Continuing Disclosure Statement for the Nine Months Ended ...

Fairview Health Services

Continuing Disclosure Statement for the Nine Months Ended September 30, 2020

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Fairview Health Services Continuing Disclosure Statement

for the Nine Months Ended September 30, 2020

Table of Contents

Overview of Fairview Health Services .................................................................................... 3-22

Financial Statements ............................................................................................................ 23-41

Financial Information of the Fairview Consolidated Balance Sheets Consolidated Statements of Operations and Changes in Net Assets Consolidated Statements of Cash Flows

Financial Information of Obligated & Non-Obligated Groups Consolidating Balance Sheet Consolidating Statement of Operations and Changes in Net Assets

Notes to Consolidated Financial Statements

Key Performance Indicators .................................................................................................. 42-45

Management’s Discussion and Analysis of Financial Condition and Results of Operations.. 46-54

Investment and Debt Schedule .............................................................................................. 55-57

Note: The attached information is provided for the benefit of registered or beneficial bondholders and other issuers of credit and credit enhancement to Fairview Health Services and the Fairview Obligated Group. Questions and/or requests for additional information should be directed to Kimberly Faust, Vice President and Treasurer at: [email protected]. Additional information about Fairview can be found at: www.fairview.org.

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Fairview Health Services is filing this Continuing Disclosure Statement to comply with contractual commitments made in connection with the issuance of securities to provide specified information. Descriptions of the securities, the source of payment and security for the securities, and risks associated with an investment in the securities at the time of issuance are described in the Official Statements related to the securities, copies of which are on file with the Municipal Securities Rulemaking Board or available through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (“EMMA”) website. This report is not made in connection with a purchase or sale of securities by Fairview Health Services and accordingly does not contain all information material to a decision to purchase or sell securities.

Any statement in this Continuing Disclosure Statement that includes a matter of opinion, whether or not expressly so stated, is intended as such, and not as a representation of fact.

The information contained in this Continuing Disclosure Statement is provided as of the respective dates and for the periods specified herein and is subject to change without notice, and the filing of this Continuing Disclosure Statement does not, under any circumstances, imply that there has been no change in the affairs of Fairview Health Services since the specified dates as of which such information is provided. The dates as of and periods for which information is provided occurred during the worldwide COVID-19 pandemic. These effects are continuing to impact Fairview Health Services, but the duration and magnitude of the impact cannot be fully predicted but could be material. See “OVERVIEW OF FAIRVIEW HEALTH SERVICES – Health Care Services – Key Organizational Updates” in this Continuing Disclosure Statement. Accordingly, the historical information set forth in this Continuing Disclosure Statement is not indicative of future results or performance due to these and other factors, including those discussed in the Official Statements referred to above. Any statements made in this Continuing Disclosure Statement that are not historical or current facts are “forward-looking statements.” The forward-looking statements generally can be identified with words or phrases such as “anticipates,” “believes,” “intends,” “expects,” “estimates,” “foresees,” “could,” “may,” “should,” “will,” “plans,” “predicts,” or other words or phrases of similar import. These statements are based on assumptions and analyses made by Fairview Health Services in light of its experience and perception of historical trends of the organization, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. However, whether actual results and developments conform to expectations and predictions is subject to several known and unknown risks and uncertainties, as well as additional factors beyond Fairview Health Services’ control. There can be no assurance that the actual results or developments anticipated will be realized or, even if substantially realized, that they will have the expected consequences to or effects on Fairview Health Services’ business or operations. All forward-looking statements made herein are qualified by these cautionary statements.

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Section One – Overview of Fairview Health Services

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GENERAL

Fairview Health Services (“Fairview”) is an integrated academic health system located in Minneapolis, Minnesota, and, along with its affiliates and subsidiaries, is one of the leading health care providers in Minnesota with $6.0 billion in operating revenue for 2019. Fairview offers a broad continuum of health care services through its hospitals, clinics, ambulatory care centers, senior and long-term care facilities, retail and specialty pharmacies, pharmacy benefit management (“PBM”) services, rehabilitation centers, counseling and home health care programs, physician network and health insurance products. Fairview is a Minnesota nonprofit corporation and is exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code (the “IRC”).

Fairview serves the entire twelve-county Greater Minneapolis/St. Paul Metro Area (the “Metro Area”), as well as communities throughout greater Minnesota and portions of Northern Iowa and Western Wisconsin and is one of the most comprehensive and geographically accessible systems in Minnesota. Fairview offers a broad continuum of health care services and owns and operates eleven hospitals, including the University of Minnesota Medical Center, with the University of Minnesota Masonic Children’s Hospital (collectively, “UMMC”), which is the adult and pediatric teaching hospital of the University of Minnesota (the “University”). UMMC and eight of Fairview’s other hospitals are in the Metro Area. Fairview’s other two hospitals are in northern Minnesota. Fairview also operates over 100 primary and specialty care clinics, seven ambulatory care centers, 40 retail and specialty pharmacies, PBM services, rehabilitation centers, counseling and home health care programs, physician network, as well as senior care housing and long-term care facilities, home care and hospice, medical transportation and a health plan.

Fairview, through its integrated care model, aims to deliver the benefits of academic medicine to more patients and families across the state and western Wisconsin by expanding care, research and education through access to a greater pool of physicians and patients, while seeking to reduce the total cost of care for patients.

Based on March 31, 2020 inpatient discharge statistics compiled by the Minnesota Hospital Association, Fairview is the second largest health care delivery system in the Metro Area with a combined 28.6% market share.

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HEALTH CARE SERVICES

HOSPITALS

Fairview owns and operates the following hospitals: (i) UMMC, (ii) Fairview Southdale Hospital, (iii) Fairview Ridges Hospital, (iv) Fairview Lakes Medical Center, (v) Fairview Northland Medical Center, (vi) Fairview Range Medical Center, (vii) Grand Itasca Clinic and Hospital (“Grand Itasca”), (viii) HealthEast St. Joseph’s Hospital (“St. Joseph’s”), (ix) HealthEast St. John’s Hospital (“St. John’s”), (x) HealthEast Woodwinds Hospital (“Woodwinds”) and (xi) Bethesda Long Term Acute Care Hospital (“Bethesda”) and collectively the “System Hospitals”). As of September 30, 2020, the System Hospitals had a total of 3,559 licensed beds and 2,035 staffed beds.

Fairview also holds a twenty-five percent membership interest in Maple Grove Hospital Corporation (“MGHC”), which operates a 130-staffed bed community hospital in Maple Grove, Minnesota. North Memorial Health Care holds the remaining seventy-five percent membership interest in MGHC. Fairview guarantees twenty-five percent or about $26.9 million of the debt service payable with respect to tax exempt bonds with an aggregate principal amount outstanding of $107.6 million as of September 30, 2020 for the benefit of MGHC. The guaranty terminates if MGHC achieves a stand-alone credit rating equal to the rating of “Baa1” or better from Moody’s Investors Service.

CLINICS, AMBULATORY CARE, PHARMACY AND OTHER SERVICES

Clinic Services. Fairview operates more than 100 primary and specialty care clinics throughout the Metro Area, greater Minnesota and western Wisconsin. These clinics offer services in over 70 medical specialties, including family medicine, pediatrics, obstetrics, gynecology, heart care, cancer care, otolaryngology, transplant care, and orthopedics.

Ambulatory Surgery Centers. On June 30, 2020, Range Regional Health Service, of which Fairview is the sole member, sold its ownership interest in Northwoods LLC. As of September 30, 2020, Fairview owned all or a portion of seven ambulatory surgery centers located in the Metro Area, described below:

Fairview owns and operates Fairview Maple Grove Surgery Center, an ambulatory surgery center located in Maple Grove, Minnesota that provides multi-specialty adult and pediatric outpatient surgical care, including colonoscopy, otolaryngology, eye, gastroenterology, obstetrics and gynecology, orthopedics, plastic and reconstructive surgery, podiatry, endoscopy, urology and vascular services. Fairview Maple Grove Surgery Center is included in Fairview’s consolidated financial statements.

Fairview is a 50% owner of Crosstown Surgery Center LLC, an ambulatory surgery center located in Edina, Minnesota that specializes in orthopedic surgery using advanced technology. Fairview accounts for the Crosstown Surgery center as an equity method joint venture.

Fairview is a 51% owner of Ridges Surgery Center LLC, an ambulatory surgery center located in Burnsville, Minnesota that provides multi-specialty outpatient surgical care, including gynecology, orthopedics, podiatry, otolaryngology, ophthalmology, spine, anesthesia and general surgery services. Ridges Surgery Center LLC is included in Fairview’s consolidated financial statements.

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Fairview, through a joint venture with the University of Minnesota Physicians (“UMPhysicians”), has a 50% membership interest in the University of Minnesota Health Clinics and Surgery Center (the “M Health CSC Joint Venture”), which is housed in a building with the same name (“M Health CSC Building”) and owned by the University of Minnesota. Both Fairview and the M Health CSC Joint Venture lease space and operate clinics within the building that provide outpatient clinic and surgical care for thirty-seven medical specialties including primary care, neurology, cardiology, dermatology, orthopedics, hepatology, solid organ transplant, ear, nose and throat, endoscopy, urology and vascular services. Fairview accounts for the M Health CSC Joint Venture using the equity method of accounting.

Fairview is a 51% owner of Maplewood Surgery Center, LLC with independent physician partners owning the remaining interest) which is a Minnesota limited liability company that owns a freestanding surgery center located in Maplewood, Minnesota. The Maplewood Surgery Center is a multi-specialty center offering services in orthopedics, podiatry, otolaryngology, gynecology and general surgery that is managed by Surgical Care Affiliates, Inc. Maplewood Surgery Center is included in Fairview’s consolidated financial statements.

Fairview is a 20% owner of Vadnais Heights Surgery Center, LLC, an ambulatory surgery center located in Vadnais Heights, Minnesota, with the remaining 80% owned by Summit Orthopedics. The Vadnais Heights Surgery Center is focused exclusively on providing orthopedic surgical care. Fairview accounts for the Vadnais Heights Surgery Center, LLC using the equity method of accounting.

Fairview is a 51% owner of South Health Ambulatory Surgery Center (“SHASC”) joint venture located in Edina, Minnesota doing business as Edina Specialty Surgery Center. SHASC provides multi-specialty surgical care and has the capability to perform nearly all same-day surgery procedures in six surgery suites and one procedure room. Fairview accounts for the SHASC using the equity method of accounting.

Pharmacy Services. Fairview and Fairview Pharmacy Services (“FPS”) own and operate pharmacies at 40 locations, including a network of retail pharmacies, oncology pharmacies, a home infusion pharmacy, and a specialty pharmacy. The specialty pharmacy provides drugs and a variety of clinical management services for specialty diseases and chronic conditions including: cancer, cystic fibrosis, fertility treatment, growth hormone deficiency, hemophilia, hepatitis C, HIV, inflammatory conditions (Crohn’s disease, psoriasis, psoriatic arthritis, and rheumatoid arthritis), multiple sclerosis, pulmonary hypertension, metabolic disorders, and respiratory syncytial virus. In addition to operating retail and specialty pharmacies, Fairview also provides mail order pharmacy, PBM services, retail merchandising, clinical trial services, medication therapy management, long-term care pharmacy services, a dedicated hemophilia pharmacy co-located with the University Hemophilia Treatment Center, 503a and 503b compounding pharmacies, hospice pharmacy and physician office drug and supply services.

