For this assignment, create a PowerPoint presentation that addresses the following:

Imagine you are the director of Medical Imaging department in Northwest Memorial hospital and are tasked with presenting to the C-Suite about your department’s operating budget. You need to describe the department priorities and capital investments priorities. Be sure to include the following in your presentation:

1. Explain how you would prioritize the capital investments.

2. What was your methodology in producing the budget and why?

3. What was your role as the director in producing the budget?

The PowerPoint presentation should consist of 12-15 slides, not including the title slide and reference slide. Images may be included in the presentation but be sure to keep all image file sizes low for this presentation. Save images as small files.

Refer to the resource, “Creating Effective PowerPoint Presentations,” located in the Student Success Center, for additional guidance on completing this assignment in the appropriate style.

While APA style is not required for the body of this assignment, solid academic writing is expected, and in-text citations and references should be presented using APA documentation guidelines, which can be found in the APA Style Guide, located in the Student Success Center.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

You are required to submit this assignment to LopesWrite. Refer to the

LopesWrite Technical Support articles

for assistance.

Benchmark Information

This assignment assesses the following programmatic competency:

MBA Health Systems Management

MPA Health Care Management

MS Health Administration

MS Health Care Informatics

MBA: 5.1: Develop financial plans to support the viability of health care organizations.

Ernst & Young LLP

C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Northwestern Memorial HealthCare and Subsidiaries

Years Ended August 31, 2018 and

2017

With Report of Independent Auditors

1809-2875972 1

Northwestern Memorial HealthCare and Subsidiaries

Consolidated Financial Statements

Years Ended August 31, 2018 and 2017

Contents

Report of Independent Auditors………………………………………………………………………………………….1

Consolidated Financial Statements

Consolidated Balance Sheets ……………………………………………………………………………………………..3
Consolidated Statements of Operations and Changes in Net Assets ………………………………………..5
Consolidated Statements of Cash Flows ………………………………………………………………………………7
Notes to Consolidated Financial Statements …………………………………………………………………………8

A member firm of Ernst & Young Global Limited

Ernst & Young LLP
155 North Wacker Drive
Chicago, IL 60606-1787

Tel: +1 312 879 2000
Fax: +1 312 879 4000

ey.com

1809-2875972 1

Report of Independent Auditors

The Board of Directors
Northwestern Memorial HealthCare

We have audited the accompanying consolidated financial statements of Northwestern Memorial
HealthCare and Subsidiaries which comprise the consolidated balance sheets as of August 31,
2018 and 2017, and the related consolidated statements of operations and changes in net assets and
cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

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

Auditor’s Responsibility

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

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

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.

A member firm of Ernst & Young Global Limited

1809-2875972 2

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Northwestern Memorial HealthCare and Subsidiaries at
August 31, 2018 and 2017, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with U.S. generally accepted accounting principles.


November 30,

2018

3 1809-2875972

Northwestern Memorial HealthCare and Subsidiaries

Consolidated Balance Sheets
(In Thousands)

August 31
2018 2017
Assets
Current assets:

Cash and cash equivalents $ 407,249 $ 258,463
Short-term investments 51,998 30,685
Current portion of investments, including assets limited as

to use 148,848 136,352
Patient accounts receivable, net of estimated allowances for

uncollectible accounts of $252,353 at August 31, 2018 and
$223,411 at August 31, 2017 769,567 716,277

Current portion of pledges and grants receivable, net 16,107 24,561
Current portion of insurance recoverable 12,642 14,186
Inventories 71,565 64,443
Other current assets 131,284 154,752

Total current assets 1,609,260 1,399,719

Investments, including assets limited as to use, less current portion 5,980,955 5,490,526
Property and equipment, at cost:

Land 353,975 347,036
Buildings 3,970,145 3,465,273
Equipment and furniture 1,353,766 1,166,884
Construction in progress 126,535 539,340

5,804,421 5,518,533
Less accumulated depreciation 2,221,667 2,059,946
3,582,754 3,458,587

Prepaid pension cost 180,063 118,562
Pledges and grants receivable, less current portion 44,856 35,770
Insurance recoverable, less current portion 89,224 69,706
Other assets, net 175,739 153,452
Total assets $ 11,662,851 $ 10,726,322

1809-2875972 4

August 31
2018 2017
Liabilities and net assets
Current liabilities:

Accounts payable $ 239,682 $ 230,588
Accrued salaries and benefits 285,043 314,163
Grants and academic support payable, current portion 33,932 38,753
Accrued expenses and other current liabilities 130,799 115,254
Due to third-party payors 545,759 434,965
Current accrued liabilities under self-insurance programs 105,659 94,256
Current maturities of long-term debt 24,571 30,239
Short-term debt 27,466 87,299

Total current liabilities 1,392,911 1,345,517

Long-term debt, less current maturities 1,394,396 1,324,776
Accrued liabilities under self-insurance programs, less

current portion 541,589 495,709
Grants and academic support payable, less current portion 76,954 79,469
Interest rate swaps 73,350 112,586
Other liabilities 150,502 143,428
Total liabilities 3,629,702 3,501,485

Net assets:

Unrestricted:
Undesignated 7,364,425 6,602,984
Board-designated 242,870 229,455
Non-controlling interest in consolidated venture 626 (3,599)

Total unrestricted 7,607,921 6,828,840
Temporarily restricted 242,596 220,917
Permanently restricted 182,632 175,080
Total net assets 8,033,149 7,224,837
Total liabilities and net assets $ 11,662,851 $ 10,726,322

See accompanying notes to the consolidated financial statements.

1809-2875972 5

Northwestern Memorial HealthCare and Subsidiaries

Consolidated Statements of Operations and Changes in

Net Assets

(In Thousands)

Year Ended August 31
2018 2017
Revenue
Net patient service revenue $ 5,053,132 $ 4,749,433
Provision for uncollectible accounts 175,516 202,047
Net patient service revenue after provision for uncollectible

accounts 4,877,616 4,547,386
Rental and other revenue 313,757 256,362
Net assets released from donor restrictions and federal and state 35,290 27,248
Total revenue 5,226,663 4,830,996

Expenses
Salaries 2,126,172 1,969,531
Employee benefits 317,874 297,842
Supplies 1,000,194 877,030
Purchased services 552,525 538,642
Depreciation and amortization 310,948 287,149
Insurance 112,834 104,578
Rent and utilities 100,814 91,307
Repairs and maintenance 101,960 88,331
Interest 41,027 44,106
Illinois Hospital Assessment 110,339 103,362
Other 180,926 127,949
Total expenses 4,955,613 4,529,827
Operating income 271,050 301,169

Nonoperating gains (losses)
Investment return 490,971 655,269
Change in fair value of interest rate swaps 31,353 37,521
Loss on extinguishment of long term debt (23,990) (216)
Grants and academic support provided (34,307) (20,172)
Other 9,846 9,291
Total nonoperating gains, net 473,873 681,693
Excess of revenue over expenses 744,923 982,862
Net gain (loss) attributable to non-controlling interest

in subsidiaries 775 (703)
Excess of revenue over expenses attributable to NMHC

and Subsidiaries $ 744,148 $ 983,565

1809-2875972 6

Northwestern Memorial HealthCare and Subsidiaries

Consolidated Statements of Operations and Changes in Net Assets (continued)
(In Thousands)

Year Ended August 31
2018 2017

Total Controlling
Non-

controlling Total Controlling
Non-

controlling
Unrestricted net assets
Excess (deficiency) of revenue over expenses $ 744,923 $ 744,148 $ 775 $ 982,862 $ 983,565 $ (703)
Net assets released from restrictions used for

property and equipment 7,672 7,672 – 6,279 6,279 –
Postretirement-benefit-related changes other than

net periodic 33,863 33,863 – 64,884 64,884 –
Distribution to non-controlling interest (1,243) – (1,243) (785) – (785)
Other (6,134) (10,827) 4,693 (313) (446) 133
Increase (decrease) in unrestricted net assets 779,081 774,856 4,225 1,052,927 1,054,282 (1,355)

Temporarily restricted net assets
Contributions 49,373 49,373 – 44,892 44,892 –
Investment return 15,389 15,389 – 14,051 14,051 –
Net assets released from restrictions used for:

Operating expenses, charity care, research
and education (32,208) (32,208) – (34,859) (34,859) –

Property and equipment additions (7,672) (7,672) – (6,279) (6,279) –
Change in fair value of split-interest agreements 411 411 – 147 147 –
Other (3,614) (3,614) – (8,804) (8,804) –
Increase in temporarily restricted net assets 21,679 21,679 – 9,148 9,148 –

Permanently restricted net assets
Contributions 6,403 6,403 – 5,609 5,609 –
Change in fair value of split-interest agreements 525 525 – 775 775 –
Other 624 624 – 6,785 6,785 –
Increase in permanently restricted net assets 7,552 7,552 – 13,169 13,169 –

Change in net assets 808,312 804,087 4,225 1,075,244 1,076,599 (1,355)
Net assets, beginning of period 7,224,837 7,228,436 (3,599) 6,149,593 6,151,837 (2,244)
Net assets, end of period $ 8,033,149 $ 8,032,523 $ 626 $ 7,224,837 $ 7,228,436 $ (3,599)

See accompanying notes to consolidated financial statements.

1809-2875972 7

Northwestern Memorial HealthCare and Subsidiaries

Consolidated Statements of Cash Flows
(In Thousands)

Year Ended August 31
2018 2017
Operating activities
Change in net assets $ 808,312 $ 1,075,244
Adjustments to reconcile change in net assets to net cash provided by

operating activities:
Postretirement benefit-related changes other than net periodic

pension cost (33,863) (64,884)
Change in fair value of interest rate swaps (31,353) (37,521)
Loss on extinguishment of long-term debt 23,990 216
Net unrestricted realized investment return and net change in

unrestricted and restricted unrealized investment gains/losses (492,730) (657,573)
Restricted contributions, change in fair value of split interest

agreements, and realized investment return (70,342) (63,170)
Depreciation and amortization 310,948 287,149
Provision for uncollectible accounts 175,516 202,047
Changes in operating assets and liabilities:

Patient accounts receivable (228,806) (318,552)
Due to third-party payors 115,152 29,161
Grants and academic support payable (7,336) (31,468)
Other operating assets and liabilities (58,669) (38,764)

Net cash provided by operating activities 510,819 381,885

Investing activities
Purchase of investments (2,028,729) (2,501,222)
Sale of investments 1,791,936 2,456,759
Net unrestricted realized investment return 205,285 194,902
Capital expenditures, net (432,084) (512,804)
Net cash used in investing activities (463,592) (362,365)

Financing activities
Proceeds from line of credit – 45,000
Proceeds from commercial paper – 87,299
Proceeds from issuance of long-term debt 790,240 –
Payments of commercial paper (59,833) –
Payments of line of credit – (104,750)
Payments of long-term debt (699,190) (69,939)
Restricted contributions, change in fair value of split interest agreements,

and realized investment return 70,342 63,170
Net cash provided by financing activities 101,559 20,780

Net increase in cash and cash equivalents 148,786 40,300
Cash and cash equivalents, beginning of period 258,463 218,163
Cash and cash equivalents, end of the period $ 407,249 $ 258,463

See accompanying notes to consolidated financial statements.

