Embracing the Future of Health Care

Embracing the Future of Health CareTHE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM2011 ANNUAL REPORT

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

COVER PHOTO COURTESY OF HEATHER LAUFFER FOR TAMARA LACKEY PHOTOGRAPHY

PHOTO CREDITSBRIAN STRICKLAND PHOTOGRAPHYNATHAN LAWRENSON PHOTGRAPHYBRYAN REGAN PHOTOGRAPHY

CONTRIBUTING WRITERSTEPHEN R. WERK

CONTRIBUTING WRITERSTEPHEN R. WERK Table of Contents

introduction

Partnering for the Future of Health Care 2

The Future of Health Care: Reform 4

Partnering with Patients and Families 6

Reducing Readmissions 9

Carolina Advanced Health 10

Patient and Physician Portals 12

Community Benefit Report 13

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

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By applying our well-established strengths and embracing innovation, UNC Health Care in 2011 achieved remarkable results in patient care, research and education that position us to better meet the challenges and forge the solutions of the future.

Underpinning all of our efforts and propelling us forward in a fast-evolving health care environment is our commitment to collaboration. Only by bringing to bear our collective expertise, knowledge and experience in a highly coordinated manner can we reach our objectives in patient-centered care delivery and premier medical research and education.

Synergies between the UNC School of Medicine and UNC Hospitals, Rex Healthcare, and Chatham Hospital energize the medical learning environment and help transition breakthroughs in basic and clinical research to our patient care settings. Multidisciplinary clinical teams work in unison to diagnose more accurately and treat patients, leading to improved patient safety and better outcomes.

Developing new partnerships based on shared goals and exploring new ways to collaborate with health care stakeholders

are essential in the challenging health care marketplace. Care delivery partnerships can align clinical and financial objectives, better coordinate care and access to comprehensive medical services, and eliminate the inefficiencies that are driving up health care costs.

As North Carolina’s leading public academic medical center, UNC Health Care has been a vocal advocate for revamping the U.S. health care system. We have been proactive in preparing for change proposals, complying with legislative provisions and crafting pioneering approaches of our own. Far from waiting for change to affect us, we’ve taken bold steps to shape change.

Within the pages of this Annual Report are compelling illustrations of how UNC Health Care is addressing the changing needs of the health care industry.

WORKING TOGETHERWe continually investigate collaborative projects that support our mission to improve health care efficiency and provide broader access to care and research opportunities throughout the state.

We launched, in a joint effort with IBM, a new health information exchange (HIE) to improve the flow of integrated health care data among our affiliated hospitals and physician practices throughout North Carolina. The HIE is expected to be among the most advanced in the nation, enabling health care providers to access comprehensive electronic patient care information at all points of care.

We reached an affiliation agreement with Pardee Hospital in Hendersonville, NC, that enables UNC Health Care to assume management control of the hospital to achieve cost savings and improve health care services to residents of Henderson County.

PARTNERING FOR THE FUTURE OF HEALTH CARE

2011 ANNUAL REPORT 3

The UNC School of Medicine has partnered with the Department of Kinesiology at the University of North Carolina at Charlotte to establish a neurodiagnostics and sleep science bachelor’s degree program. The program will be offered by UNC-Charlotte, with collaborative course work available in Chapel Hill.

UNC HOSPITALSOn the heels of gaining Nurse Magnet designation in late 2010 from the American Nurses Credentialing Center, UNC Hospitals received further acclaim in 2011.

The exemplary level of care delivered within our hospitals is reflected in patient satisfaction scores. UNC Hospitals achieved all of its internal patient satisfaction objectives during the 2011 fiscal year while also distinguishing itself in national patient satisfaction surveys.

UNC Hospitals ranked first overall for “Patient Centeredness” in the 2011 Quality and Accountability Performance Scorecard, a ranking involving 101 member hospitals within the University HealthSystem Consortium.

In the HCAHPS survey, which measures hospital care satisfaction, UNC Hospitals met or exceeded state and federal averages in 8 of 10 categories. In addition, UNC Hospitals ranked highest of all hospitals in the Triangle throughout the year, at one point measuring at the top within the Triangle area in all 10 categories.

Five specialty departments within UNC Hospitals were included in the 2011 U.S. News & World Report rankings.• Ear,NoseandThroat:20th

• Gynecology:30th

• Pulmonology:40th

• Nephrology:41st

• Gastroenterology:44th

Additionally, the specialty departments of cancer, urology and geriatrics were designated by the magazine as “high performing,” within the top 25 percent of hospital specialty departments in the nation. For 19 years in a row, multiple specialty

departments at UNC Hospitals have been included in the rankings.

Our physicians continue to distinguish themselves in national rankings. The Best Doctors in America® compilation for 2011-2012 featured 242 UNC HealthCare physicians. The 2011-2012 survey of “America’s Top Doctors” included 59 UNC Health Care physicians.

As the communities we serve grow, we are developing new and upgraded facilities to meet the expanding demand.

In April, we broke ground on our 60,000-square-foot, 68-bed hospital north of Chapel Hill in the town of Hillsborough. Phase 1 of the Hillsborough Hospital is expected to open in 2013, with Phase 2opening in 2015.

Wearebuildinga93,000-square-foot,cancercenter at Rex Healthcare. Slated to open in 2014,thecenterwillprovideresidentsoffast-growing Wake County and the surrounding area with comprehensive cancer care.

In July, we opened a new wing of the Newborn Critical Care Unit in the N.C. Children’s Hospital that houses 10 new patient beds, bringing the number of beds in the unit to 58.

UNC SCHOOL OF MEDICINEThe UNC School of Medicine was awarded nearly $390 million in research fundsbetween July 2010 and July 2011. Strong funding supports ongoing excellence, demonstrated through premier national rankings. In its survey of “The Best Medical Schools,” U.S. News ranked UNC School ofMedicine:

• 2nd overall in primary care teaching,• 20th overall in research,• 2nd in family medicine,• 6th in rural medicine,• 10th in AIDs programs,• 6th in audiology,• 5th in occupational therapy,• 11th in physical therapy, and• 18th in speech language pathology.

The UNC School of Medicine builds on its tradition of graduating new doctors of medicine who have distinguished themselves in research, community service and global involvement. Of the 154 newdoctors of medicine who graduated in the class of 2011, 67 percent conducted research as medical students and 90 percent participated in community service while in medical school. Collectively, our medical school graduates studied or worked in 26 different countries on six continents.

Each day, the faculty members and staff of UNC Health Care contribute to improving the experience of every patient who enters our doors and to furthering medical knowledge and discovery. All of us, as a team, are dedicated to advancing our state-mandated mission to ensure excellent patient care with great value for all North Carolinians.

In this spirit of partnership, we encourage your involvement in our efforts and look forward to sharing with you our progress in the year ahead.

Sincerely,

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

Richard M. Krasno, PhDChairman, Board of Directors (November 2009-Present)The University of North Carolina Health Care System

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THE FUTURE OF HEALTH CARE: REFORM

“There is a lot of political uncertainty about what exactly will happen because of movements in Washington, but we know for certain that we simply can’t go wrong in making the changes and preparations we’re making,” said Robb Malone, vice president of Practice Quality & Innovation (PQI).

UNC Health Care is already responding to the current changes and anticipatingthosethatwillcome,whichwillrequire:• makingdifficultdecisionsabouthowweallocateresources,• testingnew,creativeapproachestochallenges,• streamliningprocesses,and• redefiningourpartners.

KEY FEDERAL LEGISLATIONTwo key pieces of federal legislation that are driving health care reform are the Health Information Technology for Economic and Clinical Health (HITECH) Act, and the Patient Protection and Affordable Care Act. As hospitals everywhere are grappling with what

allthesechangesmean,onethingisknown:thegreatestchallengeis reducing costs. Many of the changes in health care reform place incentives for providing patient-centered care at reduced costs.

The HITECH Act contains specific incentives for health care organizations to adopt and implement “Meaningful Use” standards of Electronic Health Record (EHR) technology.

“Many of our practices have been effectively using EHRs for years,” said Donald Spencer, MD, MBA, medical director and vice president of ambulatory care. “I believe that we are well positioned to address reform and other health care movements because we have a track record in quality care and have been focused on operational improvement for a long time. We know what it takes to make meaningful changes in care improvement.” Meaningful Use requires eligible hospitals and professionals to demonstrate that they are using certified EHR technology in ways

Innovation will be the key for any hospital to keep up with the changes that are coming in the way health care is delivered and how it is paid for. Even as the legislation is still being debated, UNC Health Care is moving forward to find creative ways to address the anticipated changes of federal health care reform.


that meet specified utilization and quality measures. Hospitals and physicians that do not demonstrate Meaningful Use by 2015 will incur a reduction in their Medicare reimbursements.

“UNC Health Care’s EHR has already received certification for Meaningful Use,” said Dr. Spencer. “Our efforts now focus on the second phase of Meaningful Use, which includes demonstrating proper data reporting and use.”

LOOKING AT THE BIGGER PICTURE“Our mission is to ensure that Meaningful Use translates to meaningful care and that any changes we introduce fall within our much more comprehensive commitment to continual quality improvement,” Malone said. “No reform provisions are viewed independently. They are all regarded as components of a thoughtful, systematic and collective strategy to enhance the quality of care we deliver.”