Fairview Rehabilitation Services. Fairview’s Rehabilitation Services (“FRS”) provides a full continuum of inpatient and outpatient rehabilitation services for pediatric and adult patients: including an inpatient rehabilitation facility, a hospital based skilled nursing facility and an adult day program. In addition to providing inpatient services in eleven hospitals, 39 outpatient clinics and 15 pediatric outpatient clinics, FRS has a wide range of both hospital and clinic-based outpatient sites providing cardiac and pulmonary rehab, cancer rehab, neuro rehab, vestibular, musculoskeletal rehab and audiology. FRS serves nearly 700,000 patient visits each year. Fairview also provides outpatient orthopedic therapy services through the Institute for Athletic

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Medicine (“IAM”), and seven hand centers. A joint venture between Fairview (which owns 63%) and North Memorial Health, IAM provides outpatient physical therapy, hand therapy and chiropractic services for the treatment of a range of musculoskeletal and orthopedic conditions, including sports related injuries. There are 28 clinic facilities operating under the IAM name.

HealthEast Medical Transportation. HealthEast Medical Transportation offers emergency medical services and scheduled transportation across the Metro Area and supports the community by responding to more than 40,000 calls annually. SENIOR HOUSING, LONG-TERM CARE FACILITIES AND SENIOR SERVICES

Fairview provides a wide range of senior care facilities and services through Ebenezer, a non-profit subsidiary of Fairview. Ebenezer provides long-term senior care facilities, senior housing, adult and child care services. Through Ebenezer, Fairview operates four long-term and two TCU senior care facilities. Ebenezer also operates over 101 senior housing facilities (9 of which are owned and operated) in the Metro Area and greater Minnesota and Iowa.

In September 2020, Ebenezer sold Ebenezer Park Apartments for $24 million. Total proceeds, net of fees and extinguishment of debt on the property, was $8.9 million. There are no immediate plans for use of the proceeds. Ebenezer Management Services will continue to manage the property on behalf of the new property owners. Also, in September 2020, Ebenezer sold its corporate office in Minneapolis for net proceeds of $1.7 million. There are no immediate plans for use of the proceeds on either sale. In addition to Ebenezer, Fairview has a 45% non-consolidated minority ownership interest in Cerenity Senior Care, which provides senior living care facilities and services in the Metro Area.

HEALTH PLAN SERVICES

Fairview is the sole owner of PreferredOne, a health services organization, founded in 1984, that provides a comprehensive range of health benefit services, including insurance products and third party administrative (“TPA”) services, to employers and individuals throughout Minnesota with contracts covering 99% of clinics and hospitals throughout the state and the upper Midwest, in addition to a national network for employers with employees throughout the United States. These services are provided through PreferredOne’s three companies – PreferredOne Community Health Plan, PreferredOne Administrative Services and its wholly owned subsidiary, PreferredOne Insurance Company (“PIC”) (collectively, “PreferredOne”). PreferredOne serves over 366,200 members, of which 53,300 are fully insured at risk members in addition to serving 2,100 employers. The remaining membership includes 107,500 network rental members and over 195,400 members in TPA employer sponsored and self-insured plans and 10,000 members in Business Process Outsourcing services. PIC also provides stop loss insurance policies for 101,400 of the 195,400 TPA members. PreferredOne’s Insurance Company’s Capital and Surplus exceeds the regulatory risk-based capital 200% minimum level.

PHYSICIAN NETWORK AND OTHER STRATEGIC ALLIANCES

Employed and Staffed Physicians. Fairview has a large physician network which includes both employed and affiliated physicians. As of September 30, 2020, Fairview employed over 1,000 physicians.

Fairview Physician Associates Network. Fairview Physician Associates Network (“FPA”), a Minnesota nonprofit tax-exempt corporation of which Fairview is the sole corporate member,

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was incorporated in 1993. FPA is an integrated practice network of over 4,100 providers, of which over 2,900 are physicians, including Fairview’s employed physicians. As a physician led nonprofit organization, FPA works to advance community health by improving the quality, patient experience and total cost of care of services delivered to patients. FPA, as a large, multi-specialty group, contracts with health plans. By helping its providers reach quality goals, FPA manages clinical risk for patient populations to enhance excellence of care. FPA also offers services to support clinical care, patient safety and to enhance clinical integration. In conjunction with Fairview, the FPA network provides a full range of primary care and specialty services. University of Minnesota Physicians. Since 1997, Fairview has partnered with the University and UMPhysicians on providing patient care services to our community. Fairview, the University and UMPhysicians partner together under an agreement “the M Health Fairview Agreement” that became effective in 2018. UMPhysicians is a non-profit organization of more than 1,200 physicians that operates the direct patient care clinic practice of the University of Minnesota Medical School (“Medical School”). The M Health Agreement provides that the principal site for clinical practice for UMPhysicians will be Fairview including UMMC, community hospitals and clinics. In addition, UMPhysicians has agreed to use UMMC as the principal venue for educational and new research opportunities when and where appropriate resources are available at Fairview. Fairview Partners. Fairview Partners is an integrated health care network providing on-site primary care and care coordination to seniors through risk-sharing insurance products. As of September 30, 2020, Fairview Partners had 4,300 members enrolled in two different health plans, including 3,200 members with UCare and 1,100 members with Medica. Fairview Partners’ members are enrolled in Medicare Advantage and Special Needs Plans and live in partner nursing homes and assisted livings as well as in their own homes in the community. As of September 30, 2020, there were 35 nursing homes and 37 assisted living facilities (including 17 Ebenezer owned or managed facilities) participating in the Fairview Partners program.

Fairview Health Network. Fairview is committed to delivering on the Triple Aim goals of improving the patient experience, improving the health of populations, and reducing the cost of healthcare. To accomplish this objective, Fairview has entered into various agreements with payers to manage quality, risk and cost across the full continuum of reimbursement models. For total cost of care contracts, Fairview participates in a hybrid payment model that incorporates at risk elements based on quality, patient satisfaction and management of the total cost of care of a population, with health plan members attributed to the primary care clinics within Fairview based on utilization. These products create a mechanism by which Fairview is rewarded for reductions in total cost of care and improved quality through enhanced relationships with patients served.

Fairview has also entered limited network products with select health plans. In these products, the members enroll in a product that has lower premiums or member costs, but carry a significant out of pocket penalty for out of network utilization. Because the members are enrolled, the provider network can identify each member upon enrollment and, as a result, can proactively design plans of care. In these limited network products, Fairview shares both in the margin and loss of the product. For 2020, Fairview now has limited network products with Blue Cross, Medica, PreferredOne, UnitedHealthcare and UCARE for the Commercial markets and with Blue Cross and UCARE for the Medicare Advantage market.

In 2013, Fairview established a clinically integrated network comprised of Fairview, North Memorial and HealthEast known as the Relevant Network (“Relevant”). Relevant’s purpose is

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to share best practices, improve outcomes, enhance patient satisfaction and advance total cost of care savings by establishing product offerings that are differentiated in the market. Relevant’s member organizations align under an accountable care model and share governance responsibilities. At January 1, 2020, Relevant network products had about 90,000 members.

Through FPA, Fairview participates in the State of Minnesota’s Medicaid Integrated Health Partnership (“IHP”) 2.0 program. In this program, Fairview accepts risk for total cost of care outcomes and also receives a care management payment.

In total, these agreements have established quality outcomes and/or shared savings incentives or limited risk contracts with commercial and governmental payers that now cover over 400,000 lives. With the proliferation of both public and private insurance exchanges, a continued increase in this financial model is anticipated, and Fairview is well positioned to take advantage of that market shift.

ExceleraRx. Fairview, along with several other health systems from across the United States, formed the Excelera Specialty Pharmacy Network (“Network”), a national network of specialty pharmacies owned by integrated delivery systems and academic medical centers. The Network brings together like-minded health systems and academic medical centers to work together around specialty drugs and caring for complex and chronic patients. ExceleraRx Corp (“Excelera”) was formed as a vehicle to facilitate and support the Network. As of September 30, 2020, the Network consisted of 26 integrated delivery systems and academic medical centers.

Excelera provides members nationally with scaled infrastructure, technology and support to develop best practices for specialty pharmacy capabilities, and access to limited distribution drugs and biologics and restrictive payer agreements, which allows members to provide continuity of care for patients with complex and chronic conditions, leading to improved health outcomes and decreased healthcare costs. Members pay Excelera fees in exchange for such services. This integrated coordinated care model is intended to drive higher quality while reducing the total cost of care.

Other Strategic Alliances. Fairview has many other strategic alliances in place with other health care providers and payers and is periodically engaged in discussions with both existing partners about the expansion of current relationships and various other parties regarding possible new alliances. These alliances are expanded or established to provide more comprehensive patient care and services. Future alliances could take the form of affiliations, partnerships, joint ventures, acquisitions, mergers or other arrangements.

INFORMATION TECHNOLOGY

Fairview’s hospitals and clinics are utilizing the EPIC electronic health record system. The EPIC system assists caregivers in providing care to all patients at the hospital and clinic care locations by improving patient safety, enhancing care coordination between medical professionals, and ensuring the timeliness and accuracy of the revenue cycle processes.

Fairview has also invested in virtual care throughout the entire organization—from hospitals, emergency departments and clinics to home care and hospice, pharmacy, senior living community and home-based settings. Many virtual care initiatives expand access in rural communities to specialty care, providing video appointments and consultations with a wide range of specialists in areas such as maternal fetal medicine, cardiology, psychiatry, infectious disease, and dermatology. Fairview’s tele ICU offers remote monitoring by intensivists and registered nurses certified in critical care. Fairview offers remote behavioral health crisis

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assessments in six emergency departments, as well as remote interpreter services capabilities. Video consultation with Medication Therapy Management pharmacists brings their expertise to a variety of clinic, assisted living, and home-based settings. Fairview also has several programs to monitor patient health status in their homes. In addition, Fairview’s partnership with Zipnosis, through its OnCare brand, provides online diagnosis and treatment for patients with select conditions that generally do not require a trip to the doctor. Fairview also offers convenient remote diagnosis and treatment capabilities via EPIC’s MyChart (patient portal) for conditions that do not require a clinic office visit. Additionally, Fairview has developed advanced video visit capabilities within EPIC to support expanded virtual care offerings.

