // UNC FACULTY PHYSICIANS

Statement of Cash Flows (Unaudited) For the Years Ended June 30, 2014, and June 30, 2013

2014

2013

Received from Patients and Third Parties

$290,809,733

$298,614,149

Payments to Employees and Fringe Benefits

(367,583,211)

(323,060,954)

Payments to Vendors and Suppliers

(92,125,589)

(65,563,493)

Payments for Medical Malpractice

(11,471,000)

(3,100,000)

69,926,822

46,569,425

100,194,875

67,474,196

(10,248,370)

20,933,323

CASH FLOWS FROM OPERATING ACTIVITIES

Operating Capital Grants Other Receipts Net Cash Provided (Used)

CASH FLOWS FROM CAPITAL FINANCING AND RELATED FINANCING ACTIVITIES

Principal and Arbitrage Paid on Outstanding Debt

1,649,800

1,649,800

Interest and Fees Paid on Debt

-

(1,691,292)

Proceeds from Financing Agreements

-

-

Acquisition and Construction of Capital Assets Net Cash Provided (Used)

(1,649,800)

(1,649,800)

-

(1,691,292)

2,181,482

3,361,981

CASH FLOWS FROM INVESTING ACTIVITIES

Investment Income and Other Activity Purchase and Sale of Investments, Net of Fees

-

Investments in and Loans to Affiliated Enterprises - Net

(17,264,882)

(20,684,562)

Net Cash Provided (Used)

(15,083,400)

(17,322,581)

NET INCREASE (DECREASE)

$(25,331,770)

$1,919,450

BEGINNING CASH AND CASH EQUIVALENTS

$109,286,936

$107,367,486

$83,955,166

$109,286,936

ENDING CASH AND CASH EQUIVALENTS

2014 ANNUAL REPORT

33


THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM

Pro Forma Selected Statistics and Ratios For the Years Ended June 30, 2014, and June 30, 2013

UNCPN SITES

2014 UNC HEALTH CARE TOTAL

2013* UNC HEALTH CARE TOTAL

REX SITES

CHATHAM SITES

HPRH SITES

CALDWELL SITES

UNC SITES

122,042

3,926

69,887

17,320

268,165

481,340

390,606

25,216

603

16,088

3,347

37,576

82,830

67,689

4.2

3.1

4.3

5.2

6.8

5.8

5.8

Inpatient Operating Room Cases

10,262

1,123

2,549

1,257

12,276

27,467

22,478

Outpatient Operating Room Cases

22,588

631

2,517

4,118

16,375

46,229

40,567

Emergency Department Visits

55,720

15,158

62,629

28,561

75,796

237,864

171,963

106,942

-

235,007

-

908,191

1,764,086

1,679,659

12,592

-

1,476

450

3,568

18,086

9,279

Operating Margin Percentage

-1.08%

3.81%

Operating Margin Percentage (excluding cost report settlements)

-1.08%

3.81%

PATIENT SERVICE STATISTICS

Patient Days Inpatient Discharges Average Length of Stay

Clinic Visits Births/Deliveries

513,946

FINANCIAL RATIOS

Days in Net Accounts Receivable Days of Cash on Hand (includes investments) Average Payment Period (days) Long-Term Debt to Equity Current Debt Service Coverage * 2013

34

as restated

UNC HEALTH CARE

50.57

50.45

159.15

176.69

86.33

103.85

16.58%

18.15%

4.98

2.76


Notes to Financials NOTE 1 // SIGNIFICANT ACCOUNTING POLICIES A. ORGANIZATION – The University of North Carolina Health Care System (UNC Health Care) was established Nov. 1, 1998, by N.C.G.S. 116-37. It is governed and administered as an affiliated enterprise of The University of North Carolina system with its stated purpose to provide patient care, facilitate the education of physicians and other health care providers, conduct research collaboratively with the health sciences schools of the University of North Carolina at Chapel Hill (UNCCH), and render other services designed to promote the health and well-being of the citizens of North Carolina. The original legislation included the University of North Carolina Hospitals at Chapel Hill (UNC Hospitals) and the clinical patient care programs established or maintained by the School of Medicine of the University of North Carolina at Chapel Hill including University of North Carolina Physicians & Associates (UNC P&A). As of January 1, 2013, UNC Physicians & Associates changed its name to UNC Faculty Physicians (UNCFP) to better identify the relationship with the UNC School of Medicine. UNC Health Care is under the governance of the Board of Directors of UNC Health Care. Rex Healthcare, Inc. (Rex), Chatham Hospital, Inc. (Chatham), High Point Regional Health (High Point), Caldwell Memorial Hospital (Caldwell), UNC Physicians Network (UNCPN) and UNC Physicians Network Group Practices (UNCPNGP) have been added to the organization since its inception.

