Fighting the COVID-19 Pandemic, Keeping North Carolinians Healthy

2020 Annual Report

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Table of Contents

2 Leading in the Moment … Envisioning a Better Future 4 UNC Health System Update 2020 8 Our Values 9 School of Medicine Continues Medical Education Excellence Despite the Pandemic 11 U.S. News Rankings 13 This Year in Research 21 UNC Health Alliance 22 UNC Senior Alliance 23 Community Relations 26 Volunteer Highlights

Financials & Statistics 28 Letter of Transmittal 13 31 UNC Health Reporting Structure 32 UNC Health Board of Directors 33 Management’s Discussion and Analysis 38 Pro Forma Statement of Net Position 39 Statement of Revenues, Expenses, and Changes in Net Position 40 Pro Forma Statement of Cash Flows 41 UNC Faculty Physicians Statement of Net Position 42 UNC Faculty Physicians Statement of Revenues, Expenses, and Changes in Net Position 43 UNC Faculty Physicians Statement of Cash Flows 44 Pro Forma Selected Statistics 45 Notes to the Pro Forma Financial Statements

Cover: Photo courtesy of Scott Sharpe, News & Observer Pictured: Registered nurse Emily Howarth in the Medical Intensive Care Unit at UNC Medical Center 23

2020 Annual Report 1 Leading in the Moment … Envisioning a Better Future

As UNC Health issued its annual report for Fiscal Year 2019 (printed in March 2020), the world was beginning to focus on a new or “novel” virus, the SARS-CoV-2.

North Carolina confirmed its first case of COVID-19 on March 3, 2020.

Shortly thereafter, our state went into a “shelter in place” lockdown that began months of personal isolation, wearing masks, social distancing, working from home, online classes, etc. Graduation ceremonies moved from auditoriums and football stadiums to our computer screens. We did all of this and much more in an attempt to “flatten the curve” and slow the spread of the disease. Even still, as of March 2021, COVID-19 has taken more than 500,000 American lives.

Between the many professional and personal challenges of the last year, for all of us, including the pandemic, social and political unrest and violence through the election and in the first weeks of 2021, kids at home in school, a winter holiday where many of our co-workers were caring for patients and others of us unable to gather with our families, and many more unique issues for each of us, it won’t surprise you to read that this has been and continues to be a very tough time.

2 The University of North Carolina Health System Unexpected, but prepared. In many ways, everything all of us have done in our training and throughout our careers in medicine has prepared us for this time and the work we are doing, but until you are in the midst of a crisis, there is no way to predict how you will respond. We can say unequivocally that our One Great Team was up to the challenge. There has been a sense of urgency and intensity for all of us. At times, there were decisions that were unclear or had to be corrected. There have certainly been missteps along the way. We believe, though, there were many, many more steps in a positive direction. We have never seen so many people work so hard for such a lengthy time in our lives.

While our colleagues in the health system worked to care for patients, our colleagues in the School of Medicine were at the forefront of key research around virus identification, the development of faster and more accurate testing, development and testing of treatments such as remdesivir and monoclonal antibodies and leading clinical trial sites for the vaccines.

The pace with which we set up vaccination clinics across the state, and in fact, led in vaccinating both our workforce and the public, was nothing short of amazing.

UNC Health / School of Medicine Bring Hope It is important for us to acknowledge the difficulties of the moment, but what defines us is the ability to see a way through a difficult situation, envisioning a future when we are beyond the current problem and motivating others to work together toward that future.

In the depths of World War II, when it looked as though Great Britain might be conquered, Prime Minister Winston Churchill delivered an address that is applicable to our situation today. Churchill said of his beloved country, “If the British Empire and its Commonwealth last for a thousand years, men will still say, ‘This was their finest hour.’”

This year has been difficult, both personally and professionally for us. But, we were motivated by our mission and the knowledge that the people and the state we serve were counting on us.

Although we continue to face difficulties now, it will not last rever,fo and when we finally find ourselves on the other side of this crisis, we are certain that the strong bonds forged over the last year will help us work better together and better serve our state for years to come.

We are proud to be North Carolina’s health system.

Sincerely,

Wesley Burks, M.D. Charles D. Owen, III CEO, UNC Health Chair, UNC Health Board of Directors Dean, UNC School of Medicine

2020 Annual Report 3 UNC Health System Update 2020

While 2020 has posed unprecedented challenges, UNC Health has remained focused on our mission: improving the health and well-being of the people of North Carolina. This year, thanks to the dedication of all 35,000 members of our One Great Team, UNC Health excelled across all aspects of that mission.

4 The University of North Carolina Health System We all owe incredible thanks and gratitude to the thousands bring testing services to those who needed them the most, of compassionate coworkers and providers who have cared communities hardest hit by the virus, and lacking access to for patients this year, under stressful and ever-changing high-quality care. UNC Health’s Mobile COVID-19 Testing circumstances. Their dedication has truly been heroic. effort has been an important partnership with many groups across our community: local governments, faith leaders, and Even through preparations and advocacy groups. response to the pandemic, UNC This unit tested around 2,000 patients while also working to Health also moved forward its meet other health and emotional needs, connecting people to resources for food and financial assistance, providing coloring strategy to grow and serve more books for children, and distributing masks to anyone who communities across the state, needs one. This mobile testing service was featured in the New England Journal of Medicine and was cited over the summer promote greater equity in care, as a key component of UNC Health being awarded the 2020 advance research, and lead Latino Diamante Health and Science Community Award in recognition of extensive service and outreach to our state’s in education. Latino/Hispanic communities.

COVID-19 Testing: From the Lab to the Parking Lot Increasing Knowledge of COVID-19 On March 16, only two weeks after North Carolina’s first As the pandemic caused a ramp down of labs across the nation reported case of COVID-19, UNC Medical Center launched in March, UNC School of Medicine faculty came together in-house testing for the virus. Led by Dr. Melissa Miller, UNC and stepped up with new collaborative projects studying the became one of the first academic labs in the nation with this biology and transmission of SARS-CoV-2, as well as the safety in house capability. Early in the pandemic, our testing capacity and efficacy of treatments and vaccines for the virus. was a vital asset, helping to track and understand the spread of the virus in our state. In acknowledgement of this work, UNC Health was recognized as the leading American university in the study Also in the spring, UNC Health launched drive-through of coronaviruses. The work being done across our institution COVID-19 testing at Respiratory Diagnostic Centers (RDCs) is happening on a foundation laid over the course of many across the state. The multi-point drive-through process was years of basic science research and experience in creating the developed for maximum efficiency — UNC Health even consulted infrastructure needed for large clinical trials. with Chick-fil-A on their design and processes. As patients move through, they are guided by UNC Health staff to fill out UNC labs led key research into remdesivir, the first FDA- necessary paperwork and ultimately receive their test. Once they approved treatment for COVID-19, and researchers are drive away, however, the process is really just beginning. In most now developing and studying other experimental antiviral cases, test results are available within 24 hours. Regardless of compounds and the use of monoclonal antibodies to test results, all patients tested through the RDCs receive daily treat COVID-19. follow-up messages either by phone or text to check on how they are feeling and if there are new or worsening symptoms. UNC researchers are utilizing next-generation sequencing This has provided reassurance for patients and also allowed for assays to characterize viral genetics and COVID-19 strains quick triage in the case of patients who are feeling worse and circulating in the population, enhancing our knowledge of the may require advanced care or hospital admission. Since the start virus and helping to maintain accurate, sensitive tests. of the pandemic, more than 140,000 patients have been seen at RDCs across North Carolina. Finally, UNC was a site for the Phase 3 clinical trial of the COVID-19 vaccine developed by Moderna. The pandemic has shined a bright light on health disparities and UNC Health recognized early on that there was a need to

2020 Annual Report 5 In addition to work on COVID-19 research, this year, the UNC However, as our community and our nation faced the reality School of Medicine celebrated another significant increase of racial injustice and violence, we made a commitment to in research funding, reaching just over $535 million. We have transform our culture internally and to work to promote true sustained our growth over the last few years and have seen health equity in the communities we serve. funding spread across more departments and investigators, resulting in each of our basic science departments ranking in In June, UNC Health’s System Executive Diversity, Equity, and the Top 10 nationally for funding. Inclusion Council was established. Led by Aleyah Pryor-Pankey, System Executive Director for Diversity, Equity, and Inclusion, Leading in Education, Despite Challenges: and Dr. Cristy Page, Executive Dean of the UNC School of Medicine, this group is working to ensure our Diversity, Equity, Early in the pandemic, the UNC School of Medicine made the and Inclusion efforts continue to be integrated within our very difficult decision to suspend clinical rotations. This was a organizational strategy. significant disruption and disappointment to students, who never expected to be in medical school during a pandemic, Immediate actions from this group included expanded and to our teachers who place such high value on personal forums and opportunities for co-workers to share, listen, relationships and mentoring. and learn, an organizational emphasis on training in Inclusive Leadership and Unconscious Bias, and changes to recruitment Thanks to the innovative spirit of and hiring practices meant to promote more diversity within UNC School of Medicine faculty, system leadership.

however, adjusting to virtual As we work to promote a culture of diversity, equity, and teaching, creating courses and inclusion within our organization, UNC Health is also focused on promoting health equity in the communities we serve. In materials to teach about COVID-19 the Summer of 2020, UNC Health named Dr. Crystal Wiley and the response to the pandemic, Cené to the position of System Executive Director for Health Equity. A renowned clinician and epidemiologist, Dr. Cené has outstanding medical education focused her research on reducing disparities in health and has continued. healthcare access, and studying ways to address the social determinants of health. Over the last several months, she has been a leading voice locally and nationally, shining a light on Promoting Diversity, Equity, and Inclusion the ways that COVID-19 has amplified these disparities. She A diverse, equitable and inclusive work environment is the only will continue in her new role to build upon UNC Health’s work way we can truly fulfill our mission of caring for the people in this area, and lead a multidisciplinary and collaborative effort of North Carolina. It is essential to delivering compassionate, to plan, implement, and evaluate science-based strategies culturally appropriate care, conducting innovative research, and interventions to help address the structures, policies, and and providing outstanding education. practices that perpetuate health disparities and impede health equity in our state. Over the last several years, we have made progress in this area, offering extensive training and seminars, forming As we strive for improvement, it’s also important to celebrate employee resource groups, supporting the Equity of Care our accomplishments. Chatham Hospital was honored by the Pledge, as well as developing programs to support workforce American Hospital Association with the 2020 Carolyn Boone and career development. Lewis Equity of Care (EOC) Award. In honoring Chatham, the AHA praised the extensive training available to employees, mentorship programs for local students, and partnerships with local non-profits including developing a food pantry and working in collaboration with local law enforcement to curb misuse of prescribed opioids.

6 The University of North Carolina Health System As we strive for improvement, it’s also important to celebrate our accomplishments. Chatham Hospital was honored by the American Hospital Association with the 2020 Carolyn Boone Lewis Equity of Care (EOC) Award.

2020 Annual Report 7 Our Values

Carolina One Leading It Starts Care Great Team the Way With Me

• We care holistically • We are better together • We make a difference • Each of us takes about patients and than we are apart. by improving lives ownership of, and each other. every day and training accountability for, doing • Our effective the next generation of the right thing. • It is our privilege to collaboration is key to healthcare leaders. serve the people of providing quality care. • We empower and trust North Carolina. • Our research is changing each other to step up. • We are building an the world. • We demonstrate inclusive and equitable • We support each other kindness and culture that encourages • We provide innovative and hold each other compassion in every and supports the care. accountable in our work. interaction. diverse voices of our patients and each other.

8 The University of North Carolina Health System School of Medicine Continues Medical Education Excellence Despite the Pandemic

Through the pandemic, the School has continued to be flexible with some students using a combination of in-person and virtual learning and more senior students resuming their clinical rotations.

In August, the UNC School of Medicine welcomed the MD Class of 2024. Dr. Lisa Rahangdale, Associate Dean for Admissions, and the entire team involved with admissions, have once again put together an outstanding class of future Tar Heel Doctors.

These are, of course, highly accomplished students, but the class also features a high degree of racial and ethnic diversity, as well as diversity of backgrounds and experiences including an increase over the last few years in students from rural areas and first- generation college students. Also, the Biological and Biomedical Sciences program received a record number of applicants this year, accepting 117 outstanding students, with nearly 1 in 4 coming from groups traditionally underrepresented in the sciences.

2020 Annual Report 9 …for the third year in a row, the UNC SOM was ranked first in the nation for Primary Care Education as part of U.S. News & World Report’s 2021 edition of “America’s Best Graduate Schools.”

Highly Ranked Programs Serving More North Carolinians Kenan Primary Care Medical Scholars Program will train more students to Important to note, for the third year The organizations are committed to work in rural and under-resourced in a row, the UNC SOM was ranked expanding the medical education communities with enhanced training first in the nation for Primary Care program at NHRMC, including for care in those communities across Education as part of U.S. News & World enhancing the long-standing pediatric North Carolina. Report’s 2021 edition of “America’s program and other service lines as Best Graduate Schools.” In The SOM appropriate. Additionally, clinical trials and studies specialty of Family Medicine, UNC from UNC School of Medicine’s world- was ranked #3 in the US and was also Late in 2020, Novant Health, UNC renowned researchers will provide nationally ranked for research at #23. Health and UNC School of Medicine new treatment options for patients in announced an agreement to further Novant Health facilities. Novant Partnership & Medical expand medical education, research School Expansion and clinical services to Novant Health Collaboration on population health has facilities and other locations across Also in 2020, Novant Health, UNC the potential to make a tremendous North Carolina. The partnership will Health and UNC School of Medicine impact on the health of North Carolina. locate a UNC School of Medicine branch formed a partnership to enhance Together, through advanced analytics campus at Novant Health Presbyterian medical education and clinical services and proven population health strategies, Medical Center in Charlotte and will at New Hanover Regional Medical more data will allow these partners to serve as an important training site Center (NHRMC) in Wilmington after address community health challenges, for learners. Novant agreed to purchase NHRMC such as COVID-19, opioid addiction, from the county. social determinants of health and health It also gives more students access equity, to name a few. to learn at the best medical school This partnership will enhance UNC for primary care in the country while SOM’s educational presence and allow it expanding the pipeline for high-quality to train the next generation of physicians physicians available to serve North and promote economic development for Carolinians. Expansion of UNC SOM’s the entire Wilmington region.

