Beyond 60 Years of Care: Preparing for the Future - UNC Health Care · 2015. 5. 17. · 2 UNC HEALTH CARE 2012 ANNUAL REPORT 3 UNC Hospitals opened its doors six decades ago with

BOB HARRISON, president of the Patient and Family Advisory board for the N.C. Cancer Hospital; JOEL RAY, rn, msn, director, Surgery Service

Beyond 60 Years of Care: Preparing for the Future

THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM2012 ANNUAL REPORT

COVER PHOTO COURTESY OF TOM FULDNER

PHOTO CREDITSBRIAN STRICKLANDRICHARD PRUDHOMMEDAN SEARSROBERT CAMPELL PHOTOGRAPHY

CONTRIBUTING WRITERAMY FULK

2012 ANNUAL REPORT 1

Table of Contents

introduction

UNC Health Care: Providing Excellent Care Today, Poised for the Future 2

60 Years of Adapting to Change Shaped the UNC Health Care System 4

Leading, Teaching, Caring 8



Community Benefit Report 2012 14

financials and statistics

Letter of Transmittal 18

UNC Health Care System Reporting Structure 21

The Board of Directors 22

Management’s Discussion and Analysis 23

Pro Forma Statement of Net Assets 26

Pro Forma Statement of Revenues and Expenses 27

Pro Forma Statement of Cash Flows 28

UNC Physicians & Associates Statement of Net Assets (Unaudited) 29

UNC Physicians & Associates Statement of Revenues and Expenses (Unaudited) 30

UNC Physicians & Associates Statement of Cash Flows (Unaudited) 31

Pro Forma Selected Statistics and Ratios 32

Notes to Financials 33

Generations of Caring were recognized and celebrated during the 60th Anniversary events held throughout the year.

UNC HEALTH CARE2 2012 ANNUAL REPORT 3

UNC Hospitals opened its doors six decades ago with a purpose: to serve the health care needs of North Carolinians. As we celebrate the accomplishments that have laid the foundation of our organization, we also must recognize the important work we are currently doing to address the changing needs of the people who depend on us for care.

We have entered into an agreement with WakeMed, focusing on both education and addressing the mental health needs of Wake County. We are working with Wake County officials to provide managerial and clinical services at WakeBrook Campus, and we will begin operating a new 16-bed inpatient psychiatric program in 2013.

EDUCATION AND CARE ACROSS THE STATEThe average physician-to-patient ratio in North Carolina is low—nine physicians per 10,000 patients. The need for physicians becomes even more severe in rural and economically vulnerable areas.

The UNC School of Medicine and UNC Health Care continue to work together to mitigate the health care challenges in the rural areas of our state. One of the ways we do this is by providing our residents with opportunities to train in underserved areas across North Carolina.

UNC Family Medicine’s new Underserved Residency Program is the first of its kind in North Carolina and one of a few similar programs in the country. The program is being implemented at Prospect Hill Community Health Center in Caswell County, where there are 3.4 physicians per 10,000 patients. We hope that as the program grows, it will become a model for

meeting the needs of the underserved in our state.

Our students continue to train at satellite campuses in Charlotte and Asheville, and we are in partnership with others to provide more medical education opportunities in our state. The School currently is partnering with Blue Cross and Blue Shield of North Carolina to create a Master’s of Physician Assistant Studies degree program. This program will be available to veterans who have an undergraduate degree as well as medical training and experience as Special Forces Medical Sergeants.

We provide care for patients from all 100 counties of the state, and we continue to be there when our patients need us. UNC Lineberger recently was approached by Carteret General Hospital to form a partnership for cancer treatment in the area. Through this partnership, we will help provide comprehensive cancer treatment and support services for patients in the area, who will now have access to our research, technology and clinical staff.

UNC Health Care is proud to be a partner in addressing the health care needs of our state. While there are challenges ahead, we are confident that our dedicated faculty and staff will meet those challenges while maintaining a focus on our mission.

On behalf of UNC Health Care staff, faculty and patients, thank you. Your continued support makes it possible for us to provide affordable, excellent patient care; to conduct groundbreaking medical research; and to train the next generation of physicians.

Sincerely,

William L. Roper, MD, MPHChief Executive OfficerThe University of North Carolina Health Care System

Tim BurnettChairman, Board of Directors(November 2012-Present)The University of North Carolina Health Care System

We continue to collaborate with our partners and leaders across the state on innovations that will allow us to meet the challenges of the future. Our synergies with the UNC School of Medicine allow us to train residents in underserved areas where the need for care is urgent. Our partnerships with other hospitals in North Carolina allow us to deliver care and access to life-saving treatments more efficiently and cost-effectively.

This Annual Report tells the story of how we are working together to make a real difference for each patient who walks through our doors. Our commitment to patient care, research and teaching will ensure that our organization grows stronger well into the future.

ACCOMPLISHMENTS Behind all of the work we do is a dedicated group of individuals. Together, UNC Health Care and the UNC School of Medicine staff have earned widespread recognition in the form of awards, accolades and accomplishments. UNC Hospitals was named one of the top 65 hospitals for patient safety and quality by the Leapfrog Group—the only hospital in North Carolina on the list.

We also were honored with a first place ranking among Triangle hospitals in all 10 categories of the 2011 Hospital Consumer Assessment of Healthcare Provider Systems survey.

The commitment and curiosity of our researchers has enabled us to be included among the best in the country. A recent report by U.S. News & World Report listed the UNC School of Medicine as #11 in research dollars. That ranking played a significant role in the University of North Carolina at Chapel Hill’s current position among the top 10 universities in overall research funding.

In addition, two of our researchers recently made significant strides in the battle against HIV. Dr. Myron Cohen and Dr. David Margolis are leading clinical trials that show promise for eventually being able to prevent HIV and finding a cure for the disease.

For the 20th year in a row, specialty departments within UNC Hospitals were included in the 2012 U.S. News & World Report rankings.

• Cancer: 43rd

• Gynecology: 34th

• Ear, nose and throat: 42nd

In addition, eight specialties were named “high performing,” which means they are within the top 25 percent of hospital specialty departments in the nation. The eight specialties are: cardiology and heart surgery, gastroenterology, nephrology, pulmonology, diabetes and endocrinology, geriatrics, neurology and neurosurgery, and urology.

The School of Medicine and its campuses in Chapel Hill, Asheville and Charlotte continue to be nationally recognized as leading institutions for medical education. The School was ranked by U.S. News & World Report as the #2 school in the country for primary care and #21 for research.

WORKING TOGETHER FOR PATIENTSOur accomplishments in care, education and research position us to better serve patients—those we already have, and those who will need our services in the future. North Carolina’s population is expected to grow by 4 million people in the next 18 years, and our state’s health care challenges will grow along with it. Access to quality medical care will be critical as we move forward. We recognize that we must work with partners across the state to identify and address the needs of North Carolinians.

As health care continues to change, more community hospitals are partnering to provide higher quality care more effectively. Our longtime partnerships with Rex Healthcare in Raleigh and Chatham Hospital in Siler City, and more recent partnerships with Pardee Hospital in Hendersonville, High Point Regional Health System and Caldwell Memorial Hospital in Lenoir, allow us to better serve more patients, all while keeping trusted local providers in place.

UNC Health Care: Providing Excellent Care Today, Poised for the Future


60 Years of Adapting to Change Shaped the UNC Health Care System

The UNC Health Care System actually had its roots in the 1940s, when state leaders were looking for solutions to North Carolina’s dismal state of public health. The state had the nation’s highest rejection rate in America of World War II draftees due to health issues, and infant and child death rates also were among the highest in the country. A third of North Carolina’s counties had no local hospital, and shortages of doctors and nurses were severe.

As a result, and with a groundswell of public support, the General Assembly approved the Good Health Plan in 1947 to help address North Carolina’s significant health problems. The Plan included expanding the University’s medical education program from a two-year curriculum to a four-year school and building a large teaching hospital, N.C. Memorial Hospital, to partner with the UNC School of Medicine.

In the six decades since N.C. Memorial opened, the hospital has undergone many changes in order to enhance its ability to serve the state’s health care needs. Four other hospitals and several clinics have been built on and around the Chapel Hill campus; together these facilities now are called UNC Hospitals, and they serve patients from all 100 counties.

To reach patients outside Chapel Hill, the statewide Area Health Education Centers (AHEC) program was developed to connect UNC Hospitals to communities across North Carolina. AHEC trains the next generation of physicians and health care professionals, many of whom practice in rural or underserved areas of the state. UNC’s School of Medicine, the largest in North Carolina, has expanded to allow students to spend their third and fourth years at satellite campuses in Charlotte or Asheville. Community-based pilot projects, statewide clinical trials, and telemedicine networks

On Sept. 2, 1952, North Carolina’s first and only state-owned hospital opened its doors. Sixty years later, that hospital has transformed into a fully integrated health care system that is connected to communities all across North Carolina—and is better able than ever to fulfill its state-mandated mission of providing quality patient care, training physicians and health care professionals, and advancing innovative research to help find cures and save lives.

supported by the University Cancer Research Fund and other sources are other ways UNC Health Care positively impacts local residents and communities.

The mission of the UNC Health Care System is rooted in the state laws that created it: to provide quality patient care to the people of North Carolina, to educate tomorrow’s physicians and health care professionals, and to conduct groundbreaking research that can help find cures. UNC Health Care has earned high marks in each of its mission areas and is widely known as one of the best health care systems in the nation.

PATIENT CARE: UNC Hospitals has the No. 1 ranking for patient-centeredness in the country, has more than a dozen specialties ranked in U.S. News and World Report, and has achieved a rare Magnet designation for nursing excellence. The Leapfrog Group named UNC as one of the top 65 hospitals nationwide—and the only hospital in North Carolina—for patient safety and quality in 2011.

TEACHING: The UNC School of Medicine is ranked second in the nation for primary care and 21st for research, according to U.S. News and World Report, with several specialties also receiving high rankings. UNC is the eighth most popular medical school in the country, and North Carolina is home to more than 4,500 School alumni and former UNC Hospitals residents.

RESEARCH: UNC is sixth among all public schools, and 15th overall, in NIH funding, and faculty members have been at the forefront of many groundbreaking research projects, including the

Cancer Genome Atlas project. UNC’s HIV-prevention research was named the “2011 Scientific Breakthrough of the Year” by Science magazine.

“We aspire to be the nation’s leading public academic health system,” said Dr. William L. Roper, MD, MPH, CEO of UNC Health Care. “UNC Health Care is proud to be a partner in addressing North Carolina’s health needs, and we know that the next several years will be years of change—and challenges.”

The emergence of managed care sparked drastic changes in the health care market, and many hospitals and health care providers began to consolidate and grow into large networks in response to the new market structure. Realizing that the state-owned hospital system also had to adapt to continue its service to the people of North Carolina, the General Assembly merged UNC Hospitals and the School of Medicine in 1998, creating the UNC Health Care System and giving it the flexibility and authority it needed to operate in such a complex and rapidly changing field.

“We are not immune from the pressures to build larger networks or from requests from smaller community and regional hospitals to be assimilated into our network,” Dr. Roper said. “We have a shared responsibility for improving health outcomes and reducing costs.”

Today, the system is an interdependent organization of hospitals, the medical school, physicians, nurses, researchers, teachers and students. It includes UNC Hospitals, UNC Faculty Physicians, UNC Physicians Network, Rex Healthcare in Raleigh, Chatham Hospital in Siler City, and managed affiliates, Pardee Hospital in

Drs. William McLendon and Colin Thomas were presented with the Order of the Long Leaf Pine for work to make UNC Health Care one of the nation’s leading academic medical centers and for their efforts to preserve its history for future generations.