The University of North Carolina Hospitals – The University of North Carolina Hospitals at Chapel Hill (UNC Hospitals) is the only state-owned teaching hospital in North Carolina. With a licensed base of 830 beds, this facility serves as an acute care teaching hospital for The University of North Carolina at Chapel Hill. UNC Hospitals consists of North Carolina Memorial Hospital, North Carolina Children’s Hospital, North Carolina Neurosciences Hospital, North Carolina Women’s Hospital and North Carolina Cancer Hospital. As a state agency, UNC Hospitals is required to conform to financial requirements established by various statutory and constitutional provisions. While UNC Hospitals is exempt from both federal and state income taxes, a small portion of its revenue is subject to the unrelated business income tax. BLENDED COMPONENT UNITS – Although legally separate, Health System

Properties, LLC (the LLC), a component unit of UNC Hospitals, is reported as if it were part of the Hospitals. The LLC was established to purchase, develop and/or lease real property. Because the UNC Health Care System is the sole member manager of the LLC, the elected directors of the LLC are the same members of the UNC Health Care System Board of Directors that directs UNC Hospitals’ operations, and as the LLC’s primary purpose is to benefit UNC Hospitals, its financial statements have been blended with those of UNC Hospitals.

The University of North Carolina Faculty Physicians – Formerly known as UNC Physicians & Associates, University of North Carolina Faculty Physicians (UNCFP) is the clinical service component of the UNC School of Medicine. At the heart of UNCFP are the approximately 1,100 physicians who provide a full range of specialty and primary care services for patients of UNC Health Care. While the great majority of services are rendered at the inpatient units of UNC Hospitals and the outpatient clinics on the UNC campus, there is a growing range of services provided at clinics in the community. There are 19 clinical departments, two affiliated departments and two administrative units that collectively form UNCFP.

CLINICAL DEPARTMENTS:

Anesthesiology Orthopaedics Dermatology Otolaryngology Emergency Medicine Pathology & Laboratory Medicine Family Medicine Pediatrics Medicine Psychiatry Neurology Physical Medicine & Rehabilitation Neurosurgery Radiation Oncology Obstetrics & Gynecology Radiology Ophthalmology Surgery Urology AFFILIATED DEPARTMENTS:

Allied Health Sciences Center for Development and Learning ADMINISTRATIVE UNITS:

Administrative Office (Billing & Collections, Managed Care) Ambulatory Administration While UNCFP is affiliated with UNC Health Care, the net assets of UNCFP are held in a UNC-CH trust fund. The operating income and expenses for UNCFP are managed via UNC-CH’s accounting infrastructure; as such, its operational results are included in the annual audit for UNC-CH.

Rex Healthcare, Inc. – Rex Healthcare, Inc. (Rex) is a North Carolina notfor-profit corporation organized to provide a wide range of health care services to the residents of the Triangle area of North Carolina. The System is the sole member of the corporation and appoints eight of the thirteen seats on Rex’s Board of Trustees and also reviews and approves Rex’s annual operating and capital budgets.

Chatham Hospital, Inc. – Chatham Hospital, Inc., is a private, nonprofit corporation that owns and operates a critical access facility located in Siler City, North Carolina. The System is the sole member of Chatham Hospital, Inc. The System appoints nine of the fifteen members on the Chatham Hospital, Inc. Board and reviews and approves its annual operating and capital budgets.

UNC Physicians Network and UNC Physicians Network Group Practice – UNCPN and UNCPNGP are wholly owned subsidiaries of the System, but are private employers that own and operate more than 30 community physician practices throughout the Triangle region of North Carolina (Raleigh, Durham and Chapel Hill). They are physician-led networks structured to meet the needs of the community and community practice physicians by creating a partnership for physicians and UNC Health Care to face the challenging health care environment.

High Point Regional Health, Inc. –

High Point Regional Health. Inc. (HPRH) is a North Carolina not-for-profit corporation located in High Point, North Carolina, to promote and advance charitable, educational and scientific purposes, and to provide and support health care services. The System became the sole corporate member of HPRH on March 31, 2013. HRPH is the parent holding company of High Point Regional Health Foundation, High Point Health Care Ventures, Inc., and High Point Regional Health Services, Inc.