Fairview has a robust information security function, which is managed by a Chief Information Security Officer. Key functional areas include policy, governance, network/application access oversight, Payment Card Industry compliance, Health Insurance Portability and Accountability Act of 1996 compliance, security controls, architecture and design, compliance and technical security oversight; detecting anomalous events; and providing IT guidance on containing, eradicating and recovering from security incidents. The Board of Director’s Information Technology Committee provides direction, oversight and counsel regarding all aspects of information technology strategy and risks as well as the Audit and Compliance Committee. Information technology was critical in Fairview’s response to keep our workforce safe and reduce the spread of COVID-19 within our communities, while also maintaining productivity. To this end, Fairview transformed a network formerly limited to approximately 2,000 remote users to infrastructure supporting 29,000 remote workers in less than three weeks.

HEALTH TRANSFORMATION CENTER

The Health Transformation Center (“HTC”) is Fairview’s hub for process innovation and is focused on tackling three key challenges. The HTC is developing a single point of contact for customers to simplify all interactions with the system. It will connect patients to their health journey in convenient, relevant and simple ways, intervening earlier to improve health outcomes. It will coordinate operations across the system to provide real-time visibility into what’s happening so issues can be predicted and addressed before they become problems.

The HTC has played a critical role in our system’s COVID response, allowing us to tackle significant operational challenges and support the emerging needs of our customers. By leveraging the resources of the HTC, we developed new patient-facing technical support for virtual care, we re-purposed resources to facilitate scheduling PCR and serology tests and communicate results, and created a systemwide nurse triage call line to support our internal team’s questions around COVID.

The HTC team also provided systemwide visibility into our ICU and med/surg capacity. We were able to leverage our precious bed resources and to help proactively plan for our COVID-positive cohorting strategy at our acute care sites. The HTC also supported our restore efforts. Recently, the HTC took on the operations of the State of Minnesota Critical Care Coordination Center which is designed to help health systems across the State of Minnesota quickly locate available critical care beds.

Over time, the HTC will help Fairview synthesize other new innovations into the system and continue to remove complexity and burden for all that we touch. The first phase of the HTC launched in June 2019 with expanded capabilities expected to continue launching over the next couple of years.

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COMMUNITY COMMITMENT

Through our mission and our role as an anchor institution, an organization rooted in our community, we are in a unique position to be a catalyst for progress and change. This is a responsibility we take seriously.

Fairview lives its mission and takes its critical support role within our communities seriously, and has historically invested heavily in the communities in which we operate including subsidized healthcare, education and training, community programs and research. Fairview has been providing care navigation services through the Cultural Brokers program, managing drop-in centers for wellness checks through the Health Commons, investing in East Side growers and entrepreneurs to make food more accessible and the preparation of meals at home easier for our neighbors, and offering multiple programs of education, research, training and outreach to serve at-risk populations.

M Health Fairview continues to partner with, and invest in, the communities we serve to improve health and wellbeing, which has been especially evident in our COVID-19 responses and initiatives. Community testing is in process with many partner sites, including Hmong American Partnership, Karen Organization of Minnesota, Progressive Baptist Church, American Indian Family Center, and Minneapolis Public Housing. Additionally, Fairview has embedded five Cultural Brokers into community partner organizations. Their work has transitioned to a virtual format; further, we launched a process for our Karen and Hmong Cultural Brokers to perform follow up and resource referral for higher risk patients when discharged from our hospitals.

The Health Commons are drop-in centers in the Cedar-Riverside and North Minneapolis neighborhoods, primarily serving East African and Somali, and African American communities, respectively. Programs promote individual health and social connectedness. Programming has transitioned to virtual formats with some wellness classes moving outdoors during COVID-19. Bilingual Community Liaisons continue to do wellbeing checks and connect resources for Cedar-Riverside residents.

In addition to these efforts, Fairview continues to look for opportunities to improve and provide for the community as evidenced by the creation of pop-up COVID-19 testing locations in high-need areas throughout the Twin Cities, including partnerships with cities and counties for community flu shot clinics; and the establishment of the HOPE (Healing, Opportunity, People, and Equity) Commission to build a system where all members of our community are treated with dignity and respect and all patients receive the highest levels and quality of care. To drive more equitable healthcare outcomes and inclusive environments, as part of its HOPE Commission work Fairview has started a multi-year journey to become an anti-racist organization.

Fairview’s 2019 Community Impact Overview highlights some of the ways that Fairview works with and invests in the community, with investments totaling approximately $1 billion in 2019. Our 2019 investments support care, services, research, education and other programs that help our neighbors by improving health and wellbeing, increasing access to culturally responsive programs, providing care for our most vulnerable neighbors, funding research to advance healthcare, and offering opportunities for growth and development to today’s workforce and tomorrow’s leaders.

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KEY ORGANIZATIONAL UPDATES

Coronavirus Disease Response. In March 2020, the World Health Organization declared the Coronavirus Disease 2019 (“COVID-19”) outbreak a pandemic. The pandemic has had a significant negative effect on the economy and the healthcare industry. Fairview continues to follow guidance from the Center for Disease Control and Prevention (“CDC”) and the Minnesota Department of Health and is coordinating its activities with state and local governments as well as other health systems in the state and region. First and foremost, our focus is on caring for our patients during this ongoing pandemic. In March 2020, Minnesota Governor Tim Walz issued Emergency Executive Order 20-09 (the “Order”) directing delay of all non-essential or elective surgeries, procedures, and clinic visits. In accordance with the Governor’s order, Fairview suspended elective surgeries and elective primary and specialty care visits to preserve organizational capacity and supplies to manage the expected patient volumes from the virus. At the beginning of May 2020, Fairview was able to safely restart surgeries that had become increasingly emergent since the Order. Effective, May 11, 2020, the Governor issued Executive Order 20-51 that allowed hospitals, ambulatory surgery centers, and clinics to resume the provision of the delayed procedures and patient visits to ramp up its surgical and clinic visits, while ensuring organization capacity and supplies are appropriate for such care and the ongoing COVID-19 patients.

Fairview has evolved its care models to transition our patients to virtual care wherever possible via OnCare. Fairview has been able to adapt and innovate to deliver care to our patients in other ways as well, first creating drive-up COVID-19 testing and then pivoting that concept to launch curbside care at several of our clinics, a new initiative designed to provide high-quality, accessible care for patients while reducing potential exposure to COVID-19. This innovation offers a convenient way for patients to receive much-needed preventive care, normally provided in a clinic setting, without leaving their car or the parking lot. At the curbside locations, patients can undergo procedures including blood-pressure checks, immunizations, and select injections.

Through its partnership with the University of Minnesota, Fairview has continued to find innovative ways to deliver care throughout this crisis, including the development of a new type of low-cost ventilator, that was approved by the U.S. Food and Drug Administration, and a protective device for healthcare workers against COVID-19 exposure.

Fairview also converted one of its hospitals, Bethesda, to a dedicated COVID-19 treatment center for up to 90 patients in March 2020. Bethesda Hospital deploys a ‘cohorting’ strategy; a CDC recommended approach that places COVID-19 patients together in one area or facility. The strategy allows personal protective equipment (“PPE”) resources to be conserved and consolidated, allows life-saving equipment including ventilators and extracorporeal membrane oxygenation (ECMO) to be placed where it will be most needed, increases patient and staff safety by reducing exposures, and improves care by allowing care teams to learn and apply learnings quickly in treating patients. Fairview’s cohorted COVID-19 care will be relocated to St. Joseph’s Hospital from Bethesda Hospital during the fourth quarter utilizing the same cohorting strategy.

The suspension of surgical and clinical volumes in March reduced net patient revenue in the second quarter by $293 million or 20.8% from Plan as elective procedures and visits resumed in May and ramped up in June and July. In comparison, third quarter net patient revenue improved, while volumes remained mixed across care settings. Due to the ongoing COVID-19 situation, including the unknown duration and severity of the pandemic, it is not possible for Fairview to reliably forecast the full impact of the COVID-19 pandemic on 2020 results.

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Beginning in April 2020, Fairview was awarded both federal and state grants to help offset the lost revenue and associated costs to prepare for and treat patients with COVID-19. Fairview recognized grant funding of $151.8 million through September 30, 2020 and is continuing to evaluate terms and conditions for recognition of other grant funding received and currently deferred, including revised post-payment notice of reporting requirements which were most recently revised on October 22, 2020, for potential recognition in the fourth-quarter of 2020. Fairview also received about $325 million through the CMS Advance Funding program and expects to receive about $84 million in cash flow relief through year-end 2020 due to the FICA deferral program. In addition, Fairview continues to apply for all appropriate COVID-19 related resources, including supplies, financial support, payroll tax deferrals and relief, if any, and other assistance made available through local, state and federal government and community partners.

With the number of COVID-19 patients in the Fairview system trending upward as of the time of this disclosure, the schedule for elective procedures is being evaluated on a daily basis to allow sufficient capacity to care for patients with critical needs or to free up beds for COVID-19 patients.

Fairview’s investment performance is in line with market conditions and asset allocation. Fairview monitors its liquidity and cash flow closely and routinely takes prudent steps to manage its financial health.

The accompanying consolidated financial statements as of and for the nine-month period ended September 30, 2020, do not fully reflect the ongoing implications of COVID-19. Fairview expects to provide continued updates on the status of the impact of COVID-19 through its quarterly disclosures in 2020 and more frequently through EMMA updates, if warranted.

Organizational Transformation and Update. The cost of health care has become unsustainable and without bold action, rising costs will continue to make healthcare unaffordable and inaccessible for the community and drive ongoing losses for our healthcare system. Our goal is to make the decisions needed to reduce costs and increase value for our patients and communities, to ensure we are providing the services our community needs in the optimal care settings, from virtual care to clinics and hospitals as health care delivery rapidly transforms. As a result, we are reviewing all facilities and services across the organization.

On October 5, 2020, Fairview announced changes that align costs, simplify the patient experience, deepen community partnerships and accelerate the system’s digital investments to prioritize healthcare affordability and health equity for all Minnesotans.

Bethesda will be leased to Ramsey County to help address the homelessness crisis, providing shelter this winter to many individuals who are currently unsheltered in St. Paul, giving people necessary space to rebuild their lives while helping to reduce COVID-19 spread among the unsheltered. COVID-19 patients housed at Bethesda will be transferred to St. Joseph’s Hospital by the end of 2020. Our cohorting approach to COVID-19 care will continue at St. Joseph’s through 2021, or as community need requires it.

St. Joseph’s Hospital will be reimagined as a community hub of health and wellness. As

an acute care hospital that sits within blocks of three other acute care facilities and two other emergency departments, to better meet the upstream needs of the community today, the St. Joseph’s campus will evolve to address major factors that influence social determinants of health, including healthcare, housing and supportive services. In addition to providing COVID-19 care at St. Joseph’s, existing inpatient mental health

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beds will remain at St. Joseph’s through 2021 while the system continues a Request for Partnership process regarding ongoing mental healthcare plans.

In order to continue to improve patient outcomes and experience, Fairview will implement

several enhancements. Fairview will continue the conversion to single-occupancy hospital rooms across the system, increasing. flexibility, providing patients more privacy and enhancing infection-prevention measures. Expansion of connected, digital and virtual care will continue to help Fairview evolve to meet the needs of patients. Fairview will integrate multiple record-keeping systems onto a single platform, which will dramatically improve – and simplify – the patient experience.