10 The University of North Carolina Health System U.S. News Rankings

U.S. News & World Report’s U.S. News & World Report’s “Best Hospitals” “Best Children’s Hospitals”

Nationally Ranked Nationally Ranked Adult Specialties Children’s Specialties 2020–2021 2020-2021

UNC Medical Center (Chapel Hill, NC) UNC Children’s (Chapel Hill, NC)

Nationally Ranked Adult Specialties: Nationally Ranked Children’s Specialties: • Gynecology #18 • Diabetes & Endocrinology #13 • Ear, Nose & Throat #36 • Pulmonology #22 • Nephrology #39 • Nephrology #31 • Orthopedics #32 High Performing Adult Specialties: • Urology #35 • Cancer • Gastroenterology & GI Surgery #45 • Diabetes & Endocrinology • Cancer #46 • Gastroenterology & GI Surgery • Psychiatry and Urology

2020 Annual Report 11 U.S. News & World Report’s UNC REX Healthcare “Best Hospitals”

High Performing Noted for Group of Procedures & Conditions Surgical Procedures 2020-2021 & Chronic Conditions

UNC Medical Center (Chapel Hill, NC) UNC REX Special Recognition • Aortic valve surgery • Chronic obstructive pulmonary disease (COPD) As part of the “Best Hospitals” rankings and • Colon cancer surgery ratings, U.S. News evaluated more than 4,000 • Heart bypass surgery hospitals for their handling of two chronic • Heart failure conditions — chronic obstructive pulmonary • Lung cancer surgery disease and heart failure — and up to eight medical procedures: colon cancer surgery, lung UNC REX Healthcare (Raleigh, NC) cancer surgery, heart bypass surgery, aortic valve • Abdominal aortic aneurysm repair surgery, transcatheter aortic valve replacement • Aortic valve surgery (TAVR), abdominal aortic aneurysm repair, knee • Chronic obstructive pulmonary disease (COPD) replacement and hip replacement. • Colon cancer surgery • Heart bypass surgery In each procedure and condition in which a • Heart failure hospital had treated enough patients to be • Hip replacement evaluated, the hospital received a rating of high • Knee replacement performing, average or below average. The ratings • Lung cancer surgery are designed to help patients and healthcare • Transcatheter aortic valve replacement (TAVR) consumers make informed decisions about where to receive care for specific medical needs.

Nash UNC Health Care (Rocky Mount, NC) Only 37 standout hospitals nationwide (less than • Chronic obstructive pulmonary disease (COPD) 1% of the hospitals evaluated), got the top rating • Heart Failure in all 10 procedures and conditions. UNC REX was among that one percent. Wayne UNC Health Care (Goldsboro, NC) • Chronic obstructive pulmonary disease (COPD) • Heart failure

Johnston UNC Health Care (Smithfield, NC) • Chronic obstructive pulmonary disease (COPD) • Heart failure

Caldwell UNC (Lenoir, NC) • Chronic obstructive pulmonary disease (COPD)

12 The University of North Carolina Health System The Year in Research

UNC Health is inextricably linked to the UNC School of Medicine. That had never been more evident than in 2020 through the innovation of our physicians and researchers in every department of the school and every aspect of our hospitals, clinics, and medical campuses.

In federal FY20, the UNC School of Medicine received a total Researchers, an annual list that recognizes the most influential of $571,739,769 in external research funding, which included researchers of the past year, demonstrated by the production $363,305,228 in NIH funding – a total that includes research of multiple highly cited, peer-reviewed published papers and development contracts. This represents an increase of than rank in the top 1% by citations for field and year in Web more than $48 million from the prior year. In February of 2021, of Science. In 2020, fewer than 6,300, or .1% of the world’s the Blue Ridge Institute for Medical Research published its researchers, across 21 research fields, earned this exclusive annual list of top NIH funded research universities for the distinction. Beyond the grants and rankings, what 2020 academic fiscal year of 2021. The UNC School of Medicine showed us about the research teams at the UNC School of ranked 17th overall and 5th among peer public institutions. Medicine is that they are deep, nimble, and dedicated to do whatever it took to lend their expertise during the coronavirus All basic science departments were ranked in the top 6 in NIH pandemic. Many researchers revamped their workloads, labs, funding. All were in the top five among public universities, grants, and entire research portfolios to put research on with genetics ranked #1 among public universities. Twelve COVID-19 first and foremost. For this annual report, we will clinical departments were ranked in the top 30 in NIH funding, focus on the COVID-19 research, while we of course recognize with obstetrics & gynecology ranking highest, 3rd overall and that so much crucial research in many fields continued to 1st among public universities. Of note, 21 school of medicine make important headway to improve human health. faculty were named by Thomas Reuters as Highly Cited

2020 Annual Report 13 When German scientists created a laboratory assay to test people for the SARS-CoV-2, the virus that causes COVID-19, Dr. Melissa Miller sprang into action well before the virus captured the attention of the world.

14 The University of North Carolina Health System In the Beginning, a New Test On March 16, the U.S. Food and Drug Administration allowed UNC Health to use Miller’s test at the new Respiratory In 2002, Melissa Miller, Diagnostic Center on campus, in accordance with FDA PhD, was a postdoctoral guidance for individuals who meet criteria set by the Centers fellow at the UNC for Disease Control (CDC). The FDA allowance at first limited School of Medicine with the use of Miller’s test for patients at UNC Medical Center, a fascinating research UNC REX Hospital and UNC Health affiliate hospitals across interest: how to quickly North Carolina, as well as a select number of UNC Health clinic create and validate a locations. Use of this test by UNC Health entities allowed for diagnostic test for SARS more testing capacity at the state health department and in case the outbreak LabCorp in North Carolina. in Asia turned into a pandemic affecting North Carolina. She was “ Quickly creating and validating tests successful, but thankfully we didn’t need that test. She did the same for MERS and for emerging pathogens has always swine flu, too, but North Carolina again was spared. been part of my research passion

In 2019, as a professor in the UNC Department of Pathology and commitment, ever since I was a and Laboratory Medicine, Miller saw news of a new fellow at UNC during the first SARS,” coronavirus appear in China. When German scientists created a laboratory assay to test people for the SARS-CoV-2, the Miller said. “I am so proud of our virus that causes COVID-19, Miller sprang into action well lab for developing a high-quality before the virus captured the attention of the world. For weeks before North Carolina had its first COVID-19 case — test and for UNC Health to help as director of the Clinical Microbiology and Molecular us create the infrastructure to run Microbiology Labs at the UNC Medical Center — Miller led a team of technicians to develop and validate a COVID-19 test hundreds of samples a day to help for UNC Health. the people of our state.”

She focused on identifying unique genetic sequences of this From the beginning of the pandemic through early March new virus. And when she succeeded, she worked hard to ramp 2021, more than 250,000 COVID-19 tests have been up UNC’s capacity to test many samples in one day. conducted at the UNC Medical Center alone. This has been on top of the lab’s usual operations.

2020 Annual Report 15 The World Expert Across the Street In the second month of the pandemic, much of the world turned its attention to Ralph Baric, PhD, the William Kenan Distinguished Professor of Epidemiology at the UNC Gillings School of Global Public Health and professor in the UNC Department of Microbiology and Immunology at the UNC School of Medicine. He’s a SARS and coronavirus expert, one of the few in the country at the start of the pandemic.

Prior to SARS-CoV-2, Baric’s lab had been trying to create broad spectrum antivirals that would help people battle different types of respiratory viruses. One compound was remdesivir, developed through an academic-corporate partnership between Gilead Sciences and the Baric Lab.

On April 29, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases (NIAID), reported that data from an international clinical trial for remdesivir showed it shortened hospital stays for COVID-19 patients.

“By shortening recovery times, remdesivir could potentially help prevent the overloading of our healthcare system,” Baric said. “We have been working with Gilead for more than seven years to create broad-spectrum antiviral drugs that could be effective against multiple coronavirus strains and, hopefully, give us tools in the face of a pandemic. We were seeking ‘one drug for many bugs.’ When this pandemic arrived, we immediately had two drugs — remdesivir and EIDD-2801—positioned for use in human clinical trials.” Speaking of Vaccines . . .

The FDA eventually authorized remdesivir for emergency When it became clear the pandemic was going to hit the use, and the drug is now part of the standard of care United States hard, the National Institutes of Health leaned arsenal for hospitalized COVID-19 patients. And clinical on the leadership experience of Myron Cohen, MD, director of trials for EIDD-2801 continued through 2020. the UNC Institute for Global Health and Infectious Diseases, the Yeargan-Bate Distinguished Professor of Medicine, Baric’s large, experienced lab also was a hub for many Microbiology and Immunology, and Epidemiology, and the basic science projects and collaborations on COVID-19, Associate Vice Chancellor for Global Health and Medical including a study published in Science confirming that Affairs at UNC-Chapel Hill. His career has been focused on SARS-CoV-2 had mutated in a way that enabled the virus HIV care and prevention, including the creation of a worldwide to spread quickly around the world, but also that the network of large, expert-led clinical trial infrastructure to test mutation to the virus’s notorious spike protein may have HIV medications and prevention protocols. His work proved made the virus more susceptible to a vaccine. how effective HIV medications are at preventing transmission, earning him and his large team the 2011 Science Magazine Breakthrough of the Year.

In 2020, Cohen helped the NIH harness the power of the HIV clinical trial network to ramp up the needed infrastructure

16 The University of North Carolina Health System to efficiently complete Operation Warp Speed also helped establish clinical trials three phases of COVID-19 for treatments. At UNC, Dr. Wohl with colleagues Billy clinical trials as part of Fischer, MD, Jessica Lin, MD, and Dr. Eron, led “treatment as Operation Warp Speed. prevention” studies to determine the efficacy of therapies like mass manufactured monoclonal antibodies, which are now in Cindy Gay, MD, is the use at UNC. principal investigator of two COVID-19 vaccine In the summer, UNC Institute for Global Health and Infectious trials at UNC for the Diseases researchers began phase 2 and phase 3 evaluations Moderna and Novavax of promising treatments for COVID-19. The UNC School of vaccines. Along with Medicine joined more than 25 initial sites participating in the colleagues Joe Eron, clinical trials through ACTIV-2, a public-private partnership MD, and David Wohl, sponsored by the NIH’s National Institute of Allergy and MD, Dr. Gay led the Infectious Diseases to coordinate COVID-19 research and speed implementation of these massive clinical trials, which were development of the most promising treatments and vaccines. crucial in making it possible for the FDA and other agencies to This two-phase trial is being conducted by the AIDS Clinical efficiently review data and authorize the Moderna vaccine in Trials Group to evaluate the safety and efficacy of treatments for December 2020. adults who have COVID-19 but do not require hospitalization.

2020 Annual Report 17 Infectious diseases assistant professor Luther Bartelt, MD, of consumer-grade and modified teamed with the Mayo Clinic and UNC Blood Transfusion Services to use convalescent plasma from recovered masks, assuming the mask wearer COVID-19 patients to help current patients struggling with was exposed to the virus after the disease. Bartelt, along with UNC infectious diseases colleague David Margolis, MD, and UNC transfusion medicine an interaction with an unmasked services colleagues Susan Weiss, MD, and Yara Park, MD, infected person. also led an independent study of the best ways to use convalescent plasma to treat patients. Published in the journal JAMA Internal Medicine, the research showed that some masks were as much as 79 percent Speaking of Masks . . . effective at blocking particles that could carry the virus. These Early in the pandemic, scientists showed that when two were masks made of two layers of woven nylon and fit snug people wearing masks interacted, the chance of COVID-19 against the wearer’s face. Unmodified medical procedure transmission was drastically reduced. This is why public health masks with ear loops — also known as surgical masks — officials have pleaded for all people to wear masks: they not offered 38.5 percent filtration efficacy, but when the ear only prevent the wearers from expelling particles that might loops were tied in a specific way to tighten the fit, the efficacy carry SARS-CoV-2, but masks also provide some protection improved to 60.3 percent. And when a layer of nylon was to the wearers themselves. added, these masks offered 80 percent effectiveness.

But are all masks created equal? Co-first author Emily Sickbert-Bennett, PhD, director of infection prevention at the UNC Medical Center, added, To find out, UNC School of “Limiting the amount of virus is important because the more Medicine scientists researched the viral particles we’re exposed to, the more likely it is we will get sick and potentially severely ill.” protectiveness of various kinds

18 The University of North Carolina Health System What SARS-CoV-2 Looks Like Marsico researchers also co-led with the Baric lab an important study published The UNC School of Medicine laboratory of Camille Ehre, PhD, assistant professor in the journal Cell to show the specific of pediatrics, was the first lab to produce striking, high-resolution images of highly ways in which SARS-CoV-2 infects infective SARS-CoV-2 virus produced by respiratory epithelial cells. The New England the nasal cavity to a great degree — Journal of Medicine featured this work in its “Images in Medicine” section. infecting and replicating progressively less well in cells lower down the Ehre, a member of the UNC Marsico Lung Institute and the UNC Children’s Research respiratory tract, including in the lungs. Institute, conducted this research in collaboration with the Baric lab and Richard The findings suggested the virus tends Boucher, MD, the James C. Moeser Eminent Distinguished Professor of Medicine and to become firmly established first in the Marsico Director. nasal cavity, but in some cases the virus is aspirated into the lungs, where it may The images, re-colorized by UNC medical student Cameron Morrison, show infected cause more serious disease, including ciliated cells with strands of mucus (yellow) attached to cilia tips (blue). Cilia are the potentially fatal pneumonia. hair-like structures on the surface of airway epithelial cells that transport mucus (and trapped viruses) from the lung. A higher power magnification image shows “If the nose is the dominant initial site the structure and density of SARS-CoV-2 virions (red) produced by human airway from which lung infections are seeded, epithelia. Virions are the complete, infectious form of the virus released onto then the widespread use of masks to respiratory surfaces by infected host cells. protect the nasal passages, as well as any therapeutic strategies that reduce This imaging research helped illustrate the incredibly high number of virions produced virus in the nose, such as nasal irrigation and released per cell inside the human respiratory system. The large viral burden or antiviral nasal sprays, could be is a source for spread of infection to multiple organs of an infected individual and beneficial,” said Boucher, MD, the co- likely plays a big role in the high frequency of COVID-19 transmission to others. senior author of the Cell study. These images make a strong case for the use of masks by infected and uninfected individuals to limit SARS-CoV-2 transmission.