The Affordable Care Act includes numerous provisions to improve quality and safety through investments in preventive medicine, comparative effectiveness research and information technology, and to explore new payment strategies and new health care delivery models.

“In every initiative we undertake, we do so with the patient in focus, ensuring that the changes we are making will help our physicians improve practice quality and the quality of care delivered,” said

Sam Weir, MD, co-medical director of the UNC Family Medicine Center. “Accomplishing this requires ongoing collaboration with our clinicians and developing additional partnerships within the UNC Health Care System.”

UNC Health Care is working on several innovative pilot programs designed to address the changing needs of the industry. Here are a few examples.

1. Carolina Advanced Health—a new, model practice of care that allows medical staff members to provide coordinated, cost-effective care to patients with chronic illnesses by working collaboratively with patients and their families to improve outcomes.

2. Transitions in Care Redesign—A program aimed at reducing hospital readmissions through enhanced home monitoring and rapid intervention when needed.

3. Virtual Health—Telemedicine allows for greater access to medical services for patients in rural areas.

“ It’s important to recognize that we have laid a strong foundation in patient-centered care and operational improvements, but there are many challenges,” said Dr. Weir. “Through its commitment to provide the very best care possible and establish new and innovative ways of delivering and financing care, UNC Health Care is fully prepared to meet the health care challenges of today and tomorrow.”

Leading by Example

• UNCHospitalsranks#1overallfor“PatientCenteredness”inthe2011QualityandAccountabilityPerformanceScorecard,arankinginvolving 101 member hospitals within the University HealthSystem Consortium (UHC). UNC Hospitals’ top ranking is based on composite results of its most recent Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) scores.

• Inaddition,theprimarycarephysicianswithinUNCHealthCarehavereceivednationalacclaimfortheirleadershipinestablishingPatient-Centered Medical Homes (PCMHs), an accepted care model where primary care physicians work in partnership to coordinate all patient care.

• FourUNCHealthCare primary care clinics have achieved Level 3 PCMH standing by theNational Committee forQualityAssurance, thehighest achievable recognition for amedical group.They include: theUNCFamilyMedicineCenter, theUNCInternalMedicineClinic,UniversityPediatricsatHighgate,andtheUNCChild&AdolescentGeneralClinic.

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“I saw my participation in this board as a great opportunity to contribute to a highly rewarding cause, improving the way care is delivered,” said Harrison, who also serves on the Carolina Care committee, which is a steering and oversight committee focused on achieving high levels of customer service throughout UNC Health Care. “An important part of improving care is developing relationships and an environment of collaboration between patients and caregivers.”

Collaboration is essential to improving patient safety, reducing medical errors, promoting adherence to treatment, and increasing patient and family satisfaction. A recent national survey of doctors and hospitalized patients, however, revealed that only 48 percent ofpatients said they were always included in decisions about their treatment.

“When we set up the Patient and Family Advisory Board, the hospital leadership saw it as critical to the overall operations of the N.C. Cancer Hospital,” said Donald L. Rosenstein, MD, director of the Comprehensive Cancer Support Program, “and I felt strongly that the board needed to have a direct line to the hospital administration.

“Working with the advisory board modifies my thinking in a positive way,” added Dr. Rosenstein, “Seeing board members in administrative meetings reminds me to think about what we’re doing and how we’re doing it from a patient-centered perspective.”

At UNC Health Care, extensive partnership initiatives have been underway for years. These initiatives routinely involve patients and their families in care decisions, as well as in hospital quality improvement projects, patient and family advisory boards, and project committees.

“We are so fortunate to have such a highly engaged, committed group of patient and family board members who are helping us improve the overall quality of cancer care,” said Loretta Muss, coordinator of the board, and a co-chair of Partnering with Patients and Families.

Dr. Rosenstein asked Muss to help establish the board and said her passion for the project has been instrumental in guiding its success. “This board has been pivotal in the creation of new programs and initiatives for our patients and caregivers,” said Muss. “If not for them, our caregiver program would not be up and running and growing rapidly, and our other initiatives would not be where they are.”

In addition to his experience as a patient, Harrison is able to draw on nearly 40years of professional experience for his work with UNC Health Care. He has

PARTNERING WITH PATIENTS AND FAMILIES

Bob Harrison is a nine-year survivor of metastatic prostate cancer. He has spent more time in hospitals and with health care professionals than anyone would want, and his care will continue for years to come. However, as the president of the Patient and Family Advisory Board for the N.C. Cancer Hospital, Harrison is able to use his experiences to help the hospital provide the best care possible.


consulted for government and community organizations, as well as private businesses, both domestically and internationally. “ A common thread in all my work has been helping organizations break away from their separate, disconnected silos so they could unite toward shared goals,” said Harrison. “We’re making great progress here, both within the cancer hospital and across the UNC Health Care system, in connecting the gaps that may impede quality care and patient satisfaction.”

Led by efforts within N.C. Children’s Hospital and the N.C. Cancer Hospital, these partnership initiatives have paved the way for numerous improvements in how care is delivered and in how patients and their families view their overall health care experience.

“We are now at a place where family partnerships are a growing part of our culture, and our staff members truly champion this throughout our children’s hospital,” said Tina Schade Willis, MD, division chief of Pediatric Critical Care at N.C. Children’s Hospital.

During 2011, the pediatric intensive care unit implemented significant changes as a result of family input and involvement.

Theyincludecreating:• apolicyrequiringphysiciansandnurses

to provide timely information to family members throughout all stages of pediatric care

• a standardized process to obtain inputfrom family members during morning medical team rounds

• a “rapid response” capability, whichenables family members to alert an emergency medical team for assistance if they notice patient distress

• new communication and orientationresources, including a dedicated website to help educate family members and to answer common questions

The N.C. Cancer Hospital also integrated notableimprovementsin2011,including:• revisingchemotherapyinfusionprocedures

to make treatment more convenient and sensitive to the needs of patients

• introducing new palliative care comfortitems, such as handmade blankets, soothing music, soft lighting, and in-room meals for family members

As an extension of the patient advisory boards established at the Children’s Hospital and the Cancer Hospital, UNC Health Care established the system-wide Partnering with Patients and Families committee in early 2011. The committee’s goals are to strengthen its partnership efforts, to provide a resource

of documented collaborative achievements, and to stimulate new partnerships across all departments, disciplines and care settings. The committee includes a diverse mix of system-wide nurse managers, physicians, executives, and patient and family advisors.

“We’ve always strived to put patients and their families at the core of everything we do here at UNC Health Care,” said Brooke Gleason,afamily-centeredcarespecialistatN.C. Children’s Hospital, and a co-chair of the Partnering with Patients and Families committee. “Through the creation of the new system-wide Partnering with Patients and Families committee, we’re able to reinforce and broaden this commitment.”

SUPPORTING THE MISSION OF UNC HEALTH CARE“Our goal at UNC Health Care is to consistently deliver the finest patient care possible. Doing that requires constant, two-way information flow between patients and their families and our health care professionals,” said Meghan McCann, RN, MSN, NE-BC, director of Oncology Nursing Services at the N.C. Cancer Hospital, and co-chair of the Partnering with Patients and Families committee.

“Direct feedback from patients and their families gives our physicians and caregivers the first-hand input and unfettered

The Patient and Family Advisory Board meets with UNC Health Care physicians during a session of Schwartz Rounds.

Raymond Hutchins, cancer survivor, member of the Patient and Family Advisory Board and Loretta Muss, coordinator of the Patient and Family Advisory Board.

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perspective necessary to deliver targeted, personalized care, and to ensure a care experience that is mindful of the preferences and expectations of patients and their families,” McCann added.

“When our health care practitioners provide patients and family members with complete, timely and unbiased information, they greatly reduce uncertainty and anxiety. That helps patients and families participate as informed partners in care decisions and become more aware of the options available to them.”

Most market-based and governmental efforts to reform health care regard enhanced communication and relationships with patients and family members as vital to high-quality, patient-centered care. The Institute of Medicine, for instance, cites the importance of bridging gaps between patient and clinician communication in improving clinical outcomes. Additionally, the recently passed federal health care legislation calls for engaging patients in shared decision-

making as a means of reducing demands on the health care system and paring costs.

GATHERING MOMENTUM FOR THE FUTUREThe Partnering with Patients and Families committee is just one example of efforts to incorporate patient- and family-centered care throughout UNC Health Care. Other examplesinclude:• family Advisory Board established for

the newborn critical care center to elicit feedback and recommendations from family members of patients in the unit.

• patient and family partnership programfor the pediatric intensive care unit (PICU), which contributes to hospital-wide initiatives relevant to the PICU.

• centralpatientandfamilyadvisoryboardfor the entire N.C. Children’s Hospital is being developed based on the success of the hospital’s other initiatives.

• patient and familyAdvisoryBoard at theN.C. Cancer Hospital, which participates in more than 19 committees at the hospital

and has served on 10 panels, presentations, interviews and developing initiatives that will assist patients with a cancer diagnosis and their families and caregivers.

During 2011, the Partnering with Patients and Families committee accomplished important groundwork, which will be valuable in expanding partnership initiatives throughout UNC Health Care in 2012 and the years ahead.