2014 ANNUAL REPORT

35


Caldwell Memorial Hospital – Caldwell Memorial Hospital is a private, notfor-profit community hospital in Lenoir, North Carolina, and is an acute care hospital with a provider network of more than fifty primary and specialty care physicians and advanced practice professionals. The System became the sole corporate member of Caldwell on May 1, 2013.

WakeBrook Mental Health Campus –

highly liquid investments with an original maturity of three months or less when purchased, including deposits held by the State Treasurer in the short-term investment fund (STIF). The STIF account has the general characteristics of a demand deposit account in that participants may deposit and withdraw cash at any time without prior notice or penalty.

The System agreed to provide, enhance and expand all services offered in the past at Wake County’s WakeBrook facility. Pursuant to agreements with Wake County and Alliance Behavioral Health, the System began with the operation of WakeBrook Crisis and Assessment services on Feb. 1, 2013. WakeBrook is now fully operational, providing the behavioral health and medical services in the areas of crisis and assessment, acute inpatient psychiatric services, addiction treatment and through their Assertive Community Treatment Team. WakeBrook was included in UNC Hospital’s accreditation survey by The Joint Commission in December 2013.

UNC-CH manages the funds of UNCFP as authorized by the University of North Carolina Board of Governors pursuant to N.C.G.S. 116-36.2 and Section 600.2.4 of the Policy Manual of The University of North Carolina. Special funds and funds received for services rendered by health care professionals pursuant to N.C.G.S 116-36.1(h) are invested in the same manner as the State Treasurer is required to invest. Investments of various funds may be pooled unless prohibited by statute or by terms of the gift or contract. UNC-CH utilizes investment pools to manage investments and distribute investment income. Shares in the temporary pool trade at a fixed value of $1 per share.

B. BASIS OF PRESENTATION – The accompanying financial statements

G. INVESTMENTS – This classification includes marketable debt and equity

present all activities under the direction of the UNC Health Care Board of Directors. The financial statements for UNC Health Care are presented as a compilation of the various statements generated by its separate entities. UNC Hospitals, Rex, Chatham and UNCPN issue their own audited financial statements while UNCFP is included as a part of the audited statements for UNC-CH.

securities with readily determinable fair values, including assets whose use is limited and are measured at fair value. Investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) is included in nonoperating income (loss). The calculation of realized gains and losses is independent of a calculation of the net change in the fair value of investments.

In compiling the financial statements for UNC Health Care, significant intercompany transactions and balances between the related parties have been eliminated. In addition, while the general statutes refer to only the clinical operations of the School of Medicine, which are reported through UNCFP, this annual report includes the assets, liabilities and net assets of UNCFP, which are included in the audited financial statements for the UNC-CH.

H. PATIENT ACCOUNTS RECEIVABLE, NET – Net patient

C. BASIS OF ACCOUNTING – The financial statements of the various entities have been prepared using the accrual basis of accounting for UNC Hospitals, Rex, Chatham and UNCPN, and the modified accrual basis of accounting for UNCFP. Under the accrual basis, revenues are recognized when earned; expenses are recorded when an obligation has been incurred. When preparing the financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Actual results could differ from the estimates. For UNCFP, their monthly financials are maintained on a cash basis; and then at year-end, adjustments are made to accrue all known material amounts for revenue and expense.

D. CURRENT AND NONCURRENT DESIGNATION – Assets are classified as current when they are expected to be collected within the next 12 months or consumed for a current expense in the case of cash or prepaid items. Liabilities are classified as current if they are due and payable within the next 12 months.

E. OPERATING AND NON-OPERATING ACTIVITIES – Revenues and expenses are classified as operating or non-operating in the accompanying Statements of Revenues, Expenses and Changes in Net Position. Operating revenues and expenses generally result from providing services, and producing and delivering goods in connection with the principal ongoing operations. Operating revenues include activities that have characteristics of exchange transactions, such as charges for inpatient and outpatient services as well as for external customers who purchase medical services or supplies. Operating expenses are all expense transactions incurred other than those related to capital and noncapital financing or investing activities. Non-operating revenues include activities that have the characteristics of nonexchange transactions. Revenues from non-exchange transactions “and donations” that represent subsidies or gifts, as well as investment income “and gain (loss) on disposal of capital assets,” are considered non-operating since these are investing, capital or noncapital financing activities.