Hendersonville, Caldwell Memorial Hospital in Lenoir, and High Point Regional Health System. UNC Health Care will open a medical office in Hillsborough in 2013, and a new cancer center at Rex Healthcare is expected to open in 2014. UNC Health Care also has an ongoing partnership with WakeMed in Raleigh, which was expanded last year when UNC agreed to invest in community-based mental health services and an inpatient psychiatric hospital in Wake County.

Sen. Tom Apodaca, a Hendersonville Republican who serves as chair of the N.C. Senate Rules Committee and supported the expanded agreement between UNC and WakeMed, said UNC Health Care must be able to compete in the health care market and form successful partnerships in order to meet its three-fold mission of patient care, medical education and innovative research.

“Our responsibility is to provide the best services we can to residents,” Sen. Apodaca said. “UNC Health Care is a vital part of providing care for the people of North Carolina.”

Health care now makes up nearly 20 percent of the GDP. The movement toward larger and more integrated care networks will only escalate in the coming years as providers prepare for the Affordable Care Act to take effect and as they collaborate to provide coordinated care for growing numbers of patients—all while trying to rein in rising health care costs.

Consolidation and change is occurring across North Carolina, not just at UNC. In the past year, Duke Health partnered with LifePoint Hospitals, a for-profit health care company, to own and manage community hospitals in North Carolina and the surrounding region. Carolinas Healthcare System signed a 10-year agreement to manage Greensboro-based Cone Health and is having conversations with New Hanover Regional in Wilmington for a similar arrangement.

“I see UNC changing with the population aging and with the hospital environment changing,” Sen. Apodaca said. “Lots of hospitals can’t stand alone financially, and there is a lot of movement toward consolidation. The aging population will stretch the system even more. UNC will play a critical role in providing services to those hospitals.”

Dr. Roper said forming partnerships with other providers can help drive down health care costs through greater effectiveness and efficiency. Just as important, these partnerships enable a continuum of care that allows patients to receive quality care in low-cost settings near their homes. UNC Health Care provides management expertise, along with clinical and research capabilities, to strengthen local providers’ ability to serve their communities.

“The key to successful partnerships has been maintaining local governance and community involvement,” he said. “These local institutions are vital to their communities.”

Pardee Hospital, a not-for-profit community hospital in Hendersonville founded in 1953, is one of those vital community institutions. Henderson County’s second-largest employer, Pardee has a main hospital licensed for 222 acute care beds and several other facilities separate from the main campus.

Like many smaller independent hospitals, Pardee saw the need to join forces with another provider to maximize its ability to provide services in an increasingly competitive landscape. Last year, it entered into a management agreement with UNC Health Care.

“We had a forward-thinking hospital board and board of commissioners who recognized that we had a changing environment—and an increasingly competitive environment in terms of hospitals, physicians and employment,” Pardee CEO Jay

Kirby said. “Scale and brand mattered, and we needed to seek a partnership. UNC has a strong commitment to clinical excellence, and Pardee Hospital is fortunate to be part of UNC Health Care. Our first year of partnership has exceeded our expectations, and we look forward to continuing to grow together.”

Through leveraging purchasing power, implementing a productivity benchmarking system and other steps, Pardee Hospital has realized more than $3 million in savings through its partnership with UNC Health Care. Stronger alignment and communication with local physicians, as well as access to UNC subspecialty experts, research capabilities and managerial insights, have enhanced Pardee’s service to its community, Kirby said.

Pardee has changed its logo to reflect the importance of its agreement with UNC, incorporating the Old Well icon and a Carolina blue font. Rick Prudhomme, director of Creative Marketing and Communications at Pardee, said co-branding with UNC shows the sincerity of the collaborative and strategic partnership between the two entities.

“These are the same people at Pardee who have always cared for our community for the past 60 years, but UNC provides subspecialty clinics, medical manpower and other resources that we wouldn’t otherwise have,” Prudhomme said. “Our community is expected to grow 30 percent over the next 20 years, and UNC’s expertise and input will help us plan for the future.”

North Carolina’s population is expected to grow by 4 million people by 2030, and that population also is growing older. In 20 years, more than 2 million people age 65 and older will live in North Carolina—that is one-fifth of the state’s entire population. They will need more care and for a longer time period as lifespans continue to rise.

At the same time, the physician population is aging, and by 2020, one-third of today’s practicing physicians will have retired. North Carolina will have 25 percent fewer primary care doctors than needed. UNC’s growing medical school, and UNC Health Care’s training partnerships with hospitals across the state, will be critical in addressing the anticipated shortage of physicians—particularly in rural and underserved areas.

Kirby believes the future of health care, especially once the Affordable Care Act is fully implemented, will require a stronger, more coordinated focus on population health and community-based health services. UNC Health Care’s presence in western North Carolina, through its work with Pardee and Mission Hospitals and its satellite medical campus in Asheville, allow UNC to expand its clinical and educational portfolio in a region hundreds of miles away from the Chapel Hill campus.

“As the federal government demands better outcomes and better value, scale matters for UNC Health Care in terms of better managing population health to meet the state’s needs,” Kirby said. “As UNC grows, it continues to pick up some ideas from those of us in smaller markets—not just Pardee, but also Chatham and High Point—as it continues to reach out to new partners and adapt to these changes.”

Dr. Roper said successful collaborations between UNC Health Care and its partners—both existing and future ones—will be essential in facing North Carolina’s greatest health care challenges, including stroke, cancer and heart disease.

“By partnering with others to improve access to care in North Carolina, we can mitigate the challenges of the future and improve the overall health of our communities,” Dr. Roper said. “UNC Health Care does not do this alone. We have partners across the state to connect communities with the health care resources they need, provided by the local hospitals and doctors they trust.”

Sen. Apodaca, who has been a supporter of UNC’s strategic growth from a health care policy standpoint, recently had first-hand experience with UNC’s partnerships from a patient’s perspective. This summer he underwent successful open heart surgery at Mission Hospital in Asheville, after doctors at UNC Health Care found blockage in his arteries.

“I have never been a UNC fan in sports,” he said, “but I am definitely a fan of UNC Hospitals.”

UNC Hopsitals’ President Gary Park, left, with William Lapsley, right, president of the Pardee Hospital board of directors.

Celebrating the 60th Anniversary of the Volunteer Association, an integral part of carrying out UNC Health Care’s mission.


Myron Cohen, MD, and David Margolis, MD, lead research teams at the UNC Center for Infectious Diseases that are researching HIV and AIDS in hopes of eradicating the disease. About 33 million people are living with HIV globally and more than 1 million of those live in the United States, according to the U.S. Centers for Disease Control and Prevention (CDC).

People with the HIV/AIDS virus can lead relatively normal lives if they have access to and can afford antiretroviral treatment. Current HIV therapy stops the virus from reproducing, but it does not cure the disease. For many people with the virus, lifelong treatment is not feasible because of the cost or because they do not have access to it.

In 2011, Dr. Cohen reached a major milestone when a multi-site, international clinical trial he led definitively showed that standard HIV antiretroviral treatment also works to prevent the disease. If the treatment-as-prevention idea can be applied broadly, it would greatly slow HIV’s spread.

The prestigious journal Science named Dr. Cohen’s findings the “Breakthrough of the Year” in 2011. The journal’s editors wrote, “In

combination with other promising clinical trials, the results have galvanized efforts to end the world’s AIDS epidemic in a way that would have been inconceivable even a year ago.”

While antiretroviral treatment is effective in stopping the AIDS virus from reproducing, and could also slow the spread of HIV, lifelong treatment is expensive and is not available to everyone who needs it. After an infected person has taken antiretroviral therapy for years, it is common to be unable to detect HIV in his or her blood—but once a patient stops taking the medication, the virus comes back.

Soon after a person is infected with HIV, a few copies of the HIV virus “hide” inside the body. Called latent infection, these are the copies that cause the virus to come back once treatment stops. Dr. Margolis has found that the chemotherapy drug Vorinostat can force latent HIV to start expressing HIV genes again to bring latent copies of the virus out of hiding. His next step is to try to determine how to eradicate the latent HIV once it is forced out of hiding.

AIDS experts hope that a cure will one day become reality, and Drs. Cohen and Margolis are on the front lines in working to reach that goal.

INTERNATIONAL COLLABORATIONUNC is also on the front lines of an ambitious cancer project called The Cancer Genome Atlas (TCGA), the biggest effort in genetic research since the original effort to sequence the human genome. A project of the National Cancer Institute and the National Human Genome Research Institute, TCGA is an unprecedented, large-scale collaboration to genetically characterize the entire genome of 20 different cancer types in an effort to better understand the DNA errors that cause human tumors to grow uncontrolled—the basis of cancer.

Funds from the University Cancer Research Fund were used to invest in genomic technology that helped UNC take a leadership role as one of 12 cancer centers involved in TCGA and leverage this into more than $20 million in outside research funds for this project. The project is fueling rapid advances in cancer research including categorizing tumors in new ways, identifying new therapeutic targets, and allowing clinical trials to focus on patients who are most likely to respond to specific treatments.

“It’s the most exciting time ever to be a scientist or clinical scientist working in cancer genetics,” said Chuck Perou, PhD, who with Neil Hayes, MD, led a team of UNC researchers in performing the RNA sequencing and analysis for all the major TCGA reports.

The TCGA reports have given researchers new insights that were never before possible. For example, the research group in colon and rectal cancer found that these two cancers are, genetically speaking, nearly indistinguishable, and that colorectal tumors with high levels of genetic errors were more aggressive. Todd Auman, PhD, helped author this report, which is helping doctors improve the development of treatments that target colorectal cancer.

Dr. Hayes was a major author on the lung cancer report, which discovered a large number and variety of DNA mutations that appear to have important effects on the initiation and progression of a common type of lung cancer, and identified new potential therapeutic targets. These findings should stimulate new clinical trials for patients with this lung squamous cell carcinoma.

The breast cancer reports, which Dr. Perou co-authored with Katie Hoadley, PhD, helped identify some of the genetic causes of the most common forms of breast cancer and suggested new therapeutic targets. The breast cancer group also found molecular similarities between ovarian cancer and one sub-type of breast cancer, and was the first study to integrate information from six analytic technologies to provide new insights.

Dr. Hayes said TCGA is making data sets publicly available, including the 25 trillion base pairs of RNA sequenced by the UNC project, so that scientists around the world can use it for analysis and publication of their own interpretations. “These data sets are huge and spectacular,” he said. “Knowledge is being generated faster than we can absorb it.”

UNC Health Care strives to be a leading academic medical institution, and research is central to its mission. In 2012, UNC rose from 12th to 10th among all universities in funding from the National Institutes of Health, receiving more than $340 million in support of faculty research. The human impact of UNC research is even more important than the economic one. Patients have access to treatments and trials that could help them individually, and scientific discoveries are enhancing doctors’ long-term ability to treat diseases like cancer, heart disease, AIDS and many other illnesses.

Leading, Teaching, Caring

Medical Devices Approved for Use by FDA

Two devices tested at UNC Hospitals that repair damage to the body’s main artery have been approved by the U.S. Food and Drug Administration for use in the United States. Mark Farber, MD, director of UNC Aortic Disease Management, was the national principal investigator for both trials.

UNC Health Care is one of only a few centers in the United States to offer comprehensive, minimally invasive treatment of complex aortic disease. With these newly approved devices, patients with aortic disease or injury have more life-saving options available through minimally invasive endoscopic surgery.

The RELAY thoracic stent graft is specifically designed to treat thoracic aortic aneurysms, which occur in the aorta as it passes through the chest and which are the 13th leading cause of death in the nation. The RELAY device is made in a wide range of sizes so treatment can be provided to broader segments of patients.