“This is about a culture change,” said Dr. Rosenstein, “and the investment on the part of the hospital—recruiting, eliciting opinions from patients and family members and incorporating them into the operations of the hospital. I think it is transformational. It is not us providing for patients and family members, it is us working together with them to improve the overall patient experience.”

Patience Leino’s journey as a family advisor at N.C. Children’s Hospital began in February 2007 when her infant son Isaac was admitted to the hospital’s pediatric intensive care unit (PICU) for care of a congenital heart condition, hypoplastic left heart syndrome.

In the months that followed, Leino worked closely with caregivers to learn as much as possible about Isaac’s condition. Rounds became an integral part of her daily routine. The PICU team welcomed Leino’s involvement, inviting her comments and input in care discussions.

Despite all efforts to save him, Isaac died 26 weeks later from complications of his condition. “In the midst of grieving, our family had received an invaluable gift,” said Leino, who resides in Raleigh.

“ Through the hospital’s family-centered approach, our family was heavily involved in our son’s care. We knew, without a doubt, the caregivers had his best interest at heart.”

Committed to helping other families deal with the stresses and challenges of the PICU, Leino decided to partner with UNC Health Care as a family advisor. Her involvement has paved the way for many PICU quality improvements, such as standardizing daily updates to families from nurses and physicians, providing sleep chairs in rooms, furnishing journals to families, and establishing a Meal and Parking Voucher Program to help financially strapped families.

“I’m proud to be part of efforts to improve daily communication between families and clinicians, and help improve the PICU experience for families,” Leino said. “I strongly believe that as families and caregivers increasingly work side by side, the future of health care will only get brighter.”

Patience Leino’s story


Health care professionals have been working for years to improve post-hospitalization care and thereby reduce the number of hospital readmissions, but the issue has taken on even more significance with the focus on health care reform. New compliance regulations going into effect in 2012 are causing hospitals to look for innovative ways to reduce the number of readmissions.

The Medicare program has defined a “readmission” as a re-entry to any hospital for any reason within 30 days of a priorhospitalization. Nationally, about 20 percent of hospitalized Medicare patients are back in thehospitalwithin30days,accordingtoarecent study published in The New England Journal of Medicine. Experts believe a significant number of these readmissions can be prevented, saving the American health care system billions of dollars each year.

A provision of the Patient Protection and Affordable Care Act allows the Centers for Medicare and Medicaid Services (CMS) to penalize hospitals up to 1 percent of their total Medicare billings for above-target readmissions of patients. CMS will implement this penalty in 2012 for hospitals that lag in readmissions of patients with pneumonia, heart failure or a heart attack.

“This is the first time hospitals are being held accountable for readmission rates on a national scale,” said Larry Mandelkehr, MBA, CPHQ, director of the Performance Improvement Department at UNC Health Care. “Hospitals with lower readmission rates will be rewarded financially, while lower-performing hospitals will be penalized.”

A lot of research has been done to determine what causes readmissions. Some are unavoidable, and achieving a rate of zero readmissions is not possible. The focus is on factors that can be changed, such as educating patients to improve compliance, enhancing communication among caregivers and providing support for follow-up care.

“By virtually every industry measure, we’re excelling in inpatient care,” Mandelkehr added. “To a great degree, many of the reasons behind preventable readmissions lie outside the hospital.”

Led by Brian Goldstein, MD, MBA,executive vice president and chief operating officer, UNC Health Care is establishing multidisciplinary teams within the Hospitals to address the issues that have been identified as reasons for readmissions. It is also forging partnerships with outpatient physicians and external health care organizations, such as rehabilitation centers and skilled nursing facilities, to deliver continuity of quality care.

A recent pilot study directed by the Performance Improvement Department, involving collaboration between UNC Health Care’s clinical care management team and external home health agencies, helped reduce readmissions by 12 percent among a group of heart failure patients.

INTERNAL PROJECT TEAMS AND INITIATIVESUNC Health Care has created a readmissions action group (SWAT team) comprising clinical care managers and representatives from the emergency, pharmacy and home health departments.

“A primary focus of our SWAT team is ensuring that our chronic disease patients, those most at risk for readmission, are adequately prepared for the transition in care and have the support and educational tools they need to manage their health after discharge,” said Franklin Farmer, MBA, MT (ASCP), a quality leader within the Performance Improvement Department that directs many of UNC Health Care’s readmission initiatives.

The point of transition from the inpatient to the outpatient setting provides a critical opportunity to prevent readmissions. Two studies published recently in the Archives of Internal Medicine revealed that patients who complete transitional care programs

are much less likely to be readmitted to the hospital. These interventions have been shown to help improve patient outcomes and reduce health care costs.

Leveraging a patient-centered approach, UNCHealthCare’sSWATteam:• coordinatesreferralstohomehealthcare;• confirms targeted treatment plans with

outside health care providers and initiates follow-up contact to evaluate patient statusandwelfare;

• educates patients on dischargeinstructions and the medications they need to take, and when and how often to takethem;

• emphasizestheimportanceofadheringtodietaryguidelines;

• connects patients and family memberswith outpatient health care resources in their communities, and

• follows up to ensure patients scheduleand attend primary care appointments.

“We’re also implementing a new program that more quickly identifies heart patients within the Hospitals needing cardiac rehabilitation,” Farmer added. “These patients are immediately transitioned to case managers who coordinate with cardiac rehab resources both within and outside of UNC Health Care. This helps streamline the referral process and helps ensure patients get the rehab care they require.”

Reducing readmissions is an important priority for all hospitals because it affects so many aspects of quality care and reduces costs. UNC Health Care continues to look for ways to affect readmission rates, including improving patient education, creating partnerships externally and coordinating efforts internally for better continuity of care.

“UNC Health Care is making good progress in reducing hospital readmissions,” Mandelkehr said. “It is a goal we’ve been working toward for quite some time, and we’re determined to achieve even greater reductions.”

REDUCING READMISSIONS

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CAROLINA ADVANCED HEALTH

The new practice, named Carolina Advanced Health, brings together a comprehensive, coordinated team of primary care physicians and other health care professionals, including professionals trained in internal medicine, family medicine, behavioral health, nutrition, medication management, laboratory services and care management. The collective mission is improving all aspects of care that contribute to the better health and long-term wellness of each patient.

“The collaborative nature of this practice, which is the first of its kind in North Carolina, is truly exciting,” said Thomas K. Warcup, DO, medical director of Carolina Advanced Health. “I believe by incorporating BCBSNC as a partner and working together on a basis of mutual trust and common goals we’ll be able to improve patients’ quality of life and enhance overall health care value.”

Carolina Advanced Health is a three-year pilot practice designed to provide integratedcare toa selectpopulationofpatients:a setofup to 5,000 BCBSNC members with chronic conditions, including diabetes, high cholesterol or high blood pressure, asthma, COPD/obstructive lung disease, heart disease, or congestive heart failure.

A UNIQUE APPROACH “The focus of Carolina Advanced Health is not just on diagnosing and treating a specific disease, but approaching care from a holistic perspective,” said Carol Lewis, MBA, a faculty member in the Department of Psychiatry and the lead project manager behind the design and implementation of the practice. “This allows us to better identify all the underlying factors and risks contributing to chronic illness and to address them all in an integrated manner.”

Carolina Advanced Health incorporates a three-pronged, patient-centered approach to providing care.•comprehensive,proactiveandcontinuouscare•self-supportservicestohelppatientsplayagreaterroleinmanaging

their illnesses•accesstothepractice’steamofphysiciansandhealthcareprofessionalsCarolina Advanced Health relies on its cohesive, multidisciplinary team of health care providers and a state-of-the art disease registry to help it measure the severity of chronic illnesses and adhere to established, evidenced-based protocols designed to improve treatment and clinical outcomes.

In December 2011, UNC Health Care and Blue Cross and Blue Shield of North Carolina (BCBSNC) launched a ground-breaking medical practice in Chapel Hill. This unique collaborative venture aligns the two organizations along shared incentives to improve outcomes of patients with chronic diseases while reducing health care costs.

Thomas K. Warcup, DO, medical director of Carolina Advanced Health


“ We want to better engage patients in the management of their disease so they are more involved partners in health care treatment and can make healthier decisions,” said Lewis.

An integral part of that process is improving patient awareness and knowledge, which are essential to changing behavior that can negatively impact their health. Patients in the pilot program will have access to services designed to help them be more involved in their own health care.

The self-support services include access to individual consulting, decision aides and educational sessions; in-home visits to assessenvironmentalfactors;andpotentially, ifnecessary,transportationfor medical appointments and lab tests.

Another component of Carolina Advanced Health’s unique approach provides patients with online video appointments and tele-health meetings from home, as well as better communication with their physicians and other caregivers through UNC Health Care’s patient portal. “A vital part of helping patients stay engaged in the progress of their care is ensuring a high level of access to and communication with care providers,” Lewis said. “Carolina Advanced Health makes available many different ways patients can contact and discuss issues and concerns with their physicians and other care team members at Carolina Advanced Health.”