1809-2875972 8

Northwestern Memorial HealthCare and Subsidiaries

Notes to Consolidated Financial Statements
(In Thousands)

August 31, 2018

1. Organization and Summary of Significant Accounting Policies

Northwestern Memorial HealthCare (NMHC) is the parent of an integrated nonprofit health care
organization, anchored by Northwestern Memorial Hospital (NMH) and Northwestern Medical
Group (NMG), that provides health care services to communities in northern Illinois. NMHC
partners with Northwestern University’s Feinberg School of Medicine (FSM) to form an academic
medical center, branded as Northwestern Medicine, that is shaping the future of medicine through
outstanding patient care, research and training of resident physicians.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of NMHC and its
subsidiaries (collectively referred to herein as Northwestern Memorial). All significant
intercompany transactions and balances have been eliminated in consolidation.

Charity Care and Community Benefit

Northwestern Memorial provides care to patients regardless of their ability to pay. Northwestern
Memorial developed a Free and Discounted Care Policy (the Policy) for both the uninsured and
the underinsured. Under the Policy, patients are offered discounts of up to 100% of charges on a
sliding scale, which is based on income as a percentage of the federal poverty level guidelines (up
to 600%). The Policy also contains provisions that are responsive to those patients subject to
catastrophic health care expenses and uninsured patients not covered by the provisions above.
Since Northwestern Memorial does not pursue collection of these amounts, they are not reported
as Net patient service revenue, and the cost of providing such care is recognized within operating
expenses.

Northwestern Memorial estimates the direct and indirect costs of providing charity care by
applying a cost to gross charges ratio to the gross uncompensated charges associated with
providing charity care to patients. The cost of providing charity care was $67,146 and $61,258 for
the years ended August 31, 2018 and 2017, respectively. Northwestern Memorial also received
certain funds of $392 and $342 for the years ended August 31, 2018 and 2017, respectively, to
offset or subsidize charity care services provided. These funds are primarily received from
investment return on free care endowment funds. In the Annual Non Profit Hospital Community
Benefits Plan Report filed with the Illinois Attorney General for the year ended August 31, 2017,
Northwestern Memorial reported total community benefit of $831,862 (unaudited), including
unreimbursed cost of charity care of $65,761 (unaudited), which is calculated using a different

Northwestern Memorial HealthCare and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 9

1. Organization and Summary of Significant Accounting Policies (continued)

methodology than that used for the consolidated financial statements. Management is currently
collecting the information needed to file the 2018 report; however, it does not expect a material
change from prior year.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid short-term investments with maturities of 90 days
or less from the date of purchase.

Patient Accounts Receivable

Patient accounts receivable are stated at net realizable value. Northwestern Memorial maintains
allowances for uncollectible accounts and for estimated losses resulting from a payor’s inability to
make payments on accounts. Northwestern Memorial estimates the allowance for uncollectible
accounts based on management’s assessment of historical and expected net collections,
considering historical and current business and economic conditions, trends in health care
coverage, and other collection indicators. Patient accounts receivable are charged to the provision
for uncollectible accounts when they are deemed uncollectible.

Assets Limited as to Use

Assets limited as to use consist primarily of investments designated for certain medical education
and health care programs. The particular Northwestern Memorial corporation that controls these
investments makes such designations and may, at its discretion, subsequently use them for other
purposes. In addition, assets limited as to use include investments held by trustees under debt
agreements and for self-insurance and collateral related to interest rate swaps.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 10

1. Organization and Summary of Significant Accounting Policies (continued)

Investments

Investments in equity securities with readily determinable fair values and all investments in debt
securities are reported at fair value based on quoted market prices. Unless in pension plan assets,
alternative investments are reported using the equity method. Alternative investments can include
common collective trusts, commingled funds, 103-12 entities and other limited partnership
interests in hedge funds, private equity, venture capital and real estate funds. Alternative
investments in the pension plan are reported at fair value based on net asset value (NAV) per share
or equivalent.

Derivative Instruments

Derivative instruments, specifically interest rate swaps, are recorded in the accompanying
consolidated balance sheets at fair value. The change in the fair value of derivative instruments is
recorded in Nonoperating gains (losses).

Inventories

Inventories, consisting primarily of pharmaceuticals and other medical supplies, are stated at the
lower of cost on the first-in, first-out method or fair value.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets. Generally, buildings and building service equipment have
a composite life of approximately 40 years and equipment and furniture have useful lives of 3-20
years. Interest incurred on borrowed funds during the period of construction of capital assets is
capitalized as a component of the cost of acquiring those assets.

Other Intangible Assets

Intangible assets are stated at fair value at time of purchase and are amortized using the straight
line method over the estimated life based on terms of the underlying agreement giving rise to the
intangible.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 11

1. Organization and Summary of Significant Accounting Policies (continued)

Asset Impairment

Northwestern Memorial considers whether indicators of impairment are present and performs the
necessary tests to determine if the carrying value of an asset is appropriate. Impairment write
downs are recognized in operating income at the time the impairment is identified. There were no
impairments of long-lived assets in 2018 or 2017.

Deferred Charges

Deferred finance charges and bond discounts or premiums are amortized or accreted using the
effective interest method or the bonds outstanding method, which approximates the effective
interest method, over the life of the related debt.

Net Assets

Resources are classified for reporting purposes as unrestricted, temporarily restricted and
permanently restricted, according to the absence or existence of donor-imposed restrictions. In
addition unrestricted net assets are further classified as general unrestricted or board-designated
unrestricted. Board-designated net assets are unrestricted net assets that have been set aside by the
Board for specific purposes. Temporarily restricted net assets are those assets, including
contributions and accumulated investment returns, whose use has been limited by donors for a
specific purpose or time period. Permanently restricted net assets are those for which donors
require the principal of the gifts to be maintained in perpetuity to provide a permanent source of
income.

Any changes in donor restrictions that change the net asset category of previously recorded
contributions are recorded as Other in the accompanying consolidated statements of operations
and changes in net assets in the period communicated by the donor.

Net Patient Service Revenue

Northwestern Memorial has agreements with third-party payors that provide for payments to
Northwestern Memorial at amounts different from its established rates. Payment arrangements
include prospectively determined rates per admission or visit, reimbursed costs, discounted
charges and per diem rates. Net patient service revenue is reported at the estimated net amount due

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 12

1. Organization and Summary of Significant Accounting Policies (continued)

from patients and third-party payors for services rendered, including estimated adjustments under
reimbursement agreements with third-party payors, certain of which are subject to audit by
administering agencies. These adjustments are accrued on an estimated basis and are adjusted, as
needed, in future periods.

Contributions

Unrestricted gifts, other than long-lived assets, are included within other in Nonoperating gains
(losses) in the accompanying consolidated statements of operations and changes in net assets.
Unrestricted gifts of long-lived assets, such as land, buildings or equipment, are recorded at fair
value as an increase in unrestricted net assets. Contributions are reported as either temporarily or
permanently restricted net assets if they are received with donor restrictions. When a donor
restriction expires, that is, when a stipulated time restriction ends or purpose restriction is
accomplished, Temporarily restricted net assets are reclassified as unrestricted net assets and
reported in the accompanying consolidated statements of operations and changes in net assets as
net assets released from restrictions.

Unconditional promises to give cash or other assets are reported as pledges receivable and
contributions within the appropriate net asset category. An allowance for uncollectible pledges
receivable is estimated based on historical experience and other collection indicators. Pledges
receivable with payment terms extending beyond one year are discounted using market rates of
return reflecting the terms and credit of the pledges at the time a pledge is made.

Northwestern Memorial is a beneficiary of several split-interest agreements, primarily perpetual
trusts held by others, and recognizes its interest in these perpetual trusts as temporarily or
permanently restricted net assets based on its percentage of the fair value of the trusts’ assets.

Nonoperating Gains (Losses)

Nonoperating gains (losses) consist primarily of investment returns (including realized and
unrealized gains and losses, changes in Northwestern Memorial’s equity interest in alternative
investments, interest and dividends), contributions of unrestricted net assets in excess of
consideration paid (where applicable), unrestricted contributions received, grants and academic
support provided to external organizations, net assets released from restrictions and used for grants
and academic support, changes in fair value of interest rate swaps and loss on extinguishment of
debt.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 13

1. Organization and Summary of Significant Accounting Policies (continued)

Excess of Revenue Over Expenses

The accompanying consolidated statements of operations and changes in net assets include the
Excess of revenue over expenses. Changes in unrestricted net assets, which are excluded from the
Excess of revenue over expenses, consist primarily of contributions of long-lived assets (including
assets acquired using contributions, which, by donor restriction, are to be used for the purposes of
acquiring such assets), transfers between net asset categories based on changes in donor
restrictions and Postretirement benefit-related changes other than net periodic pension cost.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09
converged and replaced existing revenue recognition guidance, including industry-specific
guidance, and requires an entity to recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. An entity should disclose sufficient information
to enable the financial statement users to understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued
ASU 2015-14, which defers the effective date to annual reporting periods beginning after
December 15, 2017, including interim reporting periods within that reporting period. This ASU
allows two alternative methods for application, either retrospectively to each reporting period
presented or a modified retrospective approach with a cumulative effect adjustment to net assets
at the date of initial application. Northwestern Memorial expects to use the modified retrospective
approach. Northwestern Memorial expects substantially all of its current provision for
uncollectible accounts to qualify as a price concession under the new guidance and, therefore, be
netted along with charity care and contractual discounts in Net patient service revenue.
Northwestern Memorial expects expanded disclosures to also be made. Although the adoption of
ASU 2014-09 will have an impact on the amounts presented in certain categories of the
consolidated statements of operations and changes in net assets, it is not expected to materially
impact Northwestern Memorial’s consolidated financial statements

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 14

1. Organization and Summary of Significant Accounting Policies (continued)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require lessees
to put most leases on their balance sheets but recognize expenses on their income statements in a
manner similar to existing accounting standards. The guidance also eliminates current real estate-
specific provisions for all entities. This new guidance is effective for the fiscal years and interim
periods within those fiscal years beginning after December 15, 2018, with early adoption
permitted. Entities are required to use a modified retrospective approach for leases that exist or are
entered into after the beginning of the earliest comparative period in the financial statements. Full
retrospective application is prohibited. Northwestern Memorial is currently evaluating the impact
this guidance will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation
of Financial Statements of Not-for-Profit Entities. ASU 2016-14 will change certain financial
statement requirements for not-for-profit (NFP) entities in the scope of Topic 958 in an effort to
make the information more meaningful to users and make reporting less complex. NFP entities
will no longer be required to distinguish between resources with temporary and permanent
restrictions on the face of the financial statements. Additionally, NFP entities will be required to
present expenses by their natural and functional classification and present investment returns net
of external and direct internal investment expenses. This new guidance is effective for fiscal years
beginning after December 15, 2017, and interim periods within fiscal years beginning after
December 15, 2018. This guidance is to be applied retrospectively and early adoption is permitted.
Northwestern Memorial is currently evaluating the impact this guidance will have on its
consolidated financial statements

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost, which changes the presentation of periodic benefit cost components. Under ASU 2017-07,
service costs will continue to be presented within operating expenses but amortization of prior
service credits and other components of net periodic benefit cost in Nonoperating gains (losses) in
the consolidated statements of operation and changes in net assets. Northwestern Memorial has
evaluated the effect of this guidance on the consolidated financial statements and has determined
that this guidance will reduce operating income but will have no effect on revenues in excess of
expenses. This guidance will not have an effect on the measurement of pension cost nor
presentation of prepaid pension expense or pension plan liabilities on the consolidated balance
sheets. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 15

1. Organization and Summary of Significant Accounting Policies (continued)

In June 2018, the FASB issued ASU 2018-08, Not-for-Profit Entities (Topic 958) – Clarifying the
Scope and Accounting Guidance for Contributions Received and Contributions Made. ASU
2018-08 provides a more robust framework to determine when a transaction should be accounted
for as a contribution or as an exchange transaction and provides additional guidance about how to
determine whether a contribution is conditional. This ASU is effective for annual periods
beginning after June 15, 2018, including interim periods therein, and will be applied on a modified
prospective basis. Northwestern Memorial is currently evaluating the impact this guidance will
have on its consolidated financial statements.