The TAG thoracic endoprosthesis is used to repair traumatic tears in the aorta, which causes profuse bleeding and high mortality. Until now, surgical repair has been the only treatment option for these types of tears. The endovascular repair that the TAG enables is a less-invasive approach that reduces patient pain and recovery time.

Myron Cohen, MD, division chief for UNC Center for Infectious Diseases David Margolis, MD, professor of medicine and microbiology, immunology, and epidemiology in the UNC School of Medicine

A Unique Surgical Training Opportunity

In January, the UNC School of Medicine established an innovative multidisciplinary surgical skills lab that will bring together three neurosciences departments: Ophthalmology, Neurosurgery, and Otolaryngology/Head and Neck Surgery.

The training facility will be the only one of its kind in the region and will provide training opportunities to medical students, residents, fellows and physicians across the state.

“Training future generations of eye surgeons to serve the people of North Carolina is one of our top priorities,” said Donald L. Budenz, MD, MPH, professor and chair of Ophthalmology at UNC Health Care. “The new surgical training center will greatly enhance our educational mission by providing our residents with a state-of-the-art facility where they can practice and learn from our world-class surgeons.”

Funded by a $1 million gift from the North Carolina Eye Bank, the facility includes a simulation lab with access to robotic stations and anatomic computer-based simulators, and the entire training lab is wired for telecommunications.

“This gift is a transformative investment in the training of ophthalmologists, neurosurgeons and ENT surgeons,” said Matthew Ewend, MD, professor and chair of the Department of Neurosurgery. “Patients can expect that the physicians of North Carolina who take advantage of this training lab will be armed with the best and newest techniques.”


Nationally recognized for the quality of its educational programs, UNC’s medical school is ranked second in the country for primary care and 21st in research by U.S. News and World Report. Through its N.C. Area Health Education Centers program, UNC Health Care offers educational training to providers across the state, focusing on underserved and rural areas.

During the next two decades, as the current generation of doctors nears retirement age—and as North Carolina’s patient population grows and ages–UNC is more committed than ever to addressing the expected physician shortage. Collaborating with partners is critical to the success of these efforts.

PREPARING TO SERVE THE UNDERSERVEDA new residency program at UNC Family Medicine—the first of its kind at UNC and one of a few trendsetting programs in the nation—trains family doctors to practice in underserved and vulnerable areas across the state and nation. The Underserved Track provides residents with the opportunity to care for diverse patient populations that often have significant health disparities.

“The goal of this project is to form North Carolina’s first teaching health center—to create a partnership between community health centers and our academic medical center to train family medicine physicians to provide care to vulnerable communities,” said Evan Ashkin, MD, a UNC faculty member who serves as the program’s site director. “The teaching health center will give family medicine

residents a very real experience of caring for our vulnerable neighbors, increasing the likelihood that those doctors will begin their professional practices in rural communities across North Carolina.”

Residents have their continuity clinic experience at the Prospect Hill Community Health Center, a rural Federally Qualified Health Center (FQHC) located 27 miles northeast of Chapel Hill in Caswell County. Prospect Hill is the oldest FQHC site in North Carolina and is part of the Piedmont Health system of health centers in the region. In addition to medical care, the health center offers dental care, on-site pharmacy, nutrition, care management and migrant/seasonal farm worker outreach services that give UNC residents an opportunity to function as part of an interdisciplinary team. All services are available in Spanish to meet the needs of a large group of Spanish-speaking patients.

Christina Drostin and Mimi Miles, the program’s inaugural residents, are now training and providing care at Prospect Hill. “Academic and clinical links to UNC and a practice that has been grounded in the community for 40 years make Prospect Hill the perfect location for this partnership,” said Tom Wroth, MD, Piedmont’s Medical Director. The program looks to add four residents during the next two years, for a total of six resident physicians training at Prospect Hill, which will also increase access to care for the community.

“It is a win-win situation for Piedmont Health and UNC, but it also is a win for the community of Prospect Hill and surrounding areas

Since the UNC School of Medicine was expanded into a four-year program 60 years ago, it has been the state’s most prolific producer of new physicians. Today there are more than 4,500 alumni and former UNC Hospitals residents in North Carolina, and satellite campuses in Charlotte and Asheville opened in 2012 for third- and fourth-year students.


to have local community physicians practicing medicine in a rural community,” Dr. Wroth said. “That’s why we say community health centers offer the right care at the right place at the right cost.”

TAPPING INTO A VALUABLE RESOURCEA physician assistant program for veterans with medical experience is another way UNC is working to address the looming shortage of health care providers–and to help veterans re-enter the job market after leaving the military. This initiative relies on collaboration with military installations, private-sector partners, and clinics and alumni across the state.

Since 2009, the School has been working with the medical training center at Fort Bragg, offering Special Forces Medical Sergeants additional training in critical care services at UNC to supplement their extensive war surgery training. As an offshoot of that initiative,

UNC is developing a new physician assistant program for veterans with similar levels of medical training and experience. The 24-month Master of Physician Assistant Studies degree will include classroom experience and clinical rotations throughout the state.

Blue Cross Blue Shield of NC has pledged to help fund the program. The GI Bill will help soldiers pay for their educational costs, but a private scholarship committee will be formed to raise additional money for scholarships. Outreach efforts to School alumni who are veterans will help broaden support for the program.

Through collaborative projects like these, the School of Medicine is working to address specific workforce challenges in the health care field. Strong partnerships across the state enable UNC to succeed in its mission of educating North Carolina’s next generation of physicians and health care professionals.

Patient Becomes Medical Student

For first-year UNC medical student Katy Sims, caring for patients is highly personal. She decided to become a doctor while undergoing treatment for Ewing’s sarcoma, a type of bone cancer that affects children and young adults.

Sims had just begun her freshman year at Davidson College when she was diagnosed. After a surgery to remove the tumor, along with three ribs, Sims endured 14 cycles of chemotherapy. Her personal experience as a young adult oncology patient—and a challenge from a cancer nurse—put her on the path to medical school and a career of caring for others.

At the time of her treatment, Sims was a dual language major and had thought about a career as a medical interpreter. But, she remembers, “This nurse had been with me at my first hospital admission and had always been there when I was having chemotherapy. She asked me what I was going to do when I finished my therapy. I said, ‘I’m going to get back to my life. Make it exactly the way it was before.’ And she asked, ‘Really? So all of this was for nothing? You’re not changing anything?’ I asked her, ‘What do you think I should change?’ And she said, ‘I think you should be a doctor.’”

At her next treatment visit, Sims told the nurse she was going to become a doctor and switched to a pre-med biology major. After graduating from Davidson in 2011, she applied for medical school at UNC.

Sims thinks her cancer experience will shape her medical education for the better. “I understand what the patients are going through. I know pain, I know death, I know fear and I know illness. Many of my classmates are coming to medical school from a different point of view. I am in it for being able to take care of patients and taking care of myself by taking care of people.”


State leaders established N.C. Memorial Hospital 60 years ago because North Carolina’s basic health care needs were simply not being met—which is why caring for patients is such an important part of UNC Health Care’s mission today. Individualized, compassionate and accessible care is a top priority not only in UNC Hospitals and its clinical facilities, but also through statewide collaborations with community-based physician and hospital partners.


2010, supports more than 150 physicians in 34 practices and is in the process of expanding to other parts of the state. The network provides operational support to physician practices so doctors can focus on prevention, wellness, and improving patient satisfaction and outcomes. Member physician practices coordinate with UNC Hospitals and UNC Physicians and Associates in Chapel Hill, Chatham Hospital in Siler City and Rex Hospital in Raleigh, to give patients convenient access to specialty care services such as cancer care, heart and vascular surgery, neurosciences and other nationally recognized services.

Providing improved mental health services in Wake County has been a great concern of health care leaders in recent years. In 2012, UNC Health Care pledged to invest $30 million to develop and operate at least 28 inpatient psychiatric beds in Wake County to address crisis and emergency demand. It also will fund additional outpatient services and assume management of crisis services, assessment services and the voluntary inpatient substance abuse program at WakeBrook, the county’s 19-acre mental health and addictions treatment campus.

Wake County had been talking to UNC about helping with local mental health services ever since the state decided to close Dorothea Dix Hospital. The agreement will allow for a stable transition for patients and provide a higher level of mental health and substance abuse services in Wake County, meaning people who need help will not rely on emergency rooms for treatment.

At a more statewide level, the UNC Center for Excellence in Community Mental Health, in partnership with the North Carolina Area Health Education Centers and the North Carolina Psychiatric Association, has established the North Carolina Community Mental Health Medical Directors’ Network to help support psychiatrists and other physicians as the state’s system of mental health continues to evolve and face new challenges.

“UNC Health Care is committed to working together with community partners and stakeholders to provide the best possible care to the Wake County residents who need behavioral health services,” said William L. Roper, MD, MPH, CEO of UNC Health Care. “We are exploring ways to improve programs and services with an eye toward what is best for Wake County citizens who depend on these critical services.”

UNC Hospitals is home to 277 of the nation’s Best Doctors, according to U.S. News and World Report, and is among only 6 percent of all U.S. hospitals to have earned Magnet designation for excellence in nursing. These outstanding physicians and nurses work together to ensure that all patients in UNC Hospitals get the high-quality care they need and deserve.

UNC Health Care is fortunate to have forged strong health care partnerships across the state. Establishing cooperative centers of care in local hospitals, affiliating with a growing number of physician practices, and using telemedicine to connect with patients and providers are some of the ways UNC Health Care is working to care for patients in communities throughout North Carolina.

WORKING TOGETHER TO EXTEND CAREIn 2012, the UNC Lineberger Comprehensive Cancer Center worked with Carteret General Hospital to establish a cancer care partnership to serve patients in Carteret County and the surrounding areas. The affiliation will promote community-wide strategies to improve cancer screening and early detection, enhance treatment planning and consultation, enable telemedicine for patient case consultation and training for medical personnel, and provide Carteret General with access to clinical trials and other new resources to help cancer patients.

The decision to collaborate with UNC Health Care complements the steps that Carteret General Hospital had already been taking toward a comprehensive cancer center that would offer radiation and oncology services in one setting, including establishing a nurse navigator to provide patients with needed guidance and support.

“We are excited to join forces with UNC Lineberger and UNC Cancer Care,” said Richard Brvenik, MHA, president and CEO of Carteret County General Hospital. “This collaboration will benefit cancer patients and families from our region and build upon the high-quality cancer services already provided by our hospital and medical staff.”

Through this partnership, Carteret County became the latest community to join the UNC Cancer Network, which connects UNC researchers and clinicians to community physicians and clinics across North Carolina. The network, whose outreach programs are funded primarily through the University Cancer Research Fund, aims to move research into practice and to provide patients with the best cancer services available.

The cancer network is just one of several statewide networks allowing UNC to collaborate with community-based physicians. The UNC Physicians Network, which began in the Raleigh/Durham area in


40,000miles walked through

our Mallwalker programs

$750,000to Piedmont Health

to improve access to care

The award is presented annually to a business or person who demonstrates a commitment to service and civic participation, and who participates in activities that set a standard and foster a culture for citizenship, service and community responsibility. Also, recipient/s should demonstrate one or more of the following business values: integrity, stewardship, inclusion, initiative, teamwork, and accountability.

UNC Health Care’s employees were recognized for efforts that led to the addition of new jobs, the development of a new hospital campus in Hillsborough, and continuing to expand in Wake and Chatham Counties. They also were recognized for their number one ranking in the University Health System Consortium’s Quality and Accountability Scorecard for overall “patient-centeredness.”

Chris McGrath, Linda Bynum and Lucy McMillan were chosen to accept the award in recognition of their volunteer service to their local communities and for their membership in UNC Health Care’s Employee Ambassador Program.

