8-K/A - EVH - Equibles

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_________________________

FORM 8-K/A

_________________________

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

December 30, 2019

Date of Report (Date of earliest event reported)

Evolent Health, Inc.

(Exact name of registrant as specified in its charter)

_________________________

Delaware		001-37415						32-0454912
(State or other jurisdiction of<br><br>incorporation or organization)		Commission File Number:						(I.R.S. Employer<br><br>Identification No.)
800 N. Glebe Road	,	Suite 500	,	Arlington	,	Virginia	,	22203
(Address of principal executive offices)(zip code)

(571) 389-6000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

_________________________

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock of Evolent Health, Inc., par value $0.01 per share	EVH	New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Explanatory Note

On December 30, 2019, Evolent Health, Inc. ("Evolent" or the "Company") filed a Current Report on Form 8-K (the "Original Form 8-K") reporting that on December 30, 2019, the Company closed its investment in University Health Care, Inc., d/b/a Passport Health Plan, a Kentucky nonprofit corporation (“Passport”). This Form 8-K/A is being filed solely for the purpose of amending the Original Form 8-K to include the historical audited and unaudited financial statements of University Health Care, Inc. and the pro forma condensed combined financial information required by Items 9.01(a) and 9.01(b) of Form 8-K that were excluded from the Original Form 8-K in reliance on the instructions to such items.

This filing includes the consolidated financial statements as of and for the nine months ended September 30, 2019. These financial results for this period were impacted by rate and cost dynamics during the first half of 2019 that lowered Passport’s overall income for the year. During the third and fourth quarters of 2019, Passport recorded a positive operating margin and had a positive net income for the year ended December 31, 2019.

Item 9.01. Financial Statements and Exhibits

(a) Financial Statements of Business Acquired.

The consent of MCM CPAs & Advisors LLP, University Health Care, Inc.'s independent auditors, is attached as Exhibit 23.1 to this amendment. The unaudited financial statements of University Health Care, Inc. as of and for the nine months ended September 30, 2019 and 2018, are filed herewith as Exhibit 99.2 to this amendment and hereby are incorporated by reference into this Item 9.01(a). The audited financial statements of University Health Care, Inc. as of and for the years ended December 31, 2018 and 2017 and as of and for the years ended December 31, 2017 and 2016 are filed herewith as Exhibits 99.3 and 99.4 to this amendment and hereby are incorporated by reference into this Item 9.01(a).

(b) Pro Forma Financial Information.

The Company’s unaudited pro forma combined balance sheet as September 30, 2019, and its unaudited pro forma combined statements of operations for the nine months ended September 30, 2019 and the fiscal year ended December 31, 2018, and the notes related thereto, are filed as Exhibit 99.1 to this amendment and hereby are incorporated by reference into this Item 9.01(b).

(d) Exhibits

Exhibit Number	Description
23.1	Consent of MCM CPAs & Advisors LLP, Independent Auditors of University Health Care, Inc.
99.1	Unaudited pro forma combined financial information of the Company and University Health Care, Inc., for the year ended December 31, 2018, and as of September 30, 2019, and for the nine months ended September 30, 2019
99.2	Unaudited financial statements of University Health Care, Inc. as of September 30, 2019, and for the nine months ended September 30, 2019 and 2018
99.3	Audited consolidated financial statements of University Health Care, Inc. and subsidiaries as of and for the years ended December 31, 2018 and 2017
99.4	Audited consolidated financial statements of University Health Care, Inc. and subsidiaries as of and for the years ended December 31, 2017 and 2016

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EVOLENT HEALTH, INC.
By:	/s/ Jonathan Weinberg
Name:	Jonathan Weinberg
Title:	General Counsel and Secretary
	(Duly Authorized Officer)

Dated: February 28, 2020

		Exhibit

Exhibit 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the registration statements on Form S-3 (No. 333-212709, No. 333-219755) and on Form S-8 (No. 333-204785, No. 333-225714) of Evolent Health, Inc. of our report dated April 30, 2019, with respect to the consolidated balance sheets of University Health Care, Inc., and Subsidiaries d/b/a Passport Health Plan (a Kentucky non-stock, not for profit corporation) (“Passport”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and our report dated April 18, 2018, with respect to the consolidated balance sheets of Passport as of December 31, 2017 and 2016, and the related statements of operations, changes in unrestricted net assets, and cash flows for the years then ended, and our report dated February 20, 2020, with respect to the consolidated balance sheets of Passport as of September 30, 2019 and 2018, and the related consolidated statements of operations, changes in net assets, and cash flows for the nine months then ended which report appears in the Form 8-K/A of Evolent Health, Inc. dated February 28, 2020.

/s/ MCM CPAs & Advisors LLP

Louisville, KY

February 27, 2020

		Exhibit

Exhibit 99.1

EVOLENT HEALTH, INC.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements of the Company consist of a combined balance sheet at September 30, 2019 and combined statements of operations for the nine-month period ended September 30, 2019 and year ended December 31, 2018 which reflect the Company's acquisition of a 70% interest in Passport as if it occurred on September 30, 2019 with respect to the unaudited pro forma combined balance sheet, and on January 1, 2018 with respect to the unaudited pro forma combined statements of operations.

The unaudited pro forma combined financial information has been prepared for illustrative purposes only and is not necessarily indicative of our financial position or results of operations, nor is such unaudited pro forma combined financial information necessarily indicative of the results to be expected for any future period. The pro forma adjustments are based on estimates and currently available information and assumptions that management believes are reasonable. The unaudited notes to the unaudited pro forma combined financial statements provide a detailed discussion of how such adjustments were derived and presented in the unaudited pro forma financial information.

The unaudited pro forma combined financial information includes adjustments which give effect to the events that are directly attributable, factually supportable, and with respect to the pro forma statements of operations, expected to have a continuing impact. Any changes or planned adjustments affecting the balance sheet, statements of operations or changes in common stock outstanding, subsequent to the investment are not included.

The unaudited pro forma combined financial information and related notes thereto were derived from and should be read in conjunction with Passport financial statements filed as part of the 8-K/A with which these pro forma combined financial statements are filed as well as the historical consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019, the historical consolidated financial statements and related notes thereto included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 filed with the SEC on November 5, 2019.

EVOLENT HEALTH, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2019

(in thousands)

	Evolent Health, Inc. Historical			Debt Adjustment ^(a)^		Investment Adjustment ^(b)^			Class B Adjustment ^(c)^			Evolent Health, Inc. Pro Forma
ASSETS
Current assets:
Cash and cash equivalents	$	96,734		$	70,347	$	(70,533	)	$	(1,330	)	$	95,218
Restricted cash and restricted investments	101,475			—		—			—			101,475
Accounts receivable, net	74,874			—		—			—			74,874
Prepaid expenses and other current assets	29,749			—		—			—			29,749
Investments, at amortized cost	3,815			—		—			—			3,815
Contract assets	1,365			—		—			—			1,365
Total current assets	308,012			70,347		(70,533		)	(1,330		)	306,496
Restricted cash and restricted investments	8,357			—		—			—			8,357
Investments, at amortized cost	15,095			—		—			—			15,095
Investments in and advances to affiliates	55,528			—		70,533			—			126,061
Property and equipment, net	83,164			—		—			—			83,164
Right-of-use assets - operating	75,768			—		—			—			75,768
Customer advance for regulatory capital requirements	40,000			—		—			—			40,000
Prepaid expenses and other non-current assets	7,647			—		—			—			7,647
Contract assets	1,245			—		—			—			1,245
Contract cost assets	29,998			—		—			—			29,998
Intangible assets, net	317,200			—		—			—			317,200
Goodwill	771,887			—		—			—			771,887
Total assets	$	1,713,901		$	70,347	$	—		$	(1,330	)	$	1,782,918
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Liabilities
Current liabilities:
Accounts payable	$	120,024		$	—	$	—		$	—		$	120,024
Accrued liabilities	41,632			—		—			—			41,632
Operating lease liabilities - current	5,390			—		—			—			5,390
Accrued compensation and employee benefits	27,031			—		—			—			27,031
Deferred revenue	22,701			—		—			—			22,701
Reserves for claims and performance-based arrangements	43,073			—		—			—			43,073
Total current liabilities	259,851			—		—			—			259,851
Long-term debt, net of discount	227,996			65,412		—			—			293,408
Other long-term liabilities	6,553			4,935		—			—			11,488
Operating lease liabilities - noncurrent	70,560			—		—			—			70,560
Deferred tax liabilities, net	24,593			—		—			(22,700		)	1,893
Total liabilities	589,553			70,347		—			(22,700		)	637,200
Shareholders' Equity (Deficit)
Class A common stock	838			—		—			7			845
Class B common stock	7			—		—			(7		)	—
Additional paid-in-capital	1,161,696			—		—			5,065			1,166,761
Accumulated other comprehensive loss	(215		)	—		—			—			(215		)
Accumulated deficit	(53,866		)	—		—			25,504			(28,362		)
Total shareholders' equity (deficit) attributable to Evolent Health, Inc.	1,108,460			—		—			30,569			1,139,029
Non-controlling interests	15,888			—		—			(9,199		)	6,689
Total equity (deficit)	1,124,348			—		—			21,370			1,145,718
Total liabilities and shareholders' deficit	$	1,713,901		$	70,347	$	—		$	(1,330	)	$	1,782,918

See accompanying Notes to Unaudited Pro Forma Combined Financial Statements

EVOLENT HEALTH, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

(in thousands, except per share amounts)

	Evolent Health, Inc. Historical			Debt Adjustment ^(a)^			Class B Adjustment ^(c)^			Evolent Health, Inc. Pro Forma
Revenue
Transformation services	$	10,481		$	—		$	—		$	10,481
Platform and operations services	463,252			—			—			463,252
Premiums	136,125			—			—			136,125
Total revenue	609,858			—			—			609,858
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below)	357,587			—			—			357,587
Claims expenses	108,644			—			—			108,644
Selling, general and administrative expenses	200,578			—			—			200,578
Depreciation and amortization expenses	44,966			—			—			44,966
Gain on disposal of assets	(9,600		)	—			—			(9,600		)
Change in fair value of contingent consideration, warrants and indemnification asset	(300		)	16,470			—			16,170
Total operating expenses	701,875			16,470			—			718,345
Operating loss	(92,017		)	(16,470		)	—			(108,487		)
Interest income	3,026			—			—			3,026
Interest expense	(10,812		)	(6,817		)	—			(17,629		)
Loss from equity affiliates	(6,187		)	—			—			(6,187		)
Expense, net	(244		)	—			—			(244		)
Loss before income taxes and non-controlling interests	(106,234		)	(23,287		)	—			(129,521		)
Provision for income taxes	53			—			—			53
Net loss	(106,287		)	(23,287		)	—			(129,574		)
Net income (loss) attributable to non-controlling interests	(2,412		)	—			2,601			189
Net loss attributable to Evolent Health, Inc.	$	(103,875	)	$	(23,287	)	$	(2,601	)	$	(129,763	)
Loss Available to Common Shareholders
Basic and Diluted	$	(103,875	)							$	(129,763	)
Loss per Common Share
Basic and Diluted	$	(1.27	)							$	(1.59	)
Weighted-Average Common Shares Outstanding
Basic and Diluted	81,831									81,831

See accompanying Notes to Unaudited Pro Forma Combined Financial Statements

EVOLENT HEALTH, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2018

(in thousands, except per share amounts)

	Evolent Health, Inc. Historical			Debt Adjustment ^(a)^			Investment Adjustment ^(b)^			Class B Adjustment ^(c)^			Evolent Health, Inc. Pro Forma
Revenue
Transformation	$	32,916		$	—		$	—		$	—		$	32,916
Platform and operations	500,190			—			—			—			500,190
Premiums	93,957			—			—			—			93,957
Total revenue	627,063			—			—			—			627,063
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below)	327,825			—			—			—			327,825
Claims expenses	70,889			—			—			—			70,889
Selling, general and administrative expenses	235,418			—			100			—			235,518
Depreciation and amortization expenses	44,515						—			—			44,515
Change in fair value of contingent consideration, warrants and indemnification asset	(4,104		)	(9,673		)	—			—			(13,777		)
Total operating expenses	674,543			(9,673		)	100			—			664,970
Operating Income (loss)	(47,480		)	9,673			(100		)	—			(37,907		)
Interest income	3,440			—			—			—			3,440
Interest expense	(5,484		)	(8,794		)	—			—			(14,278		)
Loss from equity method investees	(4,736		)	—			(70,533		)	—			(75,269		)
Other (income) expense, net	109			—			—			(1,330		)	(1,221		)
Loss before income taxes and non-controlling interests	(54,151		)	879			(70,633		)	(1,330		)	(125,235		)
Provision (benefit) for income taxes	40			—			—			(22,700		)	(22,660		)
Net loss	$	(54,191	)	$	879		$	(70,633	)	$	21,370		$	(102,575	)
Net loss attributable to non-controlling interests	(1,533		)	—			—			1,533			—
Net loss attributable to Evolent Health, Inc.	$	(52,658	)	$	879		$	(70,633	)	$	19,837		$	(102,575	)
Loss Available for Common Shareholders
Basic and Diluted	$	(52,658	)										$	(102,575	)
Loss per Common Share
Basic and Diluted	$	(0.68	)										$	(1.33	)
Weighted-Average Common Shares Outstanding
Basic and Diluted	77,338												77,338

See accompanying Notes to Unaudited Pro Forma Combined Financial Statements

EVOLENT HEALTH, INC.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

1.	Acquisition of 70% interest in University Health Care, Inc.

On May 28, 2019, University Health Care, Inc., d/b/a Passport Health Plan, a Kentucky nonprofit corporation (“Passport”), Passport Health Solutions, LLC, a Kentucky nonprofit limited liability company and subsidiary of Passport (“PHS I”), Evolent Health, Inc., a Delaware corporation (the “Company”) and Justify Holdings, Inc., a Kentucky corporation and a subsidiary of the Company (“Buyer”) entered into an Asset Purchase Agreement (as amended on December 30, 2019, the “Agreement”), pursuant to which Buyer on December 31, 2019, acquired substantially all of the assets and assumed substantially all of the liabilities of Passport and PHS I for $70 million in cash and the issuance of a 30% equity interest in Buyer to the provider sponsors of Passport. The consideration for this investment was funded by borrowings of $75.0 million under a credit agreement as described below.

2.	Basis of Presentation

The unaudited pro forma combined balance sheet as of September 30, 2019, gives effect to the Passport investment as if it had occurred on September 30, 2019. The unaudited pro forma combined statements of operations for the nine months ended September 30, 2019 and the year ended December 31, 2018, give effect to the Passport investment as if it had occurred on January 1, 2018.

The pro forma combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma combined financial statements are based on the Company’s and Passport’s respective historical combined financial statements as adjusted to give effect to the investment in Passport, the debt necessary to finance the investment and the resulting change in Evolent’s corporate structure.

3.	Pro Forma Adjustments

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments are included in the unaudited pro forma combined balance sheet to reflect the estimated impact of the investment on the historical combined results of Evolent Health, Inc.:

^(a)^ Debt Adjustment -Reflects the credit agreement the Company entered into to finance the investment (dated December 30, 2019) as well as the accompanying interest expense and amortization of debt acquisition costs. See table below for breakout of the debt adjustments effect on the balance sheet (in thousands):

Initial borrowing under credit agreement	$	75,000
Less: debt acquisition costs	(4,653		)
Net cash received	70,347
Less: warrants	(4,935		)
Long term debt, net of discount	$	65,412

The funding from the credit agreement is also reflected in the respective combined statements of operations for the year ended December 31, 2018 and the nine months ended September 30, 2019. The statement of operations adjustments are comprised of interest expense and amortization of the debt acquisition costs listed in the above table. The interest rate for each loan under the credit agreement is calculated, at the option of the Borrower, at either the eurodollar rate plus 8.00%, or the base rate plus 7.00%. A commitment fee of 1.00% per annum is payable by the Borrower quarterly in arrears on the unused portion of the delayed draw amount.

See table below for breakout of the debt adjustments effect on the respective combined statements of operations (in thousands):

	For the Nine Months Ended September 30, 2019		For the Year Ended December 31, 2018
Interest expense	$	6,320	$	8,139
Amortization of debt acquisition costs	497		656
Total expense adjustment	$	6,817	$	8,794

Also, in conjunction with the credit agreement, the Company entered into warrant agreements whereby it agreed to sell to the holders of the warrants an aggregate of 1,513,786 shares of Class A common stock at a per share purchase price equal to $8.05. The holders can exercise the warrants at any time until thirty days after the maturity of the credit agreement. The Company, at its sole discretion, can elect to pay the holders in cash in an amount determined based on the fair market value of the Class A common stock for the shares of Class A common stock issuable upon exercise of the warrants in lieu of delivering the shares. Upon issuance, the debt proceeds were allocated between the debt and warrant liability, resulting in a debt discount which will be accreted to interest expense through debt maturity.