2. Net Patient Service Revenue

Northwestern Memorial recognizes net patient service revenue associated with services provided
to patients who have third-party payment coverage with Medicare, Medicaid, Blue Cross, other
managed care programs and other third-party payors on the basis of the contractual rates for the
services rendered at the time services are provided. Payment arrangements with those payors
include prospectively determined rates per admission or visit, reimbursed costs, discounted
charges and per diem rates. Reported costs and/or services provided under certain of the
arrangements are subject to retroactive audit and adjustment. Net patient service revenue increased
by $7,176 and $33,843 in 2018 and 2017, respectively, as a result of changes in estimates due to
settlements of prior fiscal years’ cost reports and the disposition of other payor audits and
settlements. Changes in Medicare and Medicaid programs and reduction in funding levels could
have an adverse effect on Northwestern Memorial.

Northwestern Memorial also provides care to self-pay patients. Under its Free and Discounted
Care Policy, Northwestern Memorial provides medically necessary care to patients in its
community with inadequate financial resources at discounts of up to 100% of charges using a
sliding scale that is based on patient household income as a percentage (up to 600%) of the federal
poverty level guidelines. The Policy also contains a catastrophic financial assistance provision that
limits a patient’s total financial responsibility to Northwestern Memorial. Since Northwestern
Memorial does not pursue collection of these amounts, they are not reported as net patient service
revenue. The Policy has not changed in fiscal year 2018 or 2017. Northwestern Memorial
implemented presumptive eligibility screening procedures for free care in fiscal year 2014.
Northwestern Memorial recognizes net patient service revenue on services provided to these
patients at the discounted rate at the time services are rendered.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 16

2. Net Patient Service Revenue (continued)

Net patient service revenue, net of contractual allowances and discounts, is reduced by the
provision for uncollectible accounts, and net patient accounts receivable are reduced by an
allowance for uncollectible accounts. These amounts are based primarily on management’s
assessment of historical and expected write-offs and net collections, along with the aging status
for each major payor source. Management regularly reviews data about these major payor sources
of revenue in evaluating the sufficiency of the estimated allowances for uncollectible accounts.
Based on historical experience, a portion of Northwestern Memorial’s self-pay patients who do
not qualify for charity care will be unable or unwilling to pay for the services provided. Thus, a
provision is recorded for uncollectible accounts in the period services are provided related to these
patients. After all reasonable collection efforts have been exhausted in accordance with
Northwestern Memorial’s policies, accounts receivable are written off and charged against the
estimated allowances for uncollectible accounts.

For receivables associated with self-pay patients, Northwestern Memorial records estimated
allowances for uncollectible accounts in the period of service on the basis of past experience. These
adjustments are accrued on an estimated basis and are adjusted as needed in future periods.

Net patient service revenue (including patient co pays and deductibles), net of contractual
allowances and discounts (but before the provision for uncollectible accounts) by primary payor
source was as follows for the years ended August 31:

2018 2017

Third-party payors $ 4,960,402 $ 4,643,685
Patients 92,730 105,748
$ 5,053,132 $ 4,749,433

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 17

2. Net Patient Service Revenue (continued)

Northwestern Memorial grants credit without collateral to its patients, most of whom are local
residents and are insured under third-party payor agreements. Patient accounts receivable, by
major primary payor source, including patient co-pays and deductibles before deducting estimated
allowances for uncollectible accounts, were as follows at August 31:

2018 2017

Medicare 18% 14%
Medicaid 11 11
Blue Cross 22 16
Other managed care 25 32
Other third-party payors 7 8
Patients 17 19
100% 100%

The estimated allowance for uncollectible accounts was $252,353 and $223,411, or 25.1% and
24.3% of the related patient accounts receivable, net of contractual adjustments as of August 31,
2018 and August 31, 2017, respectively. The significant variance was caused primarily due to the
aging of outstanding accounts receivable.

3. Illinois Hospital Assessment Program

In December 2008, the Illinois Hospital Assessment Program was approved by the Federal Centers
for Medicare and Medicaid Services (CMS) for the period from July 1, 2008 through June 30,
2013. In July 2012, this program was extended to December 31, 2014, as part of the Save Medicaid
Access and Resources Together (SMART) Act. In June 2014, this program was extended to
June 30, 2018 as part of the Omnibus Medicaid Bill Senate Bill 741. In October 2013, the
Enhanced Illinois Hospital Assessment Program as authorized under Illinois Public Act 97-688
was approved by CMS retroactive to June 10, 2012. Together, these two programs are referred to
herein as (HAP). Under HAP, the state receives additional federal Medicaid funds for the State’s
healthcare system, administered by the Illinois Department of Healthcare and Family Services.
HAP includes payments to NMHC hospitals from the state and assessments against NMHC
hospitals, which are paid to the state in the same year.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 18

3. Illinois Hospital Assessment Program (continued)

In June 2014, Omnibus Medicaid Bill Senate Bill 741 authorized a new supplemental program
(Access Program) to cover new Medicaid beneficiaries under the Affordable Care Act (ACA),
which was approved by CMS in January 2015. In May 2016, the State of Illinois passed HB 4678
(Expanded Access Program) which implemented a framework to increase ACA access funds to
Illinois hospitals. The new ACA access funds are attributable to the ACA adults enrolled in
managed care products. In September 2016, the Illinois Department of Family and Healthcare
Services submitted its certification of the new Medicaid managed care organization rates to CMS.
After agreements between managed care organizations and providers were executed, payments for
this new program and an adjustment to the assessments began in November 2016 and were
retroactive to January 1, 2016.

HAP and the Expanded Access Program ended on June 30, 2018. In June 2018, the Illinois General
Assembly approved SB 1773, which was signed by the Governor and is now Illinois Public Law
100-581; the law as amended redesigns both programs. CMS approved the new program on
June 20, 2018. Supplemental payments for the new HAP program began in July 2018 and are
reflected below. In addition to the supplemental payments, the new HAP program provides for
increased Illinois Medicaid and Illinois Medicaid Managed Care inpatient rates.

A summary of the amounts recognized for the HAP and Access programs is as follows:

2018 2017
Net patient service revenue:

HAP $ 123,455 $ 112,813
Access program 15,843 20,418
Expanded access program 20,393 42,557

159,691 175,788
Illinois hospital assessment 110,339 103,362
Net excess of HAP and ACA revenue over Illinois

assessment $ 49,352 $ 72,426

The Expanded Access Program Revenue and Illinois Hospital Assessment expense for the twelve
months ended August 31, 2017 include retroactive portions from January 1, 2016 through
August 31, 2016 of $16,728 and $2,004, respectively.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 19

4. Investments and Other Financial Instruments

The composition of investments, including assets limited as to use, and cash and cash equivalents
and short-term investments, at August 31 is as follows:

2018 2017
Measured at fair value:

Cash and short-term investments $ 502,382 $ 321,507
Mutual funds 262,719 228,599
Corporate bonds 305,081 312,980
U.S. government and agency issues 258,970 268,858
Equity securities 222,356 220,543
Other fixed income 23,926 13,393

1,575,434 1,365,880
Measured at net asset value as practical expedient:

Common collective trusts and commingled funds 765,371 685,948
Interest in 103-12 investment entities 297,217 291,304

1,062,588 977,252
Accounted for under the equity method:

Alternative investments 3,951,028 3,572,894
$ 6,589,050 $ 5,916,026

Investments, including assets limited as to use, and cash and cash equivalents and short-term
investments, consist of the following at August 31:

2018 2017
Assets limited as to use:

Trustee-held funds $ 651 $ 67,082
Self-insurance programs 627,438 579,780
Board-designated funds 190,188 181,417

Total assets limited as to use 818,277 828,279
Donor-restricted funds 360,442 337,025
Unrestricted, undesignated funds 4,951,084 4,461,574
Total investments, excluding short-term investments 6,129,803 5,626,878

Other financial instruments:
Cash and cash equivalents and short-term investments 459,247 289,148

$ 6,589,050 $ 5,916,026

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 20

4. Investments and Other Financial Instruments (continued)

The composition and presentation of investment returns are as follows for the years ended
August 31:

2018 2017

Interest and dividend income $ 27,373 $ 25,135
Investment expenses (4,683) (5,613)
Realized gains on alternative investments, net 98,365 123,759
Realized gains on other investments, net 97,782 62,870
Net change in unrealized gains on alternative investments 246,963 348,167
Net change in unrealized gains on other investments 40,872 115,062
Change in value of joint ventures 77 497
$ 506,749 $ 669,877
Reported as:

Rental and other revenue $ 389 $ 557
Nonoperating investment return 490,971 655,269
Temporarily restricted – investment return 15,389 14,051

$ 506,749 $ 669,877

Northwestern Memorial’s investments measured at fair value include mutual funds; common
equities; corporate and U.S. government debt issues; state, municipal and foreign government debt
issues; commingled funds; common collective trusts; and 103-12 entities.

Commingled investments, common collective trusts and 103-12 entities are commingled funds
formed from the pooling of investments under common management. Unlike a mutual fund, these
investments are not registered investment companies and, therefore, are exempt from registering
with the Securities and Exchange Commission.

The investment strategy for the mutual funds, commingled funds, common collective trusts and
103-12 entities involves maximizing the overall long-term return by investing in a wide variety of
assets, including domestic large cap equities, domestic small cap equities, international developed
equities, blended equities, (i.e., a mix of domestic and international equities), natural resources and
private investment limited partnerships (LPs).

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 21

4. Investments and Other Financial Instruments (continued)

Northwestern Memorial’s non-pension plan investments measured under the equity method of
accounting include absolute return hedge funds, equity long/short hedge funds, real estate, natural
resources and LPs, collectively referred to as alternative investments. Alternative investments in
the pension plan assets are measured at fair value.

Absolute return hedge funds include funds with the ability to opportunistically allocate capital
among several strategies. Generally, these funds diversify across strategies in an effort to deliver
consistently positive returns regardless of the movement within global markets, exhibit relatively
low volatility and are redeemable quarterly with a 60-day notice period. Equity long/short hedge
funds include hedge funds that invest both long and short in U.S. and international equities. These
funds typically focus on diversifying or hedging across particular sectors, regions or market
capitalizations and are generally redeemable quarterly with a 60-day notice period. Absolute return
and equity long/short managers are redeemable quarterly or annually with a 45- to 90-day notice
period.

Real estate includes LPs that invest in land and buildings and seek to improve property level
operations by increasing lease rates, recapitalizing properties, rehabilitating aging/distressed
properties, and repositioning properties to maximize revenue. Real estate LPs typically use
moderate leverage. Natural resources include a diverse set of LPs that invest in oil and natural gas-
related companies, commodity-oriented companies, and timberland. Private equity includes LPs
formed to make equity and debt investments in operating companies that are not publicly traded.
These LPs typically seek to influence decision-making within the operating companies. Investment
strategies in this category may include venture capital, buyouts and distressed debt. These three
categories of investments cannot be redeemed with the funds. Distributions from each fund will
be received as the underlying assets of the fund are expected to be liquidated periodically over the
lives of the LPs, which generally run 10 to 12 years.