36

F. CASH AND CASH EQUIVALENTS – This classification includes all

UNC HEALTH CARE

accounts receivable consist of unbilled (in-house patients, inpatients discharged but not final billed and outpatients not final billed) and billed amounts. Payment of these charges comes primarily from managed care payors, Medicare, Medicaid and, to a lesser extent, the patient. The amounts recorded in the financial statements are net of indigent care, contractual allowances and allowances for bad debt to determine the net realizable value of the accounts receivable balance. Reserves for these deductions are recorded based on the historical collection percentage realized for each payor and projections for future collection rates. Flexible payment arrangements with selected payors have been established to optimize collection of past-due accounts, and any amounts payable beyond one year are classified as noncurrent assets.

I. ESTIMATED THIRD-PARTY SETTLEMENTS – Estimated thirdparty amounts represent settlements with Medicare, TRICARE and Medicaid programs that may result in a receivable or a payable. Reimbursement for costbased items is paid at a tentative interim rate with final settlement determined after submission of annual cost reports and audits thereof by fiscal intermediaries. Final settlements under the Medicare and Medicaid programs are based on regulations established by the respective programs and as interpreted by fiscal intermediaries. The classification of patients under the Medicare and Medicaid programs as well as the appropriateness of their admission is subject to review. Several years of cost reports are currently under review. Beginning in 2012, UNC Health Care’s physician and hospital entities receive supplemental reimbursement for Medicaid via the Upper Payment Limit methodology.

J. INVENTORIES – Inventories consist of medical and surgical supplies, pharmaceuticals, prosthetics and other supplies that are used to provide patient care by service departments. Inventories are stated at the lower of cost or market on the FIFO (first-in, first-out) basis.

K. OTHER ASSETS AND RECEIVABLES – Other assets and receivables relate to items such as sales tax refunds due from the North Carolina Department of Revenue, amounts due from State agencies, and billings to outside companies for ancillary testing.


L. ASSETS WHOSE USE IS LIMITED OR RESTRICTED –

S. NET PATIENT SERVICE REVENUE – Patient service revenue is

Current assets whose use is limited or restricted include the debt service funds established with the trustee in accordance with the bond indenture agreements and donor restrictions. The debt service funds will be used to pay bond interest and principal as it becomes due.

recorded at established rates when services are provided with contractual adjustments, estimated bad debt expenses and services qualifying as charity care deducted to arrive at net patient service revenue. Contractual adjustments arise under reimbursement agreements with Medicare, Medicaid, certain insurance carriers, health maintenance organizations and preferred provider organizations, which provide for payments that are generally less than established billing rates. The difference between established rates and the estimated amount collectable is recognized as revenue deductions on an accrual basis.

Non-current assets whose use is limited or restricted include the bond proceeds for construction projects, the funds required by the bond indenture agreements, funds in the maintenance reserve fund that will be used to acquire or construct future property, plant or equipment and the money on deposit with the Liability Insurance Trust Fund.

M. PROPERTY, PLANT AND EQUIPMENT – Property, plant and equipment are stated at cost at date of acquisition or fair value at date of donation in the case of gifts. The value of assets constructed includes all material direct and indirect construction costs. Interest costs incurred during the period of construction are capitalized. Assets under capital lease are stated at the present value of the minimum lease payments at the inception of the lease. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to 20 years for equipment, 10 to 40 years for buildings and fixed equipment, and five to 25 years for general infrastructure and building improvements. Assets under capital leases and leasehold improvements are depreciated over the related lease term, generally periods ranging from five to seven years.

N. OTHER NON-CURRENT ASSETS – Other noncurrent assets include amounts for long-term payment arrangements for patient accounts receivable, bond issuance costs-net of amortization and investments in affiliates.

O. NOTES AND BONDS PAYABLE – Notes and bonds payable represent debt issued for the construction of buildings and the acquisition of equipment. The current amount is the portion of bonds due within one year, and the balance is reflected as noncurrent. The bonds carry interest rates ranging from 0.12 percent to 10.1 percent. The various bond series have fixed, variable or synthetic rates with final maturity in fiscal year 2034. Bonds payable are reported net of unamortized discount, premium and deferred loss on refundings. Amortization of these amounts is done using either the effective interest method or the straight-line method. The notes payable carry various interest rates ranging from 0.0 percent to 11.02 percent with a final maturity in fiscal year 2029.