Before the end of 2020, Fairview will deploy a new ambulatory care model focused on

health ‘hubs,’ expanding services across more than 40 clinics and primary care locations, repositioning specialty care through comprehensive ambulatory centers and fully leveraging new consumer demand for virtual care. To successfully implement this model, Fairview will consolidate 14 clinics in Minnesota and two in Wisconsin into its remaining clinic and primary care locations by the end of the year.

EmPATH (Emergency Psychiatric Assessment, Treatment and Healing) units will be

implemented across the system. This innovative and proven care model provides a calmer, living-room style environment for patients with urgent mental health needs, connecting them to the right outpatient resources and helping them avoid potentially traumatic emergency department visits and lengthy inpatient stays.

Fairview’s Institute for Athletic Medicine (IAM) joint venture with North Memorial Health will end on December 31, 2020. Fairview will integrate its portion of IAM into M Health Fairview Rehabilitation Services. Three IAM clinics co-located with an impacted primary care clinic are anticipated to close by the end of 2020.

As a result of the changes announced on October 5, approximately 900 staff positions across the Fairview system will be eliminated, or slightly less than 3 percent of the total workforce. Wherever possible, employees will be encouraged to transition to new roles within the system. Fairview currently has approximately 1,200 open roles. Fairview Health System Optimization. In February 2020, the Fairview Board approved a $200 million multi-year project to address capacity constraints at high-demand acute care sites, improve system operating and financial performance, convert double occupancy rooms to single occupancy rooms, support quality efforts, improve the patient and provider experience, level patient volumes across facilities, where appropriate, and invest in growth markets. This project is expected to be completed in 2023. M Health Fairview Agreement. Fairview, the University and UMPhysicians operate under the M Health Fairview Agreement which became effective in 2018. While the parties maintain separate governance, the M Health Fairview Agreement further integrates operations across the clinical delivery system and enhances research and education by creating a joint clinical enterprise among the parties. The M Health Fairview Agreement re-shaped the previous partnership to bring together not only UMMC and its related service lines, but also Fairview’s other hospitals, primary care clinics, and other services. All are part of a shared care delivery system that is led by a single structure that includes academic physician leadership. The M Health Fairview Agreement furthers the opportunity to create a nationally-renowned academic health system. The delivery system continues efforts to unite under a single brand, M Health Fairview, which launched into the marketplace in October 2019 and will roll out throughout 2020.

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As part of the rebranding effort, the organization will begin to sunset the HealthEast brand. The M Health Agreement expires December 31, 2026 with an option for extension beginning in 2023. Fairview and UMPhysicians operate under a Master Professional Services Agreement (“MPSA”), to facilitate payment from Fairview to UMPhysicians for all professional, clinical and management services. The M Health Fairview Agreement provides for fixed and variable financial support to the University and UMPhysicians. The minimum variable academic support commitment to the University is 0.15% of patient service revenue through 2026 with the opportunity for additional variable support payments based on financial performance of Fairview. The fixed academic support to the Medical School is $45 million in 2020 and $50 million in 2021 and 2022, and increasing thereafter through 2026 in accordance with the consumer price index (“CPI”). The fixed annual academic support commitment to UMPhysicians is $31.0 million in 2020 increasing thereafter through 2026 in accordance with CPI. Goals for this support align with the programs of distinction envisioned for growth in the system along with additional benefits such as better synergies between the organizations, alignment of patient care objectives and expanded academic health reach within the Metro Area. Rating Agencies Update. In February 2020, Moody’s Investors Service downgraded Fairview’s outstanding revenue bonds from an A2 to A3 bond rating and maintained the negative outlook. In January 2020, Standard & Poor’s affirmed Fairview’s outstanding revenue bonds at an A+ bond rating and changed the outlook to negative.

Home Health and Hospice. In November 2020, Fairview sold a majority of its ownership in its Home Health and Hospice Care business to AccentCare INC., a national leader in post-acute healthcare. Fairview will retain 20% ownership in the new post-acute joint venture for home health and hospice services for Fairview Health Services. AccentCare provides a vast network of specialized resources, technology and care professionals, allowing Fairview to focus resources and investments as it continues to build its position as a regional leader in providing affordable care, increasing access and improving patient outcomes. Most of the employees of the Home Health and Hospice Care are now employed by the new joint venture.

UMMC Campus Plan. In October 2017, Fairview approved a capital investment on the UMMC campus to support current and future patient volumes and other strategic initiatives. The project will add capacity in the Emergency Department and Observation Unit, Operating Rooms and inpatient units. Fairview expects the total project to cost approximately $111.6 million and to be completed over a three-year period that started in 2018 and will be completed in 2021. This project was partially funded with proceeds from the Series 2018A Bonds. Senior Services Expansion. Ebenezer routinely enters into contracts to manage senior living communities being constructed by various third-party developers. One such development is described below: Fields at Arbor Glen in Lake Elmo, Minnesota includes 42 independent living apartments in

addition to 18 townhomes. The townhomes expect to be available in early 2021 with the apartment building opening in March 2021.

Virtual Care. In reaction to the COVID-19 pandemic, in a matter of months, Fairview’s virtual health adoption increased from 5% to a peak of 90% of our Ambulatory visits, leveling off at 35% in the third quarter. Virtual visits were 350,392 compared to 13,156 in the same period last year.

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Clinic Realignment. On October 1, 2020, Fairview realigned certain legacy Fairview clinics to reside in entities outside the Obligated Group. Over the last year, Fairview evaluated its clinic structure, which had primary care and specialty care clinics located in multiple different legal entities, some of which were part of the Obligated Group, and other entities which were not part of the Obligated Group. To improve contract negotiations, more easily participate in certain incentive arrangements, obtain the most favorable payment terms, and streamline and improve reporting processes for the organization, Fairview aligned its specialty care and primary care clinics into two separate legal entities, which entities are not part of the Obligated Group. The value of these transferred clinic assets does not exceed the applicable limit set in the Master Indenture A second phase of this realignment is expected to occur in 2021 when Fairview integrates the legacy HealthEast clinical and revenue cycle system into Fairview’s version to completely integrate the Joint Clinical Enterprise, including the University of Minnesota, which includes a drive toward one patient statement and the march toward one version of Epic. Term Loan. In July 2020, Fairview closed on a $50.0 million term loan with Wells Fargo to support general liquidity. The loan matures in 2021 and has a fixed interest rate of 1.86%.

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AWARDS AND RECOGNITION

CMS – Hospital Quality Ratings. In April 2020, Fairview hospitals were recognized nationally by the Center for Medicare Services for quality of care. The ratings are valuable consumer tools that provide helpful and important information on the safety and quality of our nation’s hospitals. Patient survey data is the basis for the ratings for individual measures and a combined score. The individual measures include but are not limited to communication, pain management, care transition, and hospital cleanliness.

Fairview Hospitals earnings three stars and above are:

Five Star Hospitals: Four Star Hospitals: Three Star Hospitals: Fairview Southdale Fairview Lakes University of Minnesota Medical Fairview Northland Fairview Ridges HealthEast St John’s

Range HealthEast Woodwinds

Grand Itasca

U.S News & World Report – Best Medical Schools. In March 2020, the University of Minnesota Medical School was named one of the ten best medical schools for family medicine and in the top 20 for primary care. The ratings were developed based on data in seven categories including quality, research activity, and faculty resources. Mpls. St. Paul Magazine – Top Doctors. In July 2020, Fairview, UMPhysicians, and the independent clinics in our network have been recognized by the Mpls St. Paul Magazine. With 404 physicians in 48 specialties named to the list, Fairview has the most in the Twin Cities. Top Doctors are nominated by their peers and candidates are extensively researched on their professional achievements and disciplinary history and reviewed by an expert panel.

U.S News & World Report – Leader in Children’s Health. In June 2020, for the 13th year in a row the M Health Fairview University of Minnesota Masonic Children’s Hospital was recognized as a national leader on children’s health. The ratings are based on a range of factors, including patient safety, infection prevention and the adequacy of nurse staffing. The rankings are also based on an annual national survey of more than 11,000 pediatric specialists.

Human Rights Campaign Foundation – 2020 Healthcare Equality Index (“HEI”) report. In September 2020, Ridges Hospital has been recognized as an “LGBTQ Healthcare Equality Leader” by the Human Rights Campaign Foundation in its 2020 HEI report. The distinction, based on evaluating and benchmarking healthcare facilities' policies and practices, recognizes the hospital for receiving a perfect score of 100 on the HEI, one of only four in Minnesota and fewer than 500 nationwide.

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OBLIGATED GROUP AND OTHER FAIRVIEW SUBSIDIARIES

Members of the Obligated Group currently include Fairview, Range Regional Health Services (“RRHS”), FPS, HealthEast Care System (“HealthEast”), St. Joseph’s, St. John’s, Woodwinds and Grand Itasca (collectively, the “Obligated Group”). Fairview owns and operates UMMC and four other hospitals in the Metro Area and is the sole member of FPS, HealthEast, RRHS and Grand Itasca. RRHS owns and operates Fairview Range Medical Center, located in northern Minnesota. HealthEast owns and operates Bethesda, HealthEast Home Care, an in-home skilled nursing and therapy service, and HealthEast Medical Transportation, an ambulance and medical transportation service, which operations are all part of the Obligated Group, and is also the sole member of St. Joseph’s, St. John’s and Woodwinds.

The Obligated Group accounted for approximately 86% of Fairview’s consolidated total operating revenue for the nine-months ended September 30, 2020, and approximately 88% of Fairview’s total consolidated assets at September 30, 2020.

None of the other Fairview subsidiaries, joint ventures, or partnerships in which Fairview has an interest are members of the Obligated Group (collectively these excluded entities are referred to as the “Non-Obligated Group Affiliates”).

The following exhibit illustrates the significant entities comprising Fairview and indicates whether each entity is a member of the Obligated Group as of September 30, 2020.

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GOVERNANCE AND MANAGEMENT Executive Management. The names, titles, ages and professional backgrounds of the executive officers of Fairview are set forth below. James Hereford (60), Fairview President and Chief Executive Officer. Mr. Hereford was appointed President and Chief Executive Officer in 2016. Mr. Hereford joined Fairview after serving as Chief Operations Officer at Stanford Health Care where he was responsible for all inpatient and ambulatory operations as well as various administrative functions. Prior to his role at Stanford, he was Chief Operations Officer at the Palo Alto Medical Foundation where he was responsible for operations serving more than 800,000 people in the San Francisco Bay area. He also served as the Executive Vice President responsible for the Group Health care delivery system in Seattle, Washington, an integrated health maintenance organization that served the state of Washington and northern Idaho. Mr. Hereford holds bachelor’s and master’s degrees in mathematics from Montana State University. He has taught courses with Stanford University’s Graduate School of Business, University of Washington’s Master of Health Administration program and The Ohio State University’s Master of Business Operations Excellence Program.