Because of the timing of the preparation and delivery of financial statements for limited
partnership investments, the use of the most recently available financial statements provided by
the general partners results in a two month delay in the inclusion of the limited partnership results
in Northwestern Memorial’s consolidated statements of operations and changes in net assets due
to results recorded based on June 30 investment statements. Due to this delay, these consolidated
financial statements do not yet reflect the market conditions experienced in the last two months of
the fourth quarter of fiscal 2018 or 2017 for the limited partnership investments.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 22

4. Investments and Other Financial Instruments (continued)

As of August 31, 2018, $2,918,935 of alternative investments is subject to various redemption
limits and lockup provisions, of which $2,602,923 expires within one year and $316,012 expires
after one year from the balance sheet date.

At August 31, 2018, Northwestern Memorial had commitments to fund approximately an
additional $815,000 to alternative investment entities. This funding is expected to occur over the
next 12 years.

5. Fair Value Measurements

Northwestern Memorial follows the requirements of ASC 820, Fair Value Measurement, in
regards to measuring the fair value of certain assets and liabilities as well as disclosures about fair
value measurements. ASC 820 defines fair value as the price that would be received for an asset
or paid for a transfer of a liability in an orderly transaction on the measurement date.

The methodologies used to determine the fair value of assets and liabilities reflect market
participant objectives and are based on the application of a three-level valuation hierarchy that
prioritizes observable market inputs over unobservable inputs. The three levels are defined as
follows:

• Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.

• Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or
liabilities in active markets and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. Examples
of Level 2 inputs are quoted prices for similar assets or liabilities in inactive markets or
pricing models with inputs that are observable for substantially the full term of the asset or
liability.

• Level 3 – Inputs to the valuation methodology are significant to the fair value of the asset
or the liability and less observable. These inputs reflect the assumptions market participants
would use in the estimation of the fair value of the asset or liability.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 23

5. Fair Value Measurements (continued)

Fair Values

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level
of input that is significant to the fair value measurement.

The following table presents the financial instruments measured at fair value on a recurring basis
at August 31, 2018:

Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents $ 407,249 $ – $ – $ 407,249
Investments:

Short-term investments:
Currency 15,136 – – 15,136
Fixed Income 36,862 – – 36,862
Total short-term investments 51,998 – – 51,998

Mutual funds:

Fixed income 95,944 – – 95,944
U.S. equities 166,775 – – 166,775

Total mutual funds 262,719 – – 262,719
Other fixed income – 23,926 – 23,926
Bonds:

Corporate bonds – 305,081 – 305,081
U.S. government and agency

issues – 258,970 – 258,970
Total bonds – 564,051 – 564,051

Equity securities 221,948 408 – 222,356
Cash equivalents in investment

accounts 43,135 – – 43,135
Total investments 579,800 588,385 – 1,168,185
Beneficial interest in trusts – 15,048 – 15,048
Total assets $ 987,049 $ 603,433 $ – 1,590,482

Investments recorded at fair value

based on NAV – – – 1,062,588
Total assets measured at fair value – – – $ 2,653,070

Liabilities
Interest rate swaps $ – $ 73,350 $ – $ 73,350

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 24

5. Fair Value Measurements (continued)

The following table presents the financial instruments measured at fair value on a recurring basis
at August 31, 2017:

Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents $ 258,463 $ – $ – $ 258,463
Investments:

Short-term investments:
Currency 27 – – 27
Fixed Income 30,658 – – 30,658
Total short-term investments 30,685 – – 30,685

Mutual funds:

Fixed income 98,130 – – 98,130
U.S. equities 130,469 – – 130,469

Total mutual funds 228,599 – – 228,599
Other fixed income – 13,393 – 13,393
Bonds:

Corporate bonds – 312,980 – 312,980
U.S. government and agency

issues – 268,858 – 268,858
Total bonds – 581,838 – 581,838

Equity securities 220,037 506 – 220,543
Cash equivalents in investment

accounts 32,359 – – 32,359
Total investments 511,680 595,737 – 1,107,417
Beneficial interest in trusts – 14,203 – 14,203
Total assets $ 770,143 $ 609,940 $ – 1,380,083

Investments recorded at fair value

based on NAV – – – 977,252
Total assets measured at fair value – – – $ 2,357,335

Liabilities
Interest rate swaps $ – $ 112,586 $ – $ 112,586

There were no transfers into or out of Level 1 or Level 2 during the years ended August 31, 2018
or 2017.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 25

5. Fair Value Measurements (continued)

Reconciliation to the Consolidated Balance Sheets

A reconciliation of the fair value of financial assets to the consolidated balance sheets at August 31
is as follows:

2018 2017

Short-term investments measured at fair value $ 51,998 $ 30,685
Investments, including assets limited as to use

measured at fair value 2,178,775 2,053,984
Total investments at fair value 2,230,773 2,084,669
Alternative investments accounted for under equity

method included in investments, including assets
limited as to use 3,951,028 3,572,894

Total investments $ 6,181,801 $ 5,657,563

Pledges and grants receivable, less current portion:

Beneficial interests in trusts at fair value $ 15,048 $ 14,203
Pledges and grants receivable, less current portion, net 29,808 21,567

Total pledges and grants receivable, less current portion $ 44,856 $ 35,770

Valuation Techniques and Inputs

Beneficial Interests in Trusts – The fair value of beneficial interests in trusts is based on
Northwestern Memorial Foundation’s (the Foundation) percentage of the fair value of the trusts’
assets adjusted for any outstanding liabilities (discounted using a rate per Internal Revenue Service
(IRS) regulations), based on each trust arrangement.

Interest Rate Swaps – The fair value of interest rate swaps is based on generally accepted valuation
techniques, including discounted cash flow analysis on the expected cash flows of each derivative
and quoted prices from dealer counterparties and other independent market sources. The valuation
incorporates observable interest rates and yield curves for the full term of the swaps. The valuation
is also adjusted to incorporate nonperformance risk for NMHC or the respective counterparty. The
adjustment is based on the credit spread for entities with similar credit characteristics as NMHC

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 26

5. Fair Value Measurements (continued)

or market-related data for the respective counterparty. Northwestern Memorial pays various fixed
rates and receives cash flows based on rates equal to a percentage of the London Interbank Offered
Rate (LIBOR) plus a spread for certain interest rate swaps.

Investments – The fair value of Level 1 investments, which consist of equity securities and mutual
funds, is based on quoted market prices that are valued on a daily basis. Level 2 investments consist
of U.S. equities, government and agencies’ issues and corporate bonds, and fixed income
instruments issued by municipalities and foreign government. The fair value of the U.S.
government and agencies’ issues and corporate bonds is established based on values obtained from
nationally recognized pricing services that value the investments based on similar securities and
matrix pricing of similar quality and maturity securities. The fair values of commingled funds,
common collective trusts and 103-12 entities are based on the ownership interest in the net asset
value (NAV) per share or its equivalent, of the respective fund.

Northwestern Memorial’s investments are exposed to various kinds and levels of risk. Equity
securities and equity mutual funds expose Northwestern Memorial to market risk, performance
risk and liquidity risk. Market risk is the risk associated with major movements of the equity
markets. Performance risk is that risk associated with a company’s operating performance. Fixed
income securities and fixed income mutual funds expose Northwestern Memorial to interest rate
risk, credit risk and liquidity risk. As interest rates change, the value of many fixed income
securities is affected, including those with fixed interest rates. Credit risk is the risk that the obligor
of the security will not fulfill its obligations. Liquidity risk is affected by the willingness of market
participants to buy and sell particular securities. Liquidity risk tends to be higher for equities
related to small capitalization companies and certain alternative investments. Due to the volatility
in the capital markets, there is a reasonable possibility of subsequent changes in fair value,
resulting in additional gains and losses in the near term.

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other current liabilities and short-term borrowings are reasonable estimates of their
fair values due to their short-term nature.

The fair value of the long-term debt portfolio, including the current portion, was $1,434,210 and
$1,424,354 at August 31, 2018 and 2017 respectively. The fair value of this Level 2 liability is
based on quoted market prices for the same or similar issues and the relationship of those bond

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 27

5. Fair Value Measurements (continued)

yields with various market indices. The market data used to determine yield and calculate fair
value represents Aa/AA-rated tax-exempt municipal health care bonds. The effect of third-party
credit valuation adjustments, if any, is immaterial.

The fair value of pledges receivable, a Level 2 asset, is based on discounted cash flow analysis and
approximates the carrying value of $46,791 and $42,241 at August 31, 2018 and August 31, 2017,
respectively.

6. Investment in Joint Ventures

Northwestern Memorial has joint venture and operating partnership investment interests ranging
from 30.0% to 50.0% in health-related businesses, as well as a 33.3% restricted interest in two
non-health-related businesses that were donated to Northwestern Memorial. These investment
interests are accounted for under the equity method of accounting, as Northwestern Memorial
holds a 20% or more voting interest. The carrying value of the non-health-related investments of
$6,919 and $7,811 at August 31, 2018 and 2017, respectively, is included in Investments,
including assets limited to use, less current portion in the accompanying consolidated balance
sheets.

The carrying value of the health-related investments of $21,733 and $23,144 at August 31, 2018
and 2017, respectively, is included in other assets, net in the accompanying consolidated balance
sheets. Net equity earnings from the health-related investments totaled $75 and $446 for the years
ended August 31, 2018 and 2017, respectively, and are included in Investment return in the
accompanying consolidated statements of operations and changes in net assets. The carrying value
of these investments exceeds the underlying equity in net assets by $7,400, reflecting the fair value
change recorded at the time of acquisition of CDH-Delnor Health System (Cadence), and
KishHealth System (KishHealth).

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 28

6. Investment in Joint Ventures (continued)

The following is a summary of financial information as of and for the years ended August 31
relating to these investments:

2018 2017

Current assets $ 72,792 $ 77,343
Current liabilities 31,884 31,834
Net working capital 40,908 45,509

Property, plant, and equipment 36,734 36,192
Other long-term assets 3,187 3,192
Long-term liabilities 32,665 32,950
Net assets $ 48,164 $ 51,943

Revenue $ 38,584 $ 37,869
Expenses 32,163 29,821
Excess of revenue over expenses $ 6,421 $ 8,048

Net equity earnings from the non-health-related investments totaled $1,758 and $2,304 for the
years ended August 31, 2018 and 2017, respectively, and are included in temporarily restricted net
assets investment return in the accompanying consolidated statements of operations and changes
in net assets. Northwestern Memorial made no capital contributions to such joint ventures for the
years ended August 31, 2018 or 2017. Northwestern Memorial received cash distributions from
such joint ventures of $3,478 and $4,067 for the years ended August 31, 2018 and 2017,
respectively.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 29

7. Long-Term Debt

Long-term debt consists of the following at August 31:

2018 2017
Revenue Bonds, Series 2017A (NMHC), payable in annual installments

through July 15, 2047 (fixed coupon rates range from 3.00% to 5.00%) $ 538,225 $ –
Revenue Bonds, Series 2017B (NMHC), payable in annual installments

through July 25, 2057 (fixed coupon rate of 5.00% through December 15,
2022) 162,380 –

Revenue Bonds, Series 2015A and 2015B (KishHealth System), payable in
monthly installments through March 1, 2035 (fixed coupon rate of 2.80%) 10,662 11,158