Even though the practice itself is newly formed, the collaboration that made it a reality has already been enormously productive, according to David R. Rubinow, MD, chair of the Department of Psychiatry and director of Innovation and Health Care System Transformation. Dr. Rubinow co-led UNC Health Care’s collaboration with BCBSNC and laid the foundation for Carolina Advanced Health.

Working together to develop the practice has given everyone involved the opportunity to examine areas of health care that need to be redesigned and to target challenges that can be approached creatively through a joint effort.

“Both health care organizations strongly believe it is very possible to deliver comprehensive, high-quality medical services that will improve patient outcomes and bend the cost curve,” added Dr. Rubinow. “Certainly, an important component of the practice is eliminating the inefficiencies that are driving up health care costs.”

LEVERAGING EXISTING CARE MODELS Carolina Advanced Health incorporates many of the characteristics of Patient-Centered Medical Homes (PCMH) and Accountable Healthcare Organizations—two models of care highlighted in federal health care reform legislation that are gaining greater acceptance in the private sector.

Carolina Advanced Health takes those care models a step further in providing a comprehensive and innovative approach to managing overall wellness in a patient-centered primary care environment.

“A traditional PCMH might have a case manager and a basic patient registry to keep track of which patients have what type of illness,” explained Lewis. However, Carolina Advanced Health also incorporates a clinical social worker who can treat the depression that often accompanies chronic illness; a pharmacist to providemedicationtherapymanagement;anutritionisttopromotehealthymeals; lab services; and a sophisticated disease registry that canstratify patients based on their specific risk levels.

UNC Health Care and BCBSNC share the expenses of the practice, and both will share in the medical cost savings, if the practice achieves the targeted outcomes and lowers downstream health care expenditures.

“Moving health care forward depends on cultivating new partners and establishing innovative collaborations,” said Dr. Warcup, a board-certified family physician with more than 10 years of clinical and administrative experience.

“ This practice model of delivering care in a highly coordinated manner can counteract rising costs and produce a higher-quality, patient-centered experience.”

William L. Roper, MD, MPH, CEO of UNC Health Care; Brad Wilson, President and CEO of BCBSNC; and Thomas K. Warcup, DO, medical director of Carolina Advanced Health recognize the opening of the new, innovative model of care called Carolina Advanced Health.

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Broader access to and use of electronic information—most notably patient data stored in electronic health records (EHRs)—are core components of UNC Health Care’s efforts to improve clinical decision making, patient outcomes and health care efficiency. These are also part of the legislative focus for health care reform.

Specialized websites, called portals, play an important role in helping health care organizations expand the secure availability and value of electronic data, whether it is lab test results, a treatment plan or a reminder to schedule a routine check-up.

UNC Health Care is developing patient and physician portals to provide a convenient and confidential means for patients to manage their health care information and appointments, and for UNC Health Care physicians to communicate and exchange information securely with referring physicians.

“Our new patient and physician portals deliver the potential to improve the quality and continuity of patient-centered care, to better engage patients in their own care, and to enhance patient and physician satisfaction,” said Allen Daugird, MD, MBA, president of UNC Physicians & Associates, the faculty practice plan of the UNC School of Medicine.

The patient portal’s first phase launched in the summer of 2011, and the physician portal launched in November of 2011. When fully developed, the portals will provide a number of benefits to patients and caregivers.

• implement patient-specific health awareness and diseasemanagement programs

• promote patient education and engagement in preventivemedicine and wellness

• improvecarecoordinationwithreferringphysiciansthroughEHRs• enhancecommunicationwithreferringphysicians• complywithhealthcarereformandsatisfycriteriaofnewpatient-

focused care models

PATIENT PORTALThe patient portal allows patients to create password-protected accounts where they can manage appointments, pay bills online, receive and send secure messages with UNC staff members, and enter health information available for inclusion in the EHR.

“Moving forward, we are very eager to explore how we can use the patient portal to support better patient care and provide patients with a greater sense of empowerment through education and ongoing communication with their physicians,” said Dr. Daugird, who also serves as president of the Triangle Physician Network, UNC Health Care’s regional network of physicians. “We expect the portal will be each patient’s central online source for personalized, real-time information and education.”

In its final form, the portal also will update the UNC Health Care EHR so essential data relating to each patient’s health and treatment is centrally stored, explained Matthew Castellano, IT director at UNC Health Care.

PHYSICIAN PORTALThe physician portal is expected to improve efficiency, communication and care coordination when primary care physicians refer patients to UNC Health Care for specialty care.

“Primary care physicians have asked for an easier way to submit patient referral requests and to receive updates on the specialty care their patients receive here,” said Castellano.

The physician portal is being designed as a centralized, online website for submitting all referral requests to UNC Health Care and its specialty clinics, which includes requests for ancillary services, such as imaging. The portal also supports continuity and coordination of care by allowing referring physicians to upload data and records for their patients prior to specialty care appointments.

“Our goal is to make sending patients here convenient for referring physicians and to gain a consistent way for our specialty physicians to receive patient records before consultation,” emphasized Dr. Daugird. “Enabling physicians to upload important patient files to our EHR will allow our specialty physicians to be more proactive, which can improve quality of care.”

As with the patient portal, the physician portal will be launched in phases, adding new capabilities at each phase.

“We will continue to add new and interoperable functionality so data can be exchanged in a seamless manner,” said Castellano. “By integrating the portal with our electronic patient record, we will provide a higher level of service to referring physicians and encourage more collaborative physician relationships.”

Vigorous adoption of EHRs and new and improved forms of communication between patients and providers will be vital in the future for meeting high levels of patient-centered care and reform mandates, said Dr. Daugird. “Patient and physician portals are part of our efforts to support ongoing responsiveness to patient and referring physician needs and concerns.”

PATIENT AND PHYSICIAN PORTALS

Community Benefit Report 2011

UNC HEALTH CARE14

Supported more than

1,000middle and high school students interested in careers in medicine

$750,000to Piedmont Health to improve access to care

The purpose of Commitment to Communities is to provide health education to people across the state to help improve their health. Throughout the year, the program engages the community with a number of events and initiatives, such as Mallwalkers, Habitat for Humanity, the Komen Race for the Cure and Employee Ambassadors. The other part of Commitment to Communities’ mission is to encourage and attract students who are interested in careers in the health care industry.

WORKING WITH STUDENTSBy partnering with student organizations, Commitment to Communities is able to reach many North Carolina students who want to know more about careers in health care. The UNC Hospitals’ Volunteer Association is an important part of these student programs.

“Our college student volunteer program currently has more than 800 students participating in 70 areas of service,” said Linda Bowles, director of Volunteer Services at UNC Hospitals. “We are also one of the only hospitals in the area to offer a year-round high school volunteer program, which typically has about 200 students participating.”

Every year, the Volunteer Association hosts the Health Careers Symposium, which draws more than 200 high school students, educators and counselors from around the state. “HealthCareersbeganin1970with63studentsattending;Today,we have 250 students, and the format has evolved,” said Bowles. “At each symposium, we have two keynote physicians who present various topics, then we have staff from ancillary support services

UNC Health Care is known for its excellent patient care and groundbreaking medical research, but its dedication to caring for people extends farther in ways that are not as well known. Through its Commitment to Communities program, UNC Health Care is able to expand its outreach into the community both locally and statewide by working with area schools and community organizations.

1Habitat for Humanity

home built

39,015miles walked

by Mallwalkers this year


$242,930donated by UNC Hospitals Volunteer Association to our patients, their families and

the community

More than

220Employee Ambassadors

volunteered

6,464hours with local charities

3,453free screenings/consultations

provided worth

$693,486

10,000items collected for

N.C. schools

UNC’s Medication Assistance Program saved patients more than

$25 million

speak about how their careers interface with the particular field of medicine being discussed.”

The symposium also offers students the opportunity to tour some of the hospital departments and speak to staff to learn about the different jobs.

These student outreach programs not only help students understand career options available in the health care industry but they also provide opportunities for UNC Health Care employees to get involved in the community. Here are some of the ways employees worked with North Carolina students in the past year.

•UNCHealthCarehosted the2011NationalYouthLeadershipForum on Medicine, which is a nationally known program that provides hands-on, interactive experience taught by physicians and other medical professionals. More than 200 students from across the country attended this year’s event.

To view this video, please visit www.youtube.com/uncmedicine and search for “Youth Leadership Forum.”

•Several employees participated in the North Carolina HealthOccupations Student Association’s annual State Conference. This event drew more than 2,000 high school and college students to Greensboro to participate in interactive activities, skillscompetitions and to meet with health professionals, including those from UNC Health Care.

To view this video, please visit www.youtube.com/uncmedicine and search for “HOSA.”

•Members of UNC Hospitals’ Nursing Diversity Councilspoke with high school students during the Health Professions Recruitment and Exposure Program (HPREP), which is coordinated by the Student National Medical Association chapter at the UNC School of Medicine. HPREP is free and open to all students and was created specifically to serve under-represented minority high school students.

To view this video, please visit www.youtube.com/uncmedicine and search for “HPREP.”

UNC HEALTH CARE16

STUDENT SCHOLARSHIPSCommitment to Communities makes it possible for students who otherwise wouldn’t be able to attend some of these outreach events by awarding scholarships.

