F–5 STANDING COMMITTEES Finance and Asset Management Committee

F–5/211-17 11/9/17

Approve Financial Stability Plan (aka Project FIT) for UW Medicine RECOMMENDED ACTION It is the recommendation of the administration and the Finance and Asset Management Committee that the Board of Regents:

1) Approve the UW Medicine Financial Stability Plan, including a revised 5-year proforma; and

2) Suspend the Internal Lending Program loan requirements related to UW

Medical Center (UWMC) and Northwest Hospital (NWH) through June 30, 2019. Suspended requirements include:

a. Debt Service Coverage (1.25x) b. Days Cash (75 days at UWMC and 50 days at NWH)

BACKGROUND UW Medicine has ongoing requirements relating to loans at UWMC and NWH. Requirements include operating (debt service coverage) and reserve metrics (days cash). For FY17, UW Medicine experienced an overall loss of 1.5% of revenue. While UW Medicine reserves were sufficient to cover the shortfall, ILP loan requirements for UWMC and NWH were not met. In accordance with Board of Regents policy and in collaboration with the Executive Vice President for Finance & Administration, and the Treasury Office, UW Medicine developed a Financial Stability Plan (Project FIT) that defines current and future financial targets, leading to improved financial performance. The FY18 budget constitutes the first year of the Plan and reflects the impact of defined initiatives. Through September, UW Medicine is meeting its FY18 budget targets. The Plan for FY19 through FY23 incorporates significant financial improvement targets, and UW Medicine will be defining the specific initiative and actions to achieve those targets over the life of Project FIT.

STANDING COMMITTEES Finance and Asset Management Committee Approve Financial Stability Plan (aka Project FIT) for UW Medicine (continued p. 2)

F–5/211-17 11/9/17

PROJECT FIT OVERVIEW The healthcare industry is experiencing rapid change creating the need for transformational change and a sharpened focus on strategic initiatives. Continued reimbursement pressure from commercial and governmental payers as well as inflationary expense increases have resulted in diminishing margins for UW Medicine, along with other providers in our region. The UW Medicine Financial Stability Plan, Project FIT (Financial Improvement and Transformation), represents a multi-year plan designed to achieve financial stability and position UW Medicine for the future. Financial improvement is planned through revenue generation and cost savings while continuing to make certain infrastructure investments. The largest positive financial impact will come from clinical service growth and labor mix and productivity improvements. Additionally, UW Medicine has included two new capital projects in the Plan—$25M for a Child Birth Center at Northwest Hospital and $128M for an Enterprise Electronic Health Record Project. These projects have yet to undergo comprehensive due diligence and will require separate approval from the Board of Regents in the future. ASSESSMENT AND NEXT STEPS The Treasury Office has reviewed UW Medicine’s plan, conducting both a high-level financial review of the aggregate targets and initiatives and a confirming assessment of selected variables. Many of the FY19 and FY20 Project FIT initiatives are in the early stages of development, and planning is underway. Specific initiatives and actions to achieve the plan’s financial targets are in process. Taken together, these initiatives will be transformative in nature and will represent a significant implementation challenge to UW Medicine. UW Medicine will report on the progress of the plan semi-annually, in conjunction with the Semi-Annual Borrower Reports (SABRe), beginning in March 2018. The SABRe reports will focus on the borrowing entity, with current reports for UWMC, NWH, and the consolidated reporting entity. The Board of Regents will revisit the Internal Lending Program loan covenants for the outstanding loans by October 2019.