Revenue Bonds, Series 2013 (NMHC), payable in annual installments
beginning August 15, 2031 through August 15, 2043 (fixed coupon rates
from 4.00% to 5.00%) 111,235 111,235

Revenue Bonds, Series 2011A and 2011B (CDH), with interest at a variable
rate payable in annual instalments through November 1, 2038, (weighted
average interest rate of 1.78% and 0.98% for the twelve months ended
August 31, 2018 and 2017, respectively) 114,600 116,300

Revenue Bonds, Series 2011C (Delnor), with interest at a variable rate
payable in annual installments through November 1, 2038, (weighted
average interest rate of 1.73% and 0.92% for the twelve months ended
August 31, 2018 and 2017, respectively) 56,050 56,595

Revenue Bonds, Series 2009A (NMH), payable in annual installments
through August 15, 2039 (fixed coupon rates range from 5.00% to 6.00%) – 291,760

Revenue Bonds, Series 2009B (NMH), payable in annual installments
through August 15, 2030 (fixed coupon rates range from 5.00% to 5.75%) – 37,700

Revenue Bonds, Series 2009 (CDH) payable in annual installments through
November 1, 2039 (fixed coupon rates range from 5.00% to 5.25%) – 84,165

Revenue Bonds, Series 2009B (CDH) payable in annual installments through
November 1, 2039 (fixed coupon rates range from 4.00% to 5.75%) – 215,330

Variable Rate Demand Revenue Bonds, Series 2008A (NMH), payable in
annual installments through August 15, 2038 (weighted average interest
rate of 1.30% and 0.68% for the twelve months ended August 31, 2018 and
2017, respectively) 69,330 74,250

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 30

7. Long-Term Debt (continued)

2018 2017
Variable Rate Demand Revenue Bonds, Series 2007A (NMH), payable in

annual installments through August 15, 2042 (weighted average interest
rate of 1.17% and 0.73% for the twelve months ended August 31, 2018 and
2017, respectively) $ 203,400 $ 204,700

Revenue Bonds, Series 2003A–Series 2003C (Delnor) payable in annual
installments through May 15, 2033 (fixed coupon rates range from 5.00% –
5.25%) – 19,950

Revenue Bonds, Series 2002A–Series 2002D (Delnor) payable in annual
installments beginning May 15, 2020 through May 1, 2032 (fixed coupon
rate of 5.25%) – 35,000

NMHC variable rate note dated October 4, 2016, matures October 4, 2019
(weighted average interest rate of 2.14% and 1.13% for the twelve months
ended August 31, 2018 and 2017, respectively) 105,000 105,000

The Midland Surgical Center, LLC line of credit due July 10, 2019, interest
payments required monthly at a variable rate not less than 3.75%, and loan
with maturity date of December 10, 2018 330 357

NMHC commercial paper dated October 4, 2016 (weighted average interest
rate of 1.53% for the twelve months ended August 31, 2018, and 0.97% for
the eleven months ended August 31, 2017) 27,466 87,299

1,398,678 1,450,799
Less:

Unamortized (premium) discount, net and debt issuance costs (47,755) 8,485
Current maturities 24,571 30,239
Commercial paper, included in short‐term debt 27,466 87,299

$ 1,394,396 $ 1,324,776

Per the Second Amended and Restated Master Trust Indenture dated as of December 1, 2017, as
supplemented and amended (the NMHC Master Indenture), the Obligated Group includes NMHC,
NMH, Northwestern Lake Forest Hospital (NLFH), Central DuPage Hospital (CDH), Cadence,
Delnor-Community Hospital (Delnor), Cadence Physician Group (CPG) d/b/a Northwestern
Medicine Regional Medical Group (NMRMG), the Foundation, Northwestern Medical Faculty
Foundation d/b/a Northwestern Medical Group (NMG), Lake Forest Health and Fitness Institute
(HFI), KishHealth, Kishwaukee Community Hospital, Valley West Community Hospital,
Kishwaukee Physician Group, Inc. (KPG), Marianjoy Rehabilitation Hospital & Clinic, Inc.,
Rehabilitation Medicine Clinic, Inc, and Marianjoy Foundation, with Wells Fargo Bank, N.A., as
master trustee.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 31

7. Long-Term Debt (continued)

On September 1, 2018, NMHC implemented a number of actions to streamline its organization
structure; some of which impacted members of the Obligated Group. Cadence was merged into
NMHC; KPG was merged into CPG; and KishHealth Foundation was merged into the Foundation.
None of these actions had a material impact on the Obligated Group or any impact on the
accompanying consolidated financial statements.

Northwestern Memorial had lines of credit of $50,000 and $80,000 that were to expire in May 2019
and September 2018, respectively. In October 2016, the lines of credit in the amounts of $50,000
and $80,000 were replaced with two $65,000 lines of credit, totaling $130,000. At August 31, 2018
and August 31, 2017, Northwestern Memorial had restricted $1,556 of one of the $65,000 lines of
credit to secure a letter of credit. Northwestern Memorial has the option to borrow at various rates
expressed as an adjustment to LIBOR, prime rate or other bank-offered rates. At August 31, 2018,
no amounts were borrowed under the lines of credit.

Northwestern Memorial has standby bond purchase agreements (SBPAs) with multiple banks that
cover all of its variable rate demand revenue bonds (VRDBs). The short-term credit rating for each
series of VRDBs is based on the respective bank’s short-term credit rating. The long-term credit
rating for each series of VRDBs is based on Northwestern Memorial’s long-term credit rating.
Changes in credit ratings may impact the interest paid on or remarketing of the VRDBs. As of
August 31, 2018, the banks provided liquidity support in the event of a failed remarketing as
follows:

Par Value

Expiration
Date

Subseries 2007A-2, 2007A-4 $ 101,700 October 2019
Series 2008A 69,330 October 2020
Subseries 2007A-1, 2007A-3 101,700 October 2020

The SBPAs include reporting and financial requirements and other covenants. If an SBPA is not
renewed or replaced prior to its expiration, or if some portion, or all, of the related VRDBs are not
successfully remarketed (failed remarketing) during the term of the SBPAs, the related VRDBs
convert to a term loan at the earlier of the expiration date of the related SBPA or after 90
consecutive days of failed remarketing. The principal payment on the term loan would then be

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 32

7. Long-Term Debt (continued)

payable over a three-year term. The earliest principal payment on any term loan associated with
the bonds is 367 days from the initial failed remarketing date. Therefore the VRDBs, all SBPAs
with maturities greater than one year less any current portion, are classified as long-term debt in
the accompanying consolidated balance sheets.

CDH and Delnor Series 2011A, 2011B, and 2011C Revenue Bonds, which are classified as long-
term due to their long-term amortization periods, have one-year remarketing periods that occur at
staggered dates throughout the year. The bondholders are required to hold the bonds for additional
one year periods, unless notice of their intent to put the bonds to the NMHC Obligated Group is
given not less than 150 days prior to the end of the remarketing date. To the extent that bondholders
may, under the terms of the debt, put their bonds within a maximum of 12 months after August 31,
2018, the principal amount of such bonds has been classified as a current obligation in the
accompanying consolidated balance sheets. Management believes the likelihood of a material
amount of bonds being put to the NMHC Obligated Group is remote.

Scheduled principal repayments for the next five years, assuming remarketing of variable rate debt,
on long-term debt are as follows:

Year ending August 31:
2019 $ 24,571
2020 18,370
2021 22,946
2022 23,786
2023 24,657

The provisions under the respective debt agreements require the Obligated Group to maintain
reporting, financial, and other covenants. At August 31, 2018, the Obligated Group was in
compliance with these provisions.

Northwestern Memorial paid interest of $47,137 and $49,475 in 2018 and 2017, respectively
(which includes $5,910 and $7,266, respectively, for net swap payments included in Interest
expense in the accompanying consolidated statements of operations and changes in net assets).
Northwestern Memorial capitalized interest of $12,027 and $18,703 in 2018 and 2017,
respectively.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 33

7. Long-Term Debt (continued)

In October 2016, the SBPAs for the $103,000 Illinois Finance Authority Variable Rate Demand
Revenue Bonds, Subseries 2007A-1 and Subseries 2007A-3 (NMH) and for the $78,775 Illinois
Finance Authority Variable Rate Demand Revenue Bonds, Series 2008A (NMH) were each
extended for four years. The SBPA for the $103,000 Illinois Finance Authority Variable Rate
Demand Revenue Bonds, Subseries 2007A-2 and Subseries 2007A-4 was replaced by a new
standby bond purchase agreement.

In October 2016, the Illinois Finance Authority Variable Rate Demand Revenue Bonds, Series
2011A, 2011B, and 2011C (CDH-Delnor Health System) in the aggregate amount of $175,020 were
purchased by different banks at variable rates for a period of seven years, five years, and three
years, respectively.

In October 2016, the existing $105,000 CDH-Delnor Health System variable rate note was
replaced with a $105,000 NMHC variable rate note with a different lender and extended to 2019.
In October 2016, NMHC issued commercial paper in the aggregate amount of $87,299. Proceeds
were used to redeem all outstanding $27,450 NMH Series 2002C Bonds and pay down a $59,750
NMHC line of credit.

In July 2017, NMHC paid Morton Bank $13,534 to extinguish the existing Delnor medical office
building loan.

In December 2017 and January 2018, the following transactions occurred related to Northwestern
Memorial’s long- and short-term debt:

Revenue Bonds, Series 2002A-Series 2002D (Delnor); Revenue Bonds, Series 2003A-Series
2003C (Delnor) and Revenue Bonds, Series 2009B (NMH) with principal outstanding of
$35,000, $19,950 and $37,700, respectively, were fully legally defeased.

A portion of the Revenue Bonds, Series 2009A (NMH) and Revenue Bonds, Series 2009B
bonds (CDH) were legally defeased in the amount of $53,000 and $28,000, respectively.

The Illinois Finance Authority issued tax-exempt fixed rate bonds, Series 2017A, in the
aggregate amount of $544,520 on behalf of NMHC as the borrower with varying maturities
through 2047. The proceeds of these bonds were used to establish an escrow to legally defease

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 34

7. Long-Term Debt (continued)

the Revenue Bonds, Series 2009 (CDH) of $81,985 and the remaining principal of the Revenue
Bonds, Series 2009A (NMH) and Revenue Bonds, Series 2009B (CDH) in the amount of
$238,760 and $180,730, respectively. Additionally, $59,833 outstanding under the NMHC
Commercial Paper program was redeemed.

The Illinois Finance Authority issued tax-exempt bonds, Series 2017B, in the aggregate
amount of $162,380 with a nominal maturity of 2057 and an interest rate initially fixed through
December 15, 2022. The proceeds of these bonds were used to reimburse NMHC for a portion
of the cost of the replacement Northwestern Lake Forest Hospital in Lake Forest, IL.

As a result of the above transactions, Northwestern Memorial recorded a $23,990 Loss on
extinguishment of long-term debt for the twelve months ended August 31, 2018.