2020 Annual Report 19 “ While modifications to surgical A Collaboration of COVID Experts masks can enhance the The aforementioned projects were just a few of the dozens of studies that hundreds of faculty, staff, and students led at the filtering capabilities and reduce UNC School of Medicine during the pandemic, and nearly all of inhalation of airborne particles them involved the kind of collaboration UNC-Chapel Hill has become renowned for across the research world. Their expertise by improving the fit of the mask, has been instrumental in our nation’s battle against COVID-19. we demonstrated that the fitted J. Victor Garcia, PhD, Angela Wahl, PhD, Ron Swanstrom, filtration efficiencies of many PhD, and Mark Heise, PhD, conducted crucial work to develop consumer-grade masks were unique animal models to test therapies, such as EIDD-2801 and vaccine candidates. nearly equivalent to or better than surgical masks,” said co- The labs of Dirk Dittmer, PhD, and Blossom Damania, PhD, with McLendon Labs, used first author Phillip Clapp, PhD, next-generation sequencing to an inhalation toxicologist and study viral genetics and strains of SARS-CoV-2 circulating in assistant professor of pediatrics the population. And Dittmer, at the UNC School of Medicine. Damania, and David Peden, MD, led COVID-19 seroprevalence studies across the UNC Health Drs. Clapp and Sickbert-Bennett also conducted research system with Amir Barzin, DO, and early in the pandemic to show that reused, sterilized John Schmitz, PhD, and colleagues N95 masks and very out-of-date N95 masks retain from Gillings. Their goal was to their effectiveness at protecting healthcare workers find the prevalence of COVID-19 from COVID-19 infection. To accomplish that, Sickbert- among asymptomatic individuals Bennett turned to someone she knew she could trust: her who came to a UNC Health clinic dad, William Bennett, PhD, professor of medicine, who for a different reason. The rate leads the Mucociliary Clearance and Aerosol Research was low, but showed how important it was to recognize that Laboratory at the UNC Center for Environmental asymptomatic individuals were carrying SARS-CoV-2. Medicine, Asthma, and Lung Biology (CEMALB).

Craig Cameron, PhD, and Jamie Arnold, PhD, partnered with a “I told him we had two types of masks at the UNC Medical company called Riboscience to screen compounds that might Center — used but sterilized N95 masks and expired N95 stop COVID-19 from replicating. And Aravinda de Silva, PhD, masks — and we needed to know whether they would Prem Lakshmanane, PhD, offer safe and effective protection, in case we needed our and Alena Markmann, PhD, healthcare co-workers to use them.” Sickbert-Bennett said. created an antibody test that the Baric lab uses to The researchers found that expired masks retained their characterize vaccine responses effectiveness many years beyond the masks’ expiration in lab experiments. dates. In addition, N95 masks can be subjected to sterilization with hydrogen peroxide or ethylene oxide These projects and more could without compromising their efficiency. And they were not have been undertaken safe to use. without the hundreds of clinical fellows, postdoctoral researchers, graduate students, and staff members at the UNC School of Medicine and the UNC Medical Center. And they accomplished all this while the university dictated special protocols to limit research staff on campus.

All of us at UNC Health thank these researchers for their tireless efforts during this unprecedented year and for work yet to be accomplished in the year ahead.

20 The University of North Carolina Health System UNC Health Alliance

UNC Health Alliance is UNC Health’s statewide, physician- UNC Health Alliance Network led clinically integrated network, and is transforming healthcare delivery and payment models on 6,000 650 behalf of over 6,000 physicians, providers, with more than 1,800 from locations in 48 counties including community-based, independent practices independent physicians along with Skilled Nursing Facility those affiliated with UNC Health. With a focus on population health 1,800 preferred network; primary care physicians and APPs management, UNC Health Alliance home health preferred works closely with physicians, network employers, and payers to manage 4,100 quality, cost, and access to care. specialty providers, covering Community-based 130 palliative care and specialties & subspecialties hospice programs

2020 Annual Report 21 UNC Senior Alliance

UNC Senior Alliance is UNC Health’s statewide, physician-led accountable UNC Senior Alliance care organization, and is transforming healthcare delivery and payment NGACO Medicare Beneficiary Services in FY 2020 models on behalf of over 3,400 physicians, including community- based, independent physicians along 2,785 1,474 with those affiliated with UNC Health. NGACO Beneficiaries NGACO Our physician network is committed Actively Engaged in Intensive Case Paramedicine Home Visits to the mission to make care more Management (ICM) accessible to patients and shift to value-based payments, achieving high 37 NGACO Beneficiaries Using quality patient outcomes at affordable ~2,800 NGACO Beneficiaries Receiving Skilled Nursing Facility (SNF) costs. UNC Senior Alliance participates Home Health Services Waiver in the Centers for Medicare and Medicaid Services’ Next Generation ACO (NGACO) Model. 2,257 Medical Visit Rides Provided to NGACO Beneficiaries

22 The University of North Carolina Health System Community Relations

In 2020, our community partners were challenged like never before due to COVID-19. Despite challenges, UNC Health kept its commitments to community partners and North Carolinians.

We came together virtually to support non-profit partners such as the Ronald McDonald House, Community Home Trust, Leukemia and Lymphoma Society and Susan G. Komen Race for the Cure, to name a few. Their events may have been online, but they still offered an opportunity to celebrate and support the extraordinary efforts and courage of ordinary people.

We partnered with The Blood Connection to host a series of collection drives throughout the year. The largest blood drive registered more than 1,000 people for a single day at the PNC Arena in March. By the end of 2020, UNC Health hosted ten drives, collecting 3,251 units of blood.

Throughout 2020, our community demonstrated its appreciation for frontline healthcare workers in a variety of ways. Parades of first responders, motorcycle clubs as well as the NC Air National Guard and the Bandit Flight Team passed by and flew over our hospitals. The U.S. Army Black Daggers parachute stunt team jumped into Kenan Memorial Stadium and dozens of musicians who call North Carolina home sang songs of hope online and shared words of encouragement.

The outpouring of support from the local residents and the business community was awe-inspiring. Comfort items such as health & beauty products, homemade greeting cards and plants for everyone who took up gardening in the spring were donated. More than 70,000 meals, bottles of water and cups of coffee were purchased from local restaurants and brought to our hospitals in an effort to lift up co-workers and let them know they were not alone. Creativity and positive messages of courage and hope were shared via banners, sidewalk chalk art and murals.

2020 Annual Report 23 UNC Health supported co-workers experiencing difficulty finding basic household items by standing up in-house grocery stores at the Medical Center and UNC REX. Co-workers were able to purchase one of four deeply discounted pre-packed grocery box options containing hard to find items such as meat, milk, vegetables, cleaning supplies and toilet paper. A childcare subsidy and financial assistance was made available for any co-worker experiencing hardship due to the pandemic.

One of the many public health issues brought to the forefront during the COVID-19 crisis has been food insecurity across our communities. UNC Health’s support of partners such as the Inter-Faith Food Shuttle and Meals on Wheels has helped ensure our community had access to meals. The UNC Rural Health and UNC Health Foundation-funded collaborative effort between UNC Health, the UNC Center for Health Promotion and Disease Prevention and dozens of Chatham County community partners called the Chatham Food Hub helped mitigate COVID-19’s economic impact and increase food access. From August to October, the Food Hub acted as a one-stop shop for consumers to buy food and fresh produce from local restaurants and farms, and helped support businesses as well. The Food Hub offered a variety of food options for customers of all income levels, including free emergency food boxes provided by the CORA Food Pantry. And, allowed customers to make “pay-it-forward” donations to support Chatham County residents in need. Another was to expand UNC Health’s annual support of the Food Bank of Eastern and Central North Carolina’s Summer Hunger Program. This enabled the program to begin the Kids Summer Meals program two months early and provide more than 10,000 meals a week to children who were out of school.

In December, UNC Health partnered with NC Med Assist and the SE Raleigh YMCA to host a Mobile Free Pharmacy event. This event provided residents in need with free over-the-counter (OTC) medication. Such items included cough and cold medicine, vitamins, allergy medication and first aid supplies. This partnership came at a crucial time, when remaining healthy and stopping the spread of germs is more essential than ever. More than 900 local residents were served, 26% of whom were uninsured.

In November, UNC Health entered into a new military-civilian partnership with the U.S. Army where UNC Medical Center and UNC School of Medicine providers will train the U.S. Army’s Forward Resuscitation Surgical Teams and other medical personnel from U.S. Army Forces Command. As a busy, nationally recognized Level I Trauma Center and Burn Center, UNC Medical Center will help military personnel learn from real-world experience, with trauma surgeons and other providers educating on best practices, through experience in UNC Medical Center’s emergency department, operating rooms and ICUs. The goal is to help military surgeons and other care providers better prepare to treat traumatic injuries, such as gunshot wounds, burns and more, to ultimately save more lives.

24 The University of North Carolina Health System Health Equity

Building a healthier community, also means standing up for equality. UNC Health sponsored walks for health equity in support of Black Lives Matter at multiple locations, including UNC Medical Center, Hillsborough, UNC REX, UNC Wakebrook and across the UNC Physicians Network. Hundreds of co-workers and leaders came together to demonstrate their stand against racism and in support of health equity.

A common definition of “Health Equity” is that everyone has a fair and just opportunity to be as healthy as possible. This definition is embraced by Dr. Crystal Wiley Cené, MD, MPH, FAHA who was appointed System Executive Director for Health Equity at UNC Health in July 2020. Achieving health equity requires removing obstacles to health such as poverty, discrimination, and their consequences, including powerlessness and lack of access to good jobs with fair pay, quality education and housing, safe environments, and healthcare. For UNC Health, health equity goes back to our mission: Improving the health of North Carolinians. We can’t provide high quality of care when outcomes are disparate for certain groups. We have to improve health for everyone. At UNC Health, we will identify where we are not providing the highest quality care so we can then target strategies to improve quality, safety, and an overall improved healthcare experience.

UNC Health is working toward a coordinated, intentional strategy for health equity, developing strategies for achieving health equity which focus on patients and improving outcomes among our most vulnerable populations. There will be an emphasis on the social determinants of health, some of which are beyond the purview of the healthcare delivery system. This will call for a broad strategy to improve the health of our communities, where we serve patients, beyond the healthcare system. It will take better investments and making UNC Health a better steward at the community level. We will look at ways of meeting unmet social needs, closing disparity gaps and partnering with communities. We can make intentional community investments by supporting minority, and women-owned businesses through a transparent process so people understand how UNC Health operates. We want to be known as a healthcare system that is at the forefront of promoting health equity, building our reputation in communities across all UNC Health entities. To make that leap, we’ll need to remove structural inequities (policies / practices / norms) which impede equity. Health equity isn’t a destination; it’s a journey of becoming, not being. Crystal Wiley Cené, MD, MPH, FAHA System Executive Director for Health Equity

2020 Annual Report 25 Advanced Analytics & COVID-19 Modeling UNC Health data scientists played a lead role in The UNC Health model emphasizes bed (acute and ICU) and ventilator developing a highly predictive COVID-19 forecast needs, since these are more important system or “model” that has been monumental for operational planning than cases or deaths. Our model is focused on throughout the pandemic in providing the critical predictions for North Carolina as a headlights our senior leaders have needed to whole, making it specific enough to maximize relevance to UNC, but broad make key operational and policy decisions for enough to avoid sample size issues. staffing, bed capacity, and PPE stewardship. Based on the model’s state forecast, we are able to produce entity-specific This custom predictive model has served as predictions for all UNC Health entities. an instrumental component of UNC Health’s We used a powerful statistical approach response to the pandemic. that allowed us to produce a robust model early in the pandemic when data In the early days of the COVID-19 pandemic, there was a proliferation of forecasting were scarce. Our data model was also models, but they did not meet the needs of UNC Health. Many predicted cases or designed from the start to incorporate deaths but not hospitalizations, few had state-level projections, and none of them additional analyses, including a separate were tailored to UNC Health specifically. suite of models that UNC has used to forecast supply and demand of critical UNC Health's COVID-19 forecasting model uses well-tested epidemiological supplies. principles, but our statistical methodology differs from most of the others, and with several advantages.

26 The University of North Carolina Health System Financials & Statistics

Chapel Hill, North Carolina For the years ending June 30, 2020, and June 30, 2019

2020 Annual Report 27 Letter of Transmittal February 1, 2021

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 Dr. Wesley Burks, CEO.

Introduction This Annual Report includes a compilation of the operating results and financial position of the University of North Carolina Health Care System (UNC Health) as established by N.C.G.S 116-37. The financial reports as presented represent a summary of data generated by the various entities under the control of the Board of Directors of UNC Health.

The University of North Carolina Hospitals at Chapel Hill (UNC Hospitals), Rex Healthcare, Inc. (Rex), Chatham Hospital, Inc. (Chatham), Caldwell Memorial Hospital (Caldwell), UNC Rockingham Health Care, Inc. (Rockingham), UNC Physicians Network, LLC (UNCPN), and UNC Physicians Network Group Practice (UNCPNGP) prepare and publish their own separate audit reports on an annual basis. University of North Carolina Faculty Physicians (UNCFP), the clinical patient care programs of the University of North Carolina School of Medicine, is included in the audit report for The University of North Carolina at Chapel Hill (UNC- CH). Additional information regarding the organization structure can be found in the Notes to Financials section of the Annual Report.

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

The Financials and Statistics section of the Annual Report presents Management’s Discussion and Analysis and pro-forma financial statements for UNC Health and UNCFP. This section includes selected statistical and financial ratio information. Management’s Discussion and Analysis provides a review of the financial operations and the Notes to Financials section provides additional explanation for the reader.