One of this year’s recipients was a very driven junior at East Chapel Hill High School who determined at an early age that she wanted to be a doctor—specifically, a pediatric oncologist. Chi Lewasawardedascholarshiptoattendthe2011NationalYouthLeadership’s Forum on Medicine.

Growing up in Vietnam, Chi observed a very different healthcare system that did not have much of the technology available to medical professionals in the United States. Even so, she viewed doctors as the happiest people because they had the ability to turn a miserable person’s life around through medicine.

Although Chi had already worked very hard toward her goal by volunteering at the hospital and taking science and health care classes during the summers, the Youth Leadership Forum had aprofound effect on Chi. After observing a laparoscopic procedure and participating in a simulated operation, Chi was open to the idea of exploring other health care careers. She had never imagined herself as a surgeon before, but now says she wants to learn more about being a surgeon.

Helping students explore different career options is exactly what the YouthLeadershipForumandotherstudenteventsaredesignedtodo. UNC Health Care is proud to give students the opportunity to discover new career options and achieve their goals.

Commitment to Communities provided other students with scholarships as well.

•PatsyWilliams,whoisastudentatCedarRidgeHighSchool,alsowonascholarshiptoattendthe2011NationalYouthLeadership’sForum on Medicine.

•AsheboroHighSchoolseniorIsabelCruzwasawardeda$1,000scholarship from UNC Health Care at the North Carolina Society of Hispanic Professional’s Education Summit in March. Isabel’s dream is to one day become a radiology technician or physician’s assistant.

More than

500walkers in the combined UNC/Rex team for the

Komen Race for the Cure

The Volunteer Association provides

$32,500in scholarships to both high school

volunteers and college students

Financials and Statistics

CHAPEL HILL, NORTH CAROLINAFortheyearendingJune30,2011

UNC HEALTH CARE18

Letter of Transmittal

DECEMBER 31, 2011

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

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

Trustees, members of the UNC Health Care System Board of Directors,

supporters of the University of North Carolina Health Care System, and

William L. Roper, CEO.


INTRODUCTION

This Annual Report includes a compilation of the operating results and financial position of the University of North CarolinaHealthCareSystem(UNCHealthCare)asestablishedbyGeneralStatute116-37.Thefinancialreportsaspresented 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 (TPN) 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 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 Financial 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 the Annual Report provide additional explanations for the reader.

FINANCIAL INFORMATION

Internal 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 TPN 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 StandardsissuedbytheComptrollerGeneraloftheUnitedStates.

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

UNC HEALTH CARE20

N.C.GeneralStatute116-37grantedUNCHealthCareflexibilityformanagementofUNCHospitalsinregardto 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 reportissenttotheHealthAffairsCommitteeoftheBoardofGovernorsandtheJointLegislativeCommissiononGovernmentalOperationsonorbeforeSeptember30eachyear.

UNC Health Care is subject to the provisions of the Executive Budget Act, except for trust funds identified in N.C.GeneralStatutes116-36.1and116-37.2.These two statutesprimarily apply to the receiptsgeneratedbypatient 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 appropriatedbytheGeneralAssemblypursuanttoappropriationactsadoptedeverytwoyears,withmodificationsinthesecondyear.UNCHealthCarethroughUNCHospitalsreceivedStateAppropriationofapproximately$34millionforthepastfiscalyear.TheGeneralAssemblyappropriatesthesefundsfromtheGeneralFundtocoveraportion 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 Rex entered into new debt-financing arrangements. UNC Hospitals issued$49million innewbonds.Rex issued$123million innewbondsbutuseda significantportionof theproceeds to pay off its Series 1998 bonds. Chatham entered into no additional debt-financing arrangements.

StandardandPoor’s andMoody’sRatingsServicesclassifyUNCHospitals’bondsasAA-andAa3respectively.Standard and Poor’s, Moody’s and Fitch classify Rex’s bonds as A+/A1.

Cash and Investment ManagementUNC Health Care continues to work with the Office of the State Treasurer to maximize the investment earnings for UNCHospitalsbasedonchangesintheGeneralStatutesthatweremadeduringthe2005sessionoftheGeneralAssembly. In addition, UNC-CH has allowed UNC P&A to invest a portion of their funds in an intermediate fundsinceFY08.InvestmentearningssubsidizeoperatingincomeandenableUNCHealthCaretoprovidemoreservices 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

Triangle Physicians Network

Rex Hospital (Raleigh)

Chatham Hospital (Siler City)

Pardee Hospital (Hendersonville)

Management Contract

Board of Directors

UNC HEALTH CARE22

Richard M. Krasno, PhD (Chair)Executive Director, William R. Kenan, Jr., Charitable TrustChapel Hill, NC

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

William CameronPresident, Cameron Management, Inc.Wilmington, NC

Laura M. Clapp, CPAAccountant and Business ConsultantSiler City, NC

Allen J. Daugird, MD, MBAPresident, UNC Physicians & AssociatesPresident, Triangle Physician NetworkChapel Hill, NC

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

Ernest J. Goodson, DDSOrthodontistFayetteville, NC

Karol K. GrayVice Chancellor for Finance and AdministrationUNC-Chapel HillChapel Hill, NC

M. Andrew Greganti, MDProfessor, Department of MedicineChapel Hill, NC

Julia S. GrumblesRetired Executive Vice President, Turner BroadcastingChapel Hill, NC

A. Dale JenkinsCEO, Medical Mutual Insurance Company of North CarolinaRaleigh, NC

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

William G. LapsleyPresidentandPrincipalEngineer,WilliamG.Lapsley & AssociatesAsheville, NC

Charles D. Owen, IIIPresident,FletcherDevelopmentGroup,Inc.Fletcher, NC

Gary ParkPresident, UNC HospitalsChapel Hill, NC

Roger PerryPresident, East-West PartnersChapel Hill, NC

William L. Roper, MD, MPH Dean, 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 MedicineDirector, TraCSChapel Hill, NC

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

Holden Thorp, PhDChancellor, UNC-Chapel HillChapel Hill, NC

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

UNC Health Care System Board of Directors

NOVEMBER 2011–OCTOBER 2012


UNC Health Care was established November 1, 1998, by North CarolinaGeneralStatute116-37.Theoriginallegislationincludedonly 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 Physician Network (TPN) have been added to the organization since its inception.

As illustrated in the reporting structure on page 22, UNC Health Care owns and controls the net assets and financial operations of UNC Hospitals, Rex, Chatham, and TPN. The 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 the 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 TPN) 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 the 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, TPN 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 endingJune30,2011and2010.

USING THE FINANCIAL STATEMENTS

TheGovernmentalAccountingStandardsBoard (GASB) requiresthreebasicstatements:theStatementofNetAssets;theStatementofRevenues,ExpensesandChangesinNetAssets;andtheStatementof 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 Financial Statements 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

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, 2011, and June 30, 2010. 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:

UNC HEALTH CARE24

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 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 andgainor lossonaffiliate activity.UnderGASB,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, theyare 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 the Hospitals’ 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 Financial Statements 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

Data for 2011 and 2010 are presented in this report and discussed in the following sections. Discussion in the following sections is pertinent to fiscal year 2011 results and changes relative to ending balances in fiscal year 2010.

Analysis of Overall Financial Position and Results of Operations

STATEMENT OF NET ASSETS

The statements reflect a successful system, with almost $2.5 billion intotalassets.Totalassetsincreasedby14.0percentovertheprioryear, while net assets increased by 14.1 percent during the yearending June 30, 2011. Assets increased overall by $302 millionor14percentfromfiscalyear2010to2011,primarilyduetothegrowth in investment value, cash, and capital assets. The largest increase in assets was in the noncurrent section, the result of issuing revenue bonds for capital projects at both UNC Hospitals and Rex during fiscal year 2011.

Liabilities increased $93million or 13.7 percent fromfiscal year2010. The largest increase in liabilities was in the noncurrent section, again the result of issuing revenue bonds for capital projects and described in more detail in Note 6 within the Notes to the Financial Statements.

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS

For the year, UNC Health Care generated an operating margin of 5.8 percent, or $118.1 million on net operating revenue of $2.0 billion. The 9.9 percent increase in operating revenues is primarily the result of volume growth and increased payments from negotiated payor contracts. Operating expenses grew at a slower 9.6 percent rate, the result of continued aggressive cost containment efforts. In order to remain financially strong, to reinvest in new facilities, and to retain the most highly trained work force, UNC Health Care’s goalistoaverageatleast4percentforitsannualoperatingmargin.

Positive nonoperating performance was attributable to improved investment performance. UNC Health Care continues to recover from several consecutive years of depressed asset investment performance.

Net income was $209.5 million, a 10.2 percent margin. The positive net margin was the result of strong operations enhanced by the improved investment activity of a recovering stock market.

Discussion of Capital Asset and Long-Term Debt Activity

CAPITAL ASSETS

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


UNC Hospitals expended $42 million during the year forcapital equipment throughout the facilities including $6 million on computer software and an additional $36 million on theconstruction of buildings, infrastructure and renovations. At June 30,2011,outstandingcommitmentsonconstructioncontractswere$29 million. The annualized average age of plant and equipment is approximately 8 years.