The change in the valuation of the warrants was calculated using the same assumptions that were used on the actual date of the warrant agreement other than the closing stock price. See table below for adjustments from change in valuation of warrants:

Estimated value as of January 1, 2018	$
Estimated value as of December 31, 2018	21,405
2018 change in warrant valuation	(9,673	)
Estimated value as of September 30, 2019	4,935
2019 change in warrant valuation	16,470

^(b)^ Investment Adjustment - Adjustment to reflect the equity investment of 70% of University Health Care, Inc. for $70.0 million, net of closing costs of $0.5 million as well as the Company’s proportional share of Passport’s net income/loss for the year ended December 31, 2018 and the nine months ended September 30, 2019. Due to Passport’s net loss of $126 million during the year ended December 31, 2018, the Company’s initial investment of $70 million would have been reduced to zero during the year. As the investment balance was zero during 2019, no additional adjustment is necessary for the nine months ended September 30, 2019. The total capitalized amount on the combined balance sheet includes transaction costs incurred through fiscal year 2019, the adjustment to the combined statements of operations only includes adjustments incurred in the respective period. The additional $0.1 million on the unaudited pro forma combined statement of operations for the year ended December 31, 2018, is from transaction costs that do not have a continuing impact on the statement of operations.

^(c)^ Class B Adjustment - Adjustment to reflect the exchange of all remaining class B common stock to class A common stock and the dissolution of the up-C structure. The Company paid $1.3 million on behalf of certain class B shareholders to satisfy income tax obligations related to the exchanges. With the dissolution of up-C structure, net income (loss) from non-controlling interests was adjusted as well as the deferred tax liability.

		Exhibit

Exhibit 99.2

University Health

Care, Inc., and

Subsidiaries

d/b/a Passport Health Plan

Consolidated Financial Statements as of

and for the Nine Months Ended

September 30, 2019 and 2018, and

Independent Accountant’s Review Report

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES

d/b/a Passport Health Plan

TABLE OF CONTENTS

	Page
INDEPENDENT ACCOUNTANT’S REVIEW REPORT	3
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018:
Consolidated Balance Sheets	1
Consolidated Statements of Operations	2
Consolidated Statements of Changes in Net Assets	3
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	5

Independent Accountant’s Review Report

To the Board of Directors

University Health Care, Inc. d/b/a Passport Health Plan and Subsidiaries

We have reviewed the accompanying consolidated financial statements of University Health Care, Inc. d/b/a Passport Health Plan and Subsidiaries, which comprise the consolidated balance sheets as of September 30, 2019 and 2018, and the related consolidated statements of operations, changes in net assets, and cash flows for the nine months then ended, and the related notes to the consolidated financial statements (“the consolidated financial statements”). A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Accountant’s Responsibility

Our responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the consolidated financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion.

Accountant’s Conclusion

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter with Respect to Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 20 to the consolidated financial statements, University Health Care, Inc. d/b/a Passport Health Plan has experienced current year operating losses and has stated that substantial doubt exists about its ability to continue as a going concern. For purposes of clarity, this doubt pertains to the ongoing operations of University Health Care, Inc. and does not pertain to the entity to which assets are being sold (Passport Health Plan, Inc. or Buyer). Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 20. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our conclusion is not modified with respect to this matter.

/s/ MCM CPAs & Advisors LLP

Louisville, KY

February 20, 2020

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2019 AND 2018
	September 30, 2019		September 30, 2018
Assets - Held for Sale (See Note 21)
Current assets:
Current and cash equivalents	$	91,306,686	$	131,162,073
Marketable securities	45,481,364		132,296,534
Premiums receivable	10,300,000		11,523,300
Receivable from Department for Medicaid Services	—		6,280,103
Note receivable	16,475,150		—
Other receivables	6,370,637		12,530,434
Prepaid expenses	2,102,782		1,819,151
Total current assets	172,036,619		295,611,595
Land and construction in progress	19,200,000		13,594,118
Furniture and equipment, net	1,586,201		2,587,977
Marketable securities	117,703,119		123,678,981
Assets limited as to use	691,869		572,150
Total assets	$	311,217,808	$	436,044,821
Liabilities and Net Assets - Held for Sale (See Note 21)
Current liabilities:
Accrued medical expenses	$	151,935,259	$	162,933,362
Payable to Centers for Medicare & Medicaid	27,453		2,441,902
Construction and new market tax credit debt	24,118,495		500,000
Accounts payable and accrued expenses	30,622,203		40,021,999
Total current liabilities	206,703,410		205,897,263
Note payable - related party	40,736,666		—
Other liabilities	44,158		47,950
Total liabilities	247,484,234		205,945,213
Commitments and contingencies (notes 17 and 18)
Net assets - without donor restrictions	63,733,574		230,099,608
Total net assets	63,733,574		230,099,608
Total liabilities and net assets	$	311,217,808	$	436,044,821

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
	2019			2018
Revenues:
Premiums earned	$	1,462,906,320		$	1,476,165,700
Other income	984,141			80,657
Interest and dividend income	2,803,263			4,391,388
Realized investment gains (losses), net
Impairment of land and construction in progress	(13,238,285		)	—
Realized gains from sale of investments, net	32,044,145			1,603,409
Total realized investment gains, net	18,805,860			1,603,409
Total revenues	1,485,499,584			1,482,241,154
Expenses:
Medical expenses:
Purchased medical services, net	1,234,036,245			1,250,812,694
Capitation and other services	174,825,346			107,571,648
Total medical expenses	1,408,861,591			1,358,384,342
Administrative expenses:
Purchased services	90,433,580			97,450,801
Salaries and benefits	12,707,088			13,695,558
Department of Medicaid Services 1% assessment	14,374,145			14,559,886
Other administrative and general	18,490,335			14,676,274
Depreciation and amortization	766,134			773,028
Total administrative expenses	136,771,282			141,155,547
Premium deficiency reserve	(47,415,290		)	—
Total expenses	1,498,217,583			1,499,539,889
Net operating loss	(12,717,999		)	(17,298,735		)
Other non-operating changes in net assets:
Change in net assets with donor restrictions	(36,003		)	—
Change in interest rate swap valuation	863,309			—
Change in unrealized gains on investments, net	(25,994,329		)	17,963,641
(Decrease) increase in net assets	$	(37,885,022	)	$	664,906

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
	2019			2018
Net assets - without donor restriction
Net operating loss - nine months ended	$	(12,717,999	)	$	(17,298,735	)
Change in interest rate swap valuation	863,309			—
Change in unrealized gains on investments, net	(25,994,329		)	17,963,641
(Decrease) increase in net assets - without donor restrictions	(37,849,019		)	664,906
Change in net assets with donor restrictions	(36,003		)	—
Net assets, January 1	101,618,594			229,434,702
Net assets, September 30	$	63,733,572		$	230,099,608

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
	2019			2018
Cash flows from operating activities
(Decrease) increase in net assets - without donor restrictions	$	(37,849,019	)	$	664,906
Decrease in net asssets - with donor restrictions	(36,003		)	—
Adjustments to reconcile decrease in net assets - without donor restriction to net cash used in operating activities:
Net realized gains on sales of marketable securities	(32,044,145		)	(1,603,409		)
Impairment of land and construction in progress	13,238,285			—
Amortization of bond discounts or premium	567,930			530,899
Depreciation and amortization	766,134			773,028
Write off of deferred financing costs	1,385,803			—
Change in fair value of interest rate swap	(863,309		)	—
Unrealized loss (gain) on investments, net	25,838,241			(18,009,426		)
Changes in assets and liabilities:
Premiums receivable	1,223,100			(14,900		)
Other receivables	4,615,445			3,047,827
Prepaid expenses	(246,224		)	(769,095		)
Accrued medical expenses	(9,919,685		)	(37,064,542		)
Premium deficiency reserve	(47,415,290		)	—
Accounts payable and accrued expenses	(9,990,710		)	3,682,274
Payable to Department for Medicaid Services	(8,199,217		)	(1,264,045		)
Other liabilities	(3,851		)	8,120
Total adjustments	(61,047,493		)	(50,683,270		)
Net cash used in operating activities	(98,932,519		)	(5,018,363		)
Cash flows from investing activities:
Capital expenditures	(12,268,606		)	(6,775,577		)
Purchase of marketable securities	(148,024,265		)	(50,236,786		)
Proceeds from sale or maturity of marketable securities	226,302,082			50,542,921
Net cash provided by (used in) investing activities	66,009,211			(6,469,442		)
Cash flows from financing activities
Construction and new market tax credit debt	—			500,000
Repayment of construction and new tax market credit debt	(17,031,294		)	—
CMS and DMS funds administered	4,735,586			477,067
Issuance of note payable including accrued interest, related party	40,736,666			—
Net cash provided by financing activities	28,440,958			977,067
Net decrease in cash and cash equivalents	(4,482,350		)	(55,510,738		)
Cash and cash equivalents:
Beginning of the period	95,789,036			186,672,811
End of the period	$	91,306,686		$	131,162,073
Cash paid for interest	$	223,553		$	—

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES

d/b/a Passport Health Plan

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018

(1)	Organization and Description of Business

University Health Care, Inc. (UHC), doing business as “Passport Health Plan,” is a non-stock, not‑for‑profit corporation created and operated under the laws of the Commonwealth of Kentucky. UHC is a licensed health maintenance organization (HMO) that administers a prepaid health care program for the benefit of Medicaid enrollees through a contract with the Commonwealth of Kentucky’s Department for Medicaid Services (DMS). Effective January 1, 2016, UHC entered into a risk-based contract with the Centers for Medicare and Medicaid Services (CMS) to provide prepaid health care services, including Medicare Part D prescription drug coverage, to eligible Medicare enrollees through UHC’s Medicare Advantage Special Needs Plan (MA-SNP). The plan is offered in 16 counties in Kentucky.

On February 1, 2016, UHC entered into a strategic alliance with Evolent Health (Evolent) to create The Medicaid Center of Excellence in Louisville, Kentucky. The Medicaid Center of Excellence is the first of its kind in the country. It combines UHC’s expertise in Medicaid managed care with Evolent’s industry leading technology and operations to offer centralized services for provider-led Medicaid health plans nationwide. Under the terms of the agreement, UHC transferred certain assets, employees and business functions to Evolent in exchange for Evolent common stock valued at $15 million and entered into a servicing agreement whereby Evolent provides clinical and operational services to UHC for both the Medicaid and Medicare contracts, in exchange for a monthly fee (Note 12). Additionally, during the first 6 years of the agreement, UHC will receive shares of Evolent common stock valued at $1 million for each $10 million of Evolent’s recurring revenue for providing Medicaid plan services to new clients outside Kentucky, up to a maximum earn-out of $10 million.

During 2017, UHC established Passport Health Plan Foundation, Inc. (the Foundation) whose mission is to improve the health and quality of life of underserved communities through innovative partnerships that promote well-being and improved access to health services. During 2019, the Foundation became inactive and is essentially dormant.

During 2017, UHC established Passport Health Solutions LLC, (PHS I) a wholly-owned subsidiary. This entity includes financial transactions related to phase one of the establishment of a new corporate office headquarters and health and well-being campus in West Louisville.

During 2018, UHC established Passport Health Solutions Two, LLC, (PHS II) a wholly-owned subsidiary. This entity includes financial transactions related to phase two of the establishment of the health and well-being campus in West Louisville.

The consolidated financial statements include all the financial transactions for UHC, the Foundation, PHS I and PHS II. All intercompany balances have been eliminated in consolidation.

Pharmacy benefit management services for Medicaid members are provided to UHC by CaremarkPCS Health, LLC (CVS) through a contract administered by Evolent effective September 1, 2016 (Note 12).

Evolent provides clinical, medical, and provider services to UHC under a contract which expires December 15, 2025. Effective October 1, 2017, Evolent also provides administrative services including Medicaid claims processing, enrollment services, and information technology (Note 12).

Behavioral health benefit management services for Medicaid members are provided to UHC by Beacon Health Strategies, LLC (Beacon) through a fully capitated arrangement (Note 12).

Dental and vision benefit management services for Medicaid members are provided to UHC by Avesis Third Party Administrators Inc. (Avesis) through a fully capitated arrangement effective July 1, 2016 for dental and September 1, 2019 for vision (Note 12). Prior to the vision contract with Avesis, those services were provided by Superior Vision.

Effective July 1, 2018 UHC subcontracts certain administrative services related to the MA-SNP program to TMG Health (TMG) (Note 12). These administrative services include claims processing, enrollment services, and information technology. Prior to that date UHC contracted with DST Health Solutions who continued to provide run-out services through December 31, 2018.

Pharmacy benefit management services for MA-SNP members are provided to UHC by CVS through a contract administered by Evolent effective January 1, 2017 (Note 12).

Oncology and cardiology benefit management services for Medicaid members are provided to UHC by New Century Health (NCH) through a fully capitated arrangement effective August 1, 2019.

UHC subcontracts utilization and case management services for the MA-SNP program to Health Integrated, Inc. (Note 12). Effective, January 1, 2019 these administrative services will be provided by Evolent.

Care Enroll, Inc. provides member premium billing and payment process services to UHC for its assigned members of a proposed Medicaid Waiver Program within the state of Kentucky (Note 12).

The sponsors of UHC, all of which are Kentucky not-for-profit corporations, are as follows: University of Louisville Physicians, Inc. (ULP) (51.3% sponsorship); Norton Healthcare, Inc. (Norton) (12.9% sponsorship); Jewish Heritage Fund for Excellence, Inc. (Jewish) (12.9% sponsorship); University Medical Center, Inc. (UMC) (12.5% sponsorship); and Louisville Primary Care Association (Primary Care) (10.4% sponsorship) (collectively referred to as the Original Sponsors) (Note 19).

On May 28, 2019, the Board of Directors of UHC authorized the sale of UHC to Passport Health Plan, Inc. (f/k/a Justify Holdings, Inc.), a subsidiary of Evolent (PHP or the Buyer) under an Asset Purchase Agreement (the Acquisition). In consideration for the net assets purchased, the Buyer paid $70,000,000 cash consideration and issued 30% ownership interests of its common stock to the Original Sponsors. While Evolent will be the majority owner of the Buyer, the Original Sponsors will maintain significant voting interests on the Board of Directors of the Buyer. The Acquisition was effective December 30, 2019 (see Note 19).

(2)	Business Concentration

UHC’s premium revenues for the periods ended September 30, 2019 and 2018 are comprised of revenue received from DMS and CMS. UHC’s contract with DMS expired on June 30, 2019, but has been renewed through June 30, 2020. UHC’s contract with CMS expired on December 31, 2019, but has been renewed through December 31, 2020. Management expects to reach agreement for new contracts with both parties although there can be no assurance that such agreements can be reached.

Certain risks and uncertainties are inherent to UHC’s day-to-day operations as an HMO. The more significant of these risk and uncertainties, as well as UHC’s methods for mitigating, quantifying, and minimizing such, are presented throughout the notes to the consolidated financial statements.

(3)	Summary of Significant Accounting Policies

Basis of Accounting

The accompanying consolidated financial statements of UHC have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP), as established by the FASB Accounting Standards Codification (ASC).

Cash and Cash Equivalents

UHC considers all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. UHC maintains a bank account with a required minimum balance of $50,000 at September 30, 2019 and 2018. Cash equivalents totaled $3,786,872 and $4,346,709 at September 30, 2019 and 2018, respectively. At various times throughout the period, UHC maintained balances in excess of federally insured limits.

Marketable Securities

Investments in marketable equities with readily determinable fair values and investments in debt securities are recorded at fair value, as determined based on methods and assumptions described more fully in Note 6. All categories of securities are classified as available-for-sale. Unrealized holding gains and losses are reported on the statements of operations and statements of changes in net assets as a change in net assets - without donor restrictions. Realized gains and losses on the sale of investments are determined on a specific identification basis as of the trade date. Interest and dividend income is recognized when earned.

An invested asset is considered impaired when its fair value declines below cost. UHC accounts for impaired investments in accordance with ASC 320-10-65-1, which states that a fixed maturity security is other-than-temporarily impaired if the present value of future cash flows expected to be collected from the security is less than the amortized cost of the security or where UHC intends to sell or more-likely-than-not will be required to sell the security prior to recovering the security’s amortized cost basis. Equity securities are other-than-temporarily impaired when it becomes apparent that UHC will not recover its cost over a reasonable period of time. Factors considered in determining whether a credit loss exists and over what period of time the security is expected to recover include the length of time and the extent to which fair value has been below cost, adverse conditions specifically related to the security, the industry or the geographic area, the financial condition and near-term prospects of the issuer, analysis and guidance provided by rating agencies and analysts, and changes in fair value subsequent to the balance sheet date.