Financial Information Internal Control Structure UNC Health’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

28 The University of North Carolina Health System follows the assessment process to assure to the state of North Carolina and the public that UNC Health is committed to safeguarding its assets and is providing 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 is responsible for ensuring compliance with all applicable laws and regulations. A combination of state and UNC Health policies and procedures, integrated with a system of internal controls, provides for this compliance. The accounts and operations of UNC Hospitals and UNCFP (as a part of UNC-CH) are subject to an annual examination by the Office of the State Auditor. Rex, Chatham, Caldwell, Rockingham and UNCPN are audited annually by an independent third- party CPA firm. All of these entities were an integral part of the state’s reporting entity represented in the state’s Comprehensive Annual Financial Report and the state’s Single Audit Report. The audit procedures are conducted in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards issued by the Comptroller General of the United States.

Budgetary Controls On an annual basis, UNC Health’s Board of Directors approves budgets for UNC Hospitals, UNCFP, Rex, Chatham, Caldwell, Rockingham and UNCPN. The budget for UNCFP is also subject to approval by UNC-CH. Each entity of UNC Health 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.

UNC Health is subject to the provisions of the Executive Budget Act, except for trust funds identified in N.C.G.S. 116-36.1 and 116-37.2. These two statutes primarily apply to the receipts generated by patient billings and other revenues from the operations of UNC Hospitals and UNCFP. UNC Hospitals submits monthly reports to the Office of the State Controller that reflect its overall operations. UNC Health receives no appropriation from the state. In the past, appropriated funds from the General Fund covered a portion of operating expenses, including the portion of expenses attributable to the cost of providing (i) care to indigent patients and (ii) graduate medical education.

Cash and Investment Management UNC Health continues to work with the Office of the State Treasurer and the University of North Carolina Management Company (UNCMC) to maximize the investment earnings for UNC Hospitals based on changes in the General Statutes that were made during the 2005, 2008 and 2011 sessions of the General Assembly. In addition, UNC-CH has allowed UNCFP to invest a portion of their funds in an intermediate fund beginning in fiscal year 2008. Investment earnings subsidize operating income and enable UNC

2020 Annual Report 29 Health to provide more services to the citizens of the state of North Carolina. The cash management policy includes all areas of receipts and disbursements so that investment earnings are maximized and vendor relations are maintained.

Risk Management 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. 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. We are similarly committed 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 healthcare industry. Continual evaluation of existing programs and new service development is the only way to maintain or increase our competitive advantage.

Acknowledgments Preparation for this Annual Report would not have been possible without the coordinated efforts of the various financial staffs within UNC Health, with special assistance from the CEO’s office and Communications & Marketing.

Mark F. Miller Chief Financial Officer & Treasurer The University of North Carolina Health Care System

30 The University of North Carolina Health System UNC Health Reporting Structure

Board of Directors

Dr. Wesley Burks CEO of UNC Health / Dean of UNC School of Medicine

Dr. Cristy Page Amy Higgins John Lewis Andy Willis Steve Burriss Dr. Matt Ewend Executive Dean, Chief Transformation Chief Business Chief External Chief Operating Chief Clinical School of Medicine & Experience Officer Integration Officer Affairs Officer Officer (COO) Officer (CCO) (CTEO) (CBIO) (CEAO)

Jeri Williams Glenn George Katie Eimers Scott Doak Chief Audit & Chief Legal Officer Chief System Chief Human Compliance Officer (CLO) Initiatives Officer Resources Officer (CACO) (CSIO) (CHRO)

2020 Annual Report 31 UNC Health Board of Directors

(As of March 1, 2021)

Charles D. Owen, III (Charlie) Michael A. Crabb, III (Trey) Charles F. Marshall Chair, UNC Health System Board of Directors Executive Director, Morgan Stanley, Vice Chancellor and General Counsel, President, Fletcher Development Group, Inc. Not-For-Profit Strategic Services The University of North Carolina at Chapel Hill Fletcher, NC Nashville, TN Chapel Hill, NC

Gregory J. Wessling (Greg) Matthew G. Ewend, MD, FACS (Matt) Matthew A. Mauro, MD (Matt) Vice Chair, Chief Clinical Officer, UNC Health President, UNC Faculty Physicians UNC Health System Board of Directors President, UNC Physicians UNC School of Medicine Business Advisor, A&G Associates and Chapel Hill, NC Chapel Hill, NC Partners, LLC Davidson, NC Anne B. Faircloth John G. McNeil, MD, MPH, PHD Owner and Manager, Faircloth Farms President and CEO, Verum Clinical Research John E. Bailey (Jack) Clinton, NC Fayetteville, NC Strategic Advisor and Recent President, GSK U.S. Kevin M. Guskiewicz, PhD Deborah Murray Raleigh, NC Chancellor, The University of North Carolina Executive Director, Caldwell County at Chapel Hill Economic Development Commission Samuel B. Bowles (Sam) Chapel Hill, NC Lenoir, NC Managing Director, New Republic Capital Bernadette Gray-Little, PhD C. Howard Nye (Ward) Charlotte, NC Chancellor Emerita, University of Kansas Chairman of the Board, President and Chapel Hill, NC Chief Executive Officer, Martin Marietta A. Wesley Burks, MD Raleigh, NC Dean, UNC School of Medicine Janet T. Hadar Vice Chancellor for Medical Affairs, President, UNC Hospitals Cristen P. Page, MD, MPH (Cristy) UNC-Chapel Hill Chapel Hill, NC Executive Dean, UNC School of Medicine CEO, UNC Health Chapel Hill, NC Chapel Hill, NC Peter Hans President, University of North Carolina System J. Troy Smith, Jr. G. Hadley Callaway, MD Chapel Hill, NC Attorney, Ward and Smith, P.A. Physician, Raleigh Orthopaedic Clinic New Bern, NC Raleigh, NC Timothy L. Humphrey (Tim) VP, Chief Data Officer, IBM Rebecca T. Cobey (Becky) Research Triangle Park, NC Retired – Community Volunteer Chapel Hill, NC Tracy A. Leinbach Retired, CFO, Ryder, Inc. Pinehurst, NC

32 The University of North Carolina Health System Management’s Discussion and Analysis

Introduction Johnston County. Oversight and governance of the joint Management’s discussion and analysis provides an overview venture is controlled by a Board of Directors consisting of of the financial position and activities of the University of appointees from both JMHA and UNC Health. UNC Health North Carolina Health Care System (UNC Health) for the fiscal manages the day-to-day operations of JHSC. years ending June 30, 2020, and June 30, 2019. The financial statements included for UNC Health — The Statement of On November 4, 2020, the boards of REX and JHSC executed Net Position; The Statement of Revenues, Expenses, and a Joint Operating Agreement to form a stronger partnership Changes in Net Position; and The Statement of Cash Flows — to expand the organizations’ long history of collaboration are labeled “pro forma” to demonstrate that they are an to enhance care, improve outcomes, and increase access for aggregation of assets and liabilities and the results of financial patients in Johnston and Wake counties. The agreement calls activities and not the result of an overall audit of UNC Health for a long-term commitment to opening new medical facilities by an independent auditor and as a result should not be relied in Johnston County and expanding clinical services offered on as such. across the region.

UNC Health was established November 1, 1998, by N.C.G.S. UNC Health owns and/or controls the net assets and financial 116-37. The original legislation included only the University of operations of UNC Hospitals, REX, Chatham, Caldwell, North Carolina Hospitals at Chapel Hill (UNC Hospitals) and Rockingham, UNCPN and UNCPNGP. In contrast, UNC-CH the clinical patient care programs of the University of North owns and controls the net assets and financial operations Carolina at Chapel Hill (UNC-CH). UNC Health is governed of UNCFP. The UNC Health Board of Directors governs by a Board of Directors and is administered as an affiliated and oversees physician credentialing, quality and patient enterprise of the University of North Carolina. UNC Faculty safety, and resident training and acts to advise and review Physicians (UNCFP) represents the clinical patient care the financial activities of UNCFP. Final direct control of the programs of the UNC School of Medicine (UNC SOM). REX monetary operations of UNCFP remains within UNC-CH. The Healthcare, Inc. (REX), Chatham Hospital, Inc. (Chatham), physicians who provide patient care at UNC Hospitals and in Caldwell Memorial Hospital (Caldwell), UNC Rockingham the UNC-CH clinics are employees of UNC-CH. Most non- Health Care (Rockingham), UNC Physicians Network (UNCPN) physician employees who assist in providing patient care and and UNC Physicians Network Group Practice (UNCPNGP) have the associated administrative, billing and collection services been added to the organization since its inception. are employees of UNC Health.

The Liability Insurance Trust Fund (LITF) is also included in For purposes of these financial statements, UNCFP serves the annual report. LITF is an unincorporated entity created by as a financial proxy for the “clinical patient care programs North Carolina General Statutes Chapter 116, Article 26 and of the School of Medicine.” The financial statements for the the University of North Carolina Board of Governors Resolution entities directly controlled by UNC Health (UNC Hospitals, of June 9, 1978. LITF is a self-insurance program established REX, Chatham, Caldwell, Rockingham, UNCPN and UNCPNGP) to provide professional medical malpractice liability coverage are separately audited on an annual basis and have received for UNC Hospitals and UNCFP, (collectively, the program unqualified opinions for their prior year reports. The financial participants) and is discussed in more detail within the Notes activities of UNCFP are included in the financial statements to the Financial Statements. and audit report of UNC-CH. LITF is also audited separately on an annual basis. Since an audit on the aggregation of financial Effective February 1, 2014 UNC Health and Johnston Memorial information for these entities cannot be efficiently obtained, Hospital Authority (JMHA) entered into a Master Agreement we have used the term “pro forma” to describe the financial to form Johnston Health Services Corporation (JHSC), a joint statements presented. venture to provide health care services to the residents of

2020 Annual Report 33 Pro forma consolidated financial statements for UNC Health logistics coordination, information systems and telemedicine, are presented, which include UNC Hospitals, REX, Chatham, communications and public health awareness. Caldwell, Rockingham, UNCPN, UNCPNGP, LITF and UNCFP. UNCFP’s Statement of Net Position, and Statement of Recently UNC Health worked with Samaritan’s Purse to build Revenues, Expenses and Changes in Net Position and a 30 bed field hospital in the Caldwell parking lot to address Statement of Cash Flows for the fiscal years ending June 30, the surge of COVID-19 patients in Caldwell, Catawba, Burke, 2020 and 2019 are also included since these financial activities Watauga, & Alexander counties. are not separately disclosed elsewhere. UNC Health has also opened several vaccination clinics and is COVID-19 Pandemic coordinating the administration across our service area. On March 13, 2020, the President of the United States declared the ongoing Coronavirus Disease 2019 (COVID-19) Using This Financial Report pandemic to be of a severity and magnitude to warrant a UNC Health’s financial statements provide information full federal government response and recovery effort. Health regarding its financial position and results of operations as systems across the nation rose to the frontlines of containing of June 30, 2020 and 2019 and the years then ended. The the outbreak and providing medical services related to the Statement of Net Position; the Statement of Revenues, COVID-19 pandemic and took the necessary measures to Expenses and Changes in Net Position; and the Statement of protect public health and safety. Cash Flows comprise the basic financial statements required by the Governmental Accounting Standards Board (GASB). On March 10, 2020, Governor Roy Cooper of North Carolina issued an executive order declaring a state of emergency, In accordance with GASB, the pro forma financial statements which directed that all healthcare facilities be fully prepared to are presented and follow reporting concepts similar to care for a surge of COVID-19 patients. These unprecedented those used by private-sector health organizations. These circumstances triggered a magnitude of challenges for all statements offer short and long-term financial activities hospitals and healthcare providers. about its operations. The financial statement balances reported are presented in a classified format to aid the reader UNC Health, an organization that serves the entire state in understanding the nature of the operations. The Notes of North Carolina and acts as the state’s safety net, took to the Financial Statements provide information relative to immediate actions following the Emergency Declaration across the significant accounting principles applied in the financial our owned and managed hospital facilities and providers. statements and further details concerning the organization One of the first actions was to establish a multi-disciplinary and its operations. These disclosures provide information to coordinated response by establishing a COVID-19 Action better understand details, risk and uncertainty associated with Council (CAC) to manage the collective response to the the amounts reported and are considered an integral part of pandemic across all facilities in our Health System. these pro forma financial statements.