8. Derivatives

Northwestern Memorial’s only derivative financial instruments are interest rate swaps
approximately equal to its Series 2007A and Series 2011A-C variable rate bonds for the sole
purpose of risk management. These bonds expose Northwestern Memorial to variability in interest
payments due to changes in interest rates. To manage fluctuations in cash flows resulting from
interest rate risk, Northwestern Memorial entered into various interest rate swap agreements. These
swaps limit the variable-rate cash flow exposure on the variable rate bonds to synthetically fixed
cash flows. By using interest rate swaps to manage the risk of changes in interest rates,
Northwestern Memorial exposes itself to credit risk and market risk. Credit risk is the risk that a
counterparty will fail to perform under the terms of a derivative contract. When the fair value of a
swap is positive, the counterparty owes Northwestern Memorial, which creates credit risk for
Northwestern Memorial. When the fair value of a swap is zero or negative, the counterparty does
not owe Northwestern Memorial. Northwestern Memorial minimizes the credit risk in its swap
contracts by entering into transactions that either require the counterparty to post collateral for the
benefit of Northwestern Memorial based on the credit rating of the counterparty and the fair value
of the swap contract or whose cash flows are insured by a third-party. For certain interest rate
swaps, Northwestern Memorial is required to post collateral for the benefit of the counterparty
when the negative fair value of the swap exceeds a defined threshold. The aggregate fair value
liability of the swaps on the consolidated balance sheets reflect a reduction of $2,134 and $3,555
for non-performance risk at August 31, 2018 and 2017, respectively. Market risk is the adverse

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 35

8. Derivatives (continued)

effect on the value of a financial instrument that results from a change in interest rates. The market
risk associated with interest rate changes is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken. Management also mitigates
risk through periodic reviews of its swap positions in the context of their total blended cost of
capital.

The following is a summary of the outstanding positions under existing interest rate swap
agreements at August 31:

Notional Amount Maturity
2018 2017 Date Rate Paid Rate Received

$ 101,700 $ 102,350 August 2042 3.89% 63% of 1-Month LIBOR + 28 bps

101,700 102,350 August 2042 3.89 63% of 1-Month LIBOR + 28 bps
61,113 61,650 November 2038 3.82 67% of 3-Month LIBOR
61,113 61,650 November 2038 3.52 67% of 3-Month LIBOR

– 35,000 May 2032 4.18 67% of 1-Month LIBOR
– 19,950 May 2033 2.89 67% of 1-Month LIBOR

$ 325,626 $ 382,950

The fair value of derivative instruments at August 31 is as follows:

Derivatives Liabilities
Balance Sheet Location 2018 2017
Derivatives not designated as

hedging instruments:
Interest rate contracts Interest rate swap liabilities $ 73,350 $ 112,586

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 36

8. Derivatives (continued)

The effects of derivative instruments on the accompanying consolidated statements of operations
and changes in net assets for August 31 are as follows:

Amount of Loss
Recognized in Excess of
Revenue Over Expenses

on Derivatives
2018 2017
Derivatives not designated as hedging instruments:

Operating expense – interest $ (5,910) $ (7,266)
Nonoperating – change in fair value of interest rate

swaps 31,353 37,521

Northwestern Memorial’s derivative instruments contain provisions that require Northwestern
Memorial’s debt to maintain an A- or better credit rating from Standard & Poor’s and an A3 or
better rating from Moody’s. If Northwestern Memorial’s debt were to fall below those levels, it
would be in violation of these provisions, and the counterparties to the derivative instruments could
request immediate payment or demand immediate and ongoing full overnight collateralization on
derivative instruments in net liability positions. Northwestern Memorial has not posted collateral
as of August 31, 2018 and posted collateral of $330 as of August 31, 2017. If the credit risk-related
contingent features underlying these agreements were triggered to the fullest extent on August 31,
2018, Northwestern Memorial would be required to post $75,484 of collateral to its counterparties.

In October 2016, three interest rate swaps were novated under the same notional amounts and
contract terms to a new counterparty, except for the one swap that was subject to a collateral
requirement. As a result of this transaction, none of these novated swaps required collateral to be
posted.

In February 2018, Northwestern Memorial terminated two of its existing swaps with notional
amounts of $35,000 and $19,950, which did not have a material impact on the consolidated
statements of operations and changes in net assets.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 37

9. Goodwill and Other Intangible Assets

Goodwill has been recorded for the excess of purchase price over fair value of assets purchased in
business acquisitions of several medical practices. Northwestern Memorial has goodwill of
$25,306 and $25,115 included in other assets, net at August 31, 2018 and 2017, respectively. There
were no impairments of goodwill in the years ended August 31, 2018 or 2017.

The fair value of in-place leases is the present value associated with re-leasing the in-place lease
as if the property was vacant. The value of at market in-place leases is amortized as amortization
expense over the expected life of the lease. Above-market and below-market lease values for
acquired properties are recorded based upon the present value of the difference between the
contractual amounts to be paid pursuant to the in-place leases and management’s estimates of the
fair market lease rates for comparable leases. The values of above- and below-market leases are
recorded as an adjustment to rental revenue over the remaining terms of the leases.

The following table summarizes Northwestern Memorial’s identifiable intangible asset balances
as of August 31, which are included in other assets, net on the accompanying consolidated balance
sheets:

2018

Gross
Carrying

Value
Accumulated
Amortization

Net Carrying
Amount

Amortized intangible assets:
In-place leases $ 12,672 $ (7,921) $ 4,751
Above-market leases 104 (6) 98

Total intangible assets $ 12,776 $ (7,927) $ 4,849
Below-market lease intangibles $ (3,194) $ 871 $ (2,323)

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 38

9. Goodwill and Other Intangible Assets (continued)

2017

Gross
Carrying

Value
Accumulated
Amortization
Net Carrying
Amount

Amortized intangible assets:
In-place leases $ 14,580 $ (9,736) $ 4,844
Above-market leases 308 (192) 116

Total intangible assets $ 14,888 $ (9,928) $ 4,960
Below-market lease intangibles $ (7,861) $ 4,690 $ (3,171)

Amortization expense, which is included in Depreciation and amortization, was $2,554 and $2,632
for the years ended August 31, 2018 and 2017, respectively. The estimated amortization expense
for intangible assets subject to amortization for each of the years ending August 31, 2019 through
2023 is as follows: $2,408, $1,224, $727, $254, and $8.

10. Income Tax Status

Each of the NMHC not-for-profit entities is qualified under the Internal Revenue Code (the Code)
as a tax-exempt organization and is exempt from tax on income related to its tax-exempt purposes
under Section 501(a) of the Code. Accordingly, no income taxes are provided for the majority of
the income in the accompanying consolidated financial statements for these corporations. Certain
corporations had unrelated business income (UBI) generated primarily from the sale of certain
services that are not directly related to patient care and through limited partnerships within the
investment portfolio. Certain corporations have unused net operating loss carryforwards available
to offset the UBI tax. The net operating loss carryforwards expire through 2037. The deferred tax
assets associated with these net operating loss carryforwards of $10,844 and $6,802 at August 31,
2018 and 2017, respectively, are offset by valuation allowances on the accompanying consolidated
balance sheets of $10,844 and $6,802, respectively. The total net operating loss carryforwards at
August 31, 2018 and 2017 were $33,113 and $16,938, respectively.

NMHC calculates income taxes for its taxable subsidiaries. Taxable income differs from pretax
book income principally due to certain income and deductions for tax purposes being recorded in
the consolidated financial statements in different periods. Deferred income tax assets and liabilities
are recorded for the tax effect of these differences using enacted tax rates for the years in which
the differences are expected to reverse.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 39

10. Income Tax Status (continued)

In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent on the generation of future taxable income during
the periods in which those temporary differences become deductible.

The Cayman Islands government does not impose any tax on income or capital gains. However,
such corporations are subject to U.S. federal corporate taxation to the extent that they generate net
income that is effectively connected with a U.S. trade or business. These corporations were not
engaged in any such trade or business in the U.S. during fiscal year 2018 or 2017. Therefore, no
income tax provision has been recorded related to these corporations and their operations.

Provisions for federal and state income taxes of $6,028 and $13,010 for the years ended August 31,
2018 and 2017, respectively, are included within other in Nonoperating gains (losses) in the
accompanying consolidated statements of operations and changes in net assets.

11. Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are available for the following purposes at August 31:

2018 2017
Health care services:

Purchase of property and equipment $ 27,948 $ 26,273
Operating expenses and charity care 100,082 96,462
Research, education, and other 114,566 98,182

$ 242,596 $ 220,917

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 40

11. Temporarily and Permanently Restricted Net Assets (continued)

Net assets were released from donor restrictions by incurring expenditures for the following
purposes in the years ended August 31:

2018 2017
Health care services:

Purchase of property and equipment $ 7,672 $ 6,279
Operating expenses and charity care 10,633 16,167
Research, education, and other 21,575 18,692

$ 39,880 $ 41,138

Net assets released from donor restrictions reported in the statements of operations and changes in
net assets were recorded as follows for the years ended August 31:

2018 2017
Net assets released from donor restrictions and federal

and state grants $ 18,216 $ 17,916
Nonoperating other 13,992 16,943

$ 32,208 $ 34,859

Permanently restricted net assets are summarized below, the income from which is expendable to
support the following for the years ended August 31:

2018 2017
Health care services:

Purchase of property and equipment $ 14,304 $ 14,304
Operating expenses and charity care 66,803 64,412
Research, education, and other 101,525 96,364

$ 182,632 $ 175,080

Northwestern Memorial’s endowment consists of individual donor-restricted funds established for
a variety of purposes. Net assets associated with endowment funds are classified and reported
based on the donor-imposed restrictions.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 41

11. Temporarily and Permanently Restricted Net Assets (continued)

Northwestern Memorial has interpreted the Uniform Prudent Management of Institutional Funds
Act of 2006 (UPMIFA), as adopted by the state of Illinois, as requiring the preservation of the fair
value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit
donor stipulations to the contrary. As a result of this interpretation, Northwestern Memorial
classifies as permanently restricted net assets the original value of gifts donated to the permanent
endowment, the original value of subsequent gifts to the permanent endowment, and
accumulations to the permanent endowment made in accordance with the direction of the
applicable donor gift instrument at the time. The remaining portion of the donor-restricted
endowment fund that is not classified as permanently restricted net assets is classified as
temporarily restricted net assets until those amounts are appropriated for expenditure, consistent
with the donor intent or, where silent, the standard of prudence prescribed by UPMIFA.

In accordance with UPMIFA, Northwestern Memorial considers the following factors in making
a determination to appropriate or accumulate donor-restricted funds:

• The duration and preservation of the fund

• The purposes of Northwestern Memorial and the endowment fund

• General economic conditions

• The possible effects of inflation and deflation

• The expected total return from investment income

• Other resources of Northwestern Memorial

• The investment policies of Northwestern Memorial

Northwestern Memorial has adopted investment and spending policies for endowment assets
designed to provide a predictable stream of funding to programs supported by its endowment while
seeking to maintain purchasing power of the endowment assets. Endowment assets include those
assets of donor-restricted funds that must be held in perpetuity or for a donor-specified period.
Under this policy, endowment assets are allocated a fixed annual return, which is currently set at
6%.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 42

11. Temporarily and Permanently Restricted Net Assets (continued)

Northwestern Memorial has a policy that generally limits annual spending from endowment funds
to 4% of the endowment fund balance at the midpoint of the preceding fiscal year. In establishing
this policy, Northwestern Memorial considered the long-term expected return on its endowment.
Accordingly, over the long term, Northwestern Memorial expects the spending policy to allow its
endowment to grow at an average annual rate of 2%. This is consistent with its objective to
maintain the purchasing power of the endowment assets held in perpetuity or for a specific term,
as well as to provide additional real growth through new gifts and investment return.