When UHC determines that an other-than-temporary impairment loss exists for an equity security or for a fixed maturity security that UHC intends to sell or more-likely-than-not will be required to sell prior to recovering the security’s amortized cost basis, the cost basis of the security is written down to fair value, and the total amount of the impairment is included in operations as a realized investment loss.

When UHC determines that an other-than-temporary impairment loss exists for a fixed maturity security and UHC does not intend to sell the security and it is not more-likely-than-not that UHC will be required to sell the security prior to recovering the security’s amortized cost basis, the portion of the total impairment that is attributable to the credit loss is recognized in operations as a realized investment loss, and the cost basis of the security is reduced by the amount of the credit related impairment. The non-credit related component of the impairment loss is included within unrealized gains (losses) on investments in the statement of operations.

UHC may, from time to time, sell invested assets subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such sales are generally due to events occurring subsequent to the balance sheet date that result in a change in UHC’s intent or requirement to sell the invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in UHC’s liquidity needs, or changes in the regulatory environment.

Fair Value of Financial Instruments

ASC 820-10, Fair Value Measurements and Disclosures, provides enhanced guidance for using fair value to measure assets and liabilities. It does not require any new fair value measurements, but does require expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. ASC 820-10 establishes a fair value hierarchy to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is based on the inputs used in valuation and gives the highest priority to unadjusted quoted prices in active markets.

ASC 820-10-35-51 provides additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and sets forth additional disclosure requirements. ASC 820-10-35-51 also includes guidance on identifying circumstances that indicate a transaction is not orderly.

Derivative Instruments

UHC takes positions from time to time in certain derivative financial instruments to increase investment returns, to eliminate the impact of changes in interest rates, and to protect adverse movements in fair values of investments. Financial instruments used for such purposes include put and call options, interest rate swaps, and futures contracts.

To qualify for hedge accounting under ASC 815, at the inception of the hedging relationship, UHC formally documents its risk management objective and strategy for undertaking the hedging transactions, as well as its designation of the hedge as either (i) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (“cash flow hedge”); or (ii) a hedge of a new investment in foreign operation. A derivative designated as a hedging instrument must be highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and throughout the life of the hedging relationship.

UHC discontinues hedge accounting prospectively when (i) it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item; (ii) the derivative expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; (v) UHC removes the designation of the hedge; or (vi) the derivative is deemed to be impaired.

When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the fair value or cash flows of a hedged item, the derivative is carried as an asset or liability, at its fair value, with changes in fair value recognized in “Other Nonoperating Changes in Net Assets” on the consolidated statements of operations.

Upon termination of a derivative that qualified for hedge accounting, the gain or loss is reflected as an adjustment to the basis of the hedged item and is recognized in income consistent with the hedged item. If the hedged item is sold, the gain or loss on the derivative is realized but is subject to the interest maintenance reserve. To the extent UHC chooses not to designate it derivatives for hedge accounting or its designated derivatives no longer meet the criteria of an effective hedge, the derivatives are carried at fair value with changes in their fair value included in the “Other Nonoperating Changes in Net Assets” on the consolidated statements of operations.

Futures contracts are commitments to purchase or deliver securities in the future at a predetermined price or yield, and are usually settled in cash.

Assets Limited as to Use

The Kentucky Department of Insurance requires each full service HMO to maintain a security deposit of at least $500,000. In accordance with this requirement, UHC holds a U.S. Treasury Note and a money market account. These marketable securities are held in trust at a financial institution and are classified as assets limited as to use in the accompanying balance sheets.

Land and Construction in Progress

Land is stated at cost and represents parcels of property purchased for the future UHC corporate headquarters and health and well-being campus in West Louisville. The expenditures associated with the construction cost are stated at cost and are being capitalized as construction in progress until such time the headquarters are complete and put into service.

Furniture and Equipment

Furniture and equipment are stated at cost, net of accumulated depreciation and amortization. The capitalization threshold is $1,000 with the exception of laptop and desktop personal computers that individually may cost less than $1,000 but are capitalized. Similar assets purchased in bulk may also be capitalized as a group even if individual assets do not meet the minimum dollar threshold for capitalization. When property and equipment are retired or otherwise disposed of, cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations. Depreciation is computed using the straight-line method, half-year convention, over the estimated useful life of the asset, which ranges from three to seven years.

Furniture and Equipment 7 Years

Computer Hardware 3 Years

Software 3 Years

Leasehold improvements are amortized on a straight line basis over the shorter of the lease term or estimated useful life of the asset. Maintenance and repairs are charged to operations when incurred.

Long-Lived Assets

Long lived assets, such as furniture and equipment subject to depreciation, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long lived asset or asset group be tested for possible impairment, UHC first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value.

During 2019, UHC put an indefinite hold on construction of its future corporate headquarters and health and well-being campus in West Louisville. As a result of this and other facts and circumstances, the value of the land and construction in progress was deemed to be impaired. Independent appraisals were obtained and as a result of the valuation studies, the book value of the land and construction in process were impaired by $3,657,228 and $9,581,056, respectively for the periods ended September 30, 2019 and 2018. These amounts are included in realized investment gains, net on the accompanying consolidated statements of operations.

Premium Revenues

UHC records premium revenues based on membership records and premium rates for each membership category. Premiums are due monthly and are recognized as revenue in the period in which UHC is obligated to provide service to members.

DMS and CMS make payments to UHC based on estimates of membership case mix as defined in the respective contracts. To the extent that these premium payments differ from recorded revenue, the amount of the difference is recorded as either unearned premium or a premium receivable until such time that the differences are resolved.

Effective July 1, 2015, the DMS contract included a provision where a 1% assessment of capitation revenue paid to UHC would be refunded to DMS on an annual basis. The 1% assessment is recorded as a charge to administrative expense each month establishing a corresponding liability, included in accounts payable and accrued expenses, to be paid in the following calendar year. The DMS 1% assessment was $14,374,145 and $14,559,886 for the periods ended September 30, 2019 and 2018, respectively.

UHC’s contract with CMS contains a risk-sharing arrangement. This risk-sharing arrangement provides a risk corridor whereby the premiums received from CMS are compared to actual drug cost incurred during the contract period. If actual drug costs incurred vary from premiums received by an amount greater than a predetermined threshold, a receivable or payable is recorded as an adjustment to premium revenue.

Other Income

Other income in 2019 of $984,141 included $853,913 of Evolent common stock in connection with the administrative services agreement and $5,749 from donations received by the Foundation. An additional $124,479 relates to accrued interest from a note receivable. Other income in 2018 of $80,657 included $65,000 of Lucina Health, Inc. common stock obtained by UHC in connection with services provided for under a Development and Master Services Agreement and $15,657 from donations received by the Foundation.

Medical Expenses and Related Liabilities

Medical expenses include capitation payments for primary care physicians, vision, behavioral health, oncology, cardiology, and dental benefits. All other medical expenses are paid on a fee-for-service basis based upon contracted rates with providers as well as prescription drug costs, net of rebates. Rebates are recognized when earned, according to the contractual arrangements with the drug manufacturer. UHC maintains reinsurance for medical expenses with commercial carriers that is more fully described in Note 15.

Accrued medical expenses includes medical expenses billed and not paid and an estimate for costs incurred but not reported, which is actuarially determined. Actuarial estimates are based upon authorized healthcare services, past claims payment experience, patient census and other factors. To estimate the required claims incurred but not reported reserves, UHC uses the triangulation method. The method of triangulation makes estimates of completion factors, which are then applied to the total paid claims net of coordination of benefits to date for each incurral month. This provides an estimate of the total projected incurred claims and total amount outstanding or claims incurred but not reported. Consideration is also given to changes in turnaround time and claim processing, which may impact completion factors.

For the most current dates of service where there is insufficient paid claim data to rely solely on the completion factor method, UHC examines cost and utilization trends as well as plan changes, provider contracts, membership changes, and historical seasonal patterns to estimate the reserve required for these months. While UHC believes the accrual for medical expenses is adequate, actual results could differ from such estimates.

Premium Deficiency Reserve

The current contract with DMS to provide Medicaid services covers the period of July 1, 2019 - June 30, 2020. At September 30, 2019 management has determined the contracted premium rates from DMS to be sufficient to provide for estimated medical and administrative expenses related to this contract period. Previously, UHC had recorded a premium deficiency reserve of $47,415,290 at December 31, 2018 which represented the expected underwriting losses through June 30, 2019. The estimated PDR at December 31, 2018 reversed during the first six months of 2019 as actual operating results were recognized. Due to the Medicare Advantage contract with CMS ending December 31, 2018 there is no premium deficiency for the CMS contract. Anticipated investment income was utilized in the calculation of a premium deficiency reserve.

Risk Corridor Reserve

During March 2010, the President of the United States signed the “Patient Protection and Affordable Care Act” and related “Reconciliation Act of 2010” into law. This is commonly known as the “Affordable Care Act” (ACA). This legislation took effect over a four-year period and includes provisions related to coverage, eligibility, Medicaid expansion and for a new sales distribution model (state healthcare exchanges). In addition, the legislation encompasses certain new taxes and fees. Under the new law, Kentucky elected to expand Medicaid eligibility starting in 2014. UHC participated in this expansion.

UHC had established a $6,280,103 receivable representing an estimate of additional revenue due from DMS for the period of January 1, 2016 - June 30, 2016 associated with the Affordable Care Act (ACA) expansion population due to exceeding the ninety-two percent higher end corridor boundary. This amount was received in full during June 2019. The DMS contracts for the periods ending June 30, 2018, June 30, 2019, and June 30, 2020 have a provision requiring a refund of revenue should the overall medical loss ratio for these periods fall below ninety percent. At this time

management believes the medical loss ratio for these periods of time will exceed the ninety percent threshold. The reserve estimates were calculated using a risk corridor medical loss ratio methodology.

Also, as of September 30, 2019, UHC had established a $2,711,977 payable representing a refund of revenue to the Centers for Medicare and Medicaid Services associated with the 2018 Part D settlement. A $2,684,523 receivable is established at September 30, 2019, representing an estimated receipt from the Center for Medicare and Medicaid Services associated with the 2019 Part D settlement. These amounts are shown net as a liability on the accompanying consolidated balance sheets. As of September 30, 2018, UHC had established a $464,830 payable representing an estimated refund of revenue to the Centers for Medicare and Medicaid Services associated with the 2018 Part D settlement. The estimate for 2018 accrued Part D settlement payable as of September 30, 2018 was $713,027.

Department for Medicaid Services Payable

On February 1, 2019, UHC was notified by DMS that additional amounts were due to providers as well as back to DMS. These amounts represent supplemental payment funds paid to UHC in excess of the amounts originally required by DMS. An additional payment of $2,227,575 was paid to DMS and $5,430,595 was paid to various providers during March 2019.

Advertising

Advertising costs are expensed as incurred. In an effort to expand UHC’s brand recognition and membership base, advertising costs of $1,320,835 and $1,797,292 were incurred for the periods ended September 30, 2019 and 2018, respectively.

Income Taxes

UHC is a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no income tax provision has been recorded by UHC for the current period. Management believes that UHC has continued to meet the eligibility requirements set forth in the above referenced Internal Revenue Code and has therefore continued to qualify as a tax-exempt organization as of September 30, 2019. UHC did not have asserted and unsettled or unasserted income tax contingencies during the periods ended September 30, 2019 and 2018. UHC did not recognize any benefits or provisions from uncertain tax positions during the periods ended September 30, 2019 and 2018.

Net Assets

Net assets without donor restrictions are those that are available for the support of operations and whose use is not externally restricted, although their use may be limited by other factors such as by contract or board designation. Net assets with donor restrictions are those for which use has been limited by donors to a specific time period or purpose. The only net assets with donor restrictions are associated with the Passport Health Plan Foundation, which is currently inactive.

Changes in Net Assets

The consolidated statements of operations include net operating loss. Changes in net assets that are excluded from net operating loss include unrealized gains and losses on investments and change in the fair value of interest rate swaps. All changes in net assets are without donor restriction unless otherwise specified.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. Some of the more significant estimates include accrued medical expenses, premium deficiency reserves, risk corridor reserves, and retroactive premiums receivable. Actual results could differ from those estimates.

Liquidity

As a business-oriented not-for-profit that is not solely dependent on donor contributions, the capital needs of UHC and operating budgets are coordinated so that anticipated cash needs are provided by current cash flow from operations, supplemented from time to time by debt financing. Included within current assets on the consolidated balance sheets are financial assets available for general expenditure within one year of September 30, 2019, and include cash and cash equivalents, marketable securities, premiums and other receivables, receivable from the Department for Medicaid Services, and prepaid expenses. See additional information with respect to these financial assets in Note 3 and Note 4. As part of UHC’s management of liquidity, certain cash in excess of operating requirements for general expenditures is transferred to long term marketable securities. UHC’s long-term marketable securities contain various investments that can be drawn upon, if necessary, to meet liquidity needs of UHC within the next fiscal year. See Notes 4 and 6 for additional information as it relates to marketable securities classified as long term.

Regulation

UHC is regulated by the Kentucky Department of Insurance and prepares its statutory financial statements in accordance with accounting principles and practices prescribed and permitted by the Commonwealth of Kentucky. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as the National Association of Insurance Commissioners Accounting Practices and Procedures Manual and a variety of other NAIC publications.

Financial statements prepared for the Kentucky Department of Insurance in accordance with statutory accounting practices differ from the financial statements prepared in accordance with GAAP. The principal differences are (1) certain assets, such as accounts receivable from non-governmental entities greater than 90 days old and prepaid expenses, are excluded from the statutory balance sheet and (2) debt securities are carried at amortized cost, not fair value as required under GAAP. As a result of the foregoing, statutory net worth at September 30, 2019 and 2018 is $92,039,918 and $208,569,972, respectively. Statutory net income (loss) was $1,639,724 and $(31,475,271) for the periods ending September 30, 2019 and 2018, respectively.

Under applicable Kentucky state laws and regulations, UHC is required to maintain the greater of a minimum net worth of $1,250,000, determined in accordance with statutory accounting practices, or the minimum capital requirements as calculated by the risk-based capital (RBC) calculation. The RBC requirements are designed to measure the acceptable amount of capital an insurer should have based on the inherent specific risks to each insurer. Within certain ratio ranges, regulators have increasing authority to take action as the RBC ratio decreases. There are four levels of regulatory action, ranging from requiring insurers to submit a comprehensive plan to the state insurance commissioner to requiring the state insurance commissioner to place the insurer under regulatory control. At September 30, 2019 and 2018, UHC’s statutory net worth exceeds that required by the RBC calculation for health insurers in Kentucky.

Recent Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The amendments mitigate transition complexity by requiring entities other than public business entities, including not-for-profit organizations and certain employee benefit plans, to implement the credit losses standard issued in 2016, for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This aligns the implementation date for their annual financial statements with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard.

The effective date and transition requirements are the same as the effective dates and transition requirements in the credit losses standard, as amended by the new ASU.

In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting. In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government (UST), the London Interbank Offered Rate (LIBOR) swap rate, and the Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate. When the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate as the fourth permissible U.S. benchmark rate.

The new ASU adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes.

The amendments will be effective concurrently with ASU 2017-12, which is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this ASU if the organization already has adopted ASU 2017-12.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. These amendments remove the disclosure requirements in Topic 820 as follows: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; 2) the policy for timing of transfers between levels; 3) the valuation processes for Level 3 fair value measurements; and 4) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

These amendments modify the disclosure requirements in Topic 820 as follows: 1) in lieu of a roll forward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; 2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and 3) the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

These amendments add the disclosure requirements in Topic 820 as follows: 1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

For all entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date.

transfer of assets, or the reduction, settlement, or cancellation of liabilities, is a contribution or an exchange transaction. It provides criteria for determining whether the resource provider is receiving commensurate value in return for the resources transferred which, depending on the outcome, determines whether the organization follows contribution guidance or exchange transaction guidance in the revenue recognition and other applicable standards. It also provides a more robust framework for determining whether a contribution is conditional or unconditional, and for distinguishing a donor-imposed condition from a donor-imposed restriction.

This guidance is effective for transactions in which the entity serves as a resource recipient to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

This guidance is effective for transactions in which the entity serves as the resource provider to annual periods beginning after December 15, 2019, and interim periods within those annual periods beginning after December 15, 2020. Early adoption is permitted.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. These amendments refine and expand hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2021. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period (i.e., the initial application date).