The UNC Health CAC was structured to include broad Pro Forma Statement of Net Position representation from clinical and non-clinical stakeholders The pro forma Statement of Net Position provides with accountability to protect public health and safety. Our information relative to the assets (resources), deferred committee included Executive Leadership, Project Managers, outflows of resources, liabilities (claims to resources), Owned and Managed-entity stakeholders including: deferred inflows of resources, and net position (equity). Communications, Human Resources, Emergency Services, Assets and liabilities on this Statement are categorized as Infection Prevention, Ambulatory Services, Patient Care & either current or noncurrent. Current assets are those that Staffing, System Pharmacy, Information Services, Infectious are available to pay for expenses in the next fiscal year, and Disease, Finance, and Affiliate Leaders. it is anticipated that they will be used to pay for current liabilities. Current liabilities are those payable in the next Since its enactment the committee has taken immediate steps fiscal year. Management estimates are necessary in some to plan, synchronize, prioritize, and collectively advance actions instances to determine current or noncurrent categorization. and activities in all areas required to respond to the pandemic, The pro forma Statement of Net Position provides the basis including human capital & staff redeployment, staff education for evaluating the capital structure, liquidity and its ability to & training, risk reduction and infectious disease prevention, meet current and long-term obligations. and emergency medical care. The CAC also addressed tactical elements such as facility preparedness, personal protective equipment (PPE) and other critical supply procurement,

34 The University of North Carolina Health System Pro Forma Statement of Revenues, Expenses, and Changes Deferred outflows of resources increased $141 million from in Net Position adjustments related to Governmental Accounting Standards The pro forma Statement of Revenues, Expenses and Changes Board (GASB) No. 68 and Statement No. 75 as it relates to in Net Position provides information relative to the results the State of North Carolina Teacher’s’ and State Employee’s of the organization’s operations, nonoperating activities and Retirement System Plan and other postemployment benefits. other activities affecting net assets. Nonoperating activities include noncapital gifts and grants, investment income (net Total liabilities increased $1.1 billion from June 30, 2019. of investment expenses), unrealized gains and losses on Current liabilities increased $373.3 million due primarily to investments, and loss realized on the disposition of capital recognizing deferred revenue upon receipt of the Medicare assets. Under GASB, bond interest expense is considered a Advance Payments. In contrast, accounts and other payables nonoperating activity; but for these pro forma statements decreased due to process improvements. Noncurrent Liabilities it is presented as operating. The pro forma Statement of increased by $694.3 million due to the bond issuances Revenues, Expenses and Changes in Net Position measures described in more detail in the long term debt section. Also the success of UNC Health’s operations and can be used to contributing to this increase was the combined change in the determine whether UNC Health successfully recovered all of its net pension liability and net other postemployment benefits costs through its revenue, profitability and credit worthiness. liability recorded in accordance with GASB Statements No. 68 and No. 75, respectively. Pro Forma Statement of Cash Flows The pro forma Statement of Cash Flows provides information Deferred inflows of resources decreased $106.3 million from relative to the cash receipts, cash disbursements, and net the recognition of differences between actual and expected changes in cash resulting from operating activities, noncapital pension plan experience, including investment performance, financing activities, capital and related financing activities, related to the pension plan and other postretirement benefits and investing activities. It also provides answers to such in accordance with GASB No. 68 and Statement No. 75. questions as where cash comes from, what cash was used for, and what the change in the cash balance was during the Net position increased $95.1 million year over year as reporting period. described in the statement of revenues, expenses, and changes in net position. Notes to the Financial Statements Notes to the pro forma financial statements are designed to Statement of Revenues, Expenses, and Changes give the reader additional information concerning UNC Health in Net Position and further supports the statements noted above. These UNC Health generated operating income of just $5.7 million disclosures provide information to better understand details, (0.1% operating margin) in fiscal year 2020 which resulted risk, and uncertainty associated with the amounts reported largely from a sharp decline in volume while expenses and are considered an integral part of the financial statements. increased in response to the COVID-19 pandemic. Ordinarily, UNC Health’s ongoing goal is to average an annual operating Comparison of Two-Year Data for 2020 to 2019 margin of nearly 4 percent in order to remain financially strong, Data for 2020 and 2019 are presented in this report and to reinvest in new facilities, and to retain the most highly discussed in the following sections. Discussion in the following trained workforce. Breaking even this fiscal year 2020 was sections is pertinent to fiscal year 2020 results and changes considered a significant achievement considering the impact of relative to ending balances in fiscal year 2019. the pandemic and was possible because of the collaborative, system wide approach to managing expenses. Financial Analysis Statement of Net Position Nonoperating gains of $128 million resulted from CARES Act Total assets increased by $915 million or 18.9 percent during Stimulus funds received to address the pandemic and positive fiscal year 2020. Current assets increased $574.6 million due in investment returns. large part to the increase in cash that resulted from the receipt of the CARES Act stimulus payments, Medicare Advance Transfers are negative compared to fiscal year 2019 but are Payments, bond issuances and to a lesser extent from the more reflective of a typical year. The positive transfer amount increase in inventories and prepaids that also resulted from seen in 2019 resulted from the sale of High Point. COVID-19 purchases. Patient Accounts Receivable decreased, as expected, due to reduced volumes. Noncurrent assets increased $340.9 million as a result of property plant and equipment acquisitions and investment returns.

2020 Annual Report 35 Discussion of Capital Asset and Long-Term Debt Activity Investment in facility improvements, routine capital equipment Capital Assets and technology were also made throughout UNC Health Capital investment remained strong in fiscal year 2020 with during the fiscal year. some of the most notable transactions being the ongoing expenditures related to the construction of a new surgical Long-Term Debt Activity tower at UNC Hospitals which began in the Fall of 2018 UNC Health has no borrowing authority. UNC Hospitals, and is expected to be completed in early 2024. The surgical REX, and Chatham have issued revenue bonds in the past tower will modernize a significant number of operating rooms and may issue additional debt in the future should the need located on UNC Hospitals’ campus. A new UNC Health medical arise to finance construction projects and if the market rates office building is being constructed at Eastowne located in are favorable. Chapel Hill and will house 150,000 square feet office space, including multi-specialty, imaging, infusion, pharmacy, On December 1, 2019, UNC Hospitals issued Series 2019 lab, medical offices, and a parking structure. This project Revenue Bonds with a face amount of $150 million with will establish a flagship ambulatory medical campus with premium payments of $49.9 million. These bonds will be used increased collaboration among clinical services and provide to finance the final phase of construction of the new surgical convenient, patient centered care. The medical office building pavilion to replace operating suites and support facilities on the project is expected to be completed within the first quarter Chapel Hill, NC campus. of 2021. Work is also underway to renovate the ground floor to accommodate new patient behavioral health and medical On February 1, 2020, REX issued Series 2020A Health Care rooms. Also noteworthy, a new generator plant project will Facilities Revenue Bonds through the North Carolina Medical provide a facility to house the standard and emergency power Care Commission to finance (a) the construction of the new equipment to UNC Hospitals. hospital and associated support facilities in Holly Springs, North Carolina, (b) the new outpatient cancer center located on the REX began construction on a 50-bed community hospital at main campus in Raleigh, North Carolina and (c) the costs of its campus in Holly Springs. The hospital will serve the medical issuance and interest accruing during the construction period. needs of the fast growing region of southwest Wake County These Bonds had a face amount of $199.7 million with premium and beyond with emergency care, labor and delivery, surgery payments of $27.8 million. and more. The facility is expected to open in 2021. REX also began construction on a new cancer center on Blue Ridge Road S&P Global Ratings (S&P) and Moody’s Investors Service in Raleigh, directly across the street from the main hospital (Moody’s) rate UNC Hospitals’ bonds as AA and Aa3, campus. The four story, 145,000 square foot facility will provide respectively. S&P and Moody’s, rate REX’s bonds as AA- and A1, the latest cancer treatment and services for an expanding respectively. All of these ratings have stable outlooks. population of patients from across Eastern North Carolina. Discussion of Conditions that May Have a Significant Effect on Caldwell began construction on a new 27 inpatient bed Net Position or Revenues, Expenses and Changes psychiatric facility and clinic in the spring of 2019, named the in Net Position Jonas Hill Hospital and Clinic. The construction of this facility UNC Health derives the vast majority of its operating revenues was substantially completed during the fiscal year and opened from patient care services. Strong operating performance in in July 2020. This facility serves people in the community living the past and earning a positive operating margin during fiscal with mental health conditions and their families by providing year 2020 has enabled UNC Health to make investments hope and healing through a holistic program of evidence- in support of the clinical, education, and research programs based psychiatric treatment, team based medical care, and of UNCFP, UNC SOM, and other network entities. These education. Working collaboratively with local mental health investments have yielded positive results as measured by partners, their goal is to make mental healthcare as routine, growth in needed services, expansion of the medical school accessible, and understandable as physical healthcare. class and increased research funding.

Other notable investments include the construction of a new UNC Health has adapted to the challenges presented by Maternity Care Center that opened in September and the the COVID-19 pandemic and continues to evolve in order to purchase of a new CT scanner at Chatham. remain a leader in providing the continuum of services required in health care. Providing these services relies on a variety of options for program and service development as well as significant capital investment. UNC Health utilizes acquisitions, partnerships, network development, contracts, and other means to expand its provision of care as opportunities are

36 The University of North Carolina Health System developed. Guided by a philosophy of collaboration and The COVID-19 pandemic significantly impacted UNC Health partnership with other providers, UNC Health continues to during the 2020 fiscal year resulting in lower than expected evaluate options of strategic importance to its development. patient volumes and higher overall expenses. The full impact Acquisitions and affiliations include hospitals, home health, of the COVID-19 outbreak continues to evolve and as we look hospice, physician practices and infusion services. We are forward, we are uncertain as to the full magnitude that the making significant infrastructure investments to modernize pandemic will have on our financial condition, liquidity, and and expand our patient care as noted in the Capital Assets future results of operations for fiscal year 2021. section. We are also working to optimize square footage utilization of existing space. As an example, UNC Hospitals, in a joint effort with UNCFP, began a multi-year effort to optimize square footage utilization on the Medical Center campus and off-campus locations. These particular enhancements will provide patients access to services in the most appropriate care setting and allow UNC Health to more effectively care for a growing number of behavioral health patients.

Third-party payors, including governmental sponsored programs, continue to migrate from fee-for-service to fee-for-value. Significant investments have been made in population health care to prepare for a value-based reimbursement regulatory environment. UNC Health Alliance, LLC, a subsidiary of UNCPN, is a clinically integrated network designed to enable private practice community physicians to enter into value contracts jointly with UNC Health and third party payors, with the goal of increasing quality and better managing the cost of care. UNC Senior Alliance, LLC, is also a subsidiary of UNCPN and has entered into an agreement with the Centers for Medicare and Medicaid Services (CMS’s) to participate in the Next Generation Accountable Care Organization (ACO) for Medicare recipients effective January 1, 2017. The Next Generation ACO Model is a value-based payment model that encourages providers to assume greater accountability in coordinating the health care of Medicare fee-for-service beneficiaries. Learning from these programs will allow UNC Health to more rapidly scale and ramp-up our initiatives when appropriate.

Continued reductions to payment levels for Medicaid patients, added legislative burdens, market consolidation, and cuts to the UNC School of Medicine place added pressures on the organization.

Management is committed to proper expense management while maintaining high quality patient care, innovation, and very satisfied patients. Successfully managing in the future requires tighter integration of administrative functions across the entities of UNC Health, caring for patients in lower cost delivery settings, and developing sufficient scale to spread the cost of major investments across a broad base. UNC Health continues to implement these changes through a health system-wide planning and implementation process.

2020 Annual Report 37 The University of North Carolina Health Care System Pro Forma Statement of Net Position June 30, 2020 and June 30, 2019

restated 2020 2019 Current Assets Cash and Investments $1,462,113,000 $854,915,000 Patient Accounts Receivable Net 394,354,000 438,607,000 Estimated Third Party Settlements 43,632,000 47,608,000 Other Assets Whose Use is Limited or Restricted 129,030,000 187,700,000 Inventories 132,942,000 79,747,000 Prepaid Expenses and Other Current Assets 70,087,000 48,998,000 Total Current Assets 2,232,158,000 1,657,575,000

Noncurrent Assets Investments and Assets Whose Use is Limited or Restricted 1,057,668,000 1,005,171,000 Other Noncurrent Assets 724,986,000 640,634,000 Property Plant and Equipment, Net 1,755,934,000 1,551,896,000 Total Noncurrent Assets 3,538,588,000 3,197,701,000 Total Assets 5,770,746,000 4,855,276,000

Deferred Outflows of Resources 435,956,000 294,978,000 Total Assets and Deferred Outflows of Resources $6,206,702,000 $5,150,254,000

Current Liabilities Accounts and Other Payables $266,201,000 $307,939,000 Accrued Salaries and Benefits 262,576,000 241,330,000 Current Portion of Long Term Debt 43,669,000 32,781,000 Estimated Third Party Settlements - Current 94,463,000 113,301,000 Other Current Liabilities 503,260,000 101,498,000 Total Current Liabilities 1,170,169,000 796,849,000

Noncurrent Liabilities Noncurrent Portion of Long Term Debt 2,394,914,000 2,122,578,000 Estimated Third Party Settlements - Noncurrent 59,553,000 72,206,000 Other Noncurrent Liabilities 534,116,000 99,464,000 Total Noncurrent Liabilities 2,988,583,000 2,294,248,000 Total Liabilities 4,158,752,000 3,091,097,000

Deferred Inflows of Resources 487,923,000 594,245,000 Net Position 1,560,027,000 1,464,912,000 Total Liabilities, Deferred Inflows of Resources and Net Position $6,206,702,000 $5,150,254,000

38 The University of North Carolina Health System The University of North Carolina Health Care System Pro Forma Statement of Revenues, Expenses, and Changes in Net Position For the Years Ended June 30, 2020 and June 30, 2019

restated 2020 2019 Operating Revenues Net patient service revenue $4,027,810,000 $3,992,753,000 Other operating revenues 355,893,000 322,497,000 Total Operating Revenues 4,383,703,000 4,315,250,000

Operating Expenses Salaries and benefits 2,530,604,000 2,330,341,000 Medical and surgical supplies 932,392,000 870,112,000 Contracted services 493,272,000 468,643,000 Other supplies and services 242,509,000 208,656,000 Depreciation and amortization 150,618,000 145,738,000 Interest expense 28,598,000 21,147,000 Total Operating Expenses 4,377,993,000 4,044,637,000

Operating Income 5,710,000 270,613,000

Nonoperating Income (Loss) Investment income, net 54,727,000 114,538,000 CARES Act Stimulus 74,070,000 - Other, net (748,000) (15,260,000) Nonoperating Income, Net 128,049,000 99,278,000

Income Before Health Care System Transfers 133,759,000 369,891,000

Health Care System Transfers (Out) In (38,644,000) 174,361,000

Change in Net Position $95,115,000 $544,252,000

2020 Annual Report 39 The University of North Carolina Health Care System Pro Forma Statement of Cash Flows For the Years Ended June 30, 2020 and June 30, 2019

restated 2020 2019 Operating Activities Receipts from patients and third-party payors $4,518,306,000 $4,023,311,000 Payments to and on behalf of employees (2,823,477,000) (2,230,829,000) Payments to suppliers (1,792,054,000) (1,382,689,000) Other receipts 331,058,000 224,789,000 Net Cash Used by Operating Activities 233,833,000 634,582,000

Noncapital Financing Activities Health Care System transfers (38,644,000) (192,120,000) CARES Act stimulus 71,224,000 Other payments (3,645,000) Net Cash Provided by Noncapital Financing Activities 28,935,000 (192,120,000)

Capital and Related Financing Activities Proceeds from issuance of long-term debt, net of premium 427,467,000 Interest paid on capital debt (24,835,000) (21,147,000) Principal paid on revenue bond maturity (1,746,000) (18,940,000) Principal paid on capital lease and notes payable 367,441,000 (26,676,000) Acquisition and construction of capital assets (303,869,000) (215,640,000) Transfer to construction fund (165,213,000) - Net Cash Used by Capital and Related Financing Activities 299,245,000 (282,403,000)