The Ambassador program was created to help better connect employees with their communities support employees who give back. Through the Employee Ambassador Recognition Program, UNC Health Care makes a one-time donation up to $250 to any qualified 501(c)3 non-profit organization to which an employee gives 50 or more hours of their time.

“I really appreciate that we have this program to recognize how people are giving in their off time,” said McGrath who volunteers as an assistant scoutmaster with Boy Scout Troop 213. “It makes it easier for us to do things like take a trip or to purchase equipment.”

In 2012, UNC Health Care recognized 40 Employee Ambassadors who volunteered close to 4,300 hours with dozens of local charities.

1event to recognize local veterans

for their service

Community Benefit Report 2012

UNC Health Care has always embraced its unique place in its local community and across the state. It is a health care provider, an educator and corporate citizen; each role carrying with it certain responsibilities. Its physicians and staff have embraced these duties and were formally recognized this past year for their efforts with the Duke Energy Citizenship and Service Award. The presentation took place at the Chapel Hill-Carrboro Chamber of Commerce’s annual meeting in January 2012 and marked the first time in the Chamber’s history the award has been presented to a group of employees rather than to an individual or an organization.

15,000 items collected for local schools

$72,500in scholarships presented by the UNC Hospitals Volunteer Association

Executive Vice President and COO Brian Goldstein, MD, MBA, recognizes an Employee Ambassador for her volunteer efforts in the community.

UNC HEALTH CARE16

300Employee Ambassadors volunteered close to

4,300hours with local charities

10,000Pharmacy Assistance Program prescriptions dispensed

$13 millionin Pharmacy Assistance Program benefits to patients

COMMITMENT TO COMMUNITY HEALTH UNC Health Care encourages wellness and healthier lifestyles through several programs each year. The organization sponsored the Healthiest You Fitness Challenge for 97.9 FM and 1360 AM WCHL this year. Sixty-four participants were chosen from more than 400 applicants to be a part of one of the Challenge’s eight teams. With UNC Health Care’s support, participants were given access to a wide range of fitness facilities in the Chapel Hill-Carrboro community. This included yoga, Pilates, swimming, massage, jazzercise, boot camp training, dancing, and spin classes. It also provided one-on-one consultations with nutritionists, access to the UNC Wellness Center at Meadowmont and the chance to be a part of team workouts led by their coach.

By the end of the eight-week challenge, the teams lost a combined 300 pounds.

“It’s more about a lifestyle change than just losing weight,” said George Wayson, director of the UNC Wellness Center and coach of one of the Challenge’s teams. To mark his team’s progress, Wayson used a very unusual but effective method.

“Once a week, after our team workout, we would step out into the parking lot and push my truck up an incline. We would mark where we stopped, and each week our goal would be to push that truck just a little farther.”

Another way UNC Health Care is helping local residents live healthier lifestyles is through its Mallwalker programs at The Streets at Southpoint in Durham and University Mall in Chapel Hill. Since 2002 at Southpoint and 2008 at University Mall, these programs have provided community members the opportunity to stretch their legs and exercise in safe and comfortable environments. Every month, guest speakers talk to members about health topics such as managing diabetes or recognizing the signs of stroke.

“Going to walk is the first thing we think about when we wake up,” said Franklin Boone one of the program’s top walkers along with his wife Lois. “It keeps us feeling fit and energized.”

Since its inception 10 years ago, the mallwalking program at Southpoint has grown to more than 1,200 members who have logged more than 250,000 miles.

Financials and Statistics

CHAPEL HILL, NORTH CAROLINAFor the year ending June 30, 2012

Coordinated mock crashes for

1,000 high school students


Letter of Transmittal

DECEMBER 31, 2012

To the Governor, the State Auditor, members of the General Assembly, members

of the UNC Board of Governors, UNC Chapel Hill Board of Trustees, members

of the UNC Health Care System Board of Directors, supporters of the University

of North Carolina Health Care System, and William L. Roper, CEO.

INTRODUCTIONThis Annual Report includes a compilation of the operating results and financial position of the University of North Carolina Health Care System (UNC Health Care) as established by General Statute 116-37. The financial reports as presented represent a summary of data generated by the various entities under the control of the Board of Directors of UNC Health Care. The University of North Carolina Hospitals (UNC Hospitals), Rex Healthcare, Inc. (Rex), Chatham Hospital, Inc. (Chatham), and Triangle Physician Network (As of July 1, 2012, TPN changed its name to UNC Physicians Network (UNCPN) to better identify with UNC Health Care.) prepare and publish their own separate audit reports on an annual basis. The University of North Carolina Physicians & Associates (UNC P&A) is included in the audited report for The University of North Carolina at Chapel Hill (UNC-CH). Additional information regarding the organization structure can be found in the Notes to Financials section of the Annual Report.

The Annual Report is compiled to provide useful information about the entity’s operations and programs and to ensure its accountability to the citizens of North Carolina. While UNC Health Care’s management believes this information to be accurate, it should be noted that these documents are unaudited and not intended to be used for any financial decisions.

The Financials and Statistics section presents management’s discussion and analysis and pro-forma financial statements for UNC Health Care and financial statements for UNC P&A. This section includes selected statistical and financial ratio information. Management’s Discussion and Analysis provides a review of the financial operations and the Notes to Financials section provides additional explanations for the reader.

FINANCIAL INFORMATIONInternal Control StructureUNC Health Care’s management establishes and maintains an internal control structure to achieve the objectives of effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. Management applies the internal control standards to meet each of the internal control objectives and to assess internal control effectiveness. When evaluating the effectiveness of internal control over financial reporting and compliance with financial-related laws and regulations, management follows the assessment process to ensure the State of North Carolina and the public that UNC Health Care is committed to safeguarding its assets and provides reliable financial information.

One objective of an internal control structure is to provide management with reasonable, although not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition. Another objective is to ensure that transactions are executed in accordance with appropriate authorization and recorded properly in the financial records to permit the preparation of financial statements in accordance with generally accepted accounting principles. Annually, management provides assurances on internal control in its Performance and Accountability Report, including a separate assurance on internal control over financial reporting along with a report on identified material weaknesses and corrective actions.

As a recipient of federal and State funds, UNC Health Care is responsible for ensuring compliance with all applicable laws and regulations. A combination of State and UNC Health Care policies and procedures, integrated with a system of internal controls, provides for this compliance. The accounts and operations of UNC Hospitals and UNC P&A (as a part of UNC-CH) are subject to an annual examination by the Office of the State Auditor. Rex, Chatham and UNCPN have annual audits performed by outside independent CPA firms. All five entities are an integral part of the State’s reporting entity represented in the State’s Comprehensive Annual Financial Report and the State’s Single Audit Report. The audit procedures are conducted in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards issued by the Comptroller General of the United States.

Budgetary ControlsOn an annual basis, UNC Health Care’s Board of Directors approves budgets for UNC Hospitals, UNC P&A, Rex, Chatham and UNCPN. The budget for UNC P&A also is subject to approval by UNC-CH. Each entity of UNC Health Care produces monthly reports that compare budget and actual operating results. Department Heads are expected to review the reports and identify significant variances from their budget. If necessary, action plans are implemented that will improve negative variances. In addition to the monthly reports, an encumbrance system is maintained by UNC Hospitals and UNC P&A to track open purchase orders and commitments made to vendors.

UNC HEALTH CARE20

N.C. General Statute 116-37 granted UNC Health Care flexibility for management of UNC Hospitals in regard to its policies for personnel and salary management, purchasing of goods, services and property, and property construction. On an annual basis, UNC Health Care submits a report on its activity under this flexibility. The report is sent to the Health Affairs Committee of the Board of Governors and the Joint Legislative Commission on Governmental Operations on or before September 30 each year.

UNC Health Care is subject to the provisions of the Executive Budget Act, except for trust funds identified in N.C. General Statutes 116-36.1 and 116-37.2. These two statutes primarily apply to the receipts generated by patient billings and other revenues from the operations of UNC Hospitals and UNC P&A. UNC Hospitals submits monthly reports to the Office of State Budget and Management that reflect both the state appropriation received and their overall operations. Under the budgetary procedure followed by the State, all State revenues are appropriated by the General Assembly pursuant to appropriation acts adopted every two years, with modifications in the second year. UNC Health Care through UNC Hospitals received State Appropriation of approximately $18 million for the past fiscal year. The General Assembly appropriates these funds from the General Fund to cover a portion of operating expenses, including a portion of the expenses attributable to the cost of providing (i) care to indigent patients and (ii) graduate medical education.

Debt AdministrationDuring the past fiscal year, UNC Hospitals and Chatham Hospital did not enter into new debt-financing arrangements. Rex Hospital closed a construction loan and issued a note to pay off the construction loan.

Standard & Poor’s and Moody’s ratings services classify UNC Hospitals’ bonds as AA and Aa3 respectively. Standard & Poor’s, Moody’s and Fitch classify Rex’s bonds as A+/A1/A+.

Cash and Investment ManagementUNC Health Care continues to work with the Office of the State Treasurer to maximize the investment earnings for UNC Hospitals based on changes in the General Statutes that were made during the 2005 session of the General Assembly. In addition, UNC-CH has allowed UNC P&A to invest a portion of its funds in an intermediate fund beginning in FY08. Investment earnings subsidize operating income and enable UNC Health Care to provide more services to the citizens of the State of North Carolina. The cash management policy includes all areas of receipts and disbursements so that investment earnings are maximized and vendor relations are maintained.

Risk ManagementExposures to loss are handled by a combination of methods, including participation in State-administered insurance programs, purchase of commercial insurance and self-retention of certain risks. The key to managing risk is to ensure that programs are in place that educate and guide employees to the best practices for our industry. We have a responsibility to safeguard our patients so that no additional harm comes to them while under our care. In addition, we have to ensure a safe workplace for our employees.

In addition to the typical litigation risks with which we are faced, we have to recognize the risk and rewards associated with the health care industry. Continual evaluation of existing programs and new service development is the only way to maintain or increase our competitive advantage.