The changes in endowment net assets for the years ended August 31, 2018 and 2017, are summarized
below:

Temporarily

Restricted
Permanently

Restricted Total

Endowment net assets, September 1, 2016 $ 57,316 $ 161,911 $ 219,227

Contributions 460 5,609 6,069
Change in value of trusts – 775 775
Investment return 7,353 – 7,353
Appropriation for expenditure (5,602) – (5,602)
Other (705) 6,785 6,080

Endowment net assets, August 31, 2017 58,822 175,080 233,902
Contributions 135 6,403 6,538
Change in value of trusts – 525 525
Investment return 8,144 – 8,144
Appropriation for expenditure (6,186) – (6,186)
Other (5,112) 624 (4,488)

Endowment net assets, August 31, 2018 $ 55,803 $ 182,632 $ 238,435

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 43

12. Pledges Receivable

As of August 31, 2018, donor-restricted pledges, which are included in Current portion of pledges
and grants receivable, net and Pledges and grants receivable, less current portion, are expected to
be realized as follows:

Less than one year $ 17,040
One to five years 29,266
Thereafter 10,937
Total pledges receivable 57,243
Less allowances (2,096)
Less present value discount (8,344)
Net pledges receivable $ 46,803

13. Self-Insurance Liabilities and Related Insurance Recoverables

Northwestern Memorial retains certain levels of professional and general liability risks.
Northwestern Memorial also retain certain levels of workers’ compensation risks through State of
Illinois sanctioned self-insurance arrangements and through commercial insurance programs
subject to large deductibles. For those self-insured risks, Northwestern Memorial has established
revocable trust funds and two captive insurance companies to pay claims and related costs. In
addition, various insurance policies have been purchased to provide coverage in excess of self-
insured limits.

Northwestern Memorial’s self-insurance liability and related amounts recoverable from reinsurers
are reported in the accompanying consolidated balance sheets at present value based on an annual
discount rate of 1.5% as of August 31, 2018 and 2017. This discount rate is based on several
factors, including rolling averages of risk-free rates based on estimated payment patterns of the
underlying liability. The undiscounted gross liabilities for the self-insured programs were
$675,913 and $624,438 at August 31, 2018 and 2017, respectively. The undiscounted amounts
recoverable from reinsurers were $107,927 and $88,543 at August 31, 2018 and 2017,
respectively. Provisions for the professional and general liability risks are based on an actuarial
estimate of losses using actual loss data adjusted for industry trends and current conditions and on
an evaluation of claims by Northwestern Memorial’s legal counsel. The provision for estimated
self-insured claims includes estimates of ultimate costs for both reported claims and claims
incurred but not reported.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 44

13. Self-Insurance Liabilities and Related Insurance Recoverables

In the opinion of management, based in part on the advice of outside actuaries, adequate provision
has been made at August 31, 2018 for all claims incurred to date. Although there is considerable
variability inherent in such estimates, management further believes that the ultimate disposition of
these claims will not have a material adverse effect on the consolidated financial position of
Northwestern Memorial.

14. Employee Benefit Obligations

There are two noncontributory defined benefit pension plans: Northwestern Memorial Hospital
and Lake Forest Hospital (the Plans), maintained within Northwestern Memorial that cover
specified employee groups. The sponsors for the Plans approved resolutions to amend the Plans
effective at the end of the day on December 31, 2012. The amendments implemented a hard freeze,
such that no participant will earn any additional or new benefits under the Plans on and after
January 1, 2013.

The following table summarizes the change in the projected benefit obligation for the years ended
August 31:

2018 2017

Projected benefit obligation, beginning of year $ 629,775 $ 646,693

Interest cost 20,141 19,130
Net actuarial gain (16,875) (9,648)
Benefits paid (26,656) (26,400)

Projected benefit obligation, end of year $ 606,385 $ 629,775

The net actuarial gain in 2018 was caused primarily by the change in the discount rate used
compared to prior years.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 45

14. Employee Benefit Obligations (continued)

The following table summarizes the changes in the Plans’ assets for the years ended August 31:

2018 2017

Plan assets at fair value, beginning of year $ 748,337 $ 679,342

Actual return on the Plans’ assets, net of expenses 64,767 95,395
Benefits paid (26,656) (26,400)

$ 786,448 $ 748,337

The following table sets forth the Plans’ funded status, as well as recognized amounts in the
accompanying consolidated balance sheets as of August 31:

2018 2017

Plan assets at fair value $ 786,448 $ 748,337
Projected benefit obligation 606,385 629,775
Funded status recognized as prepaid pension cost $ 180,063 $ 118,562

The funded status of the Northwestern Memorial Hospital plan was $159,137 and $111,015 for
the years ended August 31, 2018 and 2017, respectively. The funded status for the Northwestern
Lake Forest Hospital plan was $20,926 and $7,547 for the years ended August 31, 2018 and 2017,
respectively.

Included in unrestricted net assets are the Plans’ amounts that have not yet been recognized in net
periodic pension cost at August 31, as follows:

2018 2017

Unrecognized actuarial loss $ 98,717 $ 132,539

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 46

14. Employee Benefit Obligations (continued)

Changes in the Plans’ assets and benefit obligations recognized in unrestricted net assets for the years
ended August 31 include the following:

2018 2017

Current year actuarial gain $ 32,071 $ 60,122
Recognized actuarial loss 1,752 3,763
$ 33,823 $ 63,885

The Plans’ prior service cost and net actuarial loss included in unrestricted net assets expected to
be recognized in net periodic pension cost during the year ending August 31, 2019 are $0 and
$617, respectively.

Net periodic pension benefit included in operating results for the years ended August 31 consists
of the following:

2018 2017

Plan expenses $ 1,541 $ 1,407
Interest cost of projected benefit obligation 20,141 19,130
Expected return on the Plans’ assets (51,112) (46,330)
Recognized actuarial loss 1,752 3,763
Net periodic pension benefit $ (27,678) $ (22,030)

The following table sets forth the discount rate assumptions used to determine the projected benefit
obligation and benefit cost as of August 31:

2018 2017
Used to determine projected benefit obligation
Discount rate – Northwestern Memorial Hospital 4.24% 3.86%
Discount rate – Northwestern Lake Forest Hospital 4.28 3.90

Used to determine benefit cost
Discount rate – Northwestern Memorial Hospital 3.86% 3.67%
Discount rate – Northwestern Lake Forest Hospital 3.90 3.73
Expected long-term rate of return on the Plans’ assets 6.00 7.00

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 47

14. Employee Benefit Obligations (continued)

The expected long-term rate of return on assets is determined based on a capital market asset
model, which assumes that future returns are based on long-term, historical performance as
adjusted for contemporary dividend yields. The adjusted historical returns were weighted by the
current long-term asset allocation targets and reduced by 100 basis points to produce a more
normal risk premium. Northwestern Memorial’s investment advisor assisted with the analysis.

The Plans’ asset allocation and investment strategies are designed to earn returns on plan assets
consistent with a reasonable and prudent level of risk. Investments are diversified across classes,
sectors and manager style to minimize the risk of loss. Northwestern Memorial uses professional
investment managers specializing in each asset category and, where appropriate, provides the
investment managers with specific guidelines that include allowable and/or prohibited investment
types. Northwestern Memorial regularly monitors manager performance and compliance with
investment guidelines.

The target allocation of the Plans’ assets as of August 31 is as follows:

2018 2017

Equity securities 51% 51%
Alternative investments 37 37
Fixed income 12 12
100% 100%

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 48

14. Employee Benefit Obligations (continued)

The following table presents the Plans’ financial instruments as of August 31, 2018, measured at
fair value on a recurring basis by the valuation hierarchy described in Note 5:

Level 1 Level 2 Level 3 Total

Cash and cash equivalents $ 105 $ – $ – $ 105
U.S. government securities – 5,882 – 5,882

Corporate debt:

Other – 16,312 – 16,312

Equity securities:

U.S. equities 20,662 99 – 20,761
International equities 81 – – 81

Total equity securities 20,743 99 – 20,842

Mutual funds:

Fixed income 63,226 – – 63,226
U.S. equities 23,561 – – 23,561

Total mutual funds 86,787 – – 86,787

Other fixed income – 392 – 392
Total assets measured on recurring

basis at fair value $ 107,635 $ 22,685 $ – 130,320

Investments recorded at fair value

based on NAV 656,128
Total assets measured at fair value $ 786,448

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 49

14. Employee Benefit Obligations (continued)

The following table presents the Plans’ financial instruments as of August 31, 2017, measured at
fair value on a recurring basis by the valuation hierarchy described in Note 5:

Level 1 Level 2 Level 3 Total

Cash and cash equivalents $ 508 $ – $ – $ 508
U.S. government securities – 8,358 – 8,358

Corporate debt:

Preferred – 839 – 839
Other – 12,881 – 12,881

Total corporate debt – 13,720 – 13,720

Equity securities:

U.S. equities 18,971 155 – 19,126

Mutual funds:

Fixed income 64,103 – – 64,103
U.S. equities 18,484 – – 18,484

Total mutual funds 82,587 – – 82,587
Total assets measured on recurring

basis at fair value $ 102,066 $ 22,233 $ – 124,299

Investments recorded at fair value

based on NAV 624,038
Total assets measured at fair value $ 748,337

The fair value of Level 1 investments, which consist of equity securities and certain mutual funds,
is based on quoted market prices that are valued on a daily basis. Level 2 investments consist of
U.S. government securities, corporate bonds and U.S. equities. The fair value of the U.S.
government securities and corporate bonds is established based on values obtained from nationally
recognized pricing services that value the investments based on similar securities and matrix
pricing of similar quality and maturity securities.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 50

14. Employee Benefit Obligations (continued)

Included in the other pension investments are commingled funds, common collective trusts, 103
12 entities and alternative investments (principally limited partnership interests in hedge, private
equity, real estate and natural resources funds) for which the fair values are based on NAV. The
fair values of the commingled funds, common collective trusts, and 103-12 entities are based on
the Master Trust’s ownership interest in the NAV per share of its equivalent of the respective fund.

The fair values of the securities held by limited partnerships that do not have readily determinable
fair values are determined by the general partner taking into consideration, among other things,
the financial performance of underlying investments, recent sales prices of underlying investments
and other pertinent information. In addition, actual market exchanges at period-end provide
additional observable market inputs of the exit price. NAV is calculated by the investment’s
management monthly for all of the Master Trust’s alternative investments other than limited
partnerships, whose NAV is calculated on a quarterly basis. The methods described above may
produce a fair value calculation that may not be indicative of net realizable value or reflective of
future fair values. Furthermore, while the Plans’ valuation methods are appropriate and consistent
with other market participants, the use of different methodologies or assumptions to determine the
fair value of certain financial instruments could result in a different estimate of fair value at the
reporting date.

Investments in LPs, which cannot be redeemed on request, totaled $43,703 as of August 31, 2018.
Certain marketable alternative investments are subject to various redemption restrictions. As of
August 31, 2018, $438,629 of alternative investments is subject to various redemption limits and
lockup provisions, of which $415,816 expires within one year and $22,813 expires after one year
from the balance sheet date.

The Plans’ assets are managed solely in the interest of the Plans’ participants and their
beneficiaries. The assets are invested with the investment objective of funding the accumulated
and projected retirement benefit obligations of the Plans consistent with the Plans’ long-term rate-
of-return assumption. A time horizon of greater than five years is assumed; therefore, interim
volatility in returns is regarded with appropriate perspective.