STANDING COMMITTEES Finance and Asset Management Committee Approve Financial Stability Plan (aka Project FIT) for UW Medicine (continued p. 3)

F–5/211-17 11/9/17

ADMINISTRATIVE REVIEWS AND APPROVALS The plan represents a framework for success and depends on the identification and implementation of out-year initiatives and actions to achieve the targets. The UW Medicine Financial Stability Plan has been reviewed and approved by the CEO of UW Medicine, the Executive Vice President for Finance & Administration, the Associate Vice President for Treasury, and the NWH Board. Review and approval by the UW Medicine Board is expected on November 6, 2017. Attachment UW Medicine Financial Stability Plan (aka Project FIT)

UW MEDICINE |FINANCIAL STABILITY PLAN

UW MEDICINEFINANCIAL STABILITY PLAN

AKA

PROJECT FIT

BOARD OF REGENTS

NOVEMBER 9, 2017

ATTACHMENTPage 1 of 14

F-5.1/211-17 11/9/17

• UW Medicine’s FY17 financial performance yielded a 1.5% loss. While UW Medicine’s reserves were sufficient to cover FY17 shortfall, ILP loan requirements for UWMC and NWH were not met.

• UW Medicine, in collaboration with Treasury and Central Administration, has drafted a three year Financial Stability Plan (FSP) aka Project FIT for the Board of Regents approval at the November meeting

• UW Medicine has embarked on detailed planning that will improve performance over the next three years and beyond. Achieving these planned improvements will require transformational change and accountability.

• This year’s LRFP is focused on Financial Improvement and Transformation (Project FIT)

EXECUTIVE SUMMARY

2F-5.1/211-17 11/9/17

• Declining reimbursements from both commercial and governmental payers that has occurred at a faster than anticipated rate

• Payer mix changes that negatively impacted reimbursement

• Volume challenges at certain of facilities

• Inflation rates for labor, benefits and medical supplies that outpaced growth in net revenue

• Other non-labor expense increases that continue to grow at an unsustainable rate (examples: IT and departmental funding)

FACTORS DRIVING DETERIORATION IN FY17

3F-5.1/211-17 11/9/17

FY18 IS THE FIRST YEAR OF PROJECT FIT -BUDGET TARGETS ARE SIGNIFICANT

4

• FY18 budget targets are the immediate focus.

• For UWMC, HMC and NWH combined, the FY18 budget targets represent an improvement of $158 million over FY17 when cost inflation impacts are considered.

• The FY18 budget process was robust and the initiatives built into our plans are currently in process. Success will be measured by evaluating budget to actual variances and reported out monthly.

($60.0) ($50.0) ($40.0) ($30.0) ($20.0) ($10.0) $0.0 $10.0 $20.0

HMC

NWH

UWMC

VMC

Medical Center Gaps from FY17 to FY18 Budget Target

FY18 $0M

FY17 -$26M FY18 -$11M

FY18 $10M

FY18 $0MFY17 -$22M

FY17 $7M

FY17 -$44M FY18 $0M

FY17 -$26M FY18 -$11M

FY18 $10M

FY18 $0MFY17 -$22M

FY17 $7M

F-5.1/211-17 11/9/17

BUDGET TARGETS THROUGH Q1 HAVE BEEN MET

5

Total Income (in $000’s) for the Month of September 2017 and YTD:

Month Month Month Variance Month YTD YTD YTD Variance YTD

Actual Margin % Budget To Budget Prior Yr Actual Actual Margin % Budget To Budget Prior Yr Actual

HMC 4,127$ 5% 1,184$ 2,943$ 619$ 4,928$ 2% 6,530$ (1,602)$ 8,627$

UWMC (2,150)$ -2% (2,716)$ 566$ (10,284)$ (588)$ 0% (7,191)$ 6,603$ (16,289)$

NWH (2,331)$ -8% (1,421)$ (910)$ (2,836)$ (6,500)$ -7% (3,617)$ (2,883)$ (7,025)$

VMC 1,005$ 2% (404)$ 1,409$ 677$ 8,623$ 6% (2,426)$ 11,049$ 1,074$

SUBTOTAL 651$ 0% (3,357)$ 4,008$ (11,824)$ 6,463$ 1% (6,704)$ 13,167$ (13,613)$

UWNC (163)$ -2% (320)$ 157$ (526)$ (809)$ -3% (1,243)$ 434$ (1,230)$

ALNW 728$ 14% 523$ 205$ 622$ 1,976$ 13% 2,734$ (758)$ 3,265$

UWP** -$ 0% -$ -$ -$ -$ 0% -$ -$ -$

SoM 6,272$ 5% 7,714$ (1,442)$ 10,292$ (7,091)$ -2% (3,443)$ (3,648)$ 1,802$

TOTAL 7,488$ 2% 4,560$ 2,928$ (1,436)$ 539$ 0% (8,656)$ 9,195$ (9,776)$

**Results for UWP are shown after amounts available to the School of Medicine.

$(35,000)