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

John P. LewisChief Financial OfficerThe University of North Carolina Health Care System

UNC Health Care System Reporting Structure

Executive Council William L. Roper

William L. Roper CEO

Audit and Compliance

Governmental Affairs

Communication

John Lewis Chief Financial Officer

Allen Daugird President

Marschall Runge Executive Dean,

UNC School of Medicine

Shared Services Facility Planning Human Resources

Legal Services Quality & Patient Safety

Risk Management

Chief Information Officer UNC Health Care

Managed Care Strategic Planning &

Networking / Outreach

Gary Park President, UNC Hospitals

UNC Hospitals (Chapel Hill)

UNC Physicians & Associates

UNC Physicians Network

Rex Hospital (Raleigh)

Chatham Hospital (Siler City)

Pardee Hospital (Hendersonville)

Management Contract

Board of Directors


Timothy Burnett(Chair)President, Bessemer Improvement CompanyGreensboro, NC

A. Dale Jenkins(Vice Chair)CEO, Medical Mutual Insurance Company of North CarolinaRaleigh, NC

Anne H. BernhardtVice Chair, Bernhardt Furniture CompanyLenoir, NC

William H. CameronPresident, Cameron Management, Inc.Wilmington, NC

Susan B. CulpPast Chair, High Point Regional Health SystemHigh Point, NC

Allen Daugird, MD, MBAPresident, UNC Physicians & AssociatesPresident, UNC Physicians NetworkChapel Hill, NC

Reverend Lisa G. FischbeckVicar, The Episcopal Church of the AdvocateCarrboro, NC

Ernest J. Goodson, DDSOrthodontistFayetteville, NC

Karol Kain GrayVice Chancellor for Finance and AdministrationChapel Hill, NC

M. Andrew Greganti, MDVice Chair, Department of MedicineChapel Hill, NC

Barbara Jessie-BlackExecutive Director, PTA Thrift Shop, Inc.Carrboro, NC

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

John W. LassiterPresident, Carolina Legal Staffing LLCCharlotte, NC

Charles D. Owen, IIIPresident, Fletcher Development Group, Inc.Fletcher, NC

Gary ParkPresident, UNC HospitalsChapel Hill, NC

Roger PerryPresident, East-West PartnersChapel Hill, NC

William L. Roper, MD, MPHDean, School of MedicineVice Chancellor for Medical AffairsCEO, UNC Health Care SystemChapel Hill, NC

Thomas W. RossPresident, The University of North CarolinaChapel Hill, NC

Marschall Runge, MD, PhDExecutive Dean, School of MedicineChair, Department of MedicineDirector of TraCSChapel Hill, NC

James H. Speed, Jr.President and CEO, North Carolina Mutual Life Insurance CompanyDurham, NC

Holden Thorp, PhDChancellor, The University of North Carolina at Chapel HillChapel Hill, NC

Greg WesslingBusiness AdvisorDavidson, NC

D. Jordan WhichardRetired Publisher and CEO, Cox North Carolina Publications, Inc.Private InvestorGreenville, NC

Edward WillinghamPresident, First Citizens BankRaleigh, NC

UNC Health Care System Board of Directors

NOVEMBER 2012–OCTOBER 2013

UNC Health Care was established November 1, 1998, by North Carolina General Statute 116-37. The original legislation included only the University of North Carolina Hospitals (UNC Hospitals) and the clinical patient care programs of the University of North Carolina at Chapel Hill (UNC-CH). UNC Health Care is governed by a Board of Directors and as an affiliated enterprise of the University of North Carolina. UNC Health Care and the UNC-CH are sister entities. Rex Healthcare, Inc. (Rex), Chatham Hospital, Inc. (Chatham), and Triangle Physicians Network (TPN) have been added to the organization since its inception. As of July 1, 2012, TPN changed its name to UNC Physicians Network (UNCPN) to better identify with UNC Health Care.

As illustrated in the reporting structure on page 21, UNC Health Care owns and/or controls the net assets and financial operations of UNC Hospitals, Rex, Chatham and UNCPN. UNC-CH owns and controls the net assets and financial operations of UNC Physicians & Associates (UNC P&A). The UNC Health Care Board of Directors governs and oversees physician credentialing, quality and patient safety, and resident training and acts to advise and review the financial activities of UNC P&A. Final direct control of the monetary operations of UNC P&A remains within UNC-CH. The physicians who provide patient care at UNC Hospitals and in the UNC-CH clinics are employees of the UNC-CH. Most non-physician employees who assist in providing patient care and the associated administrative, billing and collection services are employees of UNC Health Care.

For purposes of these financial statements, UNC P&A serves as a financial proxy for the “clinical patient care programs of the School of Medicine.” The financial statements for the entities directly controlled by UNC Health Care (UNC Hospitals, Rex, Chatham and UNCPN) are separately audited on an annual basis and have received unqualified opinions for their prior year reports. The financial activities of UNC P&A are included in the financial report and audit report of UNC-CH. Since an unqualified audit opinion on the aggregation of financial information for these entities cannot

be efficiently obtained, we have used the term “pro forma” to describe fairly the full financial scope and worth of UNC Health Care.

In the interest of being concise, we have included pro forma consolidated financial statements for UNC Health Care, which includes UNC Hospitals, Rex, Chatham, UNCPN and UNC P&A. Since UNC P&A’s financial activities are not separately disclosed elsewhere, we also are presenting UNC P&A’s Statement of Net Assets and Statement of Revenues and Expenses for the fiscal years ending June 30, 2012 and 2011.

USING THE FINANCIAL STATEMENTSThe Governmental Accounting Standards Board (GASB) requires three basic statements: the Statement of Net Assets; the Statement of Revenues, Expenses and Changes in Net Assets; and the Statement of Cash Flows.

Pro forma financial statements are presented and follow reporting concepts consistent with those required of a private business enterprise. The financial statement balances reported are presented in a classified format to aid the reader in understanding the nature of the operations. The Notes to the Financials provide information relative to the significant accounting principles applied in the financial statements and further detail concerning the organization and its operations. These disclosures provide information to better understand details, risk and uncertainty associated with the amounts reported and are considered an integral part of the financial statements.

The pro forma Statement of Net Assets provides information relative to the assets, liabilities and net assets as of the last day of the fiscal year. Assets and liabilities on this Statement are categorized as either current or non-current. Current assets are those that are available to pay for expenses in the next fiscal year, and it is anticipated that they will be used to pay for current liabilities. Current liabilities are those payable in the next fiscal year. Net assets on this Statement are categorized as invested in capital assets (net of related debt), restricted or unrestricted. Restricted net assets are categorized as expendable

Management’s Discussion and AnalysisINTRODUCTION

Management’s Discussion and Analysis provides an overview of the financial position and

activities of the University of North Carolina Health Care System (UNC Health Care) for the fiscal

years ending June 30, 2012, and June 30, 2011. The financial statements included for UNC Health

Care — Statement of Net Assets, Statement of Revenues and Expenses, and Statement of Cash

Flows — are labeled “pro forma” to demonstrate that they are an aggregation of assets and liabilities

and results of financial activities that cannot easily be the subject of an unqualified opinion by an

independent auditor. The reasons for the pro forma descriptive are as follows:


for the purposes noted. Management estimates are necessary in some instances to determine current or noncurrent categorization. Overall, the pro forma Statement of Net Assets provides information relative to the financial strength of the organization and its ability to meet current and long-term obligations.

The pro forma Statement of Revenues and Expenses provides information relative to the results of the organization’s operations, non-operating activities and other activities affecting net assets, which occurred during the fiscal year. Non-operating activities include noncapital gifts and grants, investment income (net of investment expenses) and loss realized on the disposition of capital assets. Other activities include change in fair value of investments and gain or loss on affiliate activity. Under GASB, the subsidies from the State of North Carolina in the form of appropriations and bond interest expense are considered non-operating activities; but for these pro forma statements, they are presented as operating. Overall, the pro forma Statement of Revenues and Expenses provides information relative to the management of the organization’s operations and its ability to maintain its financial stability.

The pro forma Statement of Cash Flows provides information relative to UNC Health Care’s sources and uses of cash for operating activities, non-capital financing activities, capital and related financing activities, and investing activities. The Statement provides a reconciliation of beginning cash balances to ending cash balances and is representative of the activity reported on the pro forma Statement of Revenues, Expenses and Changes in Net Assets as adjusted for changes in the beginning and ending balances of noncash accounts on the pro forma Statement of Net Assets.

The Notes to the Financials provide information relative to the significant accounting principles applied in the financial statements, authority for and associated risk of deposits and investments, information on long-term liabilities, accounts receivable, accounts payable, revenues and expenses, pension plans and other post employment benefits, insurance against losses, commitments and contingencies, accounting changes, and a discussion of adjustments to prior periods and events subsequent to the enterprise’s financial statement period when appropriate. Overall, these disclosures provide information to better understand details, risk and uncertainty associated with the amounts reported and are considered an integral part of the financial statements.

COMPARISON OF TWO-YEAR DATA FOR 2012 TO 2011Data for 2012 and 2011 are presented in this report and discussed in the following sections. Discussion in the following sections is pertinent to fiscal year 2012 results and changes relative to ending balances in fiscal year 2011.

Analysis of Overall Financial Position and Results of OperationsSTATEMENT OF NET ASSETS

The statements reflect a successful system, with total assets in excess of $2.7 billion. Total assets increased by 11.2 percent over the prior year,

while net assets increased by 7.1 percent during the year ending June 30, 2012. Assets increased overall by $275 million or 11.2 percent from fiscal year 2011 to 2012, with much of this growth occurring in current assets. Asset growth was attributable to positive operations, increases to patient accounts receivable, increases to capital assets, and most significantly, increases in receivables related to the UPL program. Beginning in 2012, UNC Health Care’s entities transitioned from being reimbursed through the Medicaid cost report to participating in a newly implemented Upper Payment Limit (UPL) program.

Liabilities increased $154.6 million or 20.0 percent from fiscal year 2011. The largest increases within the current liabilities section occurred in the “due to state of North Carolina component units,” “accounts payable,” and the “accrued salaries and benefits” categories. The increase in the amount due to state of North Carolina component units resulted from the timing of payments related to Mission Support and Home Office Expenses. Accounts payable increased due to the timing of payments and the amount of invoices processed during the exercise of capturing all applicable invoices in the correct fiscal year. Accrued salaries increased with FTE growth, salary growth and with increased number of calendar days in 2012 compared to last year, as well as an increase in the employee incentive accrual.

STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS

For the year, UNC Health Care generated an operating margin of 6.1 percent, or $142.1 million on net operating revenue of $2.3 billion. The 13.3 percent increase in operating revenues was primarily the result of volume growth and increased payments from negotiated payor contracts. Operating expenses grew at a slower 12.8 percent rate, the result of continued aggressive cost containment efforts and decreased medical malpractice expense. In order to remain financially strong, to reinvest in new facilities, and to retain the most highly trained work force, UNC Health Care’s goal is to average at least 4 percent for its annual operating margin.

Nonoperating performance was negative, attributable to poor investment performance during the year. UNC Health Care continues to recover from several consecutive years of depressed investment performance. Additionally, UNC Health Care made UPL payments of $4.7 million to the UNC School of Medicine and Rex Healthcare made distributions of $6.5 million to non-controlling partners of joint ventures.

Net income was $120.7 million, a 5.2 percent margin. Positive operations were impaired by the declining investment market and the timing of UNC Hospitals’ transfer to a new investment manager.

Discussion of Capital Asset and Long-Term Debt ActivityCAPITAL ASSETS

UNC Health Care continued to improve and modernize its facilities during the past year.

UNC Hospitals expended $29 million during the year for capital

equipment throughout the facilities including $4.1 million on computer software and an additional $67 million on the acquisition of land, buildings, infrastructure and renovations.

Rex continued growth seen in prior fiscal years. Capital investments in fiscal year 2012 consisted primarily of costs incurred in conjunction with the construction of Rex Healthcare of Holly Springs, a replacement Central Energy Plant for the main campus, new inpatient beds and technology assets.

Chatham continued significant capital investment in infrastructure projects, primarily the Meditech Hospital Information System and the newly completed Medical Office Building.

LONG-TERM DEBT ACTIVITY

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

UNC Hospitals and Chatham did not enter into new debt-financing arrangements during the past fiscal year. Rex converted a $30 million construction loan into a longer-lived note payable.

Standard & Poor’s and Moody’s ratings services classify UNCH’s bonds as AA and Aa3 respectively. Standard & Poor’s, Moody’s and Fitch classify Rex’s bonds as A+/A1. Additional information about debt activity can be found in the notes to the pro forma statements.

Discussion of Conditions that May Have a Significant Effect on Net Assets or Revenues and ExpensesUNC Health Care derives the vast majority of its operating revenues from patient care services. Because the System Fund provides no revenue-generating services, it is entirely dependent upon the financial wherewithal of the entities within UNC Health Care. In recent years, the largest entities of UNC Health Care have achieved strong operating performance. Their performance has enabled the investments made through the System Fund in support of the clinical, education and research programs of UNC P&A and the UNC School of Medicine. These investments have, in turn, yielded positive results as measured by growth in needed services, expansion of the medical school class and increased research funding. Further, UNC Health Care has been able to support the fledgling UNCPN during its start-up period and Chatham Hospital despite adverse economic conditions in its primary service area.