P. OTHER CURRENT LIABILITIES – Other current liabilities represent

Charity care represents health care services that were provided free of charge or at rates that are less than the established rates to individuals who meet the criteria of UNC Health Care’s charity care and uninsured policy. For UNC Hospitals and UNCFP, uninsured patients receive a 35 percent discount for medically necessary treatment. Charity care provided is not considered to be revenue, since no effort is made to collect accounts that fall under this policy. Medicare reimburses for inpatient acute care services under the provisions of the Prospective Payment System (PPS). Under PPS, payment is made at predetermined rates for treating various diagnoses and performing procedures that have been grouped into defined diagnostic-related groups (DRGs) applicable to each patient discharge rather than on the basis of the Hospitals’ allowable charges. Psychiatric and Rehabilitation inpatient services are reimbursed under separate programs. A prospective payment system for outpatient services was implemented Aug. 1, 2000, and is based on ambulatory payment classifications. It applies to most hospital outpatient services other than ambulance, rehabilitation services, clinical diagnostic laboratory services, dialysis for end-stage renal disease, non-implantable durable medical equipment, prosthetic devices and orthotics. Medicaid reimburses inpatient services on an interim basis under PPS. Medicaid uses the Medicare DRG system with some modifications. Medicaid reimburses outpatient services on an interim basis at an agreed upon percent of charges, but is settled based on documented cost for all services except hearing aids, durable medical equipment (DME), outpatient pharmacy and home health. Hospital payments for Medicare and Medicaid services are made based on a tentative reimbursement rate with final settlement determined after submission of the appropriate cost reports by the entities within UNC Health Care. Medicaid reimburses physician services at a rate of ninety-five percent (95 percent) of allowable Medicare rates. UNCFP is also reimbursed on a cost-basis, receiving the federally reimbursed portion of costs of providing care to Medicaid patients not covered by fee-for-service reimbursement.

funds held for others and amounts due to patients or third parties for credit balances.

T. MEDICAL AND SURGICAL SUPPLIES – Medical and surgical

Q. COMPENSATED ABSENCES – Compensated absences represent the

supplies represent the items used to provide patient care. This includes instruments, special medical devices and pharmaceuticals.

liability for employees with accumulated leave balances earned through various leave programs. These amounts would be payable if an employee terminated employment. Employees earn leave at varying rates depending upon their years of service and the leave plan in which they participate.

R. NET ASSETS – Net assets represent the difference between assets and liabilities. Due to the complexities of consolidating these entities, only a combined number is shown for net assets. Normally, under general accepted accounting principles, the net asset category would be further categorized as the amounts (1) Invested in Capital Assets, Net of Related Debt, (2) Restricted Net Assets – Expendable and (3) Unrestricted Net Assets.

U. MEDICAL MALPRACTICE COSTS – Medical malpractice costs represent the actuarially determined contributions required for self-insured funding or commercial premiums for third-party coverage. The coverage is intended to include both reported claims and claims that have been incurred but not yet reported.

V. MEDICAL SCHOOL TRUST FUND – Medical School Trust Fund (MSTF) expenses represent an assessment of 4.6 percent of net patient service revenue. The MSTF funds are at the Dean’s discretion for the support of projects such as program development and recruitment incentives for new department chairs.

W. DONATED SERVICES – No amounts have been included for donated services since no objective basis is available to measure the value of such services. However, a substantial number of volunteers donated significant amounts of their time to the operations of UNC Health Care.

2014 ANNUAL REPORT

37


X. CONCENTRATIONS OF CREDIT RISK – UNC Health Care provides services to a relatively compact area surrounding the Research Triangle Park, without collateral or other proof of ability to pay. Concentration of credit risk with respect to patient accounts receivable are limited due to large numbers of patients served and formalized agreements with third-party payors. Significant accounts receivable are dependent upon the performance of certain governmental programs, primarily Medicare and North Carolina Medicaid for their collectability. Management does not believe there are significant credit risks associated with these governmental programs.

NOTE 2 // ESTIMATED THIRD-PARTY SETLEMENTS For Medicare and Medicaid, reported amounts reflect the net difference between the filed cost report settlements and amounts reserved for possible future audit findings. TRICARE/CHAMPUS is a federal insurance program for eligible active duty and retired military personnel and their dependents. TRICARE/CHAMPUS makes payments on an interim basis. Upon completion of the Medicare Cost Report, TRICARE will reimburse certain portions of direct medical and paramedical education and capital costs from the Medicare Cost Report.