Northwestern Memorial has no current plans to contribute to the Plans during the year ending
August 31, 2019.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 51

14. Employee Benefit Obligations (continued)

Benefit payments, which reflect future service, as appropriate, are expected to be paid as follows:

Year ending August 31:
2019 $ 40,355
2020 33,127
2021 34,797
2022 35,539
2023 36,253
2024–2028 186,224

Northwestern Memorial also maintains defined contribution plans covering substantially all of its
full-time and part-time employees. Participants can make voluntary tax-deferred contributions to
the plans, subject to certain IRS limitations. Northwestern Memorial contributes a specified
percentage of eligible compensation to the plans on behalf of each participant. Participants are
always fully vested in their own tax-deferred contributions and related earnings and become fully
vested in Northwestern Memorial contributions and related earnings upon completion of vesting
service. Employer contributions related to these defined contribution plans, included in Employee
benefits expense in the accompanying consolidated statements of operations and changes in net
assets totaled $106,937 and $100,388 in 2018 and 2017, respectively.

NMHC also maintains other noncontributory postretirement benefit plans (the Noncontributory
Plans) for certain executive employees.

Included in unrestricted net assets is an unrecognized actuarial loss of $672 and $998 at August 31,
2018 and 2017, respectively, for the Noncontributory Plans that has not yet been recognized in net
periodic pension cost.

Changes in the Noncontributory Plans’ assets and benefit obligations recognized in unrestricted
net assets include the following:

2018 2017

Current year actuarial (loss) $ (1,002) $ (643)
Recognized actuarial net loss 1,043 1,642
$ 41 $ 999

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 52

14. Employee Benefit Obligations (continued)

As of August 31, 2018 and 2017, the Noncontributory Plans’ unfunded projected benefit obligation
amounted to $14,188 and $21,328, respectively, and is included in other liabilities in the
accompanying consolidated balance sheets. The Noncontributory Plans’ actuarial loss included in
unrestricted net assets expected to be recognized in net periodic pension cost during 2018 is $805.

The following table sets forth the discount rate assumptions used to determine the projected benefit
obligation as of August 31:

2018 2017
Used to determine projected benefit obligation
Discount rate – Supplemental Retirement Plan 2.74% 1.60 %
Discount rate – Executive Postretirement Health and

Dental Plan 3.96 3.20

15. Functional Expenses

Northwestern Memorial provides general health care services primarily to residents within its
geographic location and supports research and education programs. Expenses related to providing
these services were as follows for the years ended August 31:

2018 2017

Health care services $ 3,692,281 $ 3,310,405
Research and education 113,721 138,425
Fundraising 12,297 13,559
General, administrative, and other 1,137,314 1,067,438
$ 4,955,613 $ 4,529,827

The research and education costs include $3,542 and $3,317 of expenses supported by federal, state,
and corporate grants and $17,927 and $15,279 of expenses supported by other donor-restricted funds
in 2018 and 2017, respectively.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 53

16. Commitments and Contingencies

Academic, Program and Other Support

Consistent with its mission, Northwestern Memorial provides academic, program and other
support to other not-for-profit entities. The present value of the total remaining commitments
related to this support is $110,886 and $118,222 at August 31, 2018 and 2017, respectively, which
is reported as Grants and academic support payable, current portion and Grants and academic
support payable, less current portion in the accompanying consolidated balance sheets.

Northwestern Memorial will provide continuing funding to Northwestern University in support of
the research and education mission of the FSM. This continuing funding is based on the average
net patient service revenue and operating results of Northwestern Memorial, with the minimum
annual amount of such funding being $39,500, plus inflation based on the Consumer Price Index,
for the fiscal years 2015 through 2017 and no minimum thereafter. The expense incurred of
$65,178 and $63,898 for the years ended August 31, 2018 and 2017, respectively, is recorded in
Other expense in the accompanying consolidated statements of operations and changes in net
assets; and a related liability of $1,118 and $452 is reported in Accrued expenses and other current
liabilities in the accompanying consolidated balance sheets as of August 31, 2018 and 2017,
respectively.

Other

As of August 31, 2018, approximately 5% of Northwestern Memorial employees, on a full-time
equivalent basis, were represented by a collective bargaining agreement. This collective bargaining
agreement expires on January 27, 2020.

Capital and Leases

Various capital projects are currently being constructed and are expected to be placed in service
over the next three years. The total estimated cost of these projects is $1,737,000. As of August 31,
2018, project commitments totaled $1,195,000, of which $1,000,504 has been incurred. These
commitments include the construction of a replacement hospital on the Lake Forest Campus as agreed
to in the 2010 affiliation agreement with Lake Forest Hospital. All governmental reviews,
approvals and building permits have been received. Construction began in February 2015. The

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 54

16. Commitments and Contingencies (continued)

facility had a staggered opening and was completely operational as of March 3, 2018. The
commitments also include the implementation of a new patient revenue and electronic medical
record system covering the majority of the healthcare system. This project, which had a rolling
implementation, was fully operational as of March 3, 2018. As a result of this investment, one-
time operating expenses of $100,347 was incurred for the year ended August 31, 2018.

Certain Northwestern Memorial buildings are located on land leased from Northwestern
University under various lease agreements. The principal lease requires annual payments of $314
through 2075. At August 31, 2018, minimum future rental payments under other noncancelable
operating leases, which consist primarily of leases for office space and equipment, some of which
include renewal options, are as follows:

Year ending August 31:
2019 $ 24,785
2020 21,873
2021 18,515
2022 15,063
2023 13,676
Thereafter 61,738

Regulatory

Laws and regulations governing the Medicare and Medicaid programs are extremely complex and
subject to interpretation. As a result, there is a reasonable possibility that recorded amounts will
change by a material amount in the near term. During the last few years, as a result of nationwide
investigations by governmental agencies, various healthcare organizations have received requests
for information and notices regarding alleged noncompliance with those laws and regulations,
which, in some instances, have resulted in organizations entering into significant settlement
agreements. Compliance with such laws and regulations may also be subject to future government
review and interpretation, as well as significant regulatory action, including fines, penalties, and
potential exclusion from the Medicare and Medicaid programs.

In addition, an increasing number of the operations and practices of not-for-profit healthcare
providers has been challenged or questioned to determine if they are consistent with the regulatory
requirements for nonprofit tax-exempt organizations. These challenges are broader than concerns

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 55

16. Commitments and Contingencies (continued)

about compliance with federal and state statutes and regulations of core business practices of the
health care organizations. The laws and regulations regarding these practices are also subject to
interpretation and challenge. Areas that have come under examination have included pricing
practices, billing and collection practices, charity care, community benefit, executive compensation,
exemption of property from real property taxation and others. Northwestern Memorial expects that
the level of review and audit to which it and other health care providers are subject will increase.
There can be no assurance that regulatory authorities will not challenge Northwestern Memorial’s
compliance with these laws and regulations or that the laws and regulations themselves will not be
subject to challenge, and it is not possible to determine the impact, if any, such claims, penalties
or challenges would have on Northwestern Memorial.

Northwestern Memorial is aware of, has investigated, and made disclosure to the United States
Department of Health and Human Services Office of Civil Rights (OCR) of certain privacy
breaches. OCR has requested information for these breaches. NMHC has responded to OCR’s
requests for information from OCR with respect to one breach related to the theft of a password-
protected, unencrypted laptop that contained patient identifiable health information. OCR has also
requested information on a separate matter relating to whether an NMHC affiliate had a Business
Associate Agreement with a vendor that has been implicated in privacy breaches not involving
Northwestern Memorial records. OCR has been taking a more aggressive enforcement position
relating to similar privacy matters by comparable health care organizations, including multiple
seven-figure settlements against the disclosing party. NMHC is unable to determine which, if any,
fines might be imposed by OCR or other actions that might be taken as a result of any privacy
breaches or OCR investigations. Northwestern Memorial is a defendant in various other lawsuits
arising in the ordinary course of business. Although the outcome of these lawsuits cannot be
predicted with certainty, management believes the ultimate disposition of such matters will not
have a material effect on Northwestern Memorial’s consolidated financial condition or results of
operations.

Litigation

Northwestern Memorial is a defendant in various other lawsuits arising in the ordinary course of
business. Although the outcome of these lawsuits cannot be predicted with certainty, management
believes the ultimate disposition of such matters will not have a material effect on Northwestern
Memorial’s financial condition or operations.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 56

17. Acquisitions

Affiliation with Centegra

On September 1, 2018, Centegra Health System (Centegra) became a wholly owned subsidiary of
NMHC pursuant to an affiliation agreement between NMHC and Centegra. This affiliation
positions Northwestern Memorial, under the Northwestern Medicine brand, to expand its
integrated academic health delivery system to McHenry County, offering patients access to
leading-edge care closer to where they live and work.

The affiliation was effected through a membership substitution with no consideration paid. For
accounting purposes, this transaction is considered an acquisition under Accounting Standards
Codification Topic (ASC) 958-805, Not-for-Profit Entities: Business Combinations, and a
contribution was recorded for the fair value of assets, net of liabilities of Centegra. No goodwill is
expected to be recorded as a result of this transaction. The valuation of all assets and liabilities is
pending. Because of the significance of the items that are pending, management is unable to
disclose the fair value of identifiable net assets at this time. In valuing these assets and liabilities
acquired, fair values will be based on, but not limited to, independent appraisals, discounted cash
flows, replacement costs and actuarially determined values.

Also effective September 1, 2018, Centegra, Northern Illinois Medical Center (d/b/a as of
August 31, 2018, Centegra Hospital – McHenry, Centegra Hospital – Huntley and Centegra
Hospital – Woodstock), Memorial Medical Center – Woodstock, NIMED Corp., and Centegra
Hospital – Huntley Holdings joined the NMHC Obligated Group. A Supplemental Master Trust
Indenture was executed to issue obligations pursuant to the NMHC Master Trust Indenture in order
to secure all debt that was previously secured by obligations issued pursuant to the Centegra Master
Trust Indenture prior to the release of the Centegra Master Trust Indenture in accordance with its
terms.

Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)

1809-2875972 57

17. Acquisitions (continued)

Following are the unaudited pro forma results as if the Centegra affiliation had occurred on
September 1, 2016:

August 31
2018 2017

Total operating revenue $ 5,793,490 $ 5,402,125
Operating income 217,596 230,609
Excess of revenue over expenses attributable to

NMHC and subsidiaries 705,838 919,119

The pro forma information provided should not be construed to be indicative of Northwestern
Memorial’s results of operations had the acquisition been consummated on September 1 2016, and
is not intended to project Northwestern Memorial’s results of operations for any future period.

18. Subsequent Events

Northwestern Memorial evaluated events and transactions occurring subsequent to August 31,
2018 through November 30, 2018, the date of issuance of the accompanying consolidated financial
statements. There were no recognized subsequent events and no unrecognized subsequent events
requiring disclosure other than those disclosed in Notes 7 and 17.

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Northwestern Memorial HealthCare and Subsidiaries
Years Ended August 31, 2018 and 2017
Northwestern Memorial HealthCare and Subsidiaries
Years Ended August 31, 2018 and 2017
Northwestern Memorial HealthCare and Subsidiaries
Consolidated Balance Sheets
Northwestern Memorial HealthCare and Subsidiaries
Consolidated Statements of Operations and Changes in Net Assets
Northwestern Memorial HealthCare and Subsidiaries
Northwestern Memorial HealthCare and Subsidiaries
Consolidated Statements of Cash Flows
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2018

Northwestern Memorial HealthCare and Subsidiaries
Northwestern Memorial HealthCare and Subsidiaries
Consolidating Statement of Revenue and Expense
Northwestern Memorial HealthCare and Subsidiaries
Notes to Supplementary Information
August 31, 2018