The conditions impacting UNC Health Care’s operating entities constitute the greatest risk to the System Fund. National health policy changes are altering the financial outlook for health systems. Adapting to new models requires greater coordination of patient care, major investments in information technology and an increased focus on wellness. Successfully managing in the future requires

tighter integration of administrative functions across the entities of UNC Health Care, caring for patients in lower-cost delivery settings, and comprising sufficient scale to spread the cost of major investments across a broad base. UNC Health Care has begun planning for these changes through a health system-wide planning and implementation process.

Payments for professional services continue to pressure the performance of physician providers. The pressure is strongest in academic medicine. Funding from major sources, patient care revenues for clinical services, research revenues for research discovery, and education revenue from State-appropriated funds are each under pressure and inadequate to fully cover their costs. At the same time, improvements to the Medicaid payment mechanism will help reduce what have been large and increasing losses.

The private health insurance market has driven important changes in patient coverage and in how/when patients seek care. As premiums have increased in a soft employment market, some employers have dropped employer-provided insurance. For others, the premiums have driven plan design decisions that have shifted cost to employees or created disincentives for seeking care, particularly for elective procedures. UNC Health Care relies heavily on privately insured patients as indigent and government payers generally do not cover the full cost of care. As this trend continues, UNC Health Care will face increasing pressure to reduce expenses.

Community-based practices face challenges attributable to similar health care financings and broader economic trends. As such, many community physicians have sought employment within health systems. UNC Health Care formed UNCPN to facilitate employment of community primary care providers. As a start-up, UNCPN has required cash infusions to develop central administrative infrastructure and deploy electronic medical records in the physician offices. Additionally, primary care practices historically situated within Rex Hospital, Inc. or UNC Hospitals moved into UNCPN. The losses from these practices are now incurred by UNCPN. These capital and operating investments will continue in future years. Physicians newly employed by UNCPN also have short-term negative cash flow. Acquiring physical assets at fair market value constitutes a relatively small investment. More importantly, UNCPN incurs operating expenses as providers and their support staffs begin employment with UNCPN. Conversely, payments for providing patient care typically lag by several months.

To further the mission of promoting the health of North Carolinians, UNC Health Care contractually agreed to fund the development of a coordinated system of clinical care for Piedmont Health Services, Inc. (PHS). PHS is a North Carolina non-profit corporation with six locations serving 14 counties in the Piedmont region. The purpose of this development is to increase access to care for the uninsured. UNC Health Care contributed $750,000 to PHS for this program during the year ended June 30, 2012, and $750,000 in the year ended June 30, 2011.


2012 2011

CURRENT ASSETS

Cash and investments $341,427,738 $307,787,702

Patient Accounts Receivable - Net 279,663,222 243,806,014

Inventories 34,088,798 15,849,942

Other Assets and Receivables 226,338,659 35,129,256

Assets Whose Use Is Limited or Restricted 76,605,684 81,481,486

Prepaid Expenses 13,808,395 11,449,761

Total Current Assets 971,932,496 695,504,162

NONCURRENT ASSETS

Property, Plant & Equipment - Net 948,353,932 887,123,721


Other Assets 40,254,643 40,232,397

Total Noncurrent Assets 1,771,932,563 1,773,061,616

Total Assets 2,743,865,059 2,468,565,778

CURRENT LIABILITIES

Accounts & Other Payables 149,849,215 81,447,338

Accrued Salaries & Benefits 104,636,203 82,651,378

Estimated Third-Party Settlements 78,836,855 20,475,201

Notes & Bonds Payable 23,381,134 50,231,247

Interest Payable 4,633,384 4,680,512

Other 8,094,167 15,919,063

Total Current Liabilities 369,430,958 255,404,738

NONCURRENT LIABILITIES


Compensated Absences 83,802,222 72,317,866

Total Noncurrent Liabilities 557,889,279 517,270,922

Total Liabilities 927,320,237 772,675,661

NET ASSETS 1,816,544,822 1,695,890,117

TOTAL LIABILITIES AND NET ASSETS $2,743,865,059 $2,468,565,778

*2011 restated

THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM

Pro Forma Statement of Net AssetsFor the Years Ended June 30, 2012, and June 30, 2011

*


Pro Forma Statement of Revenues and ExpensesFor the Years Ended June 30, 2012, and June 30, 2011

2012 2011

OPERATING REVENUE

Net Patient Service Revenue $2,224,957,586 $1,940,070,963

State Appropriations 18,000,000 33,743,133

Other Operating Revenue 75,124,714 72,991,480

Net Operating Revenue 2,318,082,300 2,046,805,576

OPERATING EXPENSES

Salaries and Fringe Benefits 1,309,046,418 1,156,046,190

Medical and Surgical Supplies 385,482,040 319,665,219

Contracted Services 208,858,655 182,137,843

Other Supplies and Services 116,209,743 106,347,586

Communications and Utilities 35,083,697 33,161,881

Medical Malpractice Costs 5,026,932 17,917,915

Depreciation 87,790,915 83,737,611

Bond and Other Interest Expense 18,065,571 17,385,262

Medical School Trust Fund (MSTF) 10,413,693 12,344,271

Total Operating Expenses 2,175,977,665 1,928,743,778

OPERATING INCOME (LOSS) 142,104,635 118,061,798

NONOPERATING GAINS (LOSSES)

Interest and Investment Activity (7,422,449) 122,724,975

Nonoperating Income (Expense) (1,718,358) (1,420,220)

Grants (12,309,123) (29,895,050)

Total Nonoperating Gains (Losses) (21,449,930) 91,409,706

NET INCOME (LOSS) $120,654,705 $209,471,504

*2011 restated

*



Pro Forma Statement of Cash FlowsFor the Years Ended June 30, 2012, and June 30, 2011

2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Received from Patients and Third Parties $2,164,735,383 $1,902,762,288

Payments to Employees and Fringe Benefits (1,275,577,237) (1,137,397,913)

Payments to Vendors and Suppliers (698,262,710) (641,558,963)

Payments for Medical Malpractice (11,444,003) (9,167,180)

Other Receipts 26,330,365 78,794,456

Net Cash Provided (Used) 205,781,798 193,432,688

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES

Health Care System Grants Paid to UNC (6,418,817) (30,000,000)

State Appropriations 18,000,000 33,743,133


CASH FLOWS FROM CAPITAL FINANCING AND RELATED FINANCING ACTIVITIES

Proceeds from Issuance of Long-Term Debt 30,072,000 181,423,722

Principal & Arbitrage Paid on Outstanding Debt (51,514,581) (93,605,320)

Interest and Fees Paid on Debt (11,161,561) (12,691,119)

Capital Grants - -

Acquisition and Construction of Capital Assets (100,699,566) (114,739,455)

Net Cash Provided (Used) (133,303,708) (39,612,172)

CASH FLOWS FROM INVESTING ACTIVITIES

Investment Income & Other Activity 11,611,060 20,446,253

Purchase and Sale of Investments, Net of Fees (49,876,001) (101,774,560)

Investments in and Loans to Affiliated Enterprises - Net

(12,154,297) (12,679,152)


NET INCREASE (DECREASE) $33,640,035 $63,556,190

BEGINNING CASH AND CASH EQUIVALENTS $307,787,702 $244,231,512

ENDING CASH AND CASH EQUIVALENTS $341,427,737 $307,787,702

*2011 restated

*

THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM // UNC PHYSICIANS & ASSOCIATES

Statement of Net Assets (Unaudited)For the Years Ended June 30, 2012, and June 30, 2011

2012 2011

CURRENT ASSETS

Cash and Investments $114,913,876 $86,946,668

Patient Accounts Receivable - Net 30,733,663 29,613,327

Estimated Third-Party Settlements 31,541,164 37,858,466

Other Assets and Receivables 18,497,086 13,936,017


Total Current Assets 202,621,216 172,668,669

NONCURRENT ASSETS

Property, Plant & Equipment - Net 1,649,800 3,199,600

Total Noncurrent Assets 1,649,800 3,199,600

Total Assets 204,271,016 175,868,269

CURRENT LIABILITIES

Accounts and Other Payables 22,959,075 7,972,491

Accrued Salaries and Benefits 18,345,518 12,214,368

Estimated Third Party Settlements 6,944,026 6,893,882


Other 1,537,733 1,833,799

Total Current Liabilities 51,436,152 30,464,340

NONCURRENT LIABILITIES

Notes & Bonds Payable - 1,649,800

Compensated Absences 26,688,000 26,714,455

Total Noncurrent Liabilities 26,688,000 28,364,255

Total Liabilities 78,124,152 58,828,595

NET ASSETS $126,146,864 $117,039,674

TOTAL LIABILITIES AND NET ASSETS $204,271,016 $175,868,269



Statement of Revenues and Expenses (Unaudited)For the Years Ended June 30, 2012, and June 30, 2011

2012 2011

OPERATING REVENUE

Net Patient Service Revenue $297,297,510 $261,727,831

Other Operating Revenue 56,738,651 58,331,714

Net Operating Revenue 354,036,161 320,059,545

OPERATING EXPENSES

Salaries and Fringe Benefits 310,056,600 286,783,442

Medical and Surgical Supplies 13,523,754 9,848,940

Contracted Services 14,505,817 14,893,412

Other Supplies and Services 23,835,411 21,481,082

Communications and Utilities 2,256,667 2,538,152

Medical Malpractice Costs 826,810 7,243,418

Bond and Other Interest Expense 1,671,762 1,575,169

Medical School Trust Fund (MSTF) 10,413,693 12,344,271

Total Operating Expenses 377,090,514 356,707,886

OPERATING INCOME (LOSS) (23,054,353) (36,648,341)

NONOPERATING GAINS (LOSSES)

Interest and Investment Income 334,847 2,484,028

Nonoperating Income (Expense) - -

Transfers to HCS Enterprise Fund (21,224,718) (6,754,470)

Transfers from HCS Enterprise Fund 53,051,414 49,762,454

Total Nonoperating Gains (Losses) 32,161,543 45,492,012

NET INCOME (LOSS) $9,107,190 $8,843,671


Statement of Cash Flows (Unaudited)For the Years Ended June 30, 2012, and June 30, 2011

2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Received from Patients and Third Parties $302,544,621 $248,636,372

Payments to Employees and Fringe Benefits (303,951,905) (280,810,911)

Payments to Vendors and Suppliers (36,157,941) (44,366,637)

Payments for Medical Malpractice (6,721,237) (7,235,692)

Operating Capital Grants 48,490,345 47,513,766

Other Receipts 46,324,958 45,987,443


CASH FLOWS FROM CAPITAL FINANCING AND RELATED FINANCING ACTIVITIES

Principal & Arbitrage Paid on Outstanding Debt (1,549,800) (1,449,800)

Interest and Fees Paid on Debt (221,962) (225,369)

Acquisition and Construction of Capital Assets 100,000 100,000


CASH FLOWS FROM INVESTING ACTIVITIES

Investment Income & Other Activity 334,847 2,484,028

Investments in and Loans to Affiliated Enterprises - Net

(21,224,718) (6,754,470)


NET INCREASE (DECREASE) $27,967,208 $3,878,730

BEGINNING CASH AND CASH EQUIVALENTS $86,946,668 $83,067,938

ENDING CASH AND CASH EQUIVALENTS $114,913,876 $86,946,668



Pro Forma Selected Statistics and RatiosFor the Years Ended June 30, 2012, and June 30, 2011

REXSITES

CHATHAMSITES

UNCSITES

UNCPNSITES

2012UNC

HEALTH CARE

TOTAL

2011UNC

HEALTH CARE

TOTAL

PATIENT SERVICE STATISTICS

Patient Days 115,210 2,125 250,304 367,639 359,129

Inpatient Discharges 25,768 548 37,744 64,060 65,361

Average Length of Stay 4.0 3.1 6.5 5.7 5.5

Inpatient Operating Room Cases 9,160 21 12,084 21,265 20,592

Outpatient Operating Room Cases 20,869 587 16,862 38,318 37,375

Emergency Department Visits 57,832 14,565 73,469 145,866 135,889

Clinic Visits 67,389 - 869,809 305,436 1,242,634 1,070,306

Births/Deliveries 5,505 - 3,522 9,027 9,428

FINANCIAL RATIOS

Operating Margin Percentage 6.13% 5.77%

Operating Margin Percentage (excluding cost report settlements) 6.13% 4.99%

Days in Net Accounts Receivable 45.88 46.27

Days of Cash on Hand (includes investments) 159.08 165.08

Average Payment Period (days) 73.35 46.36

Long-Term Debt to Equity 20.70% 20.80%

Current Debt Service Coverage 3.74 2.10

Maximum Future Debt Service Coverage 6.89 7.82

NOTE 1 // SIGNIFICANT ACCOUNTING POLICIES

A. ORGANIZATION – The University of North Carolina Health Care System (UNC Health Care) was established November 1, 1998, by North Carolina General Statute 116-37. It is governed and administered as an affiliated enterprise of The University of North Carolina system with its stated purpose to provide patient care, facilitate the education of physicians and other health care providers, conduct research collaboratively with the health sciences schools of the University of North Carolina at Chapel Hill (UNC-CH) and render other services designed to promote the health and well-being of the citizens of North Carolina.