NOTE 3 // CAPITAL ASSETS A summary of capital assets as of June 30 was:

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UNC HEALTH CARE

FY2014

FY2013

Land and Improvements

122,960,186

122,966,187

Buildings and Improvements

1,238,501,590

1,137,427,633

Equipment

1,097,797,211

1,048,239,858

Computer Software

77,694,377

47,476,962

Goodwill

7,704,529

7,704,529

Construction in Progress

182,317,090

163,486,500

Gross PP&E

2,726,974,983

2,527,301,669

Accumulated Depreciation

(1,382,243,511)

(1,299,799,701)

Net PP&E

$1,344,731,472

$1,227,501,968


NOTE 4 // LONG-TERM DEBT A summary of outstanding bond debt and related issuance costs as of June 30 was:

Chatham Series 2007 Bonds Rex Series 1998 Bonds

FY2014

FY2013

26,525,000

27,265,000

0

0

110,365,000

115,200,000

UNCFP Series Bonds

0

0

UNCH Series 1999 Bonds

0

0

UNCH Series 2001 Bonds

93,600,000

95,200,000

UNCH Series 2003 Bonds

92,295,000

92,905,000

UNCH Series 2005 Bonds

4,075,000

7,960,000

UNCH Series 2009 Bonds

32,200,000

34,800,000

UNCH Series 2010 Bonds

43,290,000

45,220,000

0

39,460,000

402,350,000

458,010,000

Rex Series 2010A Bonds

High Point Regional Series 1997 & 1999 Bonds FACE VALUE OF BONDS OUTSTANDING

Deferred Costs - Discount on Issuance Deferred Costs - Loss on Refunding Deferred Costs - Premium on Issuance Arbitrage Rebate Payable

0

0

(10,693,381)

(12,996,644)

4,133,479

4,744,274

325,026

225,018

17,573,196

18,480,241

413,688,320

468,462,889

Current Portion of Bonds

46,270,000

51,168,076

Current Portion of Notes

22,408,454

7,459,348

6,391,526

-

75,069,980

58,627,424

Noncurrent Portion of Bonds

367,418,320

417,294,813

Noncurrent Portion of Notes

62,029,063

47,386,248

5,065,180

15,473,132

434,512,563

480,154,193

Hedging Liability NET VALUE OUTSTANDING

Other Current Debt TOTAL CURRENT BONDS AND NOTES

Other Noncurrent Debt TOTAL NONCURRENT BONDS AND NOTES

Annual requirements to pay principal and interest on the bonds outstanding at June 30, 2013, are:

As currently constituted, UNC Health Care has no authority to issue debt. Only the individual entities within UNC Health Care have assets and revenue that can be pledged as collateral for the debt.

Annual requirements to pay principal and interest on the notes outstanding at June 30, 2013, are:

FISCAL YEAR

PRINCIPAL

INTEREST

TOTAL

FISCAL YEAR

PRINCIPAL

INTEREST

TOTAL

2015

16,765,000

13,998,790

30,763,790

2015

22,408,454

1,551,106

23,959,560

2016

17,740,000

13,370,897

31,110,897

2016

9,206,264

1,036,155

10,242,419

2017

18,375,000

12,666,168

31,041,168

2017

7,121,452

892,283

8,013,735

2018

19,180,000

12,015,965

31,195,965

2018

6,806,580

824,836

7,631,416

2019

19,880,000

11,262,564

31,142,564

2019

5,284,805

605,131

5,889,936

2020-2024

112,095,000

42,987,546

155,082,546

2020-2024

33,242,816

878,344

34,121,160

2025-2029

130,470,000

21,079,294

151,549,294

2025-2029

367,147

8,118

375,265

2030-2034

67,845,000

3,312,691

71,157,691

2030-2034

0

0

0

TOTAL

$402,350,000

$130,693,915

$533,043,915

TOTAL

$84,437,518

$5,795,973

$90,233,491

2014 ANNUAL REPORT

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NOTE 5 // PENSION PLANS

NOTE 7 // RISK MANAGEMENT

UNC Health Care has a variety of retirement plans available to its permanent full-time employees. The majority of employees of UNC Hospitals and UNCFP are members of the Teachers’ and State Employees’ Retirement System (TSERS) as a condition of employment. TSERS is a cost-sharing multiple-employer defined benefit pension plan established by the State to provide pension benefits for employees of the State, its component units and local boards of education. The plan is administered by the North Carolina State Treasurer. Graduate medical residents, temporary employees and permanent part-time employees with appointments of less than 30 hours per week are not covered by the plan.

UNC Health Care is exposed to various risks of loss related to torts; theft of, damage to and the destruction of assets; errors and omissions; employee injuries and illnesses; natural disasters; medical malpractice; and various employee plans for health, dental and accident. These exposures to loss are handled by a combination of methods, including participation in state-administered insurance programs, purchase of commercial insurance and self-retention of certain risks. There have been no significant reductions in insurance coverage from the previous year.