Sameer Badlani (46), MD, FACP, Chief Information Officer. Dr. Badlani joined Fairview in April 2019 from Sutter Health where he served as Chief Health Information Officer and System Vice President of Enterprise Data Management and Analytics. Before that, he was Chief Health Information Officer at Intermountain and Chief Medical Information Officer at University of Chicago Medical Center and School of Medicine. After he received his medical degree from the University of Delhi in India, Sameer completed his internal medicine residency training and served as chief resident at the University of Oklahoma. He also received training in biomedical informatics at the University of Utah in Salt Lake City. A national speaker, educator, and consultant on topics in digital medicine, clinical informatics, analytics, and innovation, Sameer sits on the board of DirectTrust and Carnegie Mellon’s Center for Machine Learning and Health. Recently, he was named to the Becker’s 2019 list of top Health System CIOs.

Hayes Batson (49), Chief Financial Officer. Mr. Batson joined Fairview in April 2019. Before joining Fairview, Mr. Batson spent seven years on the board of Children’s Minnesota. While on the board, he served as board chair, led work to evaluate strategy and partnership opportunities and provided oversight of key payer negotiations, revenue cycle and strategic pricing initiatives. Mr. Batson’s career extends beyond a traditional health care finance background. He built his business acumen with early career experience at McKinsey & Company, Inc. and William Blair & Company before co-founding Epotec, Inc., a behavioral health software and content company. After that, Mr. Batson was CEO and, then Chairman, of Regency Beauty Institute, and, most recently, was the CEO and co-founder of Tinket, a consumer digital scheduling company.

Bob Beacher (65), Chief of Shared Clinical Services. Mr. Beacher has administrative responsibility for Fairview’s laboratory, radiology, rehabilitation, and pharmacy teams. In addition, he serves as president of Fairview Pharmacy Services and provides executive leadership over respiratory therapy, Fairview ambulatory surgery centers and joint ventures. Mr. Beacher is a registered pharmacist and earned his bachelor’s degree from the University of Minnesota. Mr. Beacher is a member of several state and national pharmacy associations and serves on Fairview’s Ethics Committee.

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Srijoy Mahapatra, MD (48), Chief Clinical Innovation Officer. Dr. Mahapatra joined Fairview in May 2019 and leads system innovation efforts to create and advance clinical programs to help patients live longer, healthier lives. Prior to Fairview, he held roles at Abbott Labs and St. Jude Medical, where he led worldwide clinical trials. Dr. Mahapatra was also an Assistant Professor of Medicine and Biomedical Engineering at the University of Virginia as well as Head Team Cardiologist for NCAA student-athletes. He continues to see patients as a consulting cardiologist to several professional sports leagues. Mr. Mahapatra has been involved in several startup companies, holds 11 patents, and has had his work appear in more than 150 publications. He holds a bachelor’s degree in electrical engineering, a Master of Business Administration, and certification in artificial intelligence from Massachusetts Institute of Technology as well as a Doctor of Medicine degree from Tufts University. Mr. Mahapatra completed a Cardiology and Electrophysiology fellowship at the Mayo Clinic and advanced training in complex ablation at Haut Levaque in Bordeaux, France, and INCOR in Sao Paulo, Brazil.

Andrea Mokros (43), Chief Public Affairs Officer. Ms. Mokros leads Fairview’s Communications, Government Relations, and Community Advancement teams. Prior to joining Fairview, Ms. Mokros served as Senior Vice President at Weber Shandwick, a Public Relations consultancy; and as Vice President of Communications and Events for the Minnesota Super Bowl Host Committee. Ms. Mokros has served in a number of leadership roles in state and federal government, including at the White House as Special Assistant to the President and Director of Strategic Planning for the First Lady; and as Deputy Chief of Staff to both Minnesota Governor Mark Dayton and U.S. Senator Amy Klobuchar. Ms. Mokros is a graduate of the University of Minnesota.

Mary Nease (55), Chief People Officer. Ms. Nease joined Fairview in December 2019 as Chief People Officer. Prior to joining Fairview, Ms. Nease served as Senior Vice President and Chief Human Resource Officer at Thrivent Financial, a not-for-profit serving more than 2.3 million members. She also spent ten years advancing the mission of American Public Media in progressive leadership roles. Ms. Nease also held roles as Vice President of Human Resources at Travelers and US Bancorp Piper Jaffray. She has a Bachelor of Business Administration from the University of Wisconsin-Madison and has also completed executive programs from the University of Michigan and the University of Minnesota – Carlson School of Management.

Laura Reed, RN, DNP (59), Chief Operating Officer and Chief Nursing Executive. Ms. Reed rejoined Fairview in 2017 as Chief Nursing Executive and in 2018 also became the System’s Chief Operating Officer. Prior to rejoining Fairview, Ms. Reed was with ThedaCare where she served in capacity of Chief Nurse Executive and Chief Operating Officer. Previously Ms. Reed held several leadership positions including Chief Nurse Executive for University of Minnesota Health. She also had a prior position of Senior Vice President patient care services and Chief Nursing Officer for Mercy Medical Center in Cedar Rapids, Iowa. She holds an executive master’s degree in business administration and a master’s degree in nursing from the University of Iowa. She received her bachelor’s degree in nursing from Coe College and a diploma in nursing from the Finley Hospital School of Nursing.

Trudi Noel Trysla (53), Chief Legal Officer and General Counsel. Ms. Trysla develops Fairview’s overall legal strategy, leads Fairview’s legal and ethical adherence to federal and state law and health care public policy, and oversees the Fairview’s legal and risk management functions. Ms. Trysla was named general counsel in 2014 after serving six years as associate general counsel. Prior to joining Fairview, Ms. Trysla served as senior legal counsel at Medtronic, Inc.; as legal counsel for Mayo Foundation in Rochester, Minnesota; and as an attorney in private practice. Ms. Trysla earned her law degree from the University of Minnesota and her bachelor’s degree from the University of Nebraska.

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Mark Welton, MD (63), Chief Medical Officer. Dr. Welton became Chief Medical Officer of Fairview in July 2017. Prior to joining Fairview, Dr. Welton was the Harry A. Oberhelman Jr. Professor of Surgery and Chief of Colon and Rectal Surgery in the Stanford University School of Medicine and Chief of Staff for Stanford Hospital and Clinics for ten years. He is board certified in general surgery and colon and rectal surgery. He serves on the American Board of Surgery, the American Board of Colon and Rectal Surgeons and the American Society of Colon and Rectal Surgeons Research Foundation. He received his MD and completed his surgical residency at University of California, Los Angeles before completing a fellowship in Colon and Rectal Surgery at Washington University.

BOARD OF DIRECTORS. The Board of Directors of Fairview (the “Board”) governs Fairview and is responsible for, among other matters, the assets of Fairview, quality, patient care, compliance and its overall business and financial performance. Fairview’s bylaws authorize up to 21 directors: nine elected directors, not less than three and not more than nine appointed directors and three ex officio directors. The three ex officio directors are the President and CEO of Fairview, the Dean of the University of Minnesota Medical School and the Vice President for Health Sciences or the actual or acting chief executive of health sciences colleges of the University of Minnesota Medical School or of the University. The remaining members of the Board include elected and at large members as determined by the Board as well as communities, service areas and populations served by Fairview subsidiaries or related organizations or divisions, both of which categories of members are elected by the Board, with one of the directors elected by the Regents of the University. The President and CEO of Fairview is the only Fairview employee who may serve on the Board.

CORPORATE GOVERNANCE POLICIES. The Board is committed to sound and effective corporate governance practices. The Governance Committee regularly reviews and adopts “best practices” in corporate governance and recommends changes to Fairview’s corporate governance policies or processes as appropriate.

Fairview has a conflict of interest policy that applies to all members of the Board and requires disclosure of any conflict of interest or potential conflict of interest and includes a process for review and decision making relative to such disclosures.

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Section Two – Year-to-Date Financial Statements

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Notes to Consolidated Financial Statements (Unaudited)

(Dollars in Thousands)

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1. Organization and Basis of Presentation

Fairview Health Services, an integrated health system, along with its affiliates and subsidiaries (collectively referred to as Fairview) is a nonprofit corporation headquartered in Minnesota and is exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code.

Fairview serves the entire twelve-county Greater Minneapolis-St. Paul metro area (the Metro Area), as well as communities throughout greater Minnesota and portions of Northern Iowa and Western Wisconsin. Fairview offers a broad continuum of health care services and owns and operates 11 hospitals, including the University of Minnesota Medical Center, Fairview, with the University of Minnesota Masonic Children’s Hospital (collectively, UMMC), which is the adult and pediatric teaching hospital of the University of Minnesota (the University). UMMC and eight of Fairview’s community hospitals are in the metro area. Fairview’s other two community hospitals are in northern Minnesota. Together, Fairview also operates more than 100 primary and specialty care clinics, eight ambulatory care centers, over 40 retail and specialty pharmacies, pharmacy benefit management services, rehabilitation centers, counseling and home health care programs, a physician network, senior care housing and long-term care facilities, hospice and home care, medical transportation services, and a health plan.

Fairview, through its integrated care model, serves the Metro Area and greater Minnesota, aiming to deliver the benefits of academic medicine to more patients and families across the state by expanding care, research and education through access to a greater pool of physicians and patients, while seeking to reduce the total cost of care for patients.

The consolidated financial statements include the accounts of Fairview, comprising both tax-exempt and taxable entities. All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Fairview’s management regularly evaluates the accounting policies and estimates used. Although estimates are fairly stated at the time the estimates are made, actual results could differ from those estimates.

This quarterly report supplements our annual financial statements for the year ended December 31, 2019, as audited by Ernst & Young, LLP. Certain notes and disclosures that are required in annual financial statements prepared in accordance with GAAP have been omitted as they substantially duplicate the disclosures contained in our annual financial statements. The information included in this quarterly disclosure should be read in conjunction with the most recent audited consolidated financial statements and accompanying notes.




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2. Accounting Policies

Recent Accounting Pronouncements In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure for Fair Value Measurement. This ASU improves the effectiveness of the notes to financial statements through changes in the disclosure requirements for fair value measurement. The ASU was effective January 1, 2020. Because of adoption, there was no impact to the interim financial statements. Fairview is currently assessing the impact that ASU 2018-13 will have on its annual consolidated financial statement disclosures. Any changes will be applied using a retrospective approach.

New Accounting Standard Not Yet Adopted

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU is effective January 1, 2021 and will be applied using a prospective approach. Fairview is currently assessing the impact that ASU 2018-15 will have on its consolidated financial statements and will adopt the provisions upon the effective date.