The original legislation included the University of North Carolina Hospitals at Chapel Hill (UNC Hospitals) and the clinical patient care programs established or maintained by the School of Medicine of the University of North Carolina at Chapel Hill including University of North Carolina Physicians and Associates (UNC P&A). UNC Health Care is under the governance of the Board of Directors of UNC Health Care. Rex Healthcare, Inc. (Rex), Chatham Hospital, Inc. (Chatham) and UNC Physician Network, LLC (UNCPN) have been added to the organization since its inception.

The University of North Carolina Hospitals – The University of North Carolina Hospitals at Chapel Hill (UNC Hospitals) is the only state-owned teaching hospital in North Carolina. With a licensed base of 806 beds, this facility serves as an acute care teaching hospital for The University of North Carolina at Chapel Hill. UNC Hospitals consists of North Carolina Memorial Hospital, North Carolina Children’s Hospital, North Carolina Neurosciences Hospital, North Carolina Women’s Hospital and North Carolina Cancer Hospital. As a state agency, UNC Hospitals is required to conform to financial requirements established by various statutory and constitutional provisions. While UNC Hospitals is exempt from both federal and State income taxes, a small portion of its revenue is subject to the unrelated business income tax.

BLENDED COMPONENT UNITS – Although legally separate, Health System Properties, LLC (the LLC), and Carolina Dialysis, LLC (the CDLLC), are component units of UNC Hospitals and are reported as if they were part of the Hospitals.

The LLC was established to purchase, develop and/or lease real property. The LLC is reported as part of the Hospitals because UNC Health Care is the sole member manager and the LLC is governed by the same Board that directs the Hospitals’ operations. Additionally, the only properties owned to date by the LLC are for the sole use and benefit of the Hospitals.

The Hospitals has a two-third ownership interest in the CDLLC. Renal Research Institute owns the remaining one-third interest. A Board of Managers composed of six members manages the CDLLC, with four appointed by the Hospitals through the Chief Executive Officer and two appointed by Renal Research Institute. The CDLLC was formed for the purposes of owning and operating chronic dialysis programs, thus improving the quality of care to end-stage renal disease patients by providing dialysis services and conducting research in the field of nephrology in the state of North Carolina.

The University of North Carolina Physicians & Associates – The University of North Carolina Physicians & Associates (UNC P&A) is the clinical service component of the UNC School of Medicine. At the heart of UNC P&A are the approximately 1,100 physicians who provide a full range of specialty and primary care services for patients of UNC Health Care. While the great majority of services are rendered at the inpatient units of UNC Hospitals and the outpatient clinics on the UNC campus, there is a growing range of services provided at clinics in the community. There are 18 clinical departments, two affiliated departments and two administrative units that collectively form UNC P&A.

CLINICAL DEPARTMENTS:Anesthesiology OrthopaedicsDermatology OtolaryngologyEmergency Medicine Pathology & Laboratory MedicineFamily Medicine PediatricsMedicine PsychiatryNeurology Physical Medicine & RehabilitationNeurosurgery Radiation OncologyObstetrics & Gynecology SurgeryOphthalmology Radiology

AFFILIATED DEPARTMENTS:Allied Health Sciences Center for Development and Learning

ADMINISTRATIVE UNITS:Administrative Office (Billing & Collections, Managed Care) Ambulatory Administration

While UNC P&A is affiliated with UNC Health Care, the net assets of UNC P&A are held in a UNC-CH trust fund. The operating income and expenses for UNC P&A are managed via UNC-CH’s accounting infrastructure; and, as such, its operational results are included in the annual audit for the UNC-CH.

Rex Healthcare Inc. – Rex Healthcare, Inc. (Rex) is a not-for-profit corporation and is exempt from federal and North Carolina income taxation as a 501(c)(3) charitable organization. Rex does not conduct active operations but serves as the parent corporation for a multi-entity health care delivery system that was organized to provide a wide range of health care services to the residents of Wake County, NC, and surrounding counties. UNC Health Care acquired Rex in 2000 and is the sole member of the corporation. UNC Health Care appoints eight of the 13 seats on Rex’s Board of Trustees and also reviews and approves Rex’s annual operating and capital budgets. The principal corporate entities under the common control of Rex are:

REX HOSPITAL, INC. – Rex Hospital, Inc. is a 433-bed hospital located in Raleigh, NC, that provides inpatient, outpatient and emergency services primarily to the residents of Wake County, NC. Rex Hospital operates Rex Cancer Center, Rex Women’s Center, and Rex Rehab and Nursing Care Center of Raleigh on its main campus. Rex Hospital has additional campuses in Cary, Wakefield (in Raleigh), Garner, Holly Springs, Knightdale and Apex. Rex Hospital also owns Rex Home Services, Inc., that primarily serves residents of Wake County.

REX ENTERPRISES COMPANY, INC. – Rex Enterprises Company, Inc., is a North Carolina for-profit corporation organized to hold investments in various affiliates and to promote the development of real property in support of the mission of Rex. Rex Enterprises Company, Inc. is the sole member of Rex CDP Ventures, LLC, which is a limited liability company organized to own and develop real estate in the Wakefield community of northern Wake County.

REX HEALTHCARE FOUNDATION, INC. – Rex Healthcare Foundation, Inc., is a North Carolina not-for-profit corporation organized to promote the health and welfare of residents in Rex’s service area by promoting philanthropic contributions and public support of Rex.

REX HOLDINGS, LLC – Rex Holdings was formed in 2007 to provide medical services through various affiliations, joint ventures and independent physician practices. Rex Holdings is the sole member of Rex Physicians, LLC, which was established in 2009 to employ physicians of specialty practices.

Notes to Financials


Chatham Hospital, Inc. – Chatham Hospital, is a private, nonprofit 501(c)(3) corporation that owns and operates a 25-bed critical access facility located in Siler City, NC. The facility operates 21 acute/swing beds and four intensive care beds, along with a complement of surgical suites, emergency room and ancillary services.

UNC Hospitals entered into a five-year management agreement with Chatham Hospital on August 1, 2006, which includes executive staffing and assistance with operations and planning. By contractual agreement, the UNC Health Care became the sole member of Chatham Hospital, Inc. on July 1, 2008. The UNC Health Care appoints nine of the 15 members on the Chatham Hospital Board and reviews and approves its annual operating and capital budgets.

UNC Physicians Network, LLC – Formerly known as Triangle Physicians Network, UNCPN is a wholly owned subsidiary of the UNC Health Care that owns and operates 34 community based practices throughout the Triangle (Raleigh, Durham and Chapel Hill), NC, area. The purpose of the community based practices is to provide care close to home for the convenience of the patients and allow clinicians and staff of the UNC Health Care to be part of their local communities

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

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

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

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

E. REVENUE AND EXPENSE RECOGNITION – Revenues and expenses are classified as operating or non-operating in the accompanying Statements of Revenues, Expenses and Changes in Net Assets. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with the principal ongoing operations. Operating revenues include activities that have characteristics of exchange transactions, such as charges for inpatient and outpatient services, as well as for external customers who purchase medical services or supplies. Operating expenses are all expense transactions incurred other than those related to capital and noncapital financing or investing activities.

Non-operating revenues include activities that have the characteristics of nonexchange transactions. Revenues from nonexchange transactions “and donations” that represent subsidies or gifts, as well as investment income “and gain

(loss) on disposal of capital assets,” are considered non-operating since these are investing, capital or noncapital financing activities.

F. CASH AND CASH EQUIVALENTS – This classification includes petty cash, security deposits, cash on deposit in private bank accounts and deposits held by the State Treasurer in the short-term investment fund (STIF). The STIF account has the general characteristics of a demand deposit account in that participants may deposit and withdraw cash at any time without prior notice or penalty. All highly liquid investments with an original maturity of three months or less and which are not designated as investments are considered to be cash equivalents and are recorded at cost, which approximates market.

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

G. INVESTMENTS – This classification includes marketable debt and equity securities with readily determinable fair values, including assets whose use is limited and are measured at fair value.

Investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) is included in non-operating income (loss). The calculation of realized gains and losses is independent of a calculation of the net change in the fair value of investments.

H. PATIENT ACCOUNTS RECEIVABLE, NET – Net patient accounts receivable consist of unbilled (in-house patients, inpatients discharged but not final billed and outpatients not final billed) and billed amounts. Payment of these charges comes primarily from managed care payors, Medicare, Medicaid and, to a lesser extent, the patient. The amounts recorded in the financial statements are net of indigent care, contractual allowances and allowances for bad debt to determine the net realizable value of the accounts receivable balance.

Reserves for these deductions are recorded based on the historical collection percentage realized for each payor and projections for future collection rates. Flexible payment arrangements with selected payors have been established to optimize collection of past-due accounts, and any amounts payable beyond one year are classified as non-current assets.

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

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

K. OTHER ASSETS AND RECEIVABLES – Other assets and receivables relate to items such as sales tax refunds due from the North Carolina Department of

Revenue, amounts due from affiliates and other State agencies, and billings to outside companies for ancillary testing.

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

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

M. PREPAID EXPENSES – Prepaid expenses represent current year expenditures for services that extend beyond the current reporting cycle. Payments include insurance premiums, maintenance contracts and lease arrangements.

N. PROPERTY, PLANT AND EQUIPMENT – Property, plant and equipment are stated at cost at date of acquisition or fair value at date of donation in the case of gifts. The value of assets constructed includes all material direct and indirect construction costs. Interest costs incurred during the period of construction are capitalized. Only assets having a cost or fair value of at least $5,000 and an estimated useful life of three years or more are capitalized.

Assets under capital lease are stated at the present value of the minimum lease payments at the inception of the lease.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to 20 years for equipment, 10 to 40 years for buildings and fixed equipment and five to 25 years for general infrastructure and building improvements. Assets under capital leases and leasehold improvements are depreciated over the related lease term, generally periods ranging from five to seven years.

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

P. ACCOUNTS AND OTHER PAYABLES – Accounts and other payables represent the accrual of expenses for goods and services that have been received as of the end of the year but have not been paid.

Q. ACCRUED SALARIES AND BENEFITS – Accrued salaries and benefits represent the accrual of salaries and associated benefits earned as of the end of the year but which have not been paid.