Investing Activities Interest income 17,411,000 25,364,000 Investment income, net 4,879,000 (9,117,000) Net Affiliated Activity 22,710,000 148,383,000 Other receipts 185,000 Net Cash Provided by Investing Activities 45,185,000 164,630,000

Net Increase in Cash and Cash Equivalents 607,198,000 324,689,000 Cash and Cash Equivalents - Beginning of Year 854,915,000 530,226,000 Cash and Cash Equivalents - End of Year $1,462,113,000 $854,915,000

40 The University of North Carolina Health System The University of North Carolina Health Care System // UNC Faculty Physicians Statement of Net Position June 30, 2020 and June 30, 2019

restated 2020 2019 Current Assets Cash and Investments $169,856,000 $177,512,000 Patient Accounts Receivable Net 29,793,000 39,753,000 Estimated Third Party Settlements 33,441,000 37,825,000 Other Receivables 94,861,000 77,801,000 Prepaid Expenses and Other Current Assets 19,854,000 19,366,000 Total Current Assets 347,805,000 352,257,000

Noncurrent Assets Investments and Assets Whose Use is Limited or Restricted 6,551,000 10,702,000 Total Noncurrent Assets 6,551,000 10,702,000 Total Assets $354,356,000 $362,959,000

Current Liabilities Accounts and Other Payables $53,199,000 $55,358,000 Accrued Salaries and Benefits 34,178,000 40,605,000 Estimated Third Party Settlements - Current 508,000 502,000 Total Current Liabilities 87,885,000 96,465,000

Noncurrent Liabilities Other Noncurrent Liabilities 55,453,000 51,095,000 Total Noncurrent Liabilities 55,453,000 51,095,000 Total Liabilities 143,338,000 147,560,000

Net Position 211,018,000 215,399,000 Total Liabilities and Net Position $354,356,000 $362,959,000

2020 Annual Report 41 The University of North Carolina Health Care System // UNC Faculty Physicians Statement of Revenues, Expenses, and Changes in Net Position For the Years Ended June 30, 2020 and June 30, 2019

restated 2020 2019 Operating Revenues Net patient service revenue $473,598,000 $484,831,000 Other operating revenues 133,834,000 127,969,000 Total Operating Revenues 607,432,000 612,800,000

Operating Expenses Salaries and benefits 522,474,000 500,415,000 Medical and surgical supplies 33,881,000 31,986,000 Contracted services 78,694,000 75,954,000 Other supplies and services 28,365,000 18,632,000 Total Operating Expenses 663,414,000 626,987,000 Operating (Loss) (55,982,000) (14,187,000)

Nonoperating Income (Loss) Investment income, net 1,215,000 3,769,000 Other, net (8,283,000) (11,814,000) Nonoperating Income, Net (7,068,000) (8,045,000)

Loss Before Health Care System Transfers (63,050,000) (22,232,000) Health Care System Transfers In 58,669,000 56,681,000

Change in Net Position $(4,381,000) $34,449,000

42 The University of North Carolina Health System The University of North Carolina Health Care System // UNC Faculty Physicians Statement of Cash Flows For the Years Ended June 30, 2020 and June 30, 2019

restated 2020 2019 Operating Activities Receipts from patients and third-party payors $487,948,000 $549,257,000 Payments to and on behalf of employees (524,543,000) (477,348,000) Payments to suppliers (143,587,000) (128,555,000) Other receipts 116,774,000 76,897,000 Net Cash (Used) Provided by Operating Activities (63,408,000) 20,251,000

Noncapital Financing Activities Health Care System transfers 58,669,000 52,833,000 Other payments (8,283,000) - Net Cash Provided by Noncapital Financing Activities 50,386,000 52,833,000

Investing Activities Investment income, net 5,366,000 3,744,000 Net Cash Provided by Investing Activities 5,366,000 3,744,000

Net Increase in Cash and Cash Equivalents (7,656,000) 76,828,000 Cash and Cash Equivalents - Beginning of Year 177,512,000 100,684,000 Cash and Cash Equivalents - End of Year $169,856,000 $177,512,000

2020 Annual Report 43 The University of North Carolina Health Care System Pro Forma Selected Statistics For the Years Ended June 30, 2020 and June 30, 2019

restated 2020 2019 Patient Service Statistics Discharges 81,324 86,883 Patient Days 554,420 574,489 Observation Day Equivalents 30,045 31,035 Deliveries 9,383 9,586 Adjusted Discharges 185,036 191,133 Adjusted Patient Days 1,023,445 1,036,861 CMI Adjusted Discharges 330,302 338,120 CMI Adjusted Patient Days 1,949,002 1,932,493 ED Visits 210,301 229,709 wRVUs 8,340,649 8,505,689 Surgical Cases 57,950 63,693 Cath Lab 15,774 16,384 EP Lab 17,840 16,305 Structural Heart 584 540 Chemotherapy 92,035 88,672 Radiation Therapy 66,403 66,494 Imaging 650,188 744,601 Endoscopy 26,910 29,146 Transplants 380 400

44 The University of North Carolina Health System Notes to the Pro Forma Financial Statements

Note 1 // Significant Accounting Policies The University of North Carolina Faculty Physicians — Formerly known as UNC Physicians & Associates, University of North Carolina Faculty A. Organization — The University of North Carolina Health Care Physicians (UNCFP) is the clinical service component of the UNC School of System (UNC Health) was established November 1, 1998, by N.C.G.S. 116-37. Medicine. At the heart of UNCFP are the approximately 1,224 physicians It is governed and administered as an affiliated enterprise of The University who provide a full range of specialty and primary care services for patients of North Carolina system with its stated purpose to provide patient care, of UNC Health. While the great majority of services are rendered at the facilitate the education of physicians and other health care providers, inpatient units of UNC Hospitals and the outpatient clinics on the UNC conduct research collaboratively with the health sciences schools of the campus, there is a growing range of services provided at clinics in the University of North Carolina at Chapel Hill (UNC-CH) and render other community. There are 22 clinical departments and -four administrative services designed to promote the health and well-being of the citizens of units that collectively form UNCFP. North Carolina. Clinical Departments: The original legislation included the University of North Carolina Hospitals Allied Health Sciences Physical Medicine & Rehabilitation at Chapel Hill (UNC Hospitals) and the clinical patient care programs Anesthesiology Psychiatry established or maintained by the School of Medicine of the University of Dermatology Radiation Oncology North Carolina at Chapel Hill (UNC SOM) including University of North Emergency Medicine Radiology Carolina Physicians and Associates (UNC P&A). As of January 1, 2013, Family Medicine Surgery UNC Physicians & Associates changed its name to UNC Faculty Physicians Medicine Urology (UNCFP) to better identify the relationship with the UNC School of Neurology Medicine. UNC Health is under the governance of the Board of Directors of Neurosurgery Center for Development and UNC Health. REX Healthcare, Inc. (REX), Chatham Hospital, Inc. (Chatham), Obstetrics & Gynecology Learning Caldwell Memorial Hospital (Caldwell), UNC Rockingham Health Care Ophthalmology Treatment and Education of (Rockingham), UNC Physicians Network (UNCPN), UNC Physicians Network Orthopaedics Autistic and Orthopedics and Group Practice (UNCPNGP) have been added to the organization since Otolaryngology Related Communication its inception. Pathology & Laboratory Medicine Handicapped Children Pediatrics The University of North Carolina Hospitals — The University of North Carolina Hospitals at Chapel Hill (UNC Hospitals) is the only state-owned Administrative Units: teaching hospital in North Carolina. With a licensed base of 951 beds, Administrative Office (Billing & Collections, Managed Care) this facility serves as an acute care teaching hospital for The University Ambulatory Administration of North Carolina at Chapel Hill. UNC Hospitals consists of North Carolina Funds Flow Admin Memorial Hospital, North Carolina Children’s Hospital, North Carolina Shared Services (Home Office) Neurosciences Hospital, North Carolina Women’s Hospital, North Carolina Cancer Hospital, UNC Hospitals Hillsborough campus and UNC Hospitals While UNCFP is affiliated with UNC Health, the net assets of UNCFP are WakeBrook campus. As a state agency, UNC Hospitals is required to held in a UNC-CH trust fund. The operating income and expenses for conform to financial requirements established by various statutory and UNCFP are managed via the UNC-CH’s accounting infrastructure, and its constitutional provisions. operational results are included in the annual audit for the UNC-CH.

Blended Component Units — Although legally separate, Health System Liability Insurance Trust Fund (LITF) – LITF is an unincorporated entity Properties, LLC (the LLC), a component unit of UNC Hospitals, is reported created by North Carolina General Statutes Chapter 116, Article 26 and as if it were part of the Hospitals. the University of North Carolina Board of Governors Resolution of June 9, 1978. LITF is a self-insurance program established to provide professional The LLC was established to purchase, develop and/or lease real property. medical malpractice liability coverage for UNC Hospitals and UNCFP, Because UNC Health is the sole member manager of the LLC, the elected (collectively, the program participants). LITF services professional liability directors of the LLC are the same members of the UNC Health Board of claims and defense costs for each case and manages separate accounts Directors that directs UNC Hospitals’ operations, and as the LLC’s primary for each participant from which losses are paid. LITF provides coverage for purpose is to benefit UNC Hospitals, its financial statements have been program participants and individual health care practitioners working as blended with those of UNC Hospitals. employees, agents, or officers of the program participants. LITF is exempt from federal and state income taxes and is not subject to regulation by the North Carolina Department of Insurance.

2020 Annual Report 45 REX Healthcare, Inc. (REX) – REX is a North Carolina not-for-profit and Alliance Behavioral Health, UNC Health began with the operation of corporation organized to provide support for a wide range of services WakeBrook Crisis and Assessment services on February 1, 2013. WakeBrook offered through UNC Health and its affiliates to the residents of the Triangle provides behavioral health and medical services in the areas of Crisis and area of North Carolina. Assessment, Residential Facility Based Crisis, Detoxification Beds, Onsite Medical Care, Primary Care Clinic, Inpatient Care, and Assertive Community UNC Health is the sole member of REX. REX is the sole member and parent Treatment Team. corporation of Rex Hospital, Inc. (Rex Hospital). Both REX and Rex Hospital are separate, non-profit 501(c)(3) corporations, organized under the laws B. Basis of Presentation – The accompanying financial statements of North Carolina and each is governed by a separate board of directors. present all activities under the direction of the UNC Health Board of As of May 30, 2019 REX no longer has a 13-member Board of Trustees. As Directors. The financial statements for UNC Health are presented as a pro of that date, REX has a Board of Directors consisting of three members in forma compilation of the various statements generated by its separate order to better serve the interests of REX and provide greater flexibility entities. UNC Hospitals, REX, Chatham, UNCPN, Rockingham and Caldwell and convenience in terms of administration. UNC Health appoints all three issue their own audited financial statements while UNCFP is included as a seats on REX’s Board of Directors. Rex Hospital is governed by a Board of part of the audited statements for the UNC-CH. Directors consisting of not less than nine or more than fifteen members. The president of Rex Hospital serves as an ex-officio voting member In compiling the financial statements for UNC Health, significant of the Rex Hospital Board of Directors. All of the other members of the intercompany transactions and balances between the related parties have Rex Hospital Board of Directors are elected by UNC Health. UNC Health been eliminated. In addition, while the general statutes refer to only the reviews and approves REX’s, including Rex Hospital’s, annual operating clinical operations of the School of Medicine, which are reported through and capital budgets. UNCFP, this annual report includes the assets, liabilities and net assets of UNCFP, which are included in the audited financial statements for Health care operations are managed by Rex Hospital. REX, the parent the UNC-CH. corporation, acts as a supporting organization for UNC Health and certain affiliates. REX may perform management and administrative functions and C. Basis of Accounting – The financial statements of the various overall planning and coordination, as well as provide shared services, for entities have been prepared using the accrual basis of accounting for UNC the benefit of UNC Health. REX is a component unit of UNC Health and Hospitals, UNCFP, REX, Chatham, UNCPN, UNCPN-GP, Rockingham, its financial data is incorporated into the comprehensive annual financial Caldwell and LITF. Under the accrual basis, revenues are recognized when report of UNC Health. earned, and expenses are recorded when an obligation has been incurred. When preparing the financial statements, management makes estimates Chatham Hospital, Inc. (Chatham) – Chatham is a private, nonprofit and assumptions that affect the reported amounts of assets and liabilities, corporation that owns and operates a critical access facility located in disclosure of contingent assets and liabilities at the date of the financial Siler City, North Carolina. UNC Health is the sole member of Chatham. statements, and the reported amounts of revenues and expenses during The Chatham Board consists of 7 to 15 members including the Chatham the reporting period. Actual results could differ from the estimates. President and Chief of Staff serving as ex-officio trustees while residents of Chatham’s service area are required to hold one third of the trustee D. Current and Noncurrent Designation – Assets are positions. UNC Health’s Board reviews and approves all board nominations classified as current when they are expected to be collected within the next as well as Chatham’s annual operating and capital budgets. 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 UNC Physicians Network, LLC (UNCPN) – UNCPN is a North Carolina the next 12 months. limited liability corporation organized to meet the needs of community practice physicians and offer a partnership for both physicians and UNC E. Operating and Nonoperating Activities – Revenues and Health to face the challenging health care environment. Acting through expenses are classified as operating or nonoperating in the accompanying its network of 111 practices, UNCPN provides health care to patients from Statements of Revenues, Expenses and Changes in Net Position. Operating several locations throughout the Triangle area (Raleigh, Durham and Chapel revenues and expenses generally result from providing services and Hill) and surrounding counties in North Carolina. producing and delivering goods in connection with the principal ongoing operations. Operating revenues include activities that have characteristics UNC Physicians Network Group Practices, LLC (UNCPN-GP) – UNCPN-GP of exchange transactions, such as charges for inpatient and outpatient is also a North Carolina limited liability corporation organized to meet the services as well as for external customers who purchase medical services or needs of community practice physicians and offer a partnership for both supplies. Operating expenses are all expense transactions incurred other physicians and UNC Health to face the challenging health care environment. than those related to capital and noncapital financing or investing activities. UNCPN-GP is wholly owned by UNC Health, but is a private employer. Nonoperating revenues include activities that have the characteristics of Caldwell Memorial Hospital (Caldwell) – Caldwell is a private, not-for-profit nonexchange transactions. Revenues from nonexchange transactions “and community hospital in Lenoir, North Carolina and is an acute care hospital donations” that represent subsidies or gifts, as well as investment income with a provider network of approximately 60 primary and specialty care “and gain (loss) on disposal of capital assets,” are considered nonoperating physicians and advanced practice professionals. UNC Health became the since these are investing, capital or noncapital financing activities. sole corporate member of Caldwell on May 1, 2013. F. Cash and Cash Equivalents – This classification includes all UNC Rockingham Health Care (Rockingham) – Rockingham is a not-for- highly liquid investments with an original maturity of three months or profit acute care hospital located in Eden, North Carolina, formally known less when purchased including deposits held by the State Treasurer in as Morehead Memorial Hospital. It was acquired via an asset purchase the short-term investment fund (STIF). The STIF account has the general agreement and became a part of the UNC Health as of December 2017. characteristics of a demand deposit account in that participants may deposit and withdraw cash at any time without prior notice or penalty. WakeBrook Mental Health Campus (WakeBrook) – UNC Health agreed to provide, enhance and expand all services offered in the past at Wake UNC-CH manages the funds of UNCFP as authorized by the University County’s WakeBrook facility. Pursuant to agreements with Wake County of North Carolina Board of Governors pursuant to N.C.G.S. 116-36.2 and