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3. Investments

The composition of Fairview’s investments, including those with limited uses, is summarized below:

September 30,

2020 December 31,

2019 Cash and cash equivalents $ 616,798 $ 278,682 Certificate of deposits 1,696 1,687 Asset-backed securities 49,911 59,633 Mortgage-backed securities 45,244 40,196 Corporate debt securities 336,163 278,785 Equity mutual funds 635,589 747,193 Equity securities 95,623 100,896 Equity comingled funds 41,381 71,877 Fixed income mutual funds 237,988 230,345 Municipal debt securities 67,400 50,355 U.S. government agency securities 177,274 204,475 U.S. Treasury debt securities 125,966 169,209 Fund of hedge funds 54,051 104,600 Hedge funds 240,770 187,187 Private capital funds 26,302 17,231 Real estate investment trusts 652 740 Sovereign Debt 1,353 1,435 $ 2,754,161 $ 2,544,526

Alternative investments accounted for using the equity method of accounting and investments in certain entities that calculate net asset value (NAV) per share (or its equivalent), including restricted and unrestricted assets are as follows:

Balance reported at

September 30,

2020 December 31,

2019 Redemption frequency

Redemption notice period

Equity Commingled Funds $ 41,381 $ 71,877 Monthly 10 Days Equity Long/Short Hedge Funds 80,469 94,493 Monthly/Quarterly 30-90 Days Fixed Income Hedge Funds 101,423 92,693 Quarterly 60 Days Other Hedge Funds 58,878 – Monthly/Quarterly 30-90 Days Fund of Hedge Funds 54,051 104,600 Semi-Annually 95 Days Real Estate Investment Trust 652 740 Monthly/Quarterly 0-20 Days Private Capital Fund 26,302 17,231 7-9 Years N/A

Total $ 363,156 $ 381,634




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3. Investments (continued)

Fairview had $33,698 in unfunded private capital fund investments at September 30, 2020.

Through Fairview’s investments in fund of hedge funds, Fairview is indirectly involved in investment activities such as securities lending, trading in futures and forward contracts and other derivative products. Derivatives are used to adjust portfolio risk exposure. While these financial instruments may contain varying degrees of risk, Fairview’s risk with respect to such transactions is limited to its capital balance in each investment.

Investment return is summarized and reported in the consolidated statements of operations and changes in net assets as follows:

Nine Months Ended September 30,

Three Months Ended September 30,

2020 2019 2020 2019 Dividends and interest $ 31,091 $ 35,733 $ 10,786 $ 12,057 Investment expenses, net (3,589) (3,453) (1,108) (1,112) Net realized gains 85,656 25,061 21,896 5,040 Changes in unrealized gains and

losses on trading investments (97,423) 130,416 42,018

(9,478) $ (15,735) $ 187,757 $ 73,592 $ 6,507 Included in other operating revenue $ 4,421 $ 4,484 $ 2,418 $ 1,106 Included in nonoperating gains/(losses) 11,194 182,983 71,434 5,269 Included in changes in temporarily

restricted net assets 120 290 (260)

132 $ 15,735 $ 187,757 $ 73,592 $ 6,507




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4. Long-Term Debt

Fairview’s long-term debt is summarized below:

Annual Interest Rates

Final Scheduled

Maturity

Amount Outstanding at September 30,

2020 December 31,

2019 Health Care System Revenue Bonds:

Series 2018A Tax-Exempt 4.00%–5.00% 2049 $ 263,890 $ 263,890Series 2018B Taxable Variable 2048 113,015 113,015Series 2018C Taxable Variable 2048 110,510 110,510Series 2017A Tax-Exempt Bond 2.00%-5.00% 2047 192,515 192,515Series 2017B Taxable 3.13% 2047 95,415 95,415Series 2017C Taxable 2.79% 2047 95,410 95,410Series 2015A Tax-Exempt Bond 2.00-5.00% 2044 102,380 102,380Series 2015 Taxable 4.16% 2043 328,150 328,150

Senior housing revenue bonds & notes Various fixed rate Various 50,610 64,308Capital lease obligations Various fixed rate Various 49,762 55,616Other Various fixed rate Various 59,703 11,842 1,461,360 1,433,051Net unamortized premium 44,764 46,017Unamortized debt issuance costs (9,783) (10,386)Less current maturities of long-term debt (26,542) (30,064) $ 1,469,799 $ 1,438,618

In July 2020, Fairview closed on a $50,000 term loan to support general liquidity. The loan matures in 2021 at a fixed annual interest rate of 1.86%.

5. Derivative Financial Instruments

Fairview uses derivative financial instruments, including interest rate swaps, as part of its risk management strategy to manage exposure to fluctuation in interest rates and to manage the overall cost of its debt. Derivatives are used to manage identified and approved exposures and are not used for speculative purposes.

Interest rate swaps between Fairview and a third party (counterparty) provide for the periodic exchange of payments between the parties based on changes in a defined index (either the London Interbank Offered Rate (“LIBOR”) and a fixed rate and include counterparty credit risk.




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5. Derivative Financial Instruments (continued)

Counterparty credit risk is the risk that contractual obligations of the counterparties will not be fulfilled. Concentrations of credit risk relate to groups of counterparties that have similar economic or industry characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Counterparty credit risk is managed by requiring high credit standards for Fairview’s counterparties. The counterparties to these contracts are financial institutions that carry investment-grade credit ratings. The interest rate swap contracts contain collateral provisions applicable to both parties to mitigate credit risk. Fairview does not anticipate non-performance by its counterparties.

The following is a summary of the outstanding positions under these interest rate swaps and basis rate swaps at September 30, 2020:

Instrument Type

Notional Amount

Maturity Date

Rate Paid Rate Received

Floating to fixed rate

swap Floating to fixed rate

swap

$ 147,620 November 15, 2047

3.50% 62.4% of 1-month LIBOR and 0.29%

$ 74,880 November 15, 2047

3.60% 62.4% of 1-month LIBOR

and 0.29%

The fair value of interest rate swaps of ($111,114) and ($82,672) at September 30, 2020 and December 31, 2019, respectively, is recorded as a liability in the consolidated balance sheet. Fairview offsets fair value amounts recognized for the derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) based on the terms of the master netting agreement with the counterparty. Fairview’s master netting agreements contain provisions that require Fairview to post collateral with the counterparty when the net liability of the derivative instruments is greater than the predetermined threshold. As of September 30, 2020, Fairview had collateral posted of $74,635, related to its derivative instruments. No collateral was required to be posted on December 31, 2019.

None of the derivative financial instruments are designated as hedging instruments. Accordingly, nonoperating (loss) gains are recorded on the consolidated statements of operations and changes in net assets. The losses on interest rate swaps are ($33,014) and ($17,269) for the nine months ended September 30, 2020 and 2019, respectively.




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6. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements and Disclosures Section of the Financial Accounting Standards Board’s Accounting Standards Codification establish a framework for measuring fair value. The framework consists of a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The fair values for Level 1 assets in the fair value measurements tables were based upon quoted market prices. Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.

Inputs are obtained from various sources, including market participants, dealers and brokers. Fairview utilizes a discounted cash flow methodology for valuing derivative financial instruments. The valuations reflect a credit spread adjustment to the LIBOR discount curve to reflect the credit value adjustment for “nonperformance” risk. The credit spread adjustment is derived from other comparably rated entities’ bonds priced in the market. Fair value for Level 3 is based on unobservable market data. There were no financial instruments recorded at fair value classified as Level 3 for the nine months ended September 30, 2020 or the year ended December 31, 2019.

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 Fairview believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The carrying values of cash and cash equivalents, accounts receivable for medical services, accounts payable and receivables and payables under third-party reimbursement contracts are reasonable estimates of their fair value due to the short-term nature of these financial instruments.




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6. Fair Value Measurements (continued)

The following table represents the financial instruments carried at fair value on a recurring basis as of September 30, 2020, based on the definition of the fair value hierarchy:

The following table represents the financial instruments carried at fair value on a recurring basis as of December 31, 2019, based on the definition of the fair value hierarchy:

Level 1 Level 2 Level 3 Total Assets

Cash and cash equivalents $ 616,798 $ – $ – $ 616,798Asset-backed securities – 49,911 – 49,911Certificates of deposit – 1,696 – 1,696Mortgage-backed securities – 45,244 – 45,244Corporate debt securities – 336,163 – 336,163Equity Mutual Funds 635,589 – – 635,589Equity securities 91,268 4,355 – 95,623Fixed income mutual funds 237,988 – – 237,988Municipal debt securities – 67,400 – 67,400Sovereign debt – 1,353 – 1,353U.S. government agency debt securities – 177,274 – 177,274U.S. Treasury debt securities 125,966 – – 125,966

Total investments at fair value 1,707,609 683,396 – 2,391,005

Investments not at fair value 321,775Equity Commingled Funds at NAV 41,381Total investments 2,754,161 Liabilities Derivative financial instruments $ – $ (36,478) $ –– $ (36,478)

Level 1 Level 2 Level 3 Total Assets

Cash and cash equivalents $ 278,682 $ – $ – $ 278,682Asset-backed securities – 59,633 – 59,633Certificates of deposit – 1,687 – 1,687Mortgage-backed securities – 40,196 – 40,196Commercial Paper – - – -Corporate debt securities – 278,785 – 278,785Equity Mutual Funds 747,193 – – 747,193Equity securities 99,614 1,282 – 100,896Fixed income mutual funds 230,345 – – 230,345Municipal debt securities – 50,355 – 50,355Sovereign debt – 1,435 – 1,435U.S. government agency debt securities – 204,475 – 204,475U.S. Treasury debt securities 169,209 – – 169,209

Total investments at fair value 1,525,043 637,848 – 2,162,891

Investments not at fair value 309,758Equity Commingled Funds at NAV 71,877Total investments 2,544,526 Liabilities Derivative financial instruments $ – $ (82,672) $ –– $ (82,672)




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7. Pension Terminations

Fairview terminated two of its frozen defined benefit plans effective September 30, 2019. In June 2020, Fairview solicited bids from insurance companies to purchase the outstanding annuities and transferred assets to the selected insurance company at the end of June. Fairview contributed $1,194 in additional assets to fully fund the annuity purchase. Long-term liabilities were reduced by $3,866, and Fairview incurred a one-time non-cash loss of $4,833 on the income statement to reflect accumulated losses held in net assets that had not previously been recognized in earnings.

8. Subsequent Events

Fairview evaluated events and transactions occurring subsequent to September 30, 2020.

In October 2020, Fairview announced changes that align costs, simplify the patient experience, deepen community partnerships and accelerate the system’s digital investments to prioritize healthcare affordability and health equity for all Minnesotans. These changes included the transformation and closure of certain hospitals and clinics. Fairview is still assessing the impacts of these changes on the fourth quarter financial statements including impairment or disposals of land, building and equipment or right-of-use assets.

In November 2020, Fairview sold its home care and hospice care in an asset sale and entered into a newly formed joint venture with AccentCare Inc., a national leader in post-acute healthcare. AccentCare will be the majority owner of the newly formed company and Fairview will retain a 20% minority interest. Fairview received net cash in the transaction of $55,000 million and is assessing the accounting for the transaction.

During this period there were no additional subsequent events, other than Fairview’s continued response to the Coronavirus Disease as noted in the “Key Organization Update” section above, requiring disclosure or recognition in the consolidated financial statements.