$(20,000)

$(5,000)

$10,000

$25,000

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2017 $(16,102) $7,712 $(1,436) $(18,710) $(3,828) $11,567 $(5,971) $(24,633) $11,792 $(12,437) $(262) $(26,644)

FY 2018 $(14,238) $7,289 $7,488 $- $- $- $- $- $- $- $- $-

FY 2018 Budget $(13,033) $(183) $4,560 $(6,691) $(4,012) $7,883 $(5,654) $(13,542) $(12,406) $(5,417) $4,461 $7,785

Combined Monthly Total Income as of September 2017 (in 000's)

F-5.1/211-17 11/9/17

LRFP/ “PROJECT FIT” STEPS

STEP TWO: DIMENSION THE SIZE OF GAP TO OUR GOALOur baseline projections will not generate positive margins. Given our target margins, the question is “how much in initiatives do we need to get us where we need to be?”

STEP THREE: CLOSING THE GAPA list of potential opportunities has been generated through discussions with executive leadership over the last few months. These initiatives have been assessed for dimension and timeline for incorporation into the plan.

Targets have been assigned to each initiative and will be evaluated throughout the life of the plan as refinement occurs. Identified targeted dollars have been incorporated into each entity’s plan and will be presented at the entity board committees, UW Medicine board committees and the Board of Regents.

6

Budget Directors worked with site leadership to develop site-specific baseline assumptions:• Volumes/Length of Stay• Inputs specific to site• Ongoing capital needs

System wide global assumptions were also developed:• Net Revenue• Drug and Medical Supply Inflation• Salaries and Benefits• UWNC• IT and other allocation areas

STEP ONE: DEVELOP BASELINE LONG RANGE PLAN

F-5.1/211-17 11/9/17

FIT PORTFOLIO APPROACH

Scope / prioritize

Planning / Deployment Periodic Updates

Present to UW Medicine Board

& Regents

Re-evaluate / refine portfolio

Deploy / track

Financial modeling/tracking

DecreasingUncertainty

7F-5.1/211-17 11/9/17

8

IDENTIFY

OPPORTUNITIES

DEVELOP

BUS. PLAN

DEPLOY

RESOURCESLAUNCH

REALIZE

BENEFIT(FY19-FY20)

MAINTAINR

even

ue

Gen

erat

ion

Co

st S

avin

gsIn

fras

tru

ctu

re

Clinical Service Growth

Maximize Capacity

RevUP and Other Revenue Cycle Improvements

Philanthropy

Labor Mix & Prod.

Supply Chain

Property/Space

Admin Efficiencies

EHR

Child Birth Center (CBC) at NWH

Appropriations

Approval stage gate

F-5.1/211-17 11/9/17

ACHIEVING OUR TARGETS

• The initiatives that have been identified will be monitored and measured as we work through operationalizing them.

• At each measurement point, initiatives that that are not on track with the goal will require immediate action steps or alternative initiatives will need to be identified.

• We will be primarily focused on achieving our margin target. Initiatives are the tactics toward achieving that goal.

• The process will be iterative and is intended to evolve as we continue to work toward our goal.

9F-5.1/211-17 11/9/17

FY2020 FORECAST

10

The UW Medicine Consolidated Clinical Enterprise includes UWMC, NWH, ALNW, UWNC, UWP, Shared Services and Consolidated Laundry

Project FIT is intended to improve margins over the next three years so that by FY2020 we are able to strengthen our balance sheet and our cash levels.