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. As a result a) many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses; b) the new guidance also applies to the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial writeoff of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. This ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The new guidance is effective for fiscal years beginning after December 15, 2022, with early application permitted for fiscal years beginning after December 15, 2019. Management is currently evaluating the impact of this guidance on the financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The updated guidance provides new requirements for leases to be recognized in the financial statements. In general, the guidance requires the lessee to recognize liabilities on the balance sheet for the obligation to make lease payments and an asset for the right to use the underlying assets for the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right to use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities. The updated guidance is to be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. Management intends to adopt this guidance upon the effective date listed and is currently evaluating the related impact on the financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance makes targeted improvements to the recognition and measurement of financial instruments by a) requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; b) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and c) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities (among others deemed not applicable to UHC). The new guidance is effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. The new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost. Management intends to adopt this guidance upon the effective date listed and is currently evaluating the related impact on the financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The updated guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. UHC management intends to adopt the guidance on the effective date and it is not expected to have a material impact on the financial statements.

In May 2014, the FASB updated its guidance related to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this update (and other related following updates) is to improve the reporting of revenue by providing a more robust framework for addressing revenue issues and improved disclosure requirements. Current revenue recognition guidance in U.S. generally accepted accounting principles is comprised of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes result in different accounting for economically similar transactions. For the Company, this guidance is to be applied retrospectively to annual and interim reporting periods beginning after December 15, 2018. UHC has adopted this guidance as of January 1, 2019. Since premium revenue from insurance contracts is excluded and UHC has no other revenue items that are covered by this guidance, adoption of this guidance will have no impact on the financial condition or operating results of UHC.

4)	Marketable Securities and Assets Limited As To Use

The following is a summary of marketable securities stated at fair value as of September 30, 2019 and 2018:

	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury Securities and obligations of U.S. Government corporations and agencies	$	38,132,801	$	1,152,290	$	(1,790	)	$	39,283,301
Other government obligations	826,269		62,432		—			888,701
Other debt securities	517,661		63,471		—			581,132
Corporate debt securities	29,498,586		1,063,969		(14,428		)	30,548,127
Commercial mortgage-backed securities	22,763,139		476,939		(30,863		)	23,209,215
Residential mortgage-backed securities	21,684,567		230,473		(55,095		)	21,859,945
Bank loan bonds	2,139,736		24,784		—			2,164,520
Small cap equity securities	22,508,945		2,141,326		(8,014,959		)	16,635,312
Preferred securities	140,379		34,707		—			175,086
Equity mutual funds	20,404,083		7,435,061		—			27,839,144
Total marketable securities	$	158,616,166	$	12,685,452	$	(8,117,135	)	$	163,184,483	September 30, 2018
---	---	---	---	---	---	---	---	---	---
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury Securities and obligations of U.S. Government corporations and agencies	$	20,872,430	$	67	$	(713,714	)	$	20,158,783
Municipal bonds	930,785		—		(28,673		)	902,112
Other government obligations	1,642,926		30,010		(31,300		)	1,641,636
Other debt securities	6,411,815		11,514		(154,164		)	6,269,165
Corporate debt securities	41,250,357		227,445		(765,293		)	40,712,509
Commercial mortgage-backed securities	29,485,869		59,380		(429,053		)	29,116,196
Residential mortgage-backed securities	28,374,147		52,585		(1,034,353		)	27,392,379
Small cap equity securities	31,905,501		23,438,578		(631,580		)	54,712,499
Preferred securities	647,094		37,966		—			685,060
Equity mutual funds	40,275,262		34,109,914		—			74,385,176
Total marketable securities	$	201,796,186	$	57,967,459	$	(3,788,130	)	$	255,975,515

In order to meet the deposit requirement described in Note 3, the following assets are limited as to use at September 30, 2019 and 2018:

	2019		2018
U.S. Treasury Note (3.125% due May 15, 2048)	$	607,735	$	493,340
Money market account	84,134		78,810
Assets limited as to use	$	691,869	$	572,150

The amortized cost and estimated fair value of marketable debt securities by contractual maturity date at September 30, 2019 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

	Amortized Cost		Estimated Fair Value
Due within one year or less	$	831,250	$	831,822
Due after one year through five years	34,210,054		34,607,281
Due after five years through ten years	22,453,432		22,875,250
Due after ten years	13,620,317		15,151,428
	71,115,053		73,465,781
Commercial mortgage-backed securities	22,763,139		23,209,215
Residential mortgage-backed securities	21,684,567		21,859,945
Total debt securities	$	115,562,759	$	118,534,941

Proceeds from the sale of available-for-sale securities aggregated $226,302,082 during the period ending September 30, 2019, resulting in gross realized gains of $33,695,385 and gross realized losses of $1,198,329. Proceeds from the sale of available-for-sale securities aggregated $50,542,921 during the period ending September 30, 2018, resulting in gross realized gains of $2,196,690 and gross realized losses of $765,492.

UHC has determined that the following amounts are temporarily impaired at September 30, 2019 and 2018 summarized by asset class and length of time that a security has been in a continuous unrealized loss position:

2019	Less Than 12 Months				12 Months or Longer				Total
Description of Securities	Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses
U.S. Treasury Securities and obligations of U.S. Government corporations and agencies	$	611,844	$	1,790	$	—	$	—	$	611,844	$	1,790
Corporate debt securities	1,932,093		—		775,498		14,428		2,707,591		14,428
Commercial mortgage-backed securities	3,157,453		26,831		384,948		4,032		3,542,401		30,863
Residential mortgage-backed securities	3,625,508		13,576		4,426,715		41,518		8,052,223		55,094
Total debt securities	9,326,898		42,197		5,587,161		59,978		14,914,059		102,175
Small cap equity securities	8,843,141		7,920,831		440,206		94,129		9,283,347		8,014,960
Total equity securities	8,843,141		7,920,831		440,206		94,129		9,283,347		8,014,960
	$	18,170,039	$	7,963,028	$	6,027,367	$	154,107	$	24,197,406	$	8,117,135

2018	Less Than 12 Months				12 Months or Longer				Total
Description of Securities	Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses
U.S. Treasury Securities and obligations of U.S. Government corporations and agencies	$	14,713,947	$	383,322	$	5,438,932	$	330,392	$	20,152,879	$	713,714
Municipal bonds	508,865		9,178		393,204		19,495		902,069		28,673
Other government obligations	1,030,260		31,300		—		—		1,030,260		31,300
Other debt securities	3,920,377		84,753		1,702,381		69,411		5,622,758		154,164
Corporate debt securities	21,957,592		505,179		6,516,644		260,115		28,474,236		765,294
Commercial mortgage-backed securities	16,593,775		217,073		5,714,918		211,979		22,308,693		429,052
Residential mortgage-backed securities	10,308,730		287,426		15,410,264		746,927		25,718,994		1,034,353
Total debt securities	69,033,546		1,518,231		35,176,343		1,638,319		104,209,889		3,156,550
Small cap equity securities	2,784,360		582,180		203,130		49,400		2,987,490		631,580
Total equity securities	2,784,360		582,180		203,130		49,400		2,987,490		631,580
	$	71,817,906	$	2,100,411	$	35,379,473	$	1,687,719	$	107,197,379	$	3,788,130

At September 30, 2019, 67 debt securities and 16 equity securities with unrealized losses of $59,978 and $94,129, respectively, were in a loss position for 12 months or more. At September 30, 2018, 240 debt securities and 5 equity securities with unrealized losses of $1,698,319 and $49,400, respectively, were in a loss position for 12 months or more. The unrealized losses on fixed maturity investments with continuous unrealized losses for less than twelve months were primarily due to a widening of credit spreads rather than a decline in credit quality. UHC believes, based on its analysis, that these securities are not other-than-temporarily impaired.

For the periods ended September 30, 2019 and 2018, there were no credit-related impairment charges recorded within the consolidated statements of operations. There were no non-credit related impairment charges in 2018 or 2017.

(5)	Derivative Instruments

UHC uses deferred settlement mortgages as a cost efficient way to invest in mortgage-backed securities. In this approach, the investor accepts delayed settlement on the purchase of mortgage-backed securities in return for a modest reduction in the price paid for those mortgage-backed securities. The price differential is directly related to the fact that the investor does not experience the higher yield typically offered by mortgage-backed securities relative to the interest rate earned on cash equivalents held for the period between normal settlement and the agreed upon deferred settlement. Such deferred settlement mortgages are not designated as hedging instruments under ASC 815, Derivatives and Hedging. UHC reported net realized (losses)/gains from these securities of ($452,912) and $172,211, respectively, within realized gains from sale of investments, net on the consolidated statements of operations. There are no significant derivative instruments held at September 30, 2019 and 2018.

(6)	Fair Value Measurements

ASC 820-10 establishes a fair value hierarchy comprised of three priority levels, which are as follows:

Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets.

Level 2 - Other observable inputs, either directly or indirectly, including:

•Quoted prices for similar assets/liabilities in active markets;

•Quoted prices for identical or similar assets in non-active markets;

•Inputs other than quoted prices that are observable for the asset/liability; and

•Inputs that are derived principally from or corroborated by other observable market data.

Level 3 - Unobservable inputs that cannot be corroborated by observable market data.

UHC uses quoted values and other data provided by an independent pricing service as inputs into its process for determining fair values of its investments. The pricing service obtains market quotations and actual transaction prices for securities that have quoted prices in active markets. For securities not actively traded, the pricing service prepares estimates of fair value measurements for those securities using its proprietary pricing applications which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. As UHC is responsible for the determination of fair value in accordance with ASC 820-10, it has reviewed the pricing service inputs and levels and evaluated the appropriateness of the levels determined. UHC’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset.

UHC’s fixed maturity securities generally do not trade in an active market. The fair value estimates of such fixed maturity investments are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturities as provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy.

UHC’s equity securities trade on a major exchange in an active market. Accordingly, such equity securities are disclosed in Level 1. The one exception is common stock obtained in 2016 and 2018 in connection with services provided for under a Development and Master Services Agreement. The value is based on unobservable inputs and represents the amount disclosed in Level 3.

There were no transfers between any levels of the fair value hierarchy during the periods ended September 30, 2019 or 2018. UHC’s policy is to recognize transfers between Levels as of the end of the reporting period.

The following is a table of the fair value measurements of UHC’s applicable assets by level within the fair value hierarchy as of September 30, 2019 and 2018:

	September 30, 2019
	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs<br><br>(Level 2)		Unobservable Inputs<br><br>(Level 3)		Total Fair Value
Marketable securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	—	$	39,283,301	$	—	$	39,283,301
Municipal bonds	—		888,701		—		888,701
Other debt securities	—		581,132		—		581,132
Corporate debt securities	—		30,548,127		—		30,548,127
Commercial mortgage-backed securities	—		23,209,215		—		23,209,215
Residential mortgage-backed securities	—		21,859,945		—		21,859,945
Bank loan bonds	—		2,164,520		—		2,164,520
Small cap equity securities	16,505,312		—		130,000		16,635,312
Preferred securities	175,086		—				175,086
Equity mutual fund	27,839,144		—		—		27,839,144
Assets limited as to use:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	—		607,735		—		607,735
Total investment securities	$	44,519,542	$	119,142,676	$	130,000	$	163,792,218

	September 30, 2018
	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs<br><br>(Level 2)		Unobservable Inputs<br><br>(Level 3)		Total Fair Value
Marketable securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	—	$	20,158,783	$	—	$	20,158,783
Municipal bonds	—		902,112		—		902,112
Other government obligations	—		1,641,636		—		1,641,636
Other debt securities	—		6,269,165		—		6,269,165
Corporate debt securities	—		40,712,509		—		40,712,509
Commercial mortgage-backed securities	—		29,116,196		—		29,116,196
Residential mortgage-backed securities	—		27,392,379		—		27,392,379
Small cap equity securities	54,614,999		—		97,500		54,712,499
Preferred securities	685,060		—				685,060
Equity mutual fund	74,385,176		—		—		74,385,176
Assets limited as to use:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	—		493,340		—		493,340
Total investment securities	$	129,685,235	$	126,686,120	$	97,500	$	256,468,855

The fair value of other financial instruments approximates their carrying values at September 30, 2019 and 2018 due to the short maturity of such instruments.

(7) Premiums Receivable

Premiums receivable represents amounts due from DMS and CMS and consists of the following at September 30, 2019 and 2018:

	2019		2018
Membership premiums	$	10,300,000	$	11,523,300

Certain members are assigned to UHC with an effective date earlier than their assignment date. Based on past experience, UHC has estimated a receivable for premiums relating to those retroactive members that will be assigned to UHC in future periods with an effective date in the current or prior period.

(8)	Other Receivables

The following is a summary of other receivables as of September 30, 2019 and 2018:		2019		2018
Pharmacy rebates receivable	$	3,467,000	$	8,097,999
Reinsurance receivable	84,033		2,222,712
Interest receivable	627,044		844,416
Receivable from Evolent Health, related party	1,324,768		1,039,579
Encounter penalties from TPAs	423,164		187,490
Note interest receivable	55,832		—
Other	388,796		138,238
	$	6,370,637	$	12,530,434

(9) Land and Construction in Progress

Land and construction in progress consists of the following as of September 30, 2019 and 2018:		2019		2018
Land	$	5,700,000	$	9,306,511
Construction in Progress	13,500,000		4,287,607
	$	19,200,000	$	13,594,118

Land represents parcels of property purchased for the future UHC corporate headquarters and health and well-being campus in West Louisville. The construction in progress is cost associated with the initial design phase of the project. On February 22, 2019, UHC announced that construction would be halting on the Health and Well-Being Campus.

(10) Furniture and Equipment

Furniture and equipment consists of the following as of September 30, 2019 and 2018:

	2019		2018
Equipment and software	$	6,020,310	$	6,345,202
Furniture and fixtures	722,289		722,289
Leasehold improvements	446,352		446,352
Equipment and furniture under capital lease	159,202		159,202
	7,348,153		7,673,045
Less accumulated depreciation and amortization	5,761,952		5,085,068
	$	1,586,201	$	2,587,977

Depreciation and amortization expense charged to operations was $766,134 and $773,028 during the periods ended September 30, 2019 and 2018, respectively. Accumulated amortization of furniture and equipment under capital leases amounted to $159,202 at both September 30, 2019 and 2018, respectively.

(11) Related-Party Transactions

UHC sponsors and affiliated entities provide health care services to UHC members at contracted rates. Estimated amounts incurred by UHC for services provided by UHC sponsors and affiliates for the periods ended September 30, 2019 and 2018 were approximately as follows:

	2019		2018
ULP	$	51,813,000	$	58,713,750
Norton	192,535,500		191,125,500
Jewish	59,949,000		72,337,500
UMC	99,771,750		93,213,000
Primary Care	5,199,750		7,794,000

At September 30, 2019 and 2018, accrued medical expenses include amounts due to the sponsors for unpaid medical and related services.

In May 2019, UHC issued a note payable under an agreement with Evolent, a related party. The related party note carries a fixed interest rate of 6.5% per annum and is required to be repaid, plus accrued interest, in single payment on July 1, 2025, the maturity date, or earlier, subject to regulatory approval. The related party note is required to be repaid out of the surplus in excess of UHC’s obligations to its policyholders, claimant and beneficiary claims and all other creditors. As of September 30, 2019, the outstanding principal balance of the related party note was $40,000,000 excluding accrued interest of approximately $737,000.

(12)	Transactions with Subcontractors

As discussed in Note 1, UHC contracts various administrative and benefit management functions to third party subcontractors. The schedule below lists the individual subcontracts, description of the services provided, and the associated administrative fees for each service provided reflected under Purchased Services within the consolidated statements of operations.

Subcontractor Name	Service Provided	2019		2018
Evolent, related party	Administrative and pharmacy	$	81,181,512	$	84,657,294
Beacon	Behavioral Health	5,436,844		5,420,465
Care Enroll	Administrative	1,204,627		1,808,780
HMS	Administrative	1,176,152		1,729,952
AMHP	Administrative	301,470		1,324,350
Health Integrated	Administrative	—		1,331,368
DST	Administrative	100,160		923,394
TMG	Administrative	1,032,814		255,196
		$	90,433,579	$	97,450,799

Beacon provides behavioral health benefit management services to UHC under a contact which expires on December 31, 2020.

Care Enroll provides member premium billing and payment processing services to UHC for assigned members of a Medicaid Waiver Program within the state of Kentucky through a five year contract that expires on August 24, 2022.

Prior to October 1, 2017, AMHP provided administrative services including Medicaid claims processing, enrollment services, and information technology. From October 1, 2017 through July 31, 2018, AMHP continued to provide certain run-out services.

Health Management Systems provided third party liability services to UHC through a contract with Evolent which auto renews each December. The current contract expires on December 31, 2019.

Health Integrated provides utilization and case management services to UHC through a contract that expired December 31, 2018. These services are provided by Evolent beginning January 1, 2019.