Rex continued growth seen in fiscal year 2010. Capital investments in fiscal year 2011 consisted primarily of costs incurred in conjunction with the construction of 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 if the need arises to finance construction projects and the market rates are favorable. UNC P&A issues its bonds through the UNC-CH. As such, its revenues and assets are a part of the bond covenants of the UNC-CH.

During the past fiscal year, UNC Hospitals and Rex entered into new debt-financing arrangements. UNC Hospitals issued $49million in new bonds. Rex issued $123 million in new bonds,but used a significant portion of the proceeds to pay-off its Series 1998 bonds. Chatham entered into no additional debt-financing arrangements.

Standard and Poor’s and Moody’s Ratings Services classify UNC Hospitals’bondsasAA-andAa3respectively.StandardandPoor’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 Expenses

UNC Health Care derives the vast majority of its operating revenues from patient care services. Because UNC Health Care provides no revenue-generating services, it is entirely dependent upon the financial wherewithal of its entities. In recent years, the largest entities of UNC Health Care have achieved strong operating performance. Their performance has enabled the investments made through UNC Health Care 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 Triangle Physicians Network during its start-up period, to support Chatham Hospital despite adverse economic conditions in its primary service area, and to support an increasing level of uncompensated care across all of UNC Health Care’s entities.

The conditions impacting the operating entities of UNC Health Care constitute the greatest risk to UNC Health Care. Health policy changes nationally are changing 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 sufficiently 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 insufficient 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 payors generally do not cover the full cost of care. As this trend continues, UNC Health Care will face increasing pressure to reduce expenses.

Pressure on the State budget has resulted in sharp cuts to UNC Health Care and the UNC School of Medicine. Relative to the prior year, fiscal year 2012 State appropriated funds to UNC Hospitals were reduced by 50 percent and to the School of Medicine 20 percent. While State funding represents a relatively small fraction of total operating expense, these funds have been important contributors to defraying the cost of providing indigent care and education for our medical students, residents and sub-specialty residents. Similarly, federal budget cuts may have a significant impact on clinical revenues through cuts in Medicare payments or research revenue as a result of reductions in the National Institutes of Health (NIH) budget.

UNC HEALTH CARE26

2011 2010

CURRENT ASSETS

Cash and investments $307,787,702 $244,231,512

Patient Accounts Receivable - Net 243,806,014 210,530,989

Inventories 15,849,942 14,387,323

Other Assets and Receivables 33,183,044 55,625,929

Assets Whose Use Is Limited or Restricted 81,481,486 82,107,657

Prepaid Expenses 11,449,761 10,579,763

Total Current Assets 693,557,950 617,463,173

NONCURRENT ASSETS

Property, Plant & Equipment - Net 887,123,721 854,490,653


Other Assets 40,232,397 41,317,736

Total Noncurrent Assets 1,773,061,616 1,546,834,433

Total Assets 2,466,619,566 2,164,297,606

CURRENT LIABILITIES

Accounts & Other Payables 81,447,338 95,980,475

Accrued Salaries & Benefits 82,651,378 71,501,809

Notes & Bonds Payable 50,231,247 24,387,004

Interest Payable 4,680,512 1,344,199

Other 15,919,063 9,569,653

Total Current Liabilities 255,404,738 227,291,991

NONCURRENT LIABILITIES


Compensated Absences 72,317,866 64,819,158

Total Noncurrent Liabilities 517,270,922 452,533,214

Total Liabilities 772,675,661 679,825,205

NET ASSETS 1,693,943,905 1,484,472,401

TOTAL LIABILITIES AND NET ASSETS $2,466,619,566 $2,164,297,606

*2010 restated

THE UNIVERSITY OF NORTH CAROLINA HEALTH CARE SYSTEM

Pro Forma Statement of Net AssetsFor the Years Ended June 30, 2011, and June 30, 2010

*



Pro Forma Statement of Revenues and ExpensesFor the Years Ended June 30, 2011, and June 30, 2010

2011 2010

OPERATING REVENUE

Net Patient Service Revenue $1,923,316,296 $1,740,552,200

Cost Report Settlements 16,754,667 8,849,190

State Appropriations 33,743,133 41,811,381

Other Operating Revenue 72,991,480 70,840,743

Net Operating Revenue 2,046,805,576 1,862,053,514

OPERATING EXPENSES

Salaries and Fringe Benefits 1,156,046,190 1,042,487,667

Medical and Surgical Supplies 319,665,219 300,865,242

Contracted Services 182,137,843 165,868,801

Other Supplies and Services 106,347,586 102,020,936

Communications and Utilities 33,161,881 32,009,080

Medical Malpractice Costs 17,917,915 12,426,328

Depreciation 83,737,611 81,454,480

Bond and Other Interest Expense 17,385,262 15,593,756

Medical School Trust Fund (MSTF) 12,344,271 7,593,882

Total Operating Expenses 1,928,743,778 1,760,320,172

OPERATING INCOME (LOSS) 118,061,798 101,733,342

NONOPERATING GAINS (LOSSES)

Interest and Investment Activity 122,724,975 50,192,290

Nonoperating Income (Expense) (1,420,220) (186,547)

CapitalGrants (29,895,050) 5,561,534

Total Nonoperating Gains (Losses) 91,409,706 55,567,277

NET INCOME (LOSS) $209,471,504 $157,300,619

*2010 restated

*

UNC HEALTH CARE28


Pro Forma Statement of Cash FlowsFor the Years Ended June 30, 2011, and June 30, 2010

2011 2010

CASH FLOWS FROM OPERATING ACTIVITIES

Received from Patients and Third Parties $1,902,762,288 $1,752,136,383

Payments to Employees and Fringe Benefits (1,137,397,913) (1,023,982,017)

Payments to Vendors and Suppliers (641,558,963) (574,041,701)

Payments for Medical Malpractice (9,167,180) (10,559,107)

Other Receipts 78,794,456 40,276,165

Net Cash Provided (Used) 193,432,688 183,829,723

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES

HealthCareSystemGrantsPaidtoUNC (30,000,000)



CASH FLOWS FROM CAPITAL FINANCING AND RELATED FINANCING ACTIVITIES

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

Principal & Arbitrage Paid on Outstanding Debt (93,605,320) (32,218,416)

Interest and Fees Paid on Debt (12,691,119) (12,211,368)

CapitalGrants - 16,041,744

Acquisition and Construction of Capital Assets (114,739,455) (104,773,697)

Net Cash Provided (Used) (39,612,172) (133,161,737)

CASH FLOWS FROM INVESTING ACTIVITIES

Investment Income & Other Activity 20,446,253 20,578,395

Purchase and Sale of Investments, Net of Fees (101,774,560) (181,970,562)

Investments in and Loans to Affiliated Enterprises - Net

(12,679,152) (18,018,791)


NET INCREASE (DECREASE) 63,556,190 (88,258,392)

BEGINNING CASH AND CASH EQUIVALENTS 244,231,512 332,489,904

ENDING CASH AND CASH EQUIVALENTS 307,787,702 244,231,512

*2010 restated

*


2011 2010


Received from Patients and Third Parties $1,902,762,288 $1,752,136,383

Payments to Employees and Fringe Benefits (1,137,397,913) (1,023,982,017)



Other Receipts 78,794,456 40,276,165


CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES

HealthCareSystemGrantsPaidtoUNC (30,000,000)




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


Interest and Fees Paid on Debt (12,691,119) (12,211,368)

CapitalGrants - 16,041,744

Acquisition and Construction of Capital Assets (114,739,455) (104,773,697)




Purchase and Sale of Investments, Net of Fees (101,774,560) (181,970,562)


(12,679,152) (18,018,791)


NET INCREASE (DECREASE) 63,556,190 (88,258,392)


ENDING CASH AND CASH EQUIVALENTS 307,787,702 244,231,512

*2010 restated

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

Statement of Net Assets (Unaudited)For the Years Ended June 30, 2011, and June 30, 2010

2011 2010

CURRENT ASSETS

Cash and Investments $86,946,668 $83,067,938

Patient Accounts Receivable - Net 29,613,327 23,831,412

Estimated Third-Party Settlements 37,858,466 29,283,470

Other Assets and Receivables 13,936,017 11,687,329


Total Current Assets 172,668,669 157,935,484

NONCURRENT ASSETS

Property, Plant & Equipment - Net 3,199,600 4,649,400

Total Noncurrent Assets 3,199,600 4,649,400

Total Assets 175,868,269 162,584,884

CURRENT LIABILITIES

Accounts and Other Payables 7,972,491 8,404,061

Accrued Salaries and Benefits 12,214,368 8,215,430


Other 1,833,799 2,750,698

Total Current Liabilities 30,464,340 26,448,419

NONCURRENT LIABILITIES


Compensated Absences 26,714,455 24,740,862

Total Noncurrent Liabilities 28,364,255 27,940,462

Total Liabilities 58,828,595 54,388,881

NET ASSETS $117,039,674 108,196,003

TOTAL LIABILITIES AND NET ASSETS $175,868,269 $162,584,884

UNC HEALTH CARE30


Statement of Revenues and Expenses (Unaudited)For the Years Ended June 30, 2011, and June 30, 2010