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Section Three – Key Performance Indicators

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Nine Months Ended September 30,

2020 2019

Hospitals and Surgery Centers Medical/Surgical staffed beds 1,985 1,977 Long-term acute care staffed beds 50 94 *Total staffed beds 2,035 2,071 Medical/surgical inpatient admissions 60,830 67,687 Long-term acute care inpatient admissions 152 790 Behavioral inpatient admissions 6,538 8,288 Skilled nursing inpatient admissions 329 341 Total inpatient admissions 67,849 77,106 Outpatient registrations 663,518 845,744 Emergency room visits 208,343 240,426 Observation days 22,849 24,845 Deliveries 9,460 8,737 Inpatient surgeries 19,463 23,550 Hospital outpatient surgeries 24,852 28,812 Ambulatory care centers surgeries 8,309 11,245 Total surgeries 52,624 63,607 Medical/surgical patient days 287,411 304,443 Long-term acute care patient days 6,557 23,157 Behavioral patient days 58,914 72,868 Skilled nursing patient days 4,512 4,476 Total patient days 357,394 404,944

*Does not reflect temporary closure or transition of units due to COVID-19.

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Nine Months Ended September 30, 2020 2019

Occupancy % 60.8% 68.2% Case mix index 1.69 1.59 Medical/surgical average length of stay 4.7 4.5 Long-term acute care length of stay 43.1 29.3 Behavioral average length of stay 9.0 8.8 Skilled Nursing average length of stay 13.7 13.1 Total average length of stay 5.3 5.3 Clinics and Other Ambulatory Care Clinic work RVUs 3,711,838 4,154,599 Virtual clinic visits 305,392 13,156 On-site clinic visits 745,790 1,397,242 Institute for Athletic Medicine visits 86,860 150,967 Home Care visits 396,162 409,673 Orthotics & Prosthetics procedures 10,373 12,553 Long-Term Senior Care Facilities Beds in service 541 541 Skilled nursing patient days 129,670 139,041 Skilled nursing admissions 1,639 1,964 Occupancy % 87.4% 94.1% Other Statistics Total provider FTEs 1,348 1,455 Pharmacy unit sales 1,750,928 1,179,383 Health Plan Services

Membership 366,200 360,100

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September 30, 2020 September 30, 2019

Profitability Ratios: EBIDA margin (0.2%) 2.3% Operating margin before non-recurring revenue and expenses

(3.4%) (1.2%)

Operating margin after non-recurring (3.2%) (1.3%) revenue and expenses Total margin (3.8%) 1.9% September 30, 2020 December 31, 2020

Liquidity Ratios: Days Cash on Hand 168.4 149.8 Days Cash on Hand (Obligated Group) 185.5 164.9 Days in Accounts Receivable – Hospitals 62.6 57.6 Days in Accounts Receivable – Clinics 44.2 38.9 Cash to Debt 186.9% 167.3%

Capital Structure Ratios: Debt to Capitalization 39.3% 37.2%

Below is a calculation of the debt service coverage of the Obligated Group for the rolling twelve months ending September 30, 2020:

Excess of revenue over expenses attributable to Fairview Obligated Group

($120,727)

Interest expense 45,113 Depreciation and amortization 134,601 Unrealized swap losses 17,014 Other non-operating losses 6,457

Unrealized investment losses 41,639

Impairment of property and equipment 122,843

Net income available to pay debt service $246,930

Maximum annual debt service $82,888

Coverage of historical maximum annual debt service 3.0

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Section Four – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

for the periods ended September 30, 2020

Quarter-to-Date Financial Results For the three-months ended September 30, 2020, Fairview’s total operating revenue of $1,613.4 million increased $95.5 million or 6.3% over the comparable period in 2019 including an increase in patient service revenue of $42.4 million or 3.1% due to the following: The recognition of $38.6 million in federal and state grants Growth in revenue of our diversified businesses including Pharmacy Services of $59.0

million or 18.6%, due to specialty and infusion services and Preferred One of $18.3 million or 22.2%, due to increased lives covered

Annual contract rate changes and favorable service and case mix that partially offset the hospital and clinic volumes declines due to COVID-19

For the three-months ended September 30, 2020, Fairview’s total operating expenses of $1,603.6 million increased $61.9 million or 4.0%. Expense drivers included:

Increase in pharmaceutical expenses as a result of increase Pharmacy Services volume Increase in provider expense under the MPSA with UMP, partially offset with specialty

services revenue And by inflationary expense pressures especially in pharmaceuticals, which outpaced

revenue increases from government and commercial rate changes Partially offset by salary and benefit expense reductions through flexible staffing, furloughs

and reduction of incentives and reductions to the employer portion of retirement plan contributions, offset by an increase in unemployment insurance costs

And increased costs to support the COVID-19 response including temporary and premium labor for patient care, patient screening and testing, Personal Protective Equipment (“PPE”), and disinfecting supplies at all sites of care.

The net operating gain (loss) before non-recurring revenue and expense was $9.8 million and ($23.7) million for the three months ended September 30, 2020 and 2019, respectively, driving a net operating margin of 0.6% and (1.6%) for the respective periods. Earnings before interest, depreciation and amortization margin was 3.5% compared to 1.9% the previous period.

Non-recurring revenue and (expenses) of $10.1 million and ($3.5) million for the three months ended September 30, 2020 and 2019, respectively, for gains on sale of Ebenezer land and buildings in the current period, net of restructuring costs in both periods. Including non-recurring revenue and expenses, the operating gain (loss) was $19.9 million and ($27.2) million for the three months ended September 30, 2020 and 2019, respectively. Investment gains were $71.4 million compared to $5.3 million, for the quarter ended September 30, 2020 and 2019, respectively, which was in-line with overall financial market performance. Gain (loss) on interest rate swaps was $6.1 million and ($17.3) million for the quarter ended September 30, 2020 and 2019, respectively, due to changing interest rates during the quarter. Fairview’s consolidated excess (deficit) of revenues over expenses was $97.0 million compared to ($39.5) million in the same period from 2019.

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Year-to-Date Financial Results For the nine-months ended September 30, 2020, Fairview’s total operating revenue of $4,504.7 million increased $17.8 million or 0.4%, over the comparable period in 2019 despite a decrease in patient service revenue $153.5 million or 3.8%, due to volume reductions in response to COVID-19 which began in March 2020. The increase in operating revenue is due to:

The recognition of $151.8 million in federal and state grants Growth in revenue of our diversified businesses including Pharmacy Services of $150.4

million or 16.4% because of specialty and infusion services and Preferred One revenue of $53.7 million or 21.7% due to lives covered

Annual contract rate changes and favorable service and case mix that partially offset the hospital and clinic volume declines due to COVID-19

For the nine-months ended September 30, 2020, Fairview’s total operating expenses of $4,657.3 million increased $118.7 million or 2.6%. Expenses increased due to:

Increase in pharmaceutical expenses as a result of an increase in Pharmacy Services volume

Increased funds flow to the University under the M Health Fairview Agreement including increased academic support for our overall strategic partnership and cost of physician services agreements which are partially offset by special services revenue

Inflationary expense pressures, especially in pharmaceuticals, which outpaced revenue increases from government and commercial payor rate changes

Partially offset by salary and benefit expense reductions through flexible staffing, furloughs and reduction of incentives, lower utilization of our self-insured employee benefit plan, and reductions to the employer portion of retirement plan contributions, offset by an increase in unemployment insurance costs

Increased costs to support the COVID-19 response including temporary and premium labor for patient care, patient screening and testing, PPE, and disinfecting supplies at all sites of care.

The net operating loss before non-recurring expense was ($152.6) million and ($51.7) million for the nine months ended September 30, 2020 and 2019, respectively, driving a net operating margin of (3.4%) and (1.2%) for the respective periods. Earnings before interest, depreciation and amortization margin was (0.2%) compared to 2.3% the previous period.

Non-recurring revenue and (expenses) of $9.0 million and ($8.0) million for the nine months ended September 30, 2020 and 2019, respectively, for gains on sale of Ebenezer land and buildings in the current period, net of restructuring costs in both periods. Including these non-recurring revenue and expenses, the operating loss for the year was ($143.6) million and ($59.7) million for the nine months ended September 30, 2020 and 2019, respectively. Investment gains were $11.2 million compared to $183.0 million, for the nine-month ended September 30, 2020 and 2019, respectively, in-line with overall financial market performance. Loss on interest rate swaps was ($33.0) million and ($39.2) million for the nine months ended September 30, 2020 and 2019, respectively, due to decreasing interest rates over both periods. Combined with results of operations, Fairview’s consolidated (deficit) excess of revenues over expenses was ($171.0) million compared to $83.1 million in the same period from 2019.

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Total Operating Revenues Total operating revenue of $4,504.7 million includes inpatient and outpatient hospital revenues, clinic patient revenue, pharmacy services, and other aspects of our diverse care continuum, as well as non-patient revenues including, PBM fees, rental income, management fees, health plan member premiums and administrative fees, joint venture earnings, transportation fees, which are components of other operating revenue.

$ in millions

Year-to-date September

2020


2019

Variance

Favorable

(Unfavorable)

% Variance Favorable

(Unfavorable)

Patient service revenue $3,840.2 $3,993.8 (153.5) (3.8%)

Other operating revenue $664.5 $493.1 $171.4 34.7%

Total operating revenue $4,504.7 $4,486.9 $17.9 0.4%

Patient Service Revenue

The composition of patient service revenue was as follows:


2020


2019

Variance Favorable

(Unfavorable)


(Unfavorable)

Inpatient revenue % 47.1% 47.5% (0.4%) (0.8%) Outpatient revenue % 52.9% 52.5% 0.4% 0.8%

The percentage of gross patient charges by payment source was as follows:

Year-to-date Year-to-date

September

2020 September

2019 Variance % Variance

Governmental:

Medicare 37.8% 38.4% (0.6%) (1.6%)

Medicaid 20.1% 19.0% 1.1% 5.8%

Other 1.5% 1.2% 0.3% 25.5%

59.4% 58.6% 0.8% 1.4%

Blue Cross Blue Shield 12.3% 12.6% (0.3%) (2.4%)

Medica 4.1% 4.7% (0.6%) (12.8%)

HealthPartners 7.1% 7.7% (0.6%) (7.8%)

PreferredOne 5.9% 5.5% 0.4% 7.3%

Other 9.6% 9.2% 0.4% 4.3%

39.0% 39.7% (0.7%) (1.8%)

Self-pay 1.6% 1.7% (0.1%) (5.9%)

Total 100.0% 100.0%

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2020


2019

Variance Favorable

(Unfavorable)


(Unfavorable)

Unit Pricing Metrics: (1)

Net inpatient rev per admission $21,457 $19,799 $1,658 8.4%

Net inpatient rev per patient day $4,073 $3,770 $303 8.0%

Net outpatient rev per registration $1,436 $1,221 $215 17.6%

Clinic net patient rev per wRVU $135 $139 ($4) (2.3%)

Other Key Revenue Elements:

Prior period revenue (millions) $10.5 $12.9 ($2.4) (18.3%)

Quality/TCOC revenue (millions) $4.6 $11.8 ($7.2) (61.5%) (1) Excludes quality incentives and total-cost-of-care (“TCOC”) shared savings revenue

Net inpatient revenue per admission was $21,457 which was 8.4% higher than the prior year and largely attributable to increased transplant and outlier volumes. Net outpatient revenue per registration was $1,436, which is 17.6% higher than the prior year due to the mix of services performed. Clinic net patient revenue per provider work RVU (“wRVU”) was $135 which was 2.3% lower than the prior year driven by growth of virtual care.