DST provided administrative services including Medicare claims processing, enrollment services, and information technology under a contract that was terminated by UHC on June 30, 2018. UHC has contracted with TMG Health Inc. to provide these same services for Medicare effective July 1, 2018 through a contract with an expiration date of December 31, 2023.

(13)	Accrued Medical Expenses

Activity in accrued medical expenses is summarized as follows:

	2019			2018
Balance, January 1	$	161,854,944		$	199,997,904
Incurred related to:
Current year	1,416,436,898			1,357,920,071
Prior years	(7,575,307		)	464,271
Total incurred	1,408,861,591			1,350,584,342
Paid related to:
Current year	1,258,512,638			1,225,996,055
Prior years	160,268,638			169,452,829
Total paid	1,418,781,276			1,395,448,884
Balance, September 30	$	151,935,259		$	162,933,362

The medical expenses for prior years (decreased)/increased by a total of $(7,575,307) and $464,271 in during the periods ended September 30, 2019 and 2018, respectively, due to lower than anticipated medical cost and favorable utilization trends. These adjustments are generally the result of ongoing analysis and recent loss development trends. Original estimates are increased or decreased, as additional information becomes known regarding individual claims.

(14) Construction and New Market Tax Credit Debt

In the fourth quarter of 2018, UHC and Passport Health Solutions, LLC entered into debt arrangements totaling $107,110,000 (see details below) associated with the construction of a new UHC corporate headquarters to be located on approximately 20 acres in West Louisville and is secured by the UHC investment portfolio.

Old National Bank	$	80,000,000
New Market Tax Credits	24,110,000
REINVESTMENT FUND, INC.	2,500,000
Community Foundation of Louisville	500,000
Total Debt	$	107,110,000

A component of the financing arrangement requires UHC and Passport Health Solutions LLC to inject land and cash to meet a Cash Equity Requirement minimum of 15% (approximately $17,000,000) as detailed in the project budget approved by Old National Bank. This requirement was achieved through the 2017 and 2018 purchase of the West Louisville land, expenditures for construction in progress at the site, and funds set aside at the debt closing in a specific Old National Bank account to be used toward construction cost in 2019.

PHS I contracted to obtain New Markets Tax Credits available to entities investing in low to moderate income opportunity zones. Three Community Development Entities (CDEs) made loans to PHS I totaling $24,110,000. In exchange for the funding, PHS I makes quarterly interest only payments to each CDE beginning March 1, 2019 at an interest rate of 1.057%. When the project is complete in the opportunity zone as intended then $7,610,000 of the $24,110,000 CDE debt is forgiven. The three CDEs and amount of outstanding debt for each is listed below:

TRF NMTC Fund LXVI, LP	$	8,500,000
NDC New Markets Investments XCIII, LLC	7,760,000
Telesis CDE 15, LLC	7,850,000
Total New Market Tax Credit Debt	$	24,110,000

PHS I entered into a $2,500,000 revolving promissory note in 2018 with REINVESTMENT FUND, INC., a Pennsylvania non-profit corporation, at an interest rate of 7.42%. Interest only was payable on a monthly basis commencing on June 1, 2019 and would have continued through January 1, 2022. Commencing on February 1, 2022 the principal amount and interest would have been repaid in successive monthly installments of principal and interest each in an amount sufficient to amortize the principal amount over a hypothetical twenty-five (25) year term until paid in full at the final maturity date of December 19, 2022. There have been no draws against this loan and the promissory note was terminated during 2019.

UHC entered into a $16,500,000 Senior Leverage Loan with Old National Bank (provided in conjunction with the New Markets Tax Credits financing related to loans of $24,110,000). The loan included interest only monthly payments until maturity at September 19, 2025. This Senior Leverage Loan had a variable interest rate and was tied to an interest rate swap agreement which fixed the interest rate at 5.69%. The loan had debt covenants that required UHC to meet certain financial ratios such as annual global cash flow coverage, loan-to-value requirements, loan-to-cost requirements, minimum liquidity, and minimum account pledge balance. During 2019, the outstanding amounts of principal and interest on this loan were repaid due to being out of compliance with certain debt covenants. The interest rate swap had a current notional value of $16,500,000 with a fixed rate of 5.69% and spread of 2.40%. The swap maturity date was October 15, 2025. The terms of the swap equaled the terms of the debt which allowed for hedge effectiveness. Because the debt was repaid in 2019, the interest rate swap was also terminated. Previously capitalized debt issuance costs of $1,385,803 were written off during 2019 as a result of repaying the associated debt.

From the proceeds of the $16,500,000 loan with Old National Bank, UHC entered into a promissory note and transferred $16,475,150 to Passport Investment Fund, LLC which is affiliated with PNC New Market Investment Partners, LLC associated with PNC Bank. UHC will receive quarterly interest payments at a rate of 1.00% beginning March 10, 2019 and will continue through February, 2026. Beginning June 10, 2026, UHC will begin to receive quarterly interest and principal payment through the maturity date of March 1, 2048. Although the Old National Bank loan was repaid, this note receivable remains in place.

The final component of the Old National Bank debt structure was a $63,500,000 seven-year, draw down, construction converting to term loan. As UHC went through the construction process of the new corporate headquarters the initial debt funds to be expended are from the $24,110,000 New Market Tax Credits. Once those funds have been exhausted, then draws on the $63,500,000 draw down debt would have been utilized. Interest only payments at a variable rate began on January 15, 2019 and would have continued for 3 years when at that time monthly payments of principal and interest begin over the remaining 25 years of the debt ending December 15, 2046. During 2019, UHC was out of compliance with certain debt covenants tied to the Old National Bank loans and as a result, this loan was terminated (there had been no draws at the time of termination). This loan was tied to an interest rate swap agreement which fixed the interest rate at 5.69%. The interest rate swap had notional values that were projected to match the draws on the loan with a fixed rate of 5.69% and spread of 2.40%. The swap maturity date was December 15, 2046. The terms of the swap equaled the terms of the debt which allowed for hedge effectiveness. Because the debt was terminated in 2019, the interest rate swap was also terminated.

As of September 30, 2019, UHC had repaid the $500,000 loan agreement with the Community Foundation of Louisville for the purpose of providing a portion of the financing of the West Louisville Health and Well-Being Campus development. Quarterly interest payments in arrears at a 3% interest rate commenced on June 1, 2018 and would have continued for seven years at which time payments of principal and interest based on a 3-year amortization would have been due quarterly until maturity on the tenth anniversary of the note closing.

(15)	Reinsurance

UHC maintains reinsurance (stop-loss) coverage for hospital inpatient medical expenses with commercial insurance carriers. Under UHC’s policies relating to the Medicaid and Medicare programs, the maximum lifetime reinsurance indemnity under these policies is $3,000,000 for eligible hospital services for each insured member for Medicaid and $2,000,000 for eligible hospital services for each insured member for Medicare, subject to certain annual deductibles of $350,000 (increased to $400,000 effective November 1, 2018) for Medicaid and $275,000 for Medicare as stated in the agreements. The reinsurance coverage does not relieve UHC of its primary obligation to the policy members. Reinsurance premiums were $5,832,886 and $5,404,368 for the period ended September 30, 2019 and 2018, respectively. Reinsurance recoveries amounted to $2,545,713 and $1,825,906 for the periods ended September 30, 2019 and 2018, respectively.

(16)	401(k) Defined Contribution Plan and 457(b) Deferred Compensation Plan

UHC’s employees are eligible to participate in the University Health Care 401(k) Plan (401(k) Plan), a defined contribution plan covering substantially all employees of UHC. UHC matches employee contributions with an amount equal to 100% of such contribution up to 1% of the eligible employee’s salary, plus 50% of such contribution on the next 5% of the eligible employee’s salary. UHC’s expense for the 401(k) Plan was $278,971 and $289,946 for the periods ended September 30, 2019 and 2018, and is included in salaries and benefits on the accompanying consolidated statements of operations.

Effective April 1, 2016, UHC employees in the position of Director and above are eligible to participate in the University Health Care 457(b) Plan, a deferred compensation plan. The plan does not provide for an employer matching contribution.

(17) Lease Commitments

UHC has two non-cancelable operating leases for office space. The first lease involves a regional office in eastern Kentucky where the lease expires on February 28, 2021. The second lease covers the primary UHC office space which expires on June 30, 2021. UHC is also responsible for real estate taxes, utilities, and all other expenses associated with the operation of its leased office space. Recognition of lease expense on a straight‑line basis in accordance with ASC 840‑20‑25‑1, Leases, results in deferred rent of $44,158 and $47,950 at September 30, 2019 and 2018, respectively, which is included in other liabilities on the accompanying balance sheets. Pursuant to a sublease on the primary UHC office space, UHC acquired equipment and furniture under capital lease (note 10).

Future minimum rental commitments under these non-cancellable lease agreements are as follows:		Operating Leases
Year ending December 31:
2019	$	309,305
2020	1,245,400
2021	669,343
2022	109,699
2023	16,672
Minimum lease commitments	$	2,350,419

Total rent expense for noncancelable operating leases amounted to $1,210,897 and $1,245,286 during the periods ended September 30, 2019 and 2018, respectively, which is included within other administrative and general on the accompanying consolidated statements of operations.

(18)	Commitments and Contingencies

In the ordinary course of business, UHC is involved in and is subject to claims, contractual disputes with providers and other uncertainties. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on UHC’s financial condition or results of operations.

Due to the nature of its business, UHC is subject to audit by various state and federal agencies. In the opinion of management, any findings or recommendations resulting from these audits will not have a material adverse effect on UHC’s financial condition or results of operations.

UHC maintains professional liability coverage with a commercial insurance carrier for certain claims with limits of $10,000,000 per occurrence and $10,000,000 in the aggregate. Professional liability policies are on a claims-made basis and must be renewed or replaced with equivalent insurance if claims incurred during their term but asserted after their expiration are to be insured. No events were reported under any of these policies in the periods ended September 30, 2019 and 2018.

(19)	Subsequent Events

On December 30, 2019, the first phase of the Acquisition closed, whereby, in accordance with the Asset Purchase Agreement (APA), UHC sold net assets to Passport Health Plan, Inc. (f/k/a Justify Holdings, Inc.), a subsidiary of Evolent (PHP). The net assets transferred by UHC in this phase were related primarily to the Medicaid-related assets and liabilities. Of the $70,000,000 cash consideration, approximately $54,000,000 was transferred by PHP to the sponsors of UHC and approximately $16,000,000 was deposited by Evolent in an escrow account as funds set aside until subsequent phases of the Acquisition close in 2020. In addition to the $70,000,000 cash consideration, the sponsors of UHC received 30% ownership of PHP, valued at $30,000,000, for an enterprise valuation of $100,000,000.

In November 2019, UHC was notified that it was not awarded a Medicaid contract for the period beginning on July 1, 2020. Subsequent thereto, UHC (among others) filed appeals with DMS, resulting in a reversal of that decision. In January 2020, DMS issued a new request for proposal (RFP) for Medicaid services. The resulting contract would begin January 1, 2021 and continue for four years. In addition, organizations could receive extensions of the contract for an additional six (6) two-year periods. Responses to the RFP are due in February 2020.

Management has evaluated events and transactions occurring subsequent to the balance sheet date through the date of the Independent Auditor’s Report which represents the date which the financial statements were available to be issued, for potential recognition and disclosure. There are no additional events or transactions that meet the definition of a recognized or nonrecognized subsequent event under the scope of ASC 855-10, Subsequent Events, and, therefore, no additional recognition or disclosure in the financial statements is required.

(20)	Going Concern

Current year operating losses, uncertainty in regard to the DMS RFP, and the level of capital and surplus relative to certain risk based capital thresholds are current events and conditions that indicate it is possible that UHC will be unable to meet its obligations as they become due within one year after the date the consolidated financial statements are issued. Due to the events described above, without further developments, there is doubt about the ability of UHC to continue as a going concern. However, as more fully described in Notes 1 and 19, UHC has entered into an APA with PHP whereby management believes the ongoing operations for Medicaid, Medicare, and the construction of the West Louisville headquarters are to be able to continue as a going concern. While the net assets are considered held for sale as part of the discontinued operations, the accompanying consolidated financial statements were prepared assuming UHC will continue as a going concern, which contemplates the realization of assets and the liquidity of liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

21) Discontinued Operations

In conjunction with the Acquisition (Notes 1, 20), substantially all of UHC’s operations and the related assets and liabilities are considered discontinued operations. The Acquisition is expected to close in 3 phases. The first phase has occurred subsequent to September 30, 2019, but prior to the issuance of the consolidated financial statements (Note 20). The second phase is expected to close in the first or second quarter of 2020, and is contingent on the redeployment and repayment of the CDE debt and related items as more fully described in Note 14. Once the redeployment and repayment occurs, the net assets associated with the West Louisville building project will be transferred from UHC to PHP and the approximate $16,000,000 being set aside in escrow will be released and paid to the sponsors of UHC. The third phase of the Acquisition is expected to close in the fourth quarter of 2020, and is contingent on the approval of CMS for PHP to be certified to provide prepaid health care services, including Medicare Part D prescription drug coverage, through a MA-SNP plan.

		Exhibit

Exhibit 99.3

University Health

Care, Inc., and

Subsidiaries

d/b/a Passport Health Plan

Consolidated Financial Statements as of

and for the Years Ended

December 31, 2018 and 2017, and

Independent Auditor’s Report

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES

d/b/a Passport Health Plan

TABLE OF CONTENTS

	Page
INDEPENDENT AUDITOR’S REPORT	1
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017:
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Changes in Unrestricted Net Assets	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Consolidating Balance Sheet	33
Consolidating Statement of Operations	33

Independent Auditor’s Report

To the Board of Directors

of University Health Care, Inc., and Subsidiaries d/b/a Passport Health Plan

We have audited the accompanying consolidated financial statements of University Health Care, Inc., and Subsidiaries d/b/a Passport Health Plan (a Kentucky non-stock, not‑for‑profit corporation), which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of University Health Care, Inc., and Subsidiaries d/b/a Passport Health Plan as of December 31, 2018 and 2017, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 21 to the consolidated financial statements, University Health Care, Inc., and Subsidiaries d/b/a Passport Health PlanUniversity Health Care, Inc. d/b/a Passport Health Plan has experienced current year operating losses and expects future losses as well, has failed to maintain certain debt covenants which has caused certain debt to be classified as a current obligation, and has stated that substantial doubt exists about its ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding

these matters are also described in Note 21. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Report on Supplementary Information

Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplemental consolidating information is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibly of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

Accounting principles generally accepted in the United States of America require that the ultimate incurred and total paid information for the years prior to 2017 in footnote 13 be presented to supplement the basic financial statements (the “required supplementary information”). Such information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

/s/ MCM CPAs & Advisors LLP

Louisville, Kentucky

April 30, 2019

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2017
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	95,789,036	$	186,672,811
Marketable securities	108,747,088		110,497,231
Premiums receivable	11,523,100		11,508,400
Receivable from the Department for Medicaid Services	6,280,103		6,280,103
Other receivables	27,461,232		15,578,261
Prepaid expenses	1,856,558		1,050,056
Total current assets	251,657,117		331,586,862
Land and construction in progress	20,181,793		8,760,634
Furniture and equipment, net	2,340,222		1,418,912
Marketable securities	127,233,323		126,748,268
Assets limited as to use	535,781		526,365
Total assets	$	401,948,236	$	469,041,041
Liabilities and Net Assets
Current liabilities:
Accrued medical expenses	$	161,854,944	$	199,997,904
Payable to Department for Medicaid Services	8,199,217		1,264,045
Payable to Centers for Medicare and Medicaid Services	1,571,970		1,964,835
Premium deficiency reserve	47,415,290		—
Construction and new market tax credit debt	40,627,295		—
Accounts payable and accrued expenses	40,612,917		36,339,725
Total current liabilities	300,281,633		239,566,509
Other liabilities	48,009		39,830
Total liabilities	300,329,642		239,606,339
Commitments and contingencies (notes 17 and 18)
Net assets — with donor restrictions (note 19)	18,092		—
Net assets — without donor restrictions	101,600,502		229,434,702
Total net assets	101,618,594		229,434,702
Total liabilities and net assets	$	401,948,236	$	469,041,041