2011 2010

OPERATING REVENUE

Net Patient Service Revenue $261,727,831 $223,787,226

Other Operating Revenue 58,331,714 52,775,000

Net Operating Revenue 320,059,545 276,562,226

OPERATING EXPENSES

Salaries and Fringe Benefits 286,783,442 251,015,295

Medical and Surgical Supplies 9,848,940 6,865,349

Contracted Services 14,893,412 19,027,654

Other Supplies and Services 21,481,082 18,778,129

Communications and Utilities 2,538,152 2,754,305

Medical Malpractice Costs 7,243,418 1,710,699

Bond and Other Interest Expense 1,575,169 1,553,819

Medical School Trust Fund (MSTF) 12,344,271 7,593,882

Total Operating Expenses 356,707,886 309,299,132

OPERATING INCOME (LOSS) (36,648,341) (32,736,906)

NONOPERATING GAINS (LOSSES)

Interest and Investment Income 2,484,028 1,210,775

Nonoperating Income (Expense) - 875,000

Transfers to HCS Enterprise Fund (6,754,470) (7,500,429)

Transfers from HCS Enterprise Fund 49,762,454 43,872,590

Total Nonoperating Gains (Losses) 45,492,012 38,457,936

NET INCOME (LOSS) $8,843,671 $5,721,030



Statement of Revenues and Expenses (Unaudited)For the Years Ended June 30, 2011, and June 30, 2010


Statement of Cash Flows (Unaudited)For the Years Ended June 30, 2011, and June 30, 2010

2011 2010


Received from Patients and Third Parties $248,636,372 $217,926,742

Payments to Employees and Fringe Benefits (280,810,911) (245,037,991)



OperatingCapitalGrants 47,513,766 32,250,507

Other Receipts 45,987,443 45,181,118




Interest and Fees Paid on Debt (225,369) (204,019)

Acquisition and Construction of Capital Assets 100,000 -





(6,754,470) (6,625,429)


NET INCREASE (DECREASE) 3,878,730 1,593,819


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

UNC HEALTH CARE32


Pro Forma Selected Statistics and RatiosFor the Years Ended June 30, 2011, and June 30, 2010

REXSITES

CHATHAMSITES

UNCSITES

TPNSITES

2011UNC

HEALTH CARE

TOTAL

2010UNC

HEALTH CARE

TOTAL

PATIENT SERVICE STATISTICS

Patient Days 117,962 2,773 238,394 359,129 365,563

Inpatient Discharges 26,592 683 38,086 65,361 75,322

Average Length of Stay 3.9 3.5 6.1 5.5 4.9

Inpatient Operating Room Cases 9,109 67 11,416 20,592 20,598

Outpatient Operating Room Cases 20,656 666 16,053 37,375 36,333

Emergency Department Visits 54,817 14,436 66,636 135,889 135,587

Clinic Visits 74,782 - 857,171 138,353 1,070,306 1,100,439

Births/Deliveries 5,849 - 3,579 9,428 9,935

FINANCIAL RATIOS

Operating Margin Percentage 5.77% 5.46%

Operating Margin Percentage (excluding cost report settlements) 4.99% 5.01%

Days in Net Accounts Receivable 46.27 44.15

Days of Cash on Hand (includes investments) 165.08 171.95

Average Payment Period (days) 46.36 68.18

Long-Term Debt to Equity 20.80% 20.66%

Current Debt Service Coverage 2.67 5.12

Maximum Future Debt Service Coverage 7.82 6.27


NOTE 1 // SIGNIFICANT ACCOUNTING POLICIES

A. ORGANIZATION – The University of North Carolina Health Care System (UNCHealthCare)wasestablishedNovember1,1998,byNorthCarolinaGeneralStatute 116-37. It is governed and administered as an affiliated enterprise ofTheUniversity 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 Triangle Physician Network, LLC (TPN) 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 799 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.

OtheractivitiesblendedintothefinancialstatementsforUNCHospitalsinclude:

HEALTH SYSTEM PROPERTIES, LLC – Health System Properties (HSP) was established to purchase, develop and/or lease real property. HSP is reported as part of UNC Hospitals because UNC Hospitals is the sole member manager and HSP is governed by the same Board that directs UNC Hospitals’ operations. To date, the only properties owned by HSP either have been or are being developed for the sole use and benefit of UNC Hospitals.

CAROLINA DIALYSIS, LLC – Carolina Dialysis, LLC (CDLLC) was formed for the purpose 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. UNC Hospitals has a two-third ownership interest in the CDLLC. Renal Research Institute owns the remaining one-third interest. A Board of Managers comprising six members manages the CDLLC, with four appointed by UNC Hospitals through the Chief Executive Officer and two appointed by the Renal Research Institute. The financial results for CDLLC are blended with those of UNC Hospitals, since it provides services almost entirely to patients of UNC Hospitals.

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 aremanaged via theUNC-CH’s accounting infrastructure; and, as such, itsoperational results are included in the annual audit for the UNC-CH.

Rex Healthcare Inc. – Rex Healthcare Inc. (Rex) is a North Carolina not-for-profit corporation organized to provide a broad range of health care services to residents of the Triangle area of North Carolina. Acting through its network of operating affiliates, Rex provides health care to patients from several locations through continued development of acute care and non-hospital programs.

Rex’s sole member is UNC Health Care, and UNC Health Care appoints eight of the13seatsonRex’sBoardofTrustees.Additionally,UNCHealthCarereviewsandapproves Rex’s annual operating and capital budgets.

TheprincipalcorporateentitiesundercommoncontrolofRexHealthcare,Inc.are:

REX HOSPITAL, INC. – Rex Hospital, Inc. (Rex Hospital) located in Raleigh, N.C., is a433-bedhospital.RexHospitalprovidesinpatient,outpatientandemergencyservicesprimarily to the residents of Wake County, N.C. 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), Knightdale and Apex. Rex also owns Rex Home Services, Inc. that primarily serves residents of Wake County and Smithfield Radiation Oncology, LLC.

REX HOLDINGS, LLC – Rex formed and became the sole member of Rex Holdings, LLC (“Holdings”), a single member limited liability company. Holdings was formed to hold membership interest in various limited liability companies. During fiscal year 2010, there was no activity related to this entity.

REX PHYSICIANS, LLC – Holdings formed and became the sole member of Rex Physicians (“Physicians”), a single member limited liability company, which has elected to be treated as a taxable corporation. Physicians was formed to operate specialty physician practices serving the residents of Wake County and surrounding areas. Physicians currently operates physician practices in the areas of general surgery, heart and vascular services, and thoracic surgery.

Notes to Financials

UNC HEALTH CARE34

REX ENTERPRISES COMPANY, INC. – Rex Enterprises Company, Inc. (“Enterprises”) is a North Carolina for-profit corporation organized to hold investments in various affiliates to promote the development of real property in support of the mission of Rex.

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

REX HOME SERVICES, INC. – The Hospital owns Rex Home Services, Inc. (“Home Services”) a North Carolina not-for-profit corporation, organized to provide home health services primarily to the residents of Wake County, N.C.

SMITHFIELD RADIATION ONCOLOGY, LLC – Smithfield Radiation Oncology, LLC (SRO) is a limited liability company organized to own and operate a linear accelerator. Rex Healthcare is the sole member.

Chatham Hospital, Inc. – Chatham is a private, not-for-profit health care organization located in Siler City, N.C. Chatham’s sole corporate member is UNC Health Care. Additionally, UNC Health Care reviews and approves Chatham’s annual operating and capital budgets.

The facility is a 25-bed critical access hospital with a 70-year history of providing quality health services. Chatham provides comprehensive care, including emergency, general surgery, lab, CT, MRI, nuclear medicine, pharmacy, cardio-pulmonary and intensive care on its campus. Chatham reaches beyond the hospital setting to provide diabetes education, physical therapy and cardiac rehabilitation, which is located in the SilerCityBusinessParkapproximately3.5milesfromthemaincampus.

Triangle Physician Network, LLC – TPN is a wholly owned subsidiary of the System that owns and operates twelve community-based practices throughout the Triangle (Raleigh, Durham and Chapel Hill), North Carolina 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 System 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 TPN issue their own audited financial statements while UNC P&A is included as a part of the audited statements for the 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 the 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 and Chatham and the modified accrual basis of accounting for UNC P&A and TPN.Undertheaccrualbasis,revenuesarerecognizedwhenearned;andexpensesare 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. ForUNCP&AandTPN,theirmonthlyfinancialsaremaintainedonacashbasis;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 that represent subsidies or gifts, as well as investment income, 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.

The UNC-CH manages the funds of UNC P&A as authorized by the University of NorthCarolinaboardofGovernorspursuanttoGeneralStatute116-36.2andSection600.2.4ofthePolicyManualoftheUniversityofNorthCarolina.SpecialfundsandfundsreceivedforservicesrenderedbyhealthcareprofessionalspursuanttoGeneralStatute116-36.1(h)areinvestedinthesamemannerastheStateTreasurerisrequiredto invest. Investments of various funds may be pooled unless prohibited by statute or by terms of the gift or contract. The 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.

J. INVENTORIES – Inventories consist of medical and surgical supplies, pharmaceuticals, prosthetics and other supplies that are used to provide patient care or 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 50 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 anddeferred 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 interestratesrangingfrom1.64percentto3.76percentwithafinalmaturityinfiscalyear2014.