46 The University of North Carolina Health System Section 600.2.4 of the Policy Manual of the University of North Carolina. Depreciation and amortization are generally computed using the straight- Special funds and funds received for services rendered by health care line method over the estimated useful lives of the assets which range from professionals pursuant to N.C.G.S 116-36.1(h) are invested in the same 3 to 20 years for software and movable equipment, 10 to 40 years for manner as the State Treasurer is required to invest. Investments of various fixed equipment and buildings and 5 to 25 years for general infrastructure funds may be pooled unless prohibited by statute or by terms of the gift and building improvements. Assets under capital leases and leasehold or contract. UNC-CH utilizes investment pools to manage investments improvements are depreciated over the estimated useful life or the related and distribute investment income. Shares in the temporary pool trade at a lease term, whichever is shorter; generally periods ranging from 5 to 7 years. fixed value of $1 per share. Depreciation of assets under capital leases and leasehold improvements is included in depreciation and amortization expense in the accompanying G. Investments – This classification includes marketable debt and statements of revenues, expenses and changes in net position. equity securities with readily determinable fair values, including assets whose use is limited and is measured at fair value. Investment income or M. Other Noncurrent Assets – Other noncurrent assets include loss (including realized and unrealized gains and losses on investments, amounts for long-term payment arrangements for patient accounts interest and dividends) is included in nonoperating income (loss). The receivable, bond issuance costs-net of amortization and investments calculation of realized gains and losses is independent of a calculation of in affiliates. the net change in the fair value of investments. N. Current And Noncurrent Portions Of Long Term H. Patient Accounts Receivable, Net – Net patient accounts Debt – These categories represent debt issued for the construction receivable consist of unbilled (in-house patients, inpatients discharged of buildings and the acquisition of equipment. The current amount but not final billed and outpatients not final billed) and billed amounts. is the portion of debt due within one year, and the balance is reflected Payment of these charges comes primarily from managed care payors, as noncurrent. Medicare, Medicaid and, to a lesser extent, the patient. The amounts recorded in the financial statements are net of charity care, contractual The debt instruments have fixed, variable or synthetically fixed rates with allowances, avoidable and other losses, and allowances for bad debt to final maturity in fiscal year 2050. The interest rates in effect on June 30, determine the net realizable value of accounts receivable. 2020 ranged from 0.43% to 6.33%. When applicable, debt is reported net of unamortized discount, premium and deferred loss on refundings. Reserves for these deductions are recorded based on the historical Amortization of these amounts is done using either the effective interest collection percentage realized for each payor and projections for future method or the straight-line method. collection rates. Flexible payment arrangements have been established to optimize collection of past-due accounts, and any amounts payable O. Other Current Liabilities – Other current liabilities represent beyond one year are classified as noncurrent assets. funds held for others and amounts due to patients or third parties for credit balances. I. Inventories – Inventories consist of medical and surgical supplies, pharmaceuticals, prosthetics and other supplies that are used to provide P. Compensated Absences – Compensated absences represent patient care or used by service departments. Inventories are stated at the the liability for employees with accumulated leave balances earned lower of cost using the first-in, first-out method or market. through various leave programs. These amounts would be payable if an employee terminated employment. Employees earn leave at varying J. Other Assets and Receivables – Other assets and rates depending upon their years of service and the leave plan in which receivables relate to items such as sales tax refunds due from the North they participate. Carolina Department of Revenue, amounts due from State agencies, and billings to outside companies for ancillary testing. Q. Net Position – Net Position represents the difference between assets and liabilities. Due to the complexities of consolidating these K. Assets Whose Use Is Limited or Restricted – Current entities, only a combined number is shown for Net Position. assets whose use is limited or restricted include the debt service funds established with the trustee in accordance with the bond indenture Normally, under generally accepted accounting principles, the Net Position agreements and donor restrictions. The debt service funds are used to pay category would be further categorized as the amounts (1) Net Investment bond interest and principal as it becomes due. in Capital Assets, (2) Restricted and (3) Unrestricted.

Noncurrent assets whose use is limited or restricted include the bond R. Net Patient Service Revenue – Patient service revenue is proceeds for construction projects, the funds required by the bond recorded at established rates when services are provided with contractual indenture agreements, funds in the maintenance reserve fund that will be adjustments, estimated bad debt expenses and services qualifying as used to acquire or construct future property, plant or equipment and the charity care deducted to arrive at net patient service revenue. Contractual money on deposit with LITF. adjustments arise under reimbursement agreements with Medicare, Medicaid, certain insurance carriers, health maintenance organizations L. Property Plant and Equipment – Property, plant and and preferred provider organizations, which provide for payments that equipment are recorded at cost or acquisition value at date of donation are generally less than established billing rates. The difference between in the case of gifts. The value of assets constructed includes all material established rates and the estimated amount collectible is recognized as direct and indirect construction costs. revenue deductions on an accrual basis.

Expenditures for repairs and maintenance are charged to expense as Charity care represents health care services that were provided free of incurred. The costs for major renewals and betterments are capitalized charge or at amounts that are less than the established rates to individuals and depreciated over the estimated useful lives of the assets. Upon who meet the criteria of UNC Health Care’s charity care and uninsured disposition, the asset and related accumulated depreciation accounts policy. For UNC Hospitals and UNCFP, uninsured patients receive a 40 are relieved and any gain or loss is credited or charged to nonoperating percent discount for medically necessary treatment. Charity care provided revenues and expenses. is not considered to be revenue since no effort is made to collect accounts that fall under this policy.

2020 Annual Report 47 Medicare reimburses for inpatient acute care services under the provisions X. Deferred Outflows / Inflows of Resources – In addition of the Prospective Payment System (PPS). Under PPS, payment is made to assets, the statement of net position reports a separate section for at predetermined rates for treating various diagnoses and performing deferred outflows of resources. This separate financial statement element, procedures that have been grouped into defined diagnostic-related groups deferred outflows of resources, represents a consumption of net position (DRGs) applicable to each patient discharge rather than on the basis of that applies to a future period(s) and so will not be recognized as an outflow the Hospitals’ allowable charges. Psychiatric and Rehabilitation inpatient of resources (expense) until then. services are reimbursed under separate programs. In addition to liabilities, the statement of net position reports a separate A prospective payment system for outpatient services was implemented section for deferred inflows of resources. This separate financial statement Aug. 1, 2000 and is based on ambulatory payment classifications. It applies element, deferred inflows of resources, represents an acquisition of net to most hospital outpatient services other than ambulance, rehabilitation position that applies to a future period(s) and so will not be recognized as services, clinical diagnostic laboratory services, dialysis for end-stage renal revenue until then. disease, nonimplantable durable medical equipment, prosthetic devices and orthotics. Note 2 // Estimated Third-Party Settlements Medicaid reimburses inpatient services on an interim basis under a prospective payment system. Medicaid uses the Medicare DRG system Estimated third-party amounts represent settlements with Medicare, with some modifications. Medicaid reimburses outpatient services on an Tricare/Champus and Medicaid programs that may result in a receivable or a interim basis at an agreed-upon percent of charges approximating 70% payable. Reimbursement for cost-based items is paid at a tentative interim of cost, but is settled under an Upper Payment Limit program based on rate with final settlement determined after submission of annual cost 100% percent of documented cost, less intergovernmental transfers, for all reports and audits thereof by fiscal intermediaries. Final settlements under services except hearing aids, durable medical equipment (DME), outpatient the Medicare and Medicaid programs are based on regulations established pharmacy, laboratory, ambulance services and home health. by the respective programs and as interpreted by fiscal intermediaries. The classification of patients under the Medicare and Medicaid programs as well Hospital payments for Medicare and Medicaid services are made based as the appropriateness of their admission is subject to review. Several years on a tentative reimbursement rate with final settlement determined after of cost reports are currently under review. Beginning in 2012, UNC Health’s submission of the appropriate cost reports by the entities within UNC physician and hospital entities receive supplemental reimbursement for Health. Medicaid reimburses physician services using a fee schedule that Medicaid via the Upper Payment Limit methodology. approximates ninety-five percent (95 percent) of allowable Medicare rates. Some UNC Health physicians receive supplemental payments under the Tricare/Champus is a federal insurance program for eligible active duty Upper Payment Limit Program in addition to their Medicaid reimbursement and retired military personnel and their dependents. Tricare/Champus as a replacement to filing a Medicaid Cost report for periods after June 30, makes payments on an interim basis. Upon completion of the Medicare 2010. Cost Report, Tricare will reimburse certain portions of direct medical and paramedical education and capital costs from the Medicare Cost Report. S. Medical and Surgical Supplies – Medical and surgical supplies represent the items used to provide patient care. These include instruments, special medical devices and pharmaceuticals. Note 3 // Capital Assets

T. Medical Malpractice Costs – Medical malpractice costs A summary of capital assets as of June 30: represent the actuarially determined contributions required for self-insured funding or commercial premiums for third-party coverage. The coverage FY2020 FY2019 is intended to include both reported claims and claims that have been Land and Improvements $134,997,000 $135,222,000 incurred but not yet reported. Buildings and Improvements 1,665,921,000 1,578,102,000 U. Medical School Trust Fund – Medical School Trust Fund Equipment 1,197,793,000 1,154,511,000 (MSTF) expenses represent an assessment of 2.5 percent of net patient service revenue. The MSTF funds are at the Dean’s discretion for the Computer Software 255,583,000 241,757,000 support of projects such as program development and recruitment Goodwill 25,027,000 11,805,000 incentives for new department chairs. Construction in Progress 333,157,000 139,611,000 V. Donated Services – No amounts have been included for donated Gross PP&E $3,612,478,000 $3,261,008,000 services since no objective basis is available to measure the value of such Accumulated Depreciation (1,856,544,000) (1,709,112,000) services. However, a substantial number of volunteers donated significant amounts of their time to the operations of UNC Health. Net PP&E $1,755,934,000 $1,551,896,000

W. Concentrations of Credit Risk – UNC Health provides services to patients 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.

48 The University of North Carolina Health System Note 4 // Long-Term Debt

A summary of outstanding bond debt and related issuance costs as of June 30 was:

Total Total FY2020 FY2019 Rex Series 2010A Bonds $76,995,000 $83,205,000 Rex Series 2015A Bonds 50,000,000 50,000,000 Rex Series 2015B Bonds 100,000,000 100,000,000 Rex Series 2020A Bonds 199,725,000 0 UNCH Series 2001 Bonds 82,400,000 84,400,000 UNCH Series 2003 Bonds 64,220,000 70,125,000 UNCH Series 2009 Bonds 14,355,000 17,620,000 UNCH Series 2010 Bonds 30,595,000 32,845,000 UNCH Series 2016 A Bonds 74,945,000 74,945,000 UNCH Series 2016 B Bonds 25,000,000 25,000,000 UNCH Series 2019 Bonds 149,995,000 0 Face Value of Bonds Outstanding $868,230,00 $538,140,000

Deferred Costs - Premium on Issuance 78,633,019 2,556,509 Arbitrage Rebate Payable 0 0 Net Value Outstanding $946,863,019 $540,696,509

Current Portion of Bonds 20,485,00 19,630,000 Current Portion of Notes 8,219,120 5,923,765 Other Current Debt 431,870 415,618 Total Current Bonds and Notes $29,135,990 $25,969,383

Noncurrent Portion of Bonds 926,378,019 521,066,509 Noncurrent Portion of Notes 38,931,402 33,826,261 Other Noncurrent Debt 601,912 986,107 Total Noncurrent Bonds and Notes $965,911,334 $555,878,876

Deferred Costs - Loss on Refunding (5,713,129) (6,533,250) Hedging Liability 11,400,990 9,608,481 Deferred Bond Activity $5,687,860 $3,075,231

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

2020 Annual Report 49 REX sponsors a single-employer, defined-benefit retirement plan available Annual requirements to pay principal and interest (including swap to eligible employees. The benefit formula is based on the highest five arrangements) on the bonds outstanding at June 30, 2020 are: consecutive years of an employee’s compensation during the 10 plan years preceding retirement. There are no employee contributions to the plan. Fiscal Year Principal Interest Total During the year ended June 30, 2015, the plan was amended to freeze the 2021 $20,485,000 $28,032,195 $48,517,195 accrued benefits for all plan participants. 2022 22,430,000 27,494,864 49,924,864 Funding amounts for all of the plans are based upon actuarial calculations. 2023 23,435,000 27,009,663 50,444,663 2024 24,480,000 26,495,598 50,975,598 In addition to the employer plans, UNC Health employees may elect to participate in any number of deferred compensation and Supplemental 2025 25,610,000 25,961,644 51,571,644 Retirement Income Plans. These include 401(k) plans, 403(b) plans and 457 2026 - 2030 146,140,000 120,299,795 266,439,795 plans. All costs of administering and funding the plans are the responsibility of the participants. REX employees may contribute to a tax-deferred 2031 - 2035 96,700,000 103,225,714 199,925,714 annuity plan through which REX matches one half of each participant’s 2036 - 2040 92,415,000 89,737,643 182,152,643 voluntary contributions on a graduated scale based on length of service, 2041 - 2045 192,430,000 69,321,644 261,751,644 not to exceed 5 percent of the participant’s annual salary.