UW Medicine Combined Forecast - FY2020

Statement of Revenue and Expenses$ in (000's)

Consolidated

Clinical

Enterprise

Harborview

Medical

Center

Valley

Medical

Center

UW

School of

Medicine

Total

Combined

UW Medicine

Operating Revenues 2,336,823$ 1,076,990$ 675,398$ 1,459,300$ 5,548,511$

Operating Expenses 2,283,971 1,052,510 706,781 1,458,335 5,501,597

Operating Income (Loss) 52,852 24,480 (31,383) 965 46,914

Non Operating Income (Loss) 3,392 (13,849) 31,383 - 20,926

Total Income 56,244$ 10,631$ -$ 965$ 67,840$

Total Margin % 2.4% 1.0% 0.0% 0.1% 1.2%

Interest Expense is included in Operating Expenses in the Financial Plan to facilitate comparisons to Moody's benchmarks.

F-5.1/211-17 11/9/17

UW CONSOLIDATED CLINICAL ENTERPRISE

11

Statement of Revenue & ExpensesUW Medicine Consolidated Clinical Enterprise$ in (000's)

Audited Audited Budget Projected2016 2017 2018 2019 2020 2021 2022 2023

Total Operating Revenue 1,886,206 1,968,019 2,081,324 2,218,765 2,336,823 2,426,004 2,512,036 2,605,662

Operating ExpensesSalaries and Benefits 1,038,228 1,104,419 1,140,339 1,193,007 1,251,760 1,305,167 1,356,936 1,409,914Supplies 346,298 352,794 347,090 367,005 383,217 397,233 418,334 444,577Depreciation & Amortization 86,776 92,784 91,826 93,985 91,086 104,087 109,802 118,008Other Expense 481,939 501,275 520,080 537,427 557,908 566,403 572,873 578,298

Total Operating Expenses 1,953,241 2,051,272 2,099,335 2,191,424 2,283,971 2,372,890 2,457,945 2,550,797

Excess of Revenue over Expenses (67,035) (83,253) (18,011) 27,341 52,852 53,114 54,091 54,865from Operations

Net Nonoperating Revenue 35,891 15,748 8,983 2,820 3,392 5,968 6,595 8,393

Excess of Revenue over Expenses ($31,144) ($67,505) ($9,028) $30,161 $56,244 $59,082 $60,686 $63,258Total Margin % -1.62% -3.40% -0.43% 1.36% 2.40% 2.43% 2.41% 2.42%

Interest Expense is included in Operating Expenses in the Financial Plan to facilitate comparisons to Moody's benchmarks.

F-5.1/211-17 11/9/17

PLANNED DEBT FUNDING

12

We plan to bring forward to the UW Board of Regents a request to finance two of our key FIT projects:

1. Electronic Health Record (EHR), $128 million2. Childbirth Center at Northwest Hospital, $25 million

Additional debt of $153 million is included in the LRFP at an interest rate of 4.5%. The debt profile of the consolidated clinical enterprise would still be favorable when compared to Moody’s medians.

F-5.1/211-17 11/9/17

RECOMMENDED ACTIONS

UW Medicine has a top priority focus on continued development and execution of the three-year Financial Stability Plan and we are committed to ongoing semi-annual measurement and reporting.

We recommend the following actions to the Board of Regents:

1. Approval of the UW Medicine Financial Stability Plan, aka Project FIT, including approval to start detailed planning for two key strategic initiatives that will require access to capital

2. Temporary suspension of Internal Lending Program (ILP) requirements through June 30, 2019. During FY20, in partnership with Treasury, requirements will be revisited and reset.

13F-5.1/211-17 11/9/17

NEXT STEPS

UW Medicine leadership will continue to focus on the strategic directives of the organization, prioritizing our key initiatives as identified in our work.

We are committed to improving our financial results through revenue generation and cost savings initiatives while always ensuring high quality care is provided with a focus on UW Medicine Patients are First principles.

Periodic briefings to the BOR including SABRe reporting will occur as appropriate.

UW Medicine leadership will continue to keep Treasury and Central Administration updated on the plan development as more information is available.

14F-5.1/211-17 11/9/17