Patient Activity

The following table provides details on 2020 patient activity levels compared to the prior year:


2020


2019

Variance Favorable

(Unfavorable)


(Unfavorable)

Inpatient admissions 67,849 77,106 (9,257) (12.0%)

Hospital patient days 357,394 404,944 (47,550) (11.7%)

Average length of stay 5.3 5.3 (0.0) (0.0%)

Outpatient registrations 663,518 845,744 (182,226) (21.5%)

Total surgeries 52,624 63,607 (10,983) (17.3%)

Observation days 22,849 24,845 (1,996) (8.0%)

Emergency room registrations 208,343 240,426 (32,083) (13.3%)

Hospital case mix index 1.69 1.59 0.1 5.7%

Clinic wRVUs 3,711,838 4,154,599 (442,761) (10.7%)

Inpatient admissions were 67,849 or 12.0%, lower compared to the same period last year due to the postponement of elective procedures beginning in the latter half of March due to COVID-19, prior to this time inpatient admissions were consistent with the same period in the prior year, with volumes returning closer to prior baseline in the third quarter.

Outpatient registrations decreased 182,226, or 21.5%, compared to the same period in 2019 with a year-over-year increase of 8.4% in the first two months of the year followed by a 29.4% decline in the next seven months 2020. Similarly, total surgeries decreased 10,983 or 17.3%,

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compared to the same period in 2019 with a year-over-year increase of 3.8% in the first two months of the year followed by a 23.0% decline in next seven months of the period. Outpatient registrations were slower to return to baseline than inpatient admissions but have been trending positive period over period.

Physician clinic wRVUs decreased 442,761 or 10.7%, compared to 2019 due to year-over-year primary and specialty service revenue growth offset by COVID-19 impact in 2020. Through comprehensive initiatives such as membership in accountable care products, expansion of retail clinics, and innovative virtual care investments, Fairview continues to emphasize growth through care model innovation, increasing access to existing and new providers, and increasing patient awareness within the market.

Uncompensated Care

Overall uncompensated care for year-to-date September 2020 totaled $128.7 million which was $5.1 million higher than the same period in 2019.

$ in millions


2020


2019

Variance

Favorable (Unfavorable)


(Unfavorable)

Total uncompensated care $128.7 $123.6 ($5.1) (4.2%)

% of total operating revenue 2.9% 2.8% (0.1%) (3.8%)

Fairview experienced higher uncompensated care stemming from an increase in high-deductible insurance plans, increased deductibles within insurance plans, and higher patient need. Collections are impacted by the economic ability of patients to pay and the effectiveness of our collection efforts. Fairview continues to focus on collection initiatives that promote coverage opportunities for our patients and enhance process efficiencies to reduce collection costs for these account categories. Fairview is dedicated to implementing best practices, enhancing the use of technology to improve the accuracy and timeliness of billing and payment processing, and investing in staff training throughout the revenue cycle to provide market-leading customer service. We believe that in doing so we will increase patient satisfaction, improve collections and reduce outstanding accounts receivable.

Patient advocates from our financial counseling program assist patients to determine whether those patients meet eligibility requirements for various financial assistance programs, including charity care. They also help to speed up the process of applying for acceptance into certain government programs. Receivables from patients who are potentially eligible for Medicaid are classified as such, pending resolution of the associated application with appropriate estimated allowances recorded.

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Efficiency and Effectiveness of Operations

A summary of key performance metrics is provided in the table below:


2020


2019

Variance

Favorable (Unfavorable)


(Unfavorable)

Salaries and benefits % TOR 46.2% 47.0% 0.8% 1.8%

Hospital FTE per 100 CMI-adj admissions 4.76 4.74 (0.02) (0.4%)

Total FTEs 26,340 27,233 793 2.9%

Salaries and benefits per adjusted patient day

$1,936 $1,766 ($171) (9.7%)

Clinic staff to provider ratio 2.99 3.29 0.30 9.2%

Purchased services ($ in millions) $879.0 $801.5 ($77.5) (9.7%)

Supplies % of TOR 27.1% 25.3% (1.9%) (7.3%)

Salaries and benefits expense as a percentage of total operating revenue was 46.2%, which was 1.8% favorable to the prior year due to furloughs, reduction of management and provider incentives, lower utilization of our self-insured employee benefit plan and reduction of the employer contribution to retirement plans. This was partially offset by increased costs to support the COVID-19 response including temporary and premium labor for patient care, patient screening and testing

Purchased services expense of $879.0 million increased $77.5 million or 9.7% compared to the same period in 2019 primarily driven by an increase of $44.5 million in amounts due under the MPSA including academic support and physician and management services agreement costs which was partially offset by direct incremental revenue.

Investment and Interest Rate Swap Results

For the nine months ended September 30, 2020, realized and unrealized investment gains were $11.2 million. Investment performance was in line with market conditions. Fairview’s long-term and short-term portfolios returned 1.1% and 1.0%, respectively through September 2020. This investment activity does not include earnings on restricted investments, which are returned directly to restricted funds.

$ in thousands


2020 Cash Flow

Income


2020 Market Value

Net Swap

Change

Mark to Market

Valuation

Fixed interest rate swaps

($4,666) ($28,348) ($33,014) ($111,114)

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The total liability of swap contracts increased from $82.7 million to $111.1 million year-to-date through September 30, 2020. Collateral of $74.6 million was posted against the interest rate way contract as of September 30, 2020. Interest rate swaps have generated an unrealized loss of ($33.0) million year-to-date, consisting of negative cash interest expense of ($4.7) million and non-cash, unrealized mark-to-market losses of ($28.3) million. Although the fixed payer swaps generated negative cash flows, they are structured to synthetically fix the 2018 BC bond interest expense to minimize interest rate volatility. The total notional value of outstanding swaps is $222.5 million.

Balance Sheet and Cash Flow

$ in millions

September

2020 December

2019

Variance Favorable

(Unfavorable)

Total Unrestricted Liquidity Reserves $2,796.5 $2,456.8 $339.7

Average Daily Operating Expense $16.6 $16.4 ($0.2)

Days Cash on Hand 168.4 149.8 18.6

Days Cash on Hand-Adjusted1 219.5 190.4 29.1

Total Debt Outstanding $1,496.3 $1,468.7 $27.6

Unrestricted Net Assets $2,308.5 $2,478.5 ($17.0)

Cash to Debt Ratio 186.9% 167.3% 19.6%

Debt to Capitalization Ratio 39.3% 37.2% 2.1%

Days Cash on Hand Roll-Forward

Cash and Days Cash

Investments On Hand Beginning Cash and Investments - December 31, 2019 $ 2,456.8 149.8

Earnings before interest, depreciation, and amortization 0.2 0.0

Operating costs per day - (1.9)

Investment and interest rate swap activity (63.4) (3.8)

Capital expenditures (77.8) (4.7)

Debt activity, net 5.3 0.3

CMS advanced funds (to be repaid) 325.9 19.6

Working capital and other changes 149.5 9.1

Ending Cash and Investments – September 30, 2020 $ 2,796.5 168.4

Patient accounts receivable totaled $684.4 million at September 30, 2020, a decrease of $25.4 million from December 31, 2019. Corresponding patient accounts receivable days outstanding were 53.8 at September 30, 2020 compared to 50.3 days at December 31, 2019. The increase in accounts receivable days was driven by complexity of COVID-19 claims and the large ramp up of services in the last four months. Without Pharmacy and PreferredOne expenses, days cash on hand would increase from the current 168.4 to 219.5 as both PreferredOne and Pharmacy have a dilutive impact on days cash on hand levels due to the associated operating costs, while the costs are variable expenses and covered by revenue.

1 Excluding pharmacy and health plan variable costs

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Capital Expenditures

Capital expenditures, net of proceeds from sales, through September 30, 2020 totaled $77.8 million compared to $122.5 million in the same period last year. Capital projects that were slowed down for part of the year due to COVID-19 started to ramp up late in the third quarter. While Fairview expects to continue to invest in infrastructure needs, information systems, modern technologies and the reconfiguration of facilities to more effectively provide patient care services, Fairview will prudently manage the capital approval process for the balance of 2020 given the financial implications of the pandemic. The capital plan has been reduced from the original approved plan of $350 million for 2020.

Reserves and Debt

Fairview maintains reserves for self-insured liabilities, including Workers’ Compensation, professional and general liability and employee health insurance. Fairview continually monitors these reserves, including projected activity and market dynamics, to ensure proper recognition of liabilities and expense throughout the year. The total amount of reserves related to self-insured activity recorded as of September 30, 2020 was $138.6 million, which is $18.3 million higher than December 31, 2019.

Fairview’s debt totaled $1,496.3 million, a $27.6 million increase from December 31, 2019. The debt to capitalization ratio as of September 30, 2020 was 38.9% compared to 37.2% as of December 31, 2019 due to the $50 million term loan that was taken in July 2020.

Financial Summary

Healthcare in this country faces an affordability crisis and requires transformation – transformation that requires change with associated difficult decisions. Operating costs are rising at 4% annually due to inflation, while reimbursements are going up only 1% to 2% annually. That difference is driving intense margin pressure. We are taking the decisive and measured actions, to ensure fiscal health and stability and to continue to move the system to the healthcare service model we are creating as part of M Health Fairview.

Fairview has initiated one of the most intensive planning efforts in its history to transform care delivery for patients where and when they need it and to improve financial performance. Our transformation plan involves investing in innovation, changing our physical footprint, reducing costs, and leveraging our entire M Health Fairview platform. We must innovate and transform to continue delivering high-quality healthcare that is both accessible and affordable. These changes were addressed earlier in this document.

Finally, Management also continues to pursue further alignment opportunities with the University through the Joint Clinical Enterprise, and further integration of recent acquisitions, including HealthEast.

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Section Five – Investment and Debt Schedule

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* Interest rates are interest cost only, before capitalized interest, and do not include

premium/discount, administrative, credit facility, broker or other costs related to the issuance of the bonds.

** Other debt includes capital lease obligations, premium/discounts on fixed rate debt and other miscellaneous notes and loans.

Fixed Rate, $1,077,760 , 73.8% Variable Rate,

$223,525 , 15.3%

Other, $159,012 10.9%

Debt Outstanding

JP Morgan Letter of Credit

8%Wells Fargo

Letter of Credit

7%

None85%

Bond Credit Enhancement

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