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)RestrictedNetAssets–Expendableand(3)UnrestrictedNetAssets.

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, uninsuredpatientsreceivea35percentdiscountformedicallynecessarytreatment.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 patientdischarge 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 PaymentSystem.MedicaidusestheMedicareDRGsystemwithsomemodifications.Medicaid reimburses outpatient services on an interim basis at an agreed upon percent

UNC HEALTH CARE36

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 servicerevenue. 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.

The aggregate mix of gross receivables from patients and third-party payors on June 30wasMedicare–20percent,Managedcare–26percent,Commercial–19percent,Medicaid – 15 percent, Self pay – 19 percent and Other – 1 percent.

NOTE 2 // ESTIMATED THIRD-PARTY SETLEMENTS

The amount shown as current assets represents estimated receivables due from Medicaidintheamountof$78.1million,Tricare/Champusintheamountof$4.0million and Medicare in the amount of $1.7 million.

The amount shown as current liabilities represents estimated payables due to Medicaid intheamountsof$33.8millionandduetoMedicareintheamountof$60.2million.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

AsummaryofcapitalassetsasofJune30was:

FY2011 FY2010

Land and Improvements 91,501,833 91,501,833

Buildings and Improvements 865,641,386 810,808,973

Equipment 697,164,322 655,075,368

Construction in Progress 46,651,729 40,814,360

Gross PP&E 1,700,959,270 1,598,200,534

Accumulated Depreciation (815,380,392) (743,709,881)

Net PP&E $885,578,878 $854,490,653


FY2011 FY2010

Chatham Series 2007 Bonds 28,755,000 29,550,000

UNC P&A Series Bonds 3,199,600 4,649,400

Rex Series 1998 Bonds 0 74,415,000

Rex Series 2010A Bonds 122,965,000 0

UNC Hospitals Series 1999 Bonds 0 0

UNC Hospitals Series 2001 Bonds 98,200,000 99,600,000

UNCHospitalsSeries2003Bonds 94,055,000 94,600,000



UNC Hospitals Series 2010 Bonds 48,875,000

FACE VALUE OF BONDS OUTSTANDING 450,939,600 363,374,400

Deferred Costs - Discount on Issuance 0 (509,000)

Deferred Costs - Loss on Refunding (15,414,507) (13,242,203)

Deferred Costs - Premium on Issuance 6,164,243 579,121

Arbitrage Rebate Payable 25,002 268,892

Hedging Liability 15,821,518

NET VALUE OUTSTANDING 457,535,856 350,471,210

Current Portion of Bonds 15,119,800 16,139,800

Current Portion of Notes 35,111,447 8,247,204

TOTAL CURRENT BONDS AND NOTES 50,231,247 24,387,004

Noncurrent Portion of Bonds 442,416,056 353,141,056

Noncurrent Portion of Notes 425,000 33,702,000

Other Noncurrent Debt 2,112,000 871,000

TOTAL NONCURRENT BONDS AND NOTES 444,953,056 387,714,056

NOTE 4 // LONG-TERM DEBT

AsummaryofcapitalassetsasofJune30was:

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

2012 $15,119,800 $15,284,739 $30,404,539

2013 17,249,800 14,669,206 31,919,006

2014 16,215,000 14,038,930 30,253,930

2015 16,775,000 13,419,548 30,194,548

2016 17,740,000 12,808,390 30,548,390

2017-2021 99,560,000 54,044,612 153,604,612

2022-2026 118,870,000 34,823,126 153,693,126

2027-2031 142,900,000 13,475,654 156,375,654

2032-2034 6,510,000 587,625 7,097,625

TOTAL $450,939,600 $173,151,830 $624,091,430

FISCAL YEAR PRINCIPAL INTEREST TOTAL

2011 $35,111,447 $1,193,467 $36,304,914

2012 404,000 1,160,000 1,564,000

2013 20,000 1,000 21,000

2014 1,000 0 1,000

2015 0 0 0

TOTAL $35,536,447 $2,354,467 $37,890,914

Annual requirements to pay principal and interest on the bonds outstanding at June30,2010,are:

Annual requirements to pay principal and interest on the notes outstanding at June30,2010,are:

UNC HEALTH CARE38

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 UNC Hospitals 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 theNorthCarolinaStateTreasurer.Graduatemedicalresidents,temporaryemployeesand permanent part-time employeeswith appointments of less than 30 hours perweek 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 the Teachers’ and State Employees’ Retirement System. The Board of Governors of The University ofNorth 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 IncomePlans.Theseinclude401(k)plans,403(b)plansand457plans.Allcostsofadministering 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 injuriesandillnesses;naturaldisasters;medicalmalpractice;andvariousemployeeplansforhealth, 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. On June30,2010UNCHospitalsandUNCP&AhadadvancedepositswiththeFundtotaling$16.3million.

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 YearsEndedJune30,2011,andJune30,2010.Copiesofthisreportmaybeobtainedfrom The University of North Carolina Liability Insurance Trust Fund, 211 Friday Center Drive, Hedrick Building - Room 2029, Chapel Hill, N.C., 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, then the amount would be recorded at the time of receipt on UNC Hospitals’ financial statements.

UNC Health Care System Enterprise Fund – The Board of Directors of UNC Health Care authorized and approved the creation of the UNC Health Care System Enterprise Fund (The System Fund) to support UNC Health Care’s mission and vision to be the nation’s leading public academic health care system. Pursuant to a memorandum of understanding effective July 1, 2005, UNC Hospitals, 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 CarolinaGeneralStatutes,thesefundsmay“consistofmoneysreceivedfromorforthe 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 laundryservices;ormoneysreceivedbyan institutionin 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.”


Since its formation, the System Fund has broadened its scope to include five distinct funds. These funds function as sub-accounts of and collectively constitute the System Fund.Thesefundsareasfollows:

THE ENTERPRISE FUND invests in the teaching, research and clinical programs of UNC Health Care and the UNC School of Medicine. It is funded with revenues from UNC Hospitals, UNC School of Medicine, UNC P&A and Rex. The Enterprise Fund enables cross-entity transfers of resources. Assessments to the constituent entities are determined on an annual basis or more often as necessary. Additionally, Mission Support contributions are made to the Enterprise. See Note 5 for more information regarding assessments and Mission Support.

The overwhelming majority of transfers from the Enterprise Fund are made to the clinical departments of the UNC School of Medicine. Under no circumstances is the Enterprise Fund used to recruit community-based physicians or groups.

THE OUTREACH FUND initially invested in innovative projects designed to improve the health of the community with particular focus on geriatrics and other underserved constituencies. The initial funds were formed by a one-time contribution from UNC Hospitals. These funds were fully expended by the end of fiscal year 2009. The Outreach Fund was subsequently re-chartered by a subsequent transfer from the Enterprise Fund. These funds are being expended at a rate of $2 million per year to offset expenses incurred by clinical departments for graduatemedicaleducation(GME).Thesefundswillbefullyexpendedbytheendoffiscalyear2014.

THE RECRUITMENT FUND was established in fiscal year 2010 to enable critical faculty recruitments to the UNC School of Medicine. It was formed by contributions from UNC Hospitals, UNC P&A and several UNC School of Medicine clinical departments in response to a crisis in UNC Health Care’s cardiac surgery program. These funds are set aside to enable UNC Hospitals, UNC P&A and the UNC School of Medicine to collaboratively recruit faculty physicians to better serve the people of North Carolina.

The Recruitment Fund has not yet been used, though commitments have been made that will result in fiscal year 2012 expenditures. Under no circumstances are Recruitment Funds used to recruit community-based physicians or groups.

THE PATIENT SAFETY FUND (Performance Improvement and Patient Safety Innovations Fund or PIPSIF) is funded through savings realized in the Liability & Insurance Trust Fund (LITF). These savings were realized from efforts to improve clinical outcomes and patient safety. This Fund enables UNC Health Care to designate resources specifically intended to improve patient care and further reduce potential harm to patients.

THE SHARED ADMINISTRATIVE SERVICES FUND is used to assess and allocate administrative expenses for UNC Health Care’s centralized services. These services (including but not limited to information technology, human resources, finance, strategic planning, risk management, etc.) are provided more efficiently and effectively on a consolidated basis. See Note 5 for additional detail on Shared Administrative Services.

The John Rex Endowment – The John Rex Endowment (Endowment) operatesasa501(c)(3)corporationandisindependentoftheBoardofDirectorsofUNC 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.

The following chart shows the cost of uncompensated care provided by UNC Health Care since fiscal year 2008. The fiscal year 2011 number is an estimate, as the final calculations are reported to the North Carolina Hospital Association in March 2012. Uncompensated Care exceeds 15% of net patient service revenue. Uncompensated Care is presented at cost, after adjustments for cost-based reimbursement.

UNC HEALTH CARE UNCOMPENSATED CARE FISCAL YEARS 2008 – 2011 ($ MILLIONS)

CO

ST

OF

CA

RE

($

M)

FY2008 FY2009 FY2010 FY2011*

$257

$320 $309

$350

$300

$250

$200

$150

$100

$50

$0

*�Fiscal year 2011 number is an estimate, as the final calculations are reported to the North Carolina Hospital Association in March 2012.

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