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
	2018			2017
Revenues:
Premiums earned	$	1,953,210,500		$	1,932,183,073
Other income	109,029			11,000
Interest and dividend income	6,241,183			5,277,063
Realized investment gains (losses), net
Total other-than-temporary impairment losses	(1,361,600		)	(113,550		)
Realized gains from sale of investments, net	3,060,277			7,666,497
Total realized investment gains, net	1,698,677			7,552,947
Total revenues	1,961,259,389			1,945,024,083
Expenses:
Medical expenses:
Purchased medical services, net	1,702,205,778			1,602,195,491
Capitation and other services	143,594,797			142,472,429
Total medical expenses, net	1,845,800,575			1,744,667,920
Administrative expenses:
Purchased services	132,673,295			129,248,109
Salaries and benefits	18,500,290			17,075,501
Department for Medicaid Services 1% assessment	18,990,135			18,864,818
Other administrative and general	18,091,407			16,943,369
Depreciation and amortization	1,036,822			1,105,376
Total administrative expenses	189,291,949			183,237,173
Premium deficiency reserve	47,415,290			—
Total expenses	2,082,507,814			1,927,905,093
Net operating (loss) income	(121,248,425		)	17,118,990
Other non-operating changes in net assets:
Change in net assets with donor restrictions	18,092			—
Change in interest rate swap valuation	(863,309		)	—
Change in unrealized gains on investments, net	(5,722,466		)	9,364,776
(Decrease) increase in net assets	$	(127,816,108	)	$	26,483,766

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
	2018			2017
Net assets - without donor restrictions
Net operating (loss) income	$	(121,248,425	)	$	17,118,990
Change in interest rate swap valuation	(863,309		)	—
Change in unrealized gains on investments, net	(5,722,466		)	9,364,776
(Decrease) increase in net assets - without donor restrictions	(127,834,200		)	26,483,766
Change in net assets with donor restrictions	18,092			—
Net assets, beginning of year	229,434,702			202,950,936
Net assets, end of year	$	101,618,594		$	229,434,702

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
	2018			2017
Cash flows from operating activities:
(Decrease) increase in net assets - without donor restrictions	$	(127,834,200	)	$	26,483,766
Increase in net assets - with donor restrictions	18,092			—
Adjustments to reconcile (decrease) increase in net assets - without donor restrictions to net cash (used in) provided by operating activities:
Net realized gains on sales of marketable securities	(1,698,677		)	(7,552,947		)
Amortization of bond discounts or premium	656,784			865,969
Depreciation and amortization	1,036,822			1,105,376
Unrealized loss (gain) on investments, net	5,722,466			(9,364,776		)
Changes in assets and liabilities:
Premiums receivable	(14,700		)	42,600
Other receivables	(11,882,971		)	(3,101,232		)
Prepaid expenses	(806,502		)	(84,275		)
Accrued medical expenses	(38,142,960		)	14,526,398
Premium deficiency reserve	47,415,290			—
Accounts payable and accrued expenses	5,032,575			4,914,436
Other liabilities	8,179			23,945
Total adjustments	7,326,306			1,375,494
Net cash (used in) provided by operating activities	(120,489,802		)	27,859,260
Cash flows from investing activities:
Capital expenditures	(12,360,563		)	(9,240,905		)
Purchase of marketable securities	(71,927,175		)	(122,160,822		)
Proceeds from sale or maturity of marketable securities	66,724,163			111,255,241
Net cash used in investing activities	(17,563,575		)	(20,146,486		)
Cash flows from financing activities:
Construction and new market tax credit debt	40,627,295			—
CMS and DMS funds administered	6,542,307			6,759,899
Net cash provided by financing activities	47,169,602			6,759,899
Net (decrease) increase in cash and cash equivalents	(90,883,775		)	14,472,673
Cash and cash equivalents:
Beginning of year	186,672,811			172,200,138
End of year	$	95,789,036		$	186,672,811

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES

d/b/a Passport Health Plan

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018 AND 2017

(1)	Organization and Basis of Presentation

During 2017, UHC established Passport Health Solutions LLC, (PHS I) a wholly-owned subsidiary. This entity will include financial transactions related to phase one of the establishment of a new corporate office headquarters and health and well-being campus in West Louisville.

During 2018, UHC established Passport Health Solutions Two, LLC, (PHS II) a wholly-owned subsidiary. This entity will include financial transactions related to phase two of the establishment of the health and well-being campus in West Louisville.

The consolidated financial statements include all the financial transactions for UHC, the Foundation, PHS I and PHS II. All intercompany balances have been eliminated in consolidation.

Pharmacy benefit management services for Medicaid members are provided to UHC by CaremarkPCS Health, LLC (CVS) through a contract administered by Evolent effective September 1, 2016 (Note 12).

Prior to October 1, 2017, UHC subcontracted certain administrative services related to the Medicaid program to AmeriHealth Caritas Health Plan (ACHP) (Note 12). These administrative services included claims processing, enrollment services, and information technology. Effective October 1, 2017, these administrative services are being provided by Evolent. ACHP continued to provide certain run-out services through July 31, 2018.

Behavioral health benefit management services for Medicaid members are provided to UHC by Beacon Health Strategies, LLC (Beacon) (Note 12).

Dental benefit management services for Medicaid members are provided to UHC by Avesis Third Party Administrators Inc. (Avesis) through a fully capitated arrangement effective July 1, 2016 (Note 12).

Pharmacy benefit management services for MA-SNP members are provided to UHC by CVS through a contract administered by Evolent effective January 1, 2017 (Note 12).

Care Enroll, Inc. provides member premium billing and payment process services to UHC for its assigned members of a Medicaid Waiver Program within the state of Kentucky anticipated to begin in 2019 (Note 12).

(2)	Business Concentration

UHC’s premium revenues for the years ended December 31, 2018 and 2017 are comprised of revenue received from DMS and CMS. UHC’s contract with DMS expired on December 31, 2018, but has been renewed through June 30, 2019. UHC’s contract with CMS expired on December 31, 2018, but has been renewed through December 31, 2019. Management expects to reach agreement for new contracts with both parties although there can be no assurance that such agreements can be reached.

(2)	Significant Risks and Uncertainties, Including Business and Credit Concentrations

All of the Business’s customers are located in the United States. During 2015, there were seven customers that individually accounted for greater than 5% of net revenue. These seven customers accounted for 70% of net revenue in 2015.

The Business provides services to customers in the healthcare industry, which is highly regulated. Changes in federal and state legislation regarding healthcare may have an adverse impact on the Business’s financial position and results of operations.

(3)	Summary of Significant Accounting Policies

Basis of Accounting

Cash and Cash Equivalents

UHC considers all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. UHC maintains a bank account with a required minimum balance of $50,000 at December 31, 2018 and 2017. Cash equivalents totaled $7,147,563 and $3,444,715 at December 31, 2018 and 2017, respectively. At various times throughout the year, UHC maintained balances in excess of federally insured limits.

Marketable Securities

Fair Value of Financial Instruments

Derivative Instruments

Futures contracts are commitments to purchase or deliver securities in the future at a predetermined price or yield, and are usually settled in cash.

Assets Limited as to Use

Land and Construction in Progress

Land is stated at cost and represents parcels of property purchased for the future UHC corporate headquarters and health and well-being campus in West Louisville. The expenditures associated with the construction cost are stated at cost and are being capitalized as construction in progress and depreciation will not begin until time the headquarters is occupied in 2020.

Furniture and Equipment

Furniture and Equipment 7 Years

Computer Hardware 3 Years

Software 3 Years

Long-Lived Assets

Land and construction in progress are recorded at cost. Construction in progress costs are not transferred to the final asset classification and the start of depreciation until the asset is in place for its intended use.

Premium Revenues

Effective July 1, 2015, the DMS contract included a provision where a 1% assessment of capitation revenue paid to UHC would be refunded to DMS on an annual basis. The 1% assessment is recorded as a charge to administrative expense each month establishing a corresponding liability, included in accounts payable and accrued expenses, to be paid in the following calendar year. The DMS 1% assessment was $18,990,135 and $18,864,818 in 2018 and 2017, respectively.

Other Income

Other income in 2018 of $109,029 included $65,000 of Lucina Health, Inc. common stock obtained by UHC in connection with services provided for under a Development and Master Services Agreement and $21,942 from donations received by the Foundation. An additional $16,595 of other income was compensation from a class action settlement agreement involving Tesco Stores Limited (which were common stock investments previously owned by UHC) and $5,492 interest from a note receivable. The $11,000 of other income recorded in 2017 was donations received by the Foundation.

Medical Expenses and Related Liabilities

Medical expenses include capitation payments for primary care physicians, vision, and dental benefits. All other medical expenses are paid on a fee-for-service basis based upon contracted rates with providers as well as prescription drug costs, net of rebates. Rebates are recognized when earned, according to the contractual arrangements with the drug manufacturer. UHC maintains reinsurance for medical expenses with commercial carriers that is more fully described in Note 15.

Premium Deficiency Reserve

The current contract with DMS to provide Medicaid services covers the period of July 1, 2018 - June 30, 2019. At this time management has determined the contracted premium rates from DMS to be insufficient to provide for estimated medical and administrative expenses related to this contract period. Anticipated investment income was utilized in the calculation of a premium deficiency reserve. The premium deficiency reserve of $47,415,290 at December 31, 2018 will be used to offset underwriting losses through June 30, 2019. Due to the Medicare Advantage contract with CMS ending December 31, 2018 there is no premium deficiency for the CMS contract.

Last year the DMS and CMS contracts ended on December 31 so a premium deficiency was not required as of December 31, 2017.

Risk Corridor Reserve

UHC had established a $6,280,103 receivable representing an estimate of additional revenue due from DMS for the period of January 1, 2016 - June 30, 2016 associated with the Affordable Care Act (ACA) expansion population due to exceeding the ninety-two percent higher end corridor boundary. The DMS contracts for the periods ending December 31, 2016, June 30, 2017, December 31, 2017, June 30, 2018, and June 30, 2019 have a provision requiring a refund of revenue should the overall medical loss ratio for these periods fall below ninety percent. At this time management believes the medical loss ratio for these periods of time will exceed the ninety percent threshold. The reserve estimates were calculated using a risk corridor medical loss ratio methodology.

Also, as of December 31, 2018, UHC had established a $1,571,970 payable representing a refund of revenue to the Centers for Medicare and Medicaid Services associated with the 2018 Part D settlement. The December 31, 2017 accrued Part D 2017 settlement payable of $1,264,045 was settled during calendar year 2018.

Department for Medicaid Services Payable

Advertising

Advertising costs are expensed as incurred. In an effort to expand UHC’s brand recognition and membership base, advertising costs of $2,841,660 and $2,745,981 were incurred for the years ended December 31, 2018 and 2017, respectively.

Income Taxes

UHC is a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no income tax provision has been recorded by UHC for the current period. Management believes that UHC has continued to meet the eligibility requirements set forth in the above referenced Internal Revenue Code and has therefore continued to qualify as a tax-exempt organization as of December 31, 2018. UHC did not have asserted and unsettled or unasserted income tax contingencies during 2018 or 2017. UHC did not recognize any benefits or provisions from uncertain tax positions during 2018 or 2017.

Net Assets

Changes in Net Assets

The consolidated statements of operations include net (loss) operating income. Changes in net assets that are excluded from net (loss) operating income include unrealized gains and losses on investments and change in the fair value of interest rate swaps. All changes in net assets are without donor restriction unless otherwise specified (Note 19).

Use of Estimates

Liquidity

As a business-oriented not-for-profit that is not solely dependent on donor contributions, the capital needs of UHC and operating budgets are coordinated so that anticipated cash needs are provided by current cash flow from operations, supplemented from time to time by debt financing. Included within current assets on the consolidated balance sheets are financial assets available for general expenditure within one year of December 31, 2018, and include cash and cash equivalents, marketable securities, premiums and other receivables, receivable from the Department for Medicaid Services, and prepaid expenses. See additional information with respect to these financial assets in Note 3 and Note 4. As part of UHC’s management of liquidity, certain cash in excess of operating requirements for general expenditures is transferred to long term marketable securities. UHC’s long-term marketable securities contain various investments that can be drawn upon, if necessary, to meet liquidity needs of UHC within the next fiscal year. See Notes 4 and 6 for additional information as it relates to marketable securities classified as long term.

Regulation

Financial statements prepared for the Kentucky Department of Insurance in accordance with statutory accounting practices differ from the financial statements prepared in accordance with GAAP. The principal differences are (1) certain assets, such as accounts receivable from non-governmental entities greater than 90 days old and prepaid expenses, are excluded from the statutory balance sheet and (2) debt securities are carried at amortized cost, not fair value as required under GAAP. As a result of the foregoing, statutory net worth at December 31, 2018 and 2017 is $92,125,117 and $213,438,304, respectively. Statutory net (loss) income was ($122,638,109) and $17,107,991 in 2018 and 2017, respectively.

regulatory control. At December 31, 2018 and 2017, UHC’s statutory net worth exceeds that required by the RBC calculation for health insurers in Kentucky.

Recent Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The amendments mitigate transition complexity by requiring entities other than public business entities, including not-for-profit organizations and certain employee benefit plans, to implement the credit losses standard issued in 2016, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. This aligns the implementation date for their annual financial statements with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard.

The effective date and transition requirements are the same as the effective dates and transition requirements in the credit losses standard, as amended by the new ASU.

used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

In June 2018, the FASB issued ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. These amendments clarify and improve the scope and accounting guidance around contributions of cash and other assets received and made by not-for-profit organizations (NFPs) and business enterprises. The ASU clarifies and improves current guidance about whether a transfer of assets, or the reduction, settlement, or cancellation of liabilities, is a contribution or an exchange transaction. It provides criteria for determining whether the resource provider is receiving commensurate value in return for the resources transferred which, depending on the outcome, determines whether the organization follows contribution guidance or exchange transaction guidance in the revenue recognition and other applicable standards. It also provides a more robust framework for determining whether a contribution is conditional or unconditional, and for distinguishing a donor-imposed condition from a donor-imposed restriction.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. These amendments refine and expand hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period (i.e., the initial application date).

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The updated guidance provides new requirements for leases to be recognized in the financial statements. In general, the guidance requires the lessee to recognize liabilities on the balance sheet for the obligation to make lease payments and an asset for the right to use the underlying assets for the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right to use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities. The updated guidance is to be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. Management intends to adopt this guidance upon the effective date listed and is currently evaluating the related impact on the financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The updated guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. UHC management intends to adopt the guidance on the effective date and it is not expected to have a material impact on the financial statements.

In May 2014,the FASB updated its guidance related to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this update (and other related following updates) is to improve the reporting of revenue by providing a more robust framework for addressing revenue issues and improved disclosure requirements. Current revenue recognition guidance in U.S. generally accepted accounting principles is comprised of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes result in different accounting for economically similar transactions. For the Company, this guidance is to be applied retrospectively to annual and interim reporting periods beginning after December 15, 2018. UHC has adopted this guidance as of January 1, 2019. Since premium revenue from insurance contracts is excluded and UHC has no other revenue items that are covered by this guidance, adoption of this guidance will have no impact on the financial condition or operating results of UHC.

4) Marketable Securities and Assets Limited As To Use

The following is a summary of marketable securities stated at fair value as of December 31, 2018 and 2017:

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury Securities and obligations of U.S. Government corporations and agencies	$	22,086,273	$	173,766	$	484,204	$	21,775,835
Municipal bonds	928,590		1,596		23,451		906,735
Other government obligations	1,546,851		7,463		21,584		1,532,730
Other debt securities	6,700,273		26,217		81,772		6,644,718
Corporate debt securities	38,813,497		195,996		830,000		38,179,493
Bank loan bonds	2,844,591		4,566		9,049		2,840,108
Commercial mortgage-backed securities	31,044,247		137,918		320,254		30,861,911
Residential mortgage-backed securities	27,654,217		57,723		718,051		26,993,889
Small cap equity securities	31,879,273		10,878,036		903,965		41,853,344
Equity mutual funds	42,003,408		22,739,224		350,984		64,391,648
Total marketable securities	$	205,501,220	$	34,222.505	$	3,743.314	$	235,980,411
	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury Securities and obligations of U.S. Government corporations and agencies	$	23,261,984	$	60,140	$	245,955	$	23,076,169
Municipal bonds	898,113		2,013		6,890		893,236
Other government obligations	1,620,937		58,545		2,688		1,676,794
Other debt securities	5,662,083		72,009		21,997		5,712,095
Corporate debt securities	39,709,864		817,413		137,433		40,389,844
Commercial mortgage-backed securities	28,694,712		157,594		102,514		28,749,792
Residential mortgage-backed securities	30,207,571		128,144		285,099		30,050,616
Small cap equity securities	30,708,701		8,037,776		1,996,226		36,750,251
Equity mutual fund	40,305,970		29,640,732		—		69,946,702
Total marketable securities	$	201,069,935	$	38,974,366	$	2,798,802	$	237,245,499

In order to meet the deposit requirement described in Note 3, the following assets are limited as to use at December 31, 2018 and 2017:		2018		2017
U.S. Treasury Note (3.875% due May 15, 2018)	$	510,515	$	504,490
Money market account	25,266		21,875
Assets limited as to use	$	535,781	$	526,365

The amortized cost and estimated fair value of marketable debt securities by contractual maturity date at December 31, 2018 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

	Amortized Cost		Estimated Fair Value
Due within one year or less	$	2,511,606	$	2,502,096
Due after one year through five years	33,788,584		33,457,556
Due after five years through ten years	23,517,275		23,201,982
Due after ten years	13,102,610		12,717,986
	72,920,075		71,879,620
Commercial mortgage-backed securities	31,044,247		30,861,911
Residential mortgage-backed securities	27,654,217		26,993,889
Total debt securities	$	131,618,539	$	129,735,420

Proceeds from the sale of available-for-sale securities aggregated $66,724,163 in 2018, resulting in gross realized gains of $4,456,497 and gross realized losses of $1,396,220. Proceeds from the sale of available-for-sale securities aggregated $111,255,241 in 2017, resulting in gross realized gains of $8,410,135 and gross realized losses of $743,638.