R. NOTES AND BONDS PAYABLE – Notes and bonds payable represent debt issued for the construction of buildings and the acquisition of equipment. The current amount is the portion of bonds due within one year, and the balance is reflected as non-current.

The bonds carry interest rates ranging from 0.12 percent to 10.1 percent. The various bond series have fixed, variable or synthetic rates with final maturity in fiscal year 2034. Bonds payable are reported net of unamortized discount, premium and deferred loss on refundings. Amortization of these amounts is done using either the effective interest method or the straight-line method. The notes payable carry various interest rates ranging from 1.64 percent to 3.76 percent with a final maturity in fiscal year 2022.

S. INTEREST PAYABLE – Interest payable represents accrued interest at the end of the year that has not yet been paid.

T. OTHER CURRENT LIABILITIES – Other current liabilities represent funds held for others and amounts due to patients or third parties for credit balances.

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

V. NET ASSETS – Net assets represent the difference between assets and liabilities. Due to the complexities of consolidating these entities, only a combined number is shown for net assets.

Normally, under general accepted accounting principles, the net asset category would be further categorized as the amounts (1) Invested in Capital Assets, Net of Related Debt, (2) Restricted Net Assets – Expendable and (3) Unrestricted Net Assets.

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

Charity care represents health care services that were provided free of charge or at rates that are less than the established rates to individuals who meet the criteria of UNC Health Care’s charity care and uninsured policy. For UNC Hospitals and UNC P&A, uninsured patients receive a 35 percent discount for medically necessary treatment. Charity care provided is not considered to be revenue, since no effort is made to collect accounts that fall under this policy.

Medicare reimburses for inpatient acute care services under the provisions of the Prospective Payment System (PPS). Under PPS, payment is made at predetermined rates for treating various diagnoses and performing procedures that have been grouped into defined diagnostic-related groups (DRGs) applicable to each patient discharge rather than on the basis of the Hospitals’ allowable charges. Psychiatric and Rehabilitation inpatient services are reimbursed under separate programs.

A prospective payment system for outpatient services was implemented Aug. 1, 2000, and is based on ambulatory payment classifications. It applies to most hospital outpatient services other than ambulance, rehabilitation services, clinical diagnostic laboratory services, dialysis for end-stage renal disease, non-implantable durable medical equipment, prosthetic devices and orthotics.

Medicaid reimburses inpatient services on an interim basis under a Prospective Payment System. Medicaid uses the Medicare DRG system with some modifications. Medicaid reimburses outpatient services on an interim basis at an agreed upon percent of charges, but is settled based on documented cost for all services except hearing aids, durable medical equipment (DME), outpatient pharmacy and home health.

Hospital payments for Medicare and Medicaid services are made based on a tentative reimbursement rate with final settlement determined after submission of the appropriate cost reports by the entities within UNC Health Care. Medicaid reimburses physician services at a rate of ninety-five percent (95 percent) of allowable Medicare rates. UNC P&A is also reimbursed on a cost-basis, receiving the federally reimbursed portion of costs of providing care to Medicaid patients not covered by fee-for-service reimbursement.

X. MEDICAL AND SURGICAL SUPPLIES – Medical and surgical supplies represent the items used to provide patient care. This includes instruments, special medical devices and pharmaceuticals.


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

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

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

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

NOTE 2 // ESTIMATED THIRD-PARTY SETLEMENTS

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

NOTE 3 // CAPITAL ASSETS

A summary of capital assets as of June 30 was:

FY2012 FY2011

Land and Improvements 96,369,752 91,501,833

Buildings and Improvements 889,096,731 865,641,386

Equipment 749,130,063 697,164,322

Construction in Progress 96,280,770 46,651,729

Gross PP&E 1,830,877,316 1,700,959,270

Accumulated Depreciation (882,523,384) (815,380,392)

Net PP&E $948,353,932 $885,578,878

FY2012 FY2011

Chatham Series 2007 Bonds 28,000,000 28,755,000

UNC P&A Series Bonds 1,649,800 3,199,600

Rex Series 2010A Bonds 119,847,000 122,965,000

UNC Hospitals Series 2001 Bonds 96,800,000 98,200,000





FACE VALUE OF BONDS OUTSTANDING 435,816,800 450,939,600

Deferred Costs - Loss on Refunding (14,194,576) (15,414,507)

Deferred Costs - Premium on Issuance 5,403,529 6,164,243

Arbitrage Rebate Payable 125,010 25,002

Hedging Liability 26,832,040 15,821,518

NET VALUE OUTSTANDING 453,982,803 457,535,856

Current Portion of Bonds 17,259,800 15,119,800

Current Portion of Notes 11,784,812 35,111,447

TOTAL CURRENT BONDS AND NOTES 29,044,612 50,231,247

Noncurrent Portion of Bonds 436,723,003 442,416,056

Noncurrent Portion of Notes 31,622,054 425,000

Other Noncurrent Debt 5,742,000 2,112,000

TOTAL NONCURRENT BONDS AND NOTES 474,087,057 444,953,056

NOTE 4 // LONG-TERM DEBT

A summary of capital assets as of June 30 was:

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

FISCAL YEAR PRINCIPAL INTEREST TOTAL

2013 $17,259,800 $13,590,487 $30,850,287

2014 16,215,000 12,976,423 29,191,423

2015 16,775,000 12,374,074 29,149,074

2016 17,740,000 11,777,110 29,517,110

2017 18,375,000 11,163,732 29,538,732

2018-2022 103,510,000 41,892,566 145,402,566

2023-2027 122,500,000 28,664,128 151,164,128

2028-2031 118,822,000 9,310,442 128,132,442

2032-2034 4,620,000 282,250 4,902,250

TOTAL $435,816,800 $142,031,212 $577,848,012

FISCAL YEAR PRINCIPAL INTEREST TOTAL

2013 $11,784,812 $1,156,025 $12,940,837

2014 1,859,569 1,095,358 2,954,927

2015 1,659,052 1,039,983 2,699,035

2016 1,552,433 1,003,456 2,555,889

2017 876,000 960,000 1,836,000

TOTAL $43,406,866 $9,347,822 $52,754,688

Annual requirements to pay principal and interest on the bonds outstanding at June 30, 2010 are:

Annual requirements to pay principal and interest on the notes outstanding at June 30, 2010, are:


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

NOTE 9 // COMMUNITY BENEFITS

In addition to providing care without charge, or at amounts less than established rates to certain patients identified as qualifying for charity care, UNC Health Care also recognizes its responsibility to provide health care services and programs for the benefit of the community, at no cost or at reduced rates. UNC Health Care sponsors many community health initiatives, including breast and prostate cancer screenings, cardiovascular and pulmonary awareness, and diabetes education programs that ultimately result in the overall improved health of our community. UNC Health Care also provides contributions, cash and in-kind, to various charitable and community organizations. The costs of these programs are included in operating expenses in the accompanying pro forma statements of revenues and expenses.

UNC Health Care and its entities participate in the North Carolina Hospital Association’s (NCHA) Advocacy Needs Data Initiative (ANDI) to quantify their Community Benefit. The data for calculating the FY12 Community Benefit remains fluid, and will be included in NCHA’s report in spring 2013.

NOTE 5 // PENSION PLANS

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

The Optional Retirement Program (the Program) is a defined contribution retirement plan that provides retirement benefits with options for payments to beneficiaries in the event of the participant’s death. Administrators and eligible faculty of the University may join the Program instead of TSERS. The Board of Governors of The University of North Carolina is responsible for the administration of the Program. Participants in the Program are immediately vested in the value of employee contributions. The value of employer contributions is vested after five years of participation in the Program. Participants become eligible to receive distributions when they terminate employment or retire.

Rex sponsors a single-employer, defined benefit retirement plan available to eligible employees. The benefit formula is based on the highest five consecutive years of an employee’s compensation during the 10 plan years preceding retirement. There are no employee contributions to the plan.

Funding amounts for all of the plans are based upon actuarial calculations.

In addition to the employer plans, UNC Health Care employees may elect to participate in any number of deferred compensation and Supplemental Retirement Income Plans. These include 401(k) plans, 403(b) plans and 457 plans. All costs of administering and funding the plans are the responsibility of the participants. Rex employees may contribute to a tax-deferred annuity plan through which Rex matches one-half of each participant’s voluntary contributions on a graduated scale based on length of service, not to exceed 5 percent of the participant’s annual salary.

NOTE 6 // OTHER EMPLOYMENT BENEFITS

UNC Hospitals and UNC P&A participate in State-administered programs that provide health insurance and life insurance to current and eligible former employees. Funding for the health care benefit is financed on a pay-as-you-go basis based upon actuarial reports. UNC Hospitals and UNC P&A assume no liability for retiree health care benefits provided by the programs other than their required contributions.

UNC Hospitals and UNC P&A participate in the Disability Income Plan of North Carolina (DIPNC). DIPNC provides short-term and long-term disability benefits to eligible members of the Teachers’ and State Employees’ Retirement System. UNC Hospitals and UNC P&A assume no liability for long-term disability benefits under the Plan other than their contribution.

Rex offers a full menu of employment benefits to its employees through various third-party carriers. These include medical insurance, dental coverage, short-term and long-term disability benefits and life insurance coverage.

More information about these plans can be found in the individual audit reports for the various entities.

NOTE 7 // RISK MANAGEMENT

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

Liability Insurance Trust Fund – UNC Hospitals and UNC P&A participate in the Liability Insurance Trust Fund (the Fund), a claims-servicing public entity risk pool for professional liability protection. The Fund acts as a servicer of professional liability claims, managing separate accounts for each participant from which the losses of that participant are paid. Although participant assessments are determined on an actuarial basis, ultimate liability for claims remains with the participants and, accordingly, the insurance risks are not transferred to the Fund.

Additional disclosures relative to the funding status and obligations of the Fund are set forth in the audited financial statements of the Liability Insurance Trust Fund for the Years Ended June 30, 2012, and June 30, 2011. Copies of this report may be obtained from The University of North Carolina Liability Insurance Trust Fund, 211 Friday Center Drive, Hedrick Building - Room 2029, Chapel Hill, NC, 27517.

NOTE 8 // RELATED PARTY TRANSACTIONS

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

UNC Health Care System Enterprise Fund – The Board of Directors of UNC Health Care authorized and approved the creation of the UNC Health Care System Enterprise Fund (The System Fund) to support UNC Health Care’s mission and vision to be the nation’s leading public academic health care system. Pursuant to a memorandum of understanding effective July 1, 2005, UNC Hospitals, UNC P&A, Rex and the UNC-CH School of Medicine agreed to finance the Enterprise Fund.

The System Fund enables fund transfers among entities in the health system in support of the Board’s vision to be the nation’s leading public academic health care system.

The System Fund is the name of UNC Health Care’s bank account for central administrative functions. It contains several distinct funds. As defined by North Carolina General Statutes, these funds may “consist of moneys received from or for the operation by an institution of any of its self-supporting auxiliary enterprises, including institutional student auxiliary enterprise funds for the operation of housing, food, health, and laundry services; or moneys received by an institution in respect to fees and other payments for services rendered by medical, dental or other health care professionals under an organized practice plan approved by the institution or under a contractual agreement between the institution and a hospital or other health care provider.”

The System Fund assesses, holds and allocates funds across the entities of UNC Health Care. Initially formed as the Enterprise Fund to facilitate investments in support of the clinical, academic and research missions of UNC Health Care and the UNC School of Medicine, the Enterprise Fund today exists as a sub-account within the System Fund. Since its formation, the System Fund has been used to enable additional types of transfers between entities of UNC Health Care. As such, the Enterprise Fund, Outreach Fund, Patient Safety Fund, Recruitment Fund, and Shared Administrative Services Fund each function as sub-accounts of the System Fund.

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