2046 - 2050 224,105,000 25,514,608 249,619,608 REX offers a full menu of employment benefits to its employees through Total $868,230,000 $543,093,369 $1,411,323,369 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 Annual requirements to pay principal and interest on the outstanding reports of the various entities. notes and capital leases payable at June 30, 2020 are: Note 6 // Other Employment Benefits Fiscal Year Principal Interest Total 2021 $8,650,990 $1,010,044 $9,661,033 UNC Hospitals and UNCFP participate in State-administered programs 2022 7,310,676 913,215 8,223,891 that provide health insurance and life insurance to current and eligible former employees. Funding for the health care benefit is financed on a pay- 2023 5,077,188 824,952 5,902,140 as-you-go basis based upon actuarial reports. UNC Hospitals and UNCFP 2024 17,178,442 383,877 17,562,318 assume no liability for retiree health care benefits provided by the programs other than their required contributions. Due to the implementation of GASB 2025 1,309,252 221,211 1,530,463 75, liability for retiree health care benefits provided by the program is now 2026 - 2030 7,113,925 522,582 7,636,507 carried by employers proportionately. 2031 - 2035 1,543,832 0 1,543,832 UNC Hospitals and UNCFP participate in the Disability Income Plan Total $48,184,304 $3,875,880 $52,060,184 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 UNCFP assume no Note 5 // Pension Plans liability for long-term disability benefits under the Plan other than their contribution. Due to the implementation of GASB 75, the liability for UNC Health has a variety of retirement plans available to its permanent full- long-term disability benefits provided by the program is now carried by time employees. The majority of employees of UNC Hospitals and UNCFP employers proportionately. are members of the Teachers’ and State Employees’ Retirement System (TSERS) as a condition of employment. TSERS is a cost-sharing, multiple- More information about these plans can be found in the individual audit employer, defined-benefit pension plan established by the State to provide reports of the various entities. pension benefits for employees of the State, its component units and local boards of education. The plan is administered by the North Carolina State Treasurer. Graduate medical residents, temporary employees and Note 7 // Risk Management permanent part-time employees with appointments of less than 30 hours per week are not covered by the plan. UNC Health is exposed to various risks of loss related to torts; theft of, damage to and the destruction of assets; errors and omissions; employee The Optional Retirement Program (the Program) is a defined contribution injuries and illnesses; natural disasters; medical malpractice; and various retirement plan that provides retirement benefits with options for employee plans for health, dental and accident. These exposures to loss are payments to beneficiaries in the event of the participant’s death. Eligible handled by a combination of methods, including participation in State- employees of UNC Hospitals and eligible faculty of UNC CH may join the administered insurance programs, purchase of commercial insurance and Program instead of TSERS. The Board of Governors of The University self-retention of certain risks. There have been no significant reductions in of North Carolina is responsible for the administration of the Program. insurance coverage from the previous year. Participants in the Program are immediately vested in the value of employee contributions. The value of employer contributions is vested after Liability Insurance Trust Fund – UNC Hospitals and UNCFP participate five years of participation in the Program. Participants become eligible to in the Liability Insurance Trust Fund (the Fund), a claims-servicing public receive distributions when they terminate employment or retire. 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.

50 The University of North Carolina Health System Although participant assessments are determined on an actuarial basis, sole member of Henderson County Urgent Care Centers, Inc. and Western ultimate liability for claims remains with the participants and, accordingly, Carolina Medical Associates, Inc. HCHC was created by Henderson County the insurance risks are not transferred to the Fund. to provide for the operation of a community hospital in Henderson County, North Carolina that is dedicated to serving the health care Additional disclosures relative to the funding status and obligations of needs of Henderson County citizenry. On June 22, 2011, HCHC signed a the Fund are set forth in the audited financial statements of the Liability management service agreement engaging the Hospitals to conduct and Insurance Trust Fund. Copies of this report may be obtained from The effectively manage the day-to-day operations of Margaret R. Pardee University of North Carolina Liability Insurance Trust Fund, 5221 Paramount Memorial Hospital and HCHC’s affiliated operations over a term of 10 years. Parkway, Suite 230, Morrisville, NC 27560. On September 4, 2013, this agreement was extended to a term of 25 years.

Johnston Health Services Corporation – Effective February 1, 2014, Note 8 // Escrow For Certified Public Expenditures Johnston Memorial Hospital Authority (JMHA) and UNC Health entered (CPES) into a Master Agreement to form Johnston Health Services Corporation (JHSC), a joint venture created to achieve the long-term vision of providing With the help of the North Carolina Hospital Association, UNC Health high-quality health care to the residents of Johnston County, North Carolina. entered into an agreement with other Public Hospitals in North Carolina Oversight and governance of the joint venture is controlled by a Board of to receive the benefit of additional Certified Public Expenditures (CPEs) Directors consisting of appointees from both JMHA and UNC Health. UNC (as defined by Federal Regulation 45 CFR 95.13 and 42 CFR 433.51) from Health manages the day-to-day operations of JHSC under the terms of a public hospitals (as defined in the North Carolina State Plan for Medicaid Management Services Agreement entered into and effective November 1, payments) which decided to assist UNC Health in meeting its obligations to 2013. UNC Health has a 35.25 percent membership interest in JHSC. fund the remaining Disproportionate Share Hospital (DSH) allotment. DSH payments are special payments for hospitals which serve a disproportionate Nash Health Care Systems – Nash Health Care Systems is a nonprofit share of low income patients. By making additional CPE’s available, the hospital authority composed of Nash General Hospital, Nash Day Hospital, public hospitals risk possible DSH overpayments that would require the Bryant T. Aldridge Rehabilitation Center, Community Hospital and repayment to state or federal agencies. In order to mitigate the public Coastal Plain Hospital. It serves Nash, Edgecombe, Halifax, Wilson and hospitals’ risk, UNC Health established a reserve fund to be held in escrow. Johnston counties, but draws patients from beyond these areas as well. The fund will reimburse participating public hospitals for any repayments Nash Health Care Systems signed a management service agreement that should result from this program. At June 30, 2020, $86,705,194.74 was engaging UNC Health to conduct and manage its operations effective held by the Escrow Agent, First Citizens Bank & Trust Company. April 1, 2014.

Wayne Health Corporation – Wayne Health Corporation is a private, not- Note 9 // Related Party Transactions for-profit health corporation located in Goldsboro, North Carolina that operates Wayne Memorial Hospital, Wayne Health Physicians, Wayne The Medical Foundation of North Carolina, Inc. – UNC Hospitals and MRI, Wayne Health Enterprises, American Management Associates, UNCFP are participants in The Medical Foundation of North Carolina, Inc., Wayne Health Properties, and Wayne Health Foundation. It serves a nonprofit foundation for the University of North Carolina at Chapel Hill patients primarily from Wayne and neighboring counties. Wayne Health and UNC Hospitals, which solicits gifts and grants for both entities. The Corporation signed a management services agreement with UNC Health Board of Directors of the Medical Foundation administers the funds of on January 1, 2016 to provide certain management services over an initial the Foundation. Transactions are recorded only by the Foundation. If the term of 10 years. Foundation were to purchase any equipment for UNC Hospitals, then the amount would be recorded at the time of receipt on UNC Hospitals’ Lenoir Memorial Hospital, Inc. – Lenoir Memorial Hospital, Inc. is a private, financial statements. not-for-profit hospital located in Kinston, North Carolina that operates Lenoir Memorial Hospital and several physician practices. It serves patients UNC Health Care System Enterprise Fund – The Board of Directors of primarily from Lenoir and neighboring counties. Lenoir Memorial Hospital, Inc. UNC Health authorized and approved the creation of the UNC Health signed a management services agreement with UNC Health on May 17, 2016 Care System Enterprise Fund (The System Fund) to support UNC Health’s to provide certain management services over an initial term of 10 years. mission and vision to be the nation’s leading public academic health care system. Pursuant to a memorandum of understanding effective July 1, The John REX Endowment – The John REX Endowment (Endowment) 2005, UNC Hospitals, UNCFP, REX and the UNC-CH School of Medicine operates as a 501(c)(3) corporation and is independent of the Board of agreed to finance the Enterprise Fund. The System Fund enables fund Directors of UNC Health. Its purpose is to advance the health and well- transfers among entities in the health system in support of the Board’s being of the residents of the greater Triangle area, with specific funds set vision to be the nation’s leading public academic health care system. aside for indigent care and to make grants to support health services, education, prevention and research. In discharging its purposes, priority The System Fund assesses, holds, and allocates funds across the entities consideration will be given to any funding requests from REX, UNC Health of UNC Health. Initially formed as the Enterprise Fund to facilitate and their affiliates. The funding source for the Endowment is the $100 investments in support of the clinical, academic and research missions million transfer that came from UNC Health in April 2000. of UNC Health and the UNC School of Medicine, the Enterprise Fund today exists as a subaccount within the System Fund. Since its formation, Onslow County Hospital Authority – Onslow County Hospital Authority the System Fund has been used to enable additional types of transfers is the sole member of Onslow Memorial Hospital, Inc., which operates between entities of UNC Health. As such, the Enterprise Fund, Outreach Onslow Memorial Hospital, a not-for-profit hospital located in Jacksonville, Fund, Patient Safety Fund, Recruitment Fund, and Shared Administrative North Carolina. The hospital serves patients primarily from Onslow and Services Fund each function as subaccounts of the System Fund. neighboring counties. Onslow County Hospital Authority entered into a management services agreement with UNC Health, effective January 1, Henderson County Hospital Corporation d/b/a Margaret R. Pardee 2019, to provide certain management services for purposes of managing Memorial Hospital (HCHC) – Henderson County is the sole member of Onslow Memorial Hospital over an initial term of two (2) years. HCHC, a North Carolina not-for-profit corporation, which is in turn the 2020 Annual Report 51 Note 10 // Community Benefits to labor, materials, contracts, and equipment. To date UNC Health has submitted to date $76,761,573 of expenses and has received In addition to providing care without charge, or at amounts less than payments for $32,803,438. Under the terms of the funding, periodic established rates to certain patients identified as qualifying for charity care, audits are required and certain costs may be questioned as not being UNC Health also recognizes its responsibility to provide health care services appropriate expenditures. and programs for the benefit of the community, at no cost or at reduced rates. UNC Health sponsors many community health initiatives, including breast and prostate cancer screenings, cardiovascular and pulmonary Note 12 // Subsequent Events awareness and diabetes education programs that ultimately result in the overall improved health of the community. UNC Health also provides On July 13, 2020, the Board of Directors of Rex Hospital, Inc. approved contributions, cash and in-kind, to various charitable and community a resolution for the issuance of North Carolina Medical Care Commission organizations. The costs of these programs are included in operating Health Care Facilities revenue bonds in redemption of the 2010A bonds. The expenses in the accompanying pro forma statements of revenues, Corporation intends to borrow up to $70,535,000 through the refinancing. expenses, and changes in net position. On September 21, 2020, the Board of Directors of UNC Health approved a resolution for the issuance of University of North Carolina Hospitals Note 11 // Covid-19 Pandemic at Chapel Hill revenue bonds for the purpose of refunding all of the outstanding University of North Carolina Hospitals at Chapel Hill revenue On March 11, 2020, the World Health Organization declared the novel bonds Series 2010B (Build America Bonds). The Hospitals intends to borrow coronavirus (COVID-19) a global pandemic. The COVID-19 pandemic up to $28,280,000 through the financing with a similar term as the existing substantially impacted the global economy including significant volatility in Series 2010B revenue bonds financial markets. As a result of the COVID-19 pandemic, patient volumes and associated patient net revenues at Rex’s facilities were significantly In September 2019, the boards of REX and JHSC approved a Letter of reduced in the months of March, April and May, 2020. Rex’s facilities began Intent to combine operations via a Joint Operating Agreement which was experiencing gradual and continued improvement in patient volumes finalized and executed on November 4, 2020. This partnership will expand in late May as stay-at-home restrictions were eased and hospitals and the organizations’ long history of collaboration to enhance care, improve ambulatory surgery centers were permitted to resume elective surgeries outcomes and increase access for patients in Johnston and Wake counties. and procedures. The agreement calls for a long-term commitment to opening new medical facilities in Johnston County, expanding clinical services offered and more. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act, among other things, authorized $100 billion in funding to hospitals and other healthcare providers to be distributed through the Provider Relief Fund (PRF). These funds are not required to be repaid provided the recipients attest to, and comply with, certain terms and conditions, including among other things, that the funds are being used for lost operating revenues and COVID-19 related expenses. The U.S. Department of Health and Human Services (HHS) initially distributed $30 billion of this funding based on each provider’s share of total Medicare fee-for-service reimbursement in 2019. Subsequently, HHS distributed an additional $20 billion in CARES Act funding based on an allocation proportional to the providers’ share of 2018 net patient revenue. Distributions of the additional $50 billion were targeted primarily to hospitals in COVID-19 high impact areas, to rural providers, safety net hospitals, skilled nursing facilities and to reimburse providers for COVID-19-related treatment of uninsured patients. As of this writing, UNC Health has received payments of $81,359,555 from the general stimulus distributions of the PRF, an additional $1,743,729 for its skilled nursing facilities, and $27,349,284 in targeted funds for the Rural Health, Safety Net, and High Impact programs. The funds received from HHS are subject to specific terms, conditions and audit by HHS. Noncompliance with any of the terms or conditions is grounds for HHS to recoup some or all of the payments received by UNC Health. Management believes it has complied with the terms and conditions.

The CARES Act also made other forms of financial assistance available to healthcare providers, including through Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advanced Payment Program, which makes available accelerated payments of Medicare funds in order to increase cash flow to providers. UNC Health received $305,006,195 of advance payments, which are recorded in other current liabilities, given that recoupment will not begin until at least 1 year subsequent to receipt of the funding, which will be May, 2021.

UNC Health has also received funding from the Federal Emergency Management Agency, FEMA, to cover COVID-19 related expenses related

52 The University of North Carolina Health System

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