UHC has determined that the following amounts are temporarily impaired at December 31, 2018 and 2017 summarized by asset class and length of time that a security has been in a continuous unrealized loss position:

2018	Less Than 12 Months				12 Months or Longer				Total
Description of Securities	Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses
U.S. Treasury securities and obligations of U.S. Government corporations<br><br>and agencies	$	5,717,905	$	112,515	$	7,249,944	$	371,689	$	12,967,848	$	484,204
Municipal bonds	38,265		504		666,874		22,947		705,139		23,451
Other government obligations	178,124		5,900		1,354,606		15,684		1,532,731		21,586
Other debt securities	429,384		4,151		4,591,916		77,621		5,021,300		81,772
Corporate debt securities	14,601,459		218,533		23,578,035		611,467		38,179,494		830,000
Bank loan bonds	2,143,582		7,843		696,526		1,206		2,840,108		9,049
Commercial mortgage-backed securities	13,832,431		59,253		17,029,480		261,001		30,861,911		320,254
Residential mortgage-backed securities	1,199,421		11,423		22,422,878		706,628		23,622,299		718,049
Total debt securities	38,140,571		420,122		77,590,259		2,068,243		115,730,830		2,488,365
Small cap equity securities	4,820,366		750,526		1,088,640		153,439		5,909,006		903,965
Equity mutual Funds	19,356,354		350,984		—		—		19,356,354		350,984
Total equity securities	24,176,720		1,101,510		1,088,640		153,439		25,265,360		1,254,949
	$	62,317,291	$	1,521,632	$	78,678,899	$	2,221,682	$	140,996,190	$	3,743,314

2017	Less Than 12 Months				12 Months or Longer				Total
Description of Securities	Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses
U.S. Treasury securities and obligations of U.S. Government corporations<br><br>and agencies	$	15,540,389	$	217,777	$	3,679,001	$	28,178	$	19,219,390	$	245,955
Municipal bonds	406,317		6,890		—		—		406,317		6,890
Other government obligations	256,503		2,348		19,630		340		276,133		2,688
Other debt securities	524,352		1,762		2,265,258		20,235		2,789,610		21,997
Corporate debt securities	8,026,480		55,368		7,451,427		82,065		15,477,907		137,433
Commercial mortgage-backed securities	7,278,884		38,866		5,420,609		63,648		12,699,493		102,514
Residential mortgage-backed securities	8,919,748		56,748		13,548,381		228,351		22,468,129		285,099
Total debt securities	40,952,673		379,759		32,384,306		422,817		73,336,979		802,576
Small cap equity securities	2,664,542		108,246		13,873,329		1,887,980		16,537,871		1,996,226
Total temporarily impaired securities	$	43,617,215	$	488,005	$	46,257,635	$	2,310,797	$	89,874,850	$	2,798,802

The unrealized losses on fixed maturity investments with continuous unrealized losses for less than twelve months were primarily due to a widening of credit spreads rather than a decline in credit quality. UHC believes, based on its analysis, that these securities are not other-than-temporarily impaired.

For the years ended December 31, 2018 and 2017, a credit-related impairment charge of $1,361,600 and $113,550, respectively, was recorded within the consolidated statements of operations. There were no non-credit related impairment charges in 2018 or 2017.

(5)	Derivative Instruments

UHC uses deferred settlement mortgages as a cost efficient way to invest in mortgage-backed securities. In this approach, the investor accepts delayed settlement on the purchase of mortgage-backed securities in return for a modest reduction in the price paid for those mortgage-backed securities. The price differential is directly related to the fact that the investor does not experience the higher yield typically offered by mortgage-backed securities relative to the interest rate earned on cash equivalents held for the period between normal settlement and the agreed upon deferred settlement. Such deferred settlement mortgages are not designated as hedging instruments under ASC 815, Derivatives and Hedging. UHC reported net realized (losses)/gains from these securities of ($14,064) and $17,023, respectively, for the years ended December 31, 2018 and 2017 within realized gain from sale of investments, net on the consolidated statements of operations. There are no significant derivative instruments held at December 31, 2018 and 2017.

(6)	Fair Value Measurements

ASC 820-10 establishes a fair value hierarchy comprised of three priority levels, which are as follows:

Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets.

Level 2 - Other observable inputs, either directly or indirectly, including:

•	Quoted prices for similar assets/liabilities in active markets;
•	Quoted prices for identical or similar assets in non-active markets;
---	---
•	Inputs other than quoted prices that are observable for the asset/liability; and
---	---

•	Inputs that are derived principally from or corroborated by other observable market data.

Level 3 - Unobservable inputs that cannot be corroborated by observable market data.

There were no transfers between any levels of the fair value hierarchy during 2018 or 2017. UHC’s policy is to recognize transfers between Levels as of the end of the reporting period.

The following is a table of the fair value measurements of UHC’s applicable assets by level within the fair value hierarchy as of December 31, 2018 and 2017:

	December 31, 2018
	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs<br><br>(Level 2)		Unobservable Inputs<br><br>(Level 3)		Total Fair Value
Marketable securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	—	$	21,775,835	$	—	$	21,775,835
Municipal bonds	—		906,735		—		906,735
Other government obligations	—		1,532,730		—		1,532,730
Other debt securities	—		6,644,718		—		6,644,718
Corporate debt securities	—		38,179,493		—		38,179,493
Commercial mortgage-backed securities	—		30,861,911		—		30,861,911
Residential mortgage-backed securities	—		26,993,889		—		26,993,889
Bank loan bonds	—		2,840,108		—		2,840,108
Small cap equity securities	41,755,844		—		97,500		41,853,344
Equity mutual funds	64,391,648		—		—		64,391,648
Assets limited as to use:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	—		510,515		—		510,515
Total investment securities	$	106,147,492	$	130,245,934	$	97,500	$	236,490,926	December 31, 2017
---	---	---	---	---	---	---	---	---
	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs<br><br>(Level 2)		Unobservable Inputs<br><br>(Level 3)		Total Fair Value
Marketable securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	—	$	23,076,169	$	—	$	23,076,169
Municipal bonds	—		893,236		—		893,236
Other government obligations	—		1,676,794		—		1,676,794
Other debt securities	—		5,712,095		—		5,712,095
Corporate debt securities	—		40,389,844		—		40,389,844
Commercial mortgage-backed securities	—		28,749,792		—		28,749,792
Residential mortgage-backed securities	—		30,050,616		—		30,050,616
Small cap equity securities	36,717,751		—		32,500		36,750,251
Equity mutual funds	69,946,702		—		—		69,946,702
Assets limited as to use:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	—		504,490		—		504,490
Total investment securities	$	106,664,453	$	131,053,036	$	32,500	$	237,749,989

The fair value of other financial instruments approximates their carrying values at December 31, 2018 and 2017 due to the short maturity of such instruments.

(7) Premiums Receivable

Premiums receivable represents amounts due from DMS and CMS and consists of the following at December 31, 2018 and 2017:

	2018		2017
Membership premiums	$	11,523,100	$	11,508,400

(8)	Other Receivables

The following is a summary of other receivables as of December 31, 2018 and 2017:

	2018		2017
Note receivable	$	16,475,150	$	4,000,000
Pharmacy rebates receivable	6,887,400		8,679,119
Reinsurance receivable	2,298,956		875,473
Interest receivable	847,828		868,598
Receivable from Evolent Health	693,919		367,068
Encounter penalties from TPAs	244,940		761,272
Note interest receivable	5,492		—
Other	7,547		26,731
	$	27,461,232	$	15,578,261

(9) Land and Construction in Progress

Land and construction in progress consists of the following as of December 31, 2018 and 2017:

	2018		2017
Land	$	9,357,229	$	7,852,615
Construction in Progress	10,824,564		908,019
	$	20,181,793	$	8,760,634

Land represents parcels of property purchased for the future UHC corporate headquarters and health and well-being campus in West Louisville. The construction in progress is cost associated with the initial design phase of the project. The first phase including the corporate headquarters is scheduled for completion in 2020.

(10) Furniture and Equipment

Furniture and equipment consists of the following as of December 31, 2018 and 2017:

	2018		2017
Equipment and software	$	6,336,241	$	4,822,210
Furniture and fixtures	747,289		739,489
Leasehold improvements	446,352		419,669
Equipment and furniture under capital lease	159,202		159,202
	7,689,084		6,140,570
Less accumulated depreciation and amortization	5,348,862		4,721,658
	$	2,340,222	$	1,418,912

Depreciation and amortization expense charged to operations was $1,036,822 and $1,105,376 in 2018 and 2017, respectively. Accumulated amortization of furniture and equipment under capital leases amounted to $159,202 at both December 31, 2018 and 2017, respectively.

(11)	Related-Party Transactions

UHC sponsors and affiliated entities provide health care services to UHC members at contracted rates. Estimated amounts incurred by UHC for services provided by UHC sponsors and affiliates for the years ended December 31, 2018 and 2017 were approximately as follows:

	2018		2017
ULP	$	78,285,000	$	64,245,000
Norton	254,834,000		222,749,000
Jewish	96,450,000		101,903,000
UMC	124,284,000		122,538,000
Primary Care	10,392,000		9,366,000

At December 31, 2018 and 2017, accrued medical expenses include amounts due to the sponsors for unpaid medical and related services.

(12)	Transactions with Subcontractors

Subcontractor Name	Service Provided	2018		2017
Evolent	Administrative and pharmacy	$	114,496,757	$	88,217,818
Beacon	Behavioral Health	7,192,195		7,118,950
Care Enroll	Administrative	2,857,388		—
HMS	Administrative	2,608,409		2,364,503
ACHP	Administrative	1,792,382		27,248,762
Health Integrated	Administrative	1,789,538		1,459,221
DST	Administrative	1,394,494		1,326,628
TMG	Administrative	542,132		—
CVS	Administrative	—		1,503,647
Magellan	Pharmacy	—		8,580
		$	132,673,295	$	129,248,109

Beacon provides behavioral health benefit management services to UHC under a contact which expires on March 31, 2019.

Prior to October 1, 2017, ACHP provided administrative services including Medicaid claims processing, enrollment services, and information technology. From October 1, 2017 through July 31, 2018, ACHP continued to provide certain run-out services.

Health Management Systems provided third party liability services to UHC through a contract with ACHP which expired on December 31, 2018.

Evolent administers a pharmacy benefits management services contract with CVS through a three year contract that expires on August 31, 2019.

Health Integrated provides utilization and case management services to UHC through a contract that expires December 31, 2018.

Magellan provided pharmacy benefit management services to UHC through a three year contract that was terminated by UHC effective August 31, 2017.

Avesis provides dental benefit management services to UHC. A fee for service contract was terminated on June 30, 2016 and replaced with a fully capitated contract effective July 1, 2016 in which the contract cost is reported as medical expense. The Avesis contract expires on December 31, 2019.

(13)	Accrued Medical Expenses

Activity in accrued medical expenses is summarized as follows:

	2018			2017
Balance, January 1	$	199,997,904		$	185,471,506
Incurred related to:
Current year	1,852,775,936			1,773,494,656
Prior years	(6,975,361		)	(28,826,736		)
Total incurred	1,845,800,575			1,744,667,920
Paid related to:
Current year	1,691,047,278			1,577,918,582
Prior years	192,896,257			152,222,940
Total paid	1,883,943,535			1,730,141,522
Balance, December 31	$	161,854,944		$	199,997,904

The medical expenses for prior years decreased by a total of $6,975,361 and $28,826,736 in 2018 and 2017, respectively, due to lower than anticipated medical cost and favorable utilization trends. These adjustments are generally the result of ongoing analysis and recent loss development trends. Original estimates are increased or decreased, as additional information becomes known regarding individual claims.

Accrued medical expenses are developed by utilizing actuarial based methodology including claim lag studies, pended claim information, trended historical per member per month levels, and expected loss ratio calculations. There have been no significant changes to the basis or methodologies in this process. The charts above and below include Medicaid and since January 1, 2017 Medicare. UHC has chosen for presentation to not disaggregate between Medicaid and Medicare since Medicaid consist of approximately 99.5% of the consolidated membership since January 1, 2017.

The following tables provide information about incurred and paid claims development for Medicaid and Medicare as of December 31, 2018, net of reinsurance.

	2015		2016		2017		2018
Ultimate Incurred	(Unaudited)		(Unaudited)
Incurred dates 2015	$	1,512,765,804	$	1,506,030,404	$	1,503,779,095	$	1,503,779,095
Incurred dates 2016	—		1,679,838,200		1,653,262,773		1,688,550,761
Incurred dates 2017	—		—		1,773,494,656		1,751,231,308
Incurred dates 2018	—		—		—		1,852,775,936
	1,512,765,804		3,185,868,604		4,930,536,524		6,796,337,100
Total Paid
Incurred dates 2015	$	1,341,426,391	$	1,499,815,537	$	1,503,641,870	$	1,503,779,095
Incurred dates 2016	—		1,502,159,667		1,649,853,642		1,673,199,028
Incurred dates 2017	—		—		1,577,918,582		1,748,755,711
Incurred dates 2018	—		—		—		1,691,047,278
	$	1,341,426,391	3,001,975,204		4,731,414,094		4,731,414,094
Ultimate incurred less total paid			183,893,400		199,122,430		159,555,988
Reinsurance recoverables			1,578,106		875,474		2,298,956
Accrued medical expenses			$	185,471,506	$	199,997,904	$	161,854,944

At December 31, 2018, accrued medical expense included incurred but not reported claims of $161,854,944, which are primarily associated with claims incurred in 2018.

Claims frequency is measured as medical fee-for-service claims for each service encounter with a unique provider identification number. Claims frequency measure includes claims covered by deductibles as well as claims under capitated arrangements. The following table is unaudited supplementary information about the number of reported claims by accident year:

2015	18,325,579
2016	19,323,667
2017	24,150,908
2018	26,492,130

14) Construction and New Market Tax Credit Debt

In 2018, UHC and Passport Health Solutions, LLC entered into debt arrangements totaling $107,110,000 (see details below) associated with the construction of a new UHC corporate headquarters to be located on approximately 20 acres in West Louisville and is secured by the UHC investment portfolio.

Old National Bank	$	80,000,000
New Market Tax Credits	24,110,000
REINVESTMENT FUND, INC.	2,500,000
Community Foundation of Louisville	500,000
Total Debt	$	107,110,000

PHS I in working with external consultants contracted to obtain New Markets Tax Credits available to entities investing in low to moderate income opportunity zones. Three Community Development Entities (CDEs) made loans to PHS I totaling $24,110,000. In exchange for the funding, PHS I makes quarterly interest only payments to each CDE beginning March 1, 2019 at an interest rate of 1.057%. When the project is complete in the opportunity zone as intended then $7,610,000 of the $24,110,000 CDE debt is forgiven. The three CDEs and amount of outstanding debt for each is listed below:

TRF NMTC Fund LXVI, LP	$	8,500,000
NDC New Markets Investments XCIII, LLC	7,760,000
Telesis CDE 15, LLC	7,850,000
Total New Market Tax Credit Debt	$	24,110,000

PHS I entered into a $2,500,000 promissory note in 2018 with REINVESTMENT FUND, INC., a Pennsylvania non-profit corporation, at an interest rate of 7.42%. Interest only is payable on a monthly basis commencing June 1, 2019 and continuing through January 1, 2022. Commencing on February 1, 2022 the principal amount and interest shall be repaid in successive monthly installments of principal and interest each in an amount sufficient to amortize the principal amount over a hypothetical twenty-five (25) year term until paid in full at the final maturity date of December 19, 2022. As of December 31, 2018 there had been no draws against this loan.