The Optional Retirement Program (the Program) is a defined contribution retirement plan that provides retirement benefits with options for payments to beneficiaries in the event of the participant’s death. Administrators and eligible faculty of the University may join the Program instead of the Teachers’ and State Employees’ Retirement System. The Board of Governors of The University of North Carolina is responsible for the administration of the Program. Participants in the Program are immediately vested in the value of employee contributions. The value of employer contributions is vested after five years of participation in the Program. Participants become eligible to receive distributions when they terminate employment or retire. Rex sponsors a single-employer defined benefit retirement plan available to eligible employees. The benefit formula is based on the highest five consecutive years of an employee’s compensation during the 10 plan years preceding retirement. There are no employee contributions to the plan. Funding amounts for all of the plans are based upon actuarial calculations. In addition to the employer plans, UNC Health Care employees may elect to participate in any number of deferred compensation and Supplemental Retirement Income Plans. These include 401(k) plans, 403(b) plans and 457 plans. All costs of administering and funding the plans are the responsibility of the participants. Rex employees may contribute to a tax-deferred annuity plan through which Rex matches one-half of each participant’s voluntary contributions on a graduated scale based on length of service, not to exceed 5 percent of the participant’s annual salary.

NOTE 6 // OTHER EMPLOYMENT BENEFITS UNC Hospitals and UNCFP participate in state-administered programs that provide health insurance and life insurance to current and eligible former employees. Funding for the health care benefit is financed on a pay-as-you-go basis based upon actuarial reports. UNC Hospitals and UNCFP assume no liability for retiree health care benefits provided by the programs other than their required contributions. UNC Hospitals and UNCFP participate in the Disability Income Plan of North Carolina (DIPNC). DIPNC provides short-term and long-term disability benefits to eligible members of the Teachers’ and State Employees’ Retirement System. UNC Hospitals and UNCFP assume no liability for long-term disability benefits under the Plan other than their contribution. Rex offers a full menu of employment benefits to its employees through various thirdparty carriers. These include medical insurance, dental coverage, short-term and longterm disability benefits, and life insurance coverage. More information about these plans can be found in the individual audit reports for the various entities.

Liability Insurance Trust Fund – NC Hospitals and UNCFP participate in the Liability Insurance Trust Fund (the Fund), a claims-servicing public entity risk pool for professional liability protection. The Fund acts as a servicer of professional liability claims, managing separate accounts for each participant from which the losses of that participant are paid. Although participant assessments are determined on an actuarial basis, ultimate liability for claims remains with the participants and, accordingly, the insurance risks are not transferred to the Fund. Additional disclosures relative to the funding status and obligations of the Fund are set forth in the audited financial statements of the Liability Insurance Trust Fund for the Years Ended June 30, 2014, and June 30, 2013. Copies of this report may be obtained from The University of North Carolina Liability Insurance Trust Fund, 211 Friday Center Drive, Hedrick Building - Room 2029, Chapel Hill, N.C., 27517.

NOTE 8 // ESCROW FOR CERTIFIED PUBLIC EXPENDITURES (CPEs) With the help of the North Carolina Hospital Association, UNC Health Care has entered into an agreement with other public hospitals in North Carolina to receive the benefit of additional Certified Public Expenditures (CPEs). By making additional CPEs available, the public hospitals’ risk possible Disproportionate Share of Hospital (DSH) overpayments that would require repayment to state or federal agencies. In order to mitigate the public hospitals’ risk, UNC Health Care established a reserve fund to be held in escrow. This fund will reimburse participating public hospitals for any repayments that should result from this program. The UNC Health Care Enterprise Fund transferred $14,844,132 to the Escrow Agent, First-Citizens Bank & Trust Company.

NOTE 9 // RELATED PARTY TRANSACTIONS

The Medical Foundation of North Carolina, Inc. – UNC Hospitals and UNCFP are participants in The Medical Foundation of North Carolina, Inc., a nonprofit foundation for The University of North Carolina at Chapel Hill and UNC Hospitals, which solicits gifts and grants for both entities. The Board of Directors of the Medical Foundation administers the funds of the Foundation. Transactions are recorded only by the Foundation. If the Foundation were to purchase any equipment for UNC Hospitals, then the amount would be recorded at the time of receipt on UNC Hospitals’ financial statements.

UNC Health Care System Enterprise Fund – The Board of Directors of UNC Health Care authorized and approved the creation of the UNC Health Care System Enterprise Fund (the System Fund) to support UNC Health Care’s mission and vision to be the nation’s leading public academic health care system. Pursuant to a memorandum of understanding effective July 1, 2005, UNC Hospitals, UNCFP, Rex and the UNC-CH School of Medicine agreed to finance the Enterprise Fund. The System Fund enables fund transfers among entities of UNC Health Care in support of the Board’s vision to be the nation’s leading public academic health care system. The System Fund assesses, holds and allocates funds across the entities of UNC Health Care. Initially formed as the Enterprise Fund to facilitate investments in support of the clinical, academic and research missions of UNC Health Care and the UNC School

40

UNC HEALTH CARE


of Medicine, the Enterprise Fund today exists as a sub-account within the System Fund. Since its formation, the System Fund has been used to enable additional types of transfers between entities of UNC Health Care. As such, the Enterprise Fund, Outreach Fund, Patient Safety Fund, Recruitment Fund and Shared Administrative Services Fund each function as sub-accounts of the System Fund.

Henderson County Hospital Corporation d/b/a Margaret R. Pardee Memorial Hospital (HCHC) – Henderson County is the sole member of HCHC, a North Carolina not-for-profit corporation, which is in turn the sole member of Henderson County Urgent Care Centers, Inc., and Western Carolina Medical Associates, Inc. HCHC was created by Henderson County to provide for the operation of a community hospital in Henderson County, North Carolina, that is dedicated to serving the health care needs of Henderson County citizenry. On June 22, 2011, HCHC signed a management service agreement engaging UNC Health Care to conduct and effectively manage the day-to-day operations of Margaret R. Pardee Memorial Hospital and HCHC’s affiliated operations over a term of ten years. On Sept. 4, 2013, this agreement was extended to a term of twenty-five years.

Johnston Health Services Corporation – Effective Feb. 1, 2014, Johnston Memorial Hospital Authority (JMHA) and UNC Health Care entered into a Master Agreement to form Johnston Health Services Corporation (JHSC), a joint venture created to achieve the long-term vision of providing high-quality health care to the residents of Johnston County, North Carolina. Oversight and governance of the joint venture is controlled by a Board of Directors consisting of appointees from both JMHA and UNC Health Care. UNC Health Care manages the day-to-day operations of JHSC under the terms of a management services agreement entered into and effective Nov. 1, 2013. The System has a 35.25 percent membership interest in JHSC.

Nash Health Care Systems –

Nash Health Care Systems is a non-profit hospital authority composed of Nash General Hospital, Nash Day Hospital, the Bryant T. Aldridge Rehabilitation Center, Community Hospital and Coastal Plain Hospital. It serves Nash, Edgecombe, Halifax, Wilson and Johnston counties but draws patients from beyond these areas as well. Nash Health Care Systems signed a management service agreement engaging the System to conduct and manage its operations effective April 1, 2014.

The John Rex Endowment –

The John Rex Endowment (Endowment) operates as a 501(c)(3) corporation and is independent of the Board of Directors of UNC Health Care. Its purpose is to advance the health and well-being of the residents of the greater Triangle area, with specific funds set aside for indigent care and to make grants to support health services, education, prevention and research. In discharging its purposes, priority consideration will be given to any funding requests from Rex, UNC Health Care and their affiliates. The funding source for the Endowment is the $100 million transfer that came from UNC Health Care in April 2000.

NOTE 10 // COMMUNITY BENEFITS In addition to providing care without charge, or at amounts less than established rates to certain patients identified as qualifying for charity care, UNC Health Care also recognizes its responsibility to provide health care services and programs for the benefit of the community at no cost or at reduced rates. UNC Health Care sponsors many community health initiatives, including kidney cancer screenings, cardiovascular and pulmonary awareness, and diabetes education programs that ultimately result in the overall improved health of our community. UNC Health Care also provides contributions, cash and in-kind, to various charitable and community organizations. The costs of these programs are included in operating expenses in the accompanying pro forma statements of revenues and expenses. UNC Health Care and its entities participate in the North Carolina Hospital Association’s (NCHA) Advocacy Needs Data Initiative (ANDI) to quantify their community benefit. As was the case in prior years, the data for calculating the FY13 community benefit remains fluid and will be included in NCHA’s ANDI report in spring 2014.


101 Manning Drive | Chapel Hill, NC 27514 1,000 copies of this document were printed at a cost of $7,846 or $7.85 per copy.

UNC Health Care Annual Report 2014  
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