UHC entered into a $16,500,000 Senior Leverage Loan with Old National Bank provided in conjunction with the New Markets Tax Credits financing related to loans of $24,110,000 to be used to acquire the fee simple property and construct the approximate 325,000 square foot corporate headquarters and multi-level parking garage on Broadway Street in West Louisville. The loan includes interest only monthly payments until maturity at September 19, 2025. This Senior Leverage Loan has a variable interest rate and is tied to an interest rate swap agreement which fixed the interest rate at 5.69%. The debt covenant requires UHC to meet certain financial ratios such as annual global cash flow coverage, loan-to-value requirements, loan-to-cost requirements, minimum liquidity, and minimum account pledge balance. UHC is out of compliance with certain covenant requirements as of December 31, 2018. This indicates that, without further developments, UHC would be required to pay the entire amount of the indebtedness and therefore, the debt is classified as a current liability. All Old National Bank debt is considered current as of December 31, 2018.

The interest rate swap has a current notional value of $16,500,000 with a fixed rate of 5.69% and spread of 2.40%. The swap maturity date is October 15, 2025. The terms of the swap equal the terms of the debt which allows for hedge effectiveness. At December 31, 2018, the book adjusted carrying value is $0 and the fair value is ($863,309).

The final component of the Old National Bank debt structure is a $63,500,000 seven-year, draw down, construction converting to term loan. As UHC goes through the construction process of the new corporate headquarters the initial debt funds to be expended are from the $24,110,000 New Market Tax Credits. Once those funds have been exhausted then draws on the $63,500,000 draw down debt is utilized. Interest only payments

at a variable rate begins on January 15, 2019 and continues for 3 years when at that time monthly payments of principal and interest begin over the remaining 25 years of the debt ending December 15, 2046. This loan is tied to an interest rate swap agreement which fixed the interest rate at 5.69%. The interest rate swap has notional values that are projected to match the draws on the loan with a fixed rate of 5.69% and spread of 2.40%. The swap maturity date is December 15, 2046. The terms of the swap equal the terms of the debt which allows for hedge effectiveness. As of December 31, 2018 there had been no draws against this loan agreement.

As of December 31, 2018, UHC had $500,000 outstanding on a loan agreement with the Community Foundation of Louisville for the purpose of providing a portion of the financing of the West Louisville Health and Well-Being Campus development. Quarterly interest payments in arrears at a 3% interest rate commenced on June 1, 2018 and would continue for seven years at which time payments of principal and interest based on a 3-year amortization shall be due quarterly until maturity on the tenth anniversary of the note closing.

(15)	Reinsurance

UHC maintains reinsurance (stop-loss) coverage for hospital inpatient medical expenses with commercial insurance carriers. Under UHC’s policies relating to the Medicaid and Medicare programs, the maximum lifetime reinsurance indemnity under these policies is $3,000,000 for eligible hospital services for each insured member for Medicaid and $2,000,000 for eligible hospital services for each insured member for Medicare, subject to certain annual deductibles of $350,000 (increased to $400,000 effective November 1, 2018) for Medicaid and $275,000 for Medicare as stated in the agreements. The reinsurance coverage does not relieve UHC of its primary obligation to the policy members. Reinsurance premiums were $7,290,095 and $7,173,700 in 2018 and 2017, respectively. Reinsurance recoveries amounted to $7,968,841 and $6,329,948 for the years ended December 31, 2018 and 2017, respectively.

(16)	401(k) Defined Contribution Plan and 457(b) Deferred Compensation Plan

UHC’s employees are eligible to participate in the University Health Care 401(k) Plan (401(k) Plan), a defined contribution plan covering substantially all employees of UHC. UHC matches employee contributions with an amount equal to 100% of such contribution up to 1% of the eligible employee’s salary, plus 50% of such contribution on the next 5% of the eligible employee’s salary. UHC’s expense for the 401(k) Plan was $369,849 and $328,299 for the years ended December 31, 2018 and 2017, and is included in salaries and benefits on the accompanying consolidated statements of operations.

(17) Lease Commitments

UHC has three non-cancelable operating leases for office space. The first lease involves supplemental meeting space where the lease expires on December 31, 2019. The second lease involves a regional office in eastern Kentucky where the lease expires on February 28, 2021. The third lease covers the primary UHC office space which expires on June 30, 2021. UHC is also responsible for real estate taxes, utilities, and all other expenses associated with the operation of its leased office space. Recognition of lease expense on a straight‑line basis in accordance with ASC 840‑20‑25‑1, Leases, results in deferred rent of $48,009 and $39,830 at December 31, 2018 and 2017, respectively, which is included in other liabilities on the accompanying balance sheets. Pursuant to a sublease on the primary UHC office space, UHC acquired equipment and furniture under capital lease (note 10). UHC also leases copier equipment through a lease expiring October of 2018, a company vehicle through a lease expiring December 2018, and postage equipment through a lease expiring September of 2019.

Future minimum rental commitments under these non-cancellable lease agreements are as follows:		Operating Leases
Year ending December 31:
2019	$	1,270,775
2020	1,235,730
2021	659,674
2022	100,029
2023	16,672
Minimum lease commitments	$	3,282,880

Total rent expense for noncancelable operating leases amounted to $1,674,132 and $1,706,622 in 2018 and 2017, respectively, which is included within other administrative and general on the accompanying consolidated statements of operations.

(18)	Commitments and Contingencies

(19) Net Assets - With Donor Restrictions

During 2018, the Foundation created a scholarship fund that individuals or organizations could contribute to and is restricted for the purpose of granting educational scholarships for UHC members and their families. As of December 31, 2018, $18,092 of net assets were restricted for this purpose.

(20)	Subsequent Events

On February 15, 2019, UHC filed a complaint in Franklin County Kentucky Circuit Court against the Kentucky Cabinet for Health and Family Services to resolve an ongoing dispute seeking immediate and long-term relief regarding the rates paid to UHC dating back to July 1, 2018. The filing is part of the dispute resolution process outlined in UHC’s contract with the state and was the necessary step to ensure adequate reimbursement to UHC’s extensive network of providers. Also, on February 22, 2019, UHC announced that construction would be halting on the Health and Well-Being Campus and the plans to relocate the UHC headquarters to West Louisville in 2020.

In March 2019, in conjunction with certain events of default, UHC repaid the outstanding balances, plus applicable interest and fees, of the $500,000 note payable to the Community Foundation, the $16,500,000 note payable to Old National Bank, and terminated the two interest rate swaps at a total exit amount of $3,757,000.

(21)	Going Concern

Current year operating losses, expected future losses (due to current and expected reimbursement rate deficiencies) and the level of capital and surplus relative to certain risk based capital thresholds are current events and conditions that indicate it is possible that UHC will be unable to meet its obligations as they become due within one year after the date the consolidated financial statements are issued. In addition, as described in Note 14, UHC was in violation of a certain financial covenants contained in its debt agreements as of December 31, 2018. The debt that is in non-compliance is considered to be current liability. UHC’s management and lenders are in active negotiations to address a variety of matters. Due to the events described above, without further developments, there is doubt about the ability of UHC to continue as a going concern. The accompanying consolidated financial statements were prepared assuming UHC will continue as a going concern, which contemplates the realization of assets and the liquidity of liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

(22)	Reclassifications

Certain amounts for 2017 have been reclassified to conform to the 2018 presentation. The reclassifications had no effect on total net assets or net (loss) income.

UNIVERSITY HEALTH CARE INC., AND SUBSIDIARIES

d/b/a Passport Health Plan

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2018

	University Health Care		Passport Health Solutions		Passport Health Solutions Two		Foundation		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	72,025,327	$	23,730,732	$	—	$	32,977	$	—		$	95,789,036
Marketable securities	108,747,088		—		—		—		—			108,747,088
Premiums receivable	11,523,100		—		—		—		—			11,523,100
Receivable from DMS	6,280,103		—		—		—		—			6,280,103
Other receivables	27,461,232		—		—		—		—			27,461,232
Intercompany receivables	296,615		—		—		—		(296,615		)	—
Prepaid expenses	1,747,782		108,776		—		—		—			1,856,558
Total current assets	228,081,247		23,839,508		—		32,977		(296,615		)	251,657,117
Land and construction in progress	—		14,752,729		5,429,064		—		—			20,181,793
Furniture and equipment, net	2,340,222		—		—		—		—			2,340,222
Marketable securities	127,233,323		—		—		—		—			127,233,323
Assets limited as to use	535,781		—		—		—		—			535,781
Investments in subsidiaries	20,971,317		—		—		—		(20,971,317		)	—
Total assets	$	379,161,890	$	38,592,237	$	5,429,064	$	32,977	$	(21,267,932	)	$	401,948,236
Liabilities and Net Assets
Current liabilities:
Accrued medical expenses	$	161,854,944	$	—	$	—	$	—	$	—		$	161,854,944
Payable to DMS	8,199,217		—		—		—		—			8,199,217
Payable to CMS	1,571,970		—		—		—		—			1,571,970
Premium deficiency reserve	47,415,290		—		—		—		—			47,415,290
Construction and new market tax credit debt	17,903,098		22,724,197		—		—					40,627,295
Accounts payable and accrued expenses	40,583,745		29,172		—		—		—			40,612,917
Intercompany payable	—		296,615		—		—		(296,615		)	—
Total current liabilities	277,528,264		23,049,984		—		—		(296,615		)	300,281,633
Other liabilities	48,009		—		—		—		—			48,009
Total liabilities	277,576,273		23,049,984		—		—		(296,615		)	300,329,642
Net assets — with donor restrictions (note 19)	—		—		—		18,092		—			18,092
Net assets — without donor restrictions	101,585,617		15,542,253		5,429,064		14,885		(20,971,317		)	101,600,502
Total net assets	101,585,617		15,542,253		5,429,064		32,977		(20,971,317		)	101,618,594
Total liabilities and net assets	$	379,161,890	$	38,592,237	$	5,429,064	$	32,977	$	(21,267,932	)	$	401,948,236

UNIVERSITY HEALTH CARE INC., AND SUBSIDIARIES

d/b/a Passport Health Plan

CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2018

	University Health Care			Passport Health Solutions			Passport Health Solutions Two		Foundation		Eliminations		Consolidated
Revenues:
Premiums earned	$	1,953,210,500		$	—		$	—	$	—	$	—	$	1,953,210,500
Other income	(178,841		)	—			—		21,942		265,928		109,029
Interest and dividend income	6,240,746			404			—		33		—		6,241,183
Realized investment gains (losses), net
Total other-than-temporary impairment losses	(1,361,600		)	—			—		—		—		(1,361,600		)
Realized gains from sale of investments, net	3,060,277			—			—		—		—		3,060,277
Total revenues	1,960,971,082			404			—		21,975		265,928		1,961,259,389
Expenses:
Medical expenses:
Purchased medical services, net	1,702,205,778			—			—		—		—		1,702,205,778
Capitation and other services	143,594,797			—			—		—		—		143,594,797
Total medical expenses, net	1,845,800,575			—			—		—		—		1,845,800,575
Administrative expenses:
Purchased services	132,673,295			—			—		—		—		132,673,295
Salaries and benefits	18,233,958			266,332			—		—		—		18,500,290
Department for Medicaid Services 1% assessment	18,990,135			—			—		—		—		18,990,135
Other administrative and general	18,091,407			—			—		—		—		18,091,407
Depreciation and amortization	1,036,822			—			—		—		—		1,036,822
Total administrative expenses	189,025,617			266,332			—		—		—		189,291,949
Premium deficiency reserve	47,415,290			—			—		—		—		47,415,290
Total expenses	2,082,241,482			266,332			—		—		—		2,082,507,814
Net operating (loss) income	$	(121,270,400	)	$	(265,928	)	$	—	$	21,975	$	265,928	$	(121,248,425	)

		Exhibit

Exhibit 99.4

University Health

Care, Inc., and

Subsidiaries

d/b/a Passport Health Plan

Consolidated Financial Statements as of

and for the Years Ended

December 31, 2017 and 2016, and

Independent Auditor’s Report

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES

d/b/a Passport Health Plan

TABLE OF CONTENTS

	Page
INDEPENDENT AUDITOR’S REPORT	3
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016:
Consolidated Balance Sheets	5
Consolidated Statements of Operations	6
Consolidated Statements of Changes in Unrestricted Net Assets	7
Consolidated Statements of Cash Flows	8
Notes to Consolidated Financial Statements	9

Exhibit 99.4

Independent Auditor’s Report

To the Board of Directors

of University Health Care, Inc., and Subsidiaries d/b/a Passport Health Plan

We have audited the accompanying consolidated financial statements of University Health Care, Inc., and Subsidiaries d/b/a Passport Health Plan (a Kentucky non-stock, not‑for‑profit corporation), which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of operations, changes in unrestricted net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Consolidated Financial Statements

Auditor's Responsibility

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of University Health Care, Inc., and Subsidiaries d/b/a Passport Health Plan as of December 31, 2017 and 2016, and the changes in its unrestricted net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Supplementary Information

Exhibit 99.4

accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

/s/ MCM CPAs & Advisors LLP

Louisville, Kentucky

April 18, 2018

Exhibit 99.4

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
	2017		2016
Assets
Current assets:
Cash and cash equivalents	$	186,672,811	$	172,200,138
Marketable securities	110,497,231		102,616,148
Premiums receivable	11,508,400		11,551,000
Receivable from Centers for Medicare and Medicaid Services	—		1,511,122
Receivable from the Department for Medicaid Services	4,315,268		8,300,000
Other receivables	15,578,261		12,477,029
Prepaid expenses	1,050,056		965,781
Total current assets	329,622,027		309,621,218
Land and construction in progress	8,760,634		—
Furniture and equipment, net	1,418,912		2,044,017
Marketable securities	126,748,268		107,879,048
Assets limited as to use	526,365		521,982
Total assets	$	467,076,206	$	420,066,265
Liabilities and Net Assets
Current liabilities:
Accrued medical expenses	$	199,997,904	$	185,471,506
Payable to Centers for Medicare and Medicaid Services	1,264,045		—
Accounts payable and accrued expenses	36,339,725		31,627,938
Total current liabilities	237,601,674		217,099,444
Other liabilities	39,830		15,885
Total liabilities	237,641,504		217,115,329
Commitments and contingencies (notes 16 and 17)
Net assets — unrestricted:
Available for support of operations	229,434,702		202,950,936
Total net assets - unrestricted	229,434,702		202,950,936
Total liabilities and net assets	$	467,076,206	$	420,066,265

The accompanying notes are an integral part of these consolidated financial statements.

Exhibit 99.4

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
	2017			2016
Revenues:
Premiums earned	$	1,932,183,073		$	1,752,378,468
Other income	11,000			15,032,500
Interest and dividend income	5,277,063			4,906,657
Realized investment gains (losses), net
Total other-than-temporary impairment losses	(113,550		)	(452,001		)
Realized gains from sale of investments, net	7,666,497			3,010,687
Total realized investment gains, net	7,552,947			2,558,686
Total revenues	1,945,024,083			1,774,876,311
Expenses:
Medical expenses:
Purchased medical services, net	1,602,195,491			1,547,903,931
Capitation and other services	142,472,429			115,890,201
Total medical expenses, net	1,744,667,920			1,663,794,132
Administrative expenses:
Purchased services	129,248,109			105,455,538
Salaries and benefits	17,075,501			18,743,758
Department for Medicaid Services 1% assessment	18,864,818			25,660,937
Other administrative and general	16,943,369			19,238,747
Depreciation and amortization	1,105,376			1,172,588
Total administrative expenses	183,237,173			170,271,568
Premium deficiency reserve	—			(1,280,459		)
Total expenses	1,927,905,093			1,832,785,241
Net operating income (loss)	17,118,990			(57,908,930		)
Other non-operating changes in unrestricted net assets:
Change in unrealized gains on investments, net	9,364,776			4,771,714
Increase (decrease) in unrestricted net assets	$	26,483,766		$	(53,137,216	)

The accompanying notes are an integral part of these consolidated financial statements.

Exhibit 99.4

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF CHANGES IN UNRESTRICTED NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
	2017		2016
Unrestricted net assets:
Net operating income (loss)	$	17,118,990	$	(57,908,930	)
Change in unrealized gains on investments, net	9,364,776		4,771,714
Increase (decrease) in unrestricted net assets	26,483,766		(53,137,216		)
Unrestricted net assets, beginning of year	202,950,936		256,088,152
Unrestricted net assets, end of year	$	229,434,702	$	202,950,936

The accompanying notes are an integral part of these consolidated financial statements.

Exhibit 99.4

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES
d/b/a Passport Health Plan
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
	2017			2016
Cash flows from operating activities:
Increase (decrease) in unrestricted net assets	$	26,483,766		$	(53,137,216	)
Adjustments to reconcile increase (decrease) in unrestricted
net assets to net cash provided by (used in) operating activities:
Net realized gains on sales of marketable securities	(7,552,947		)	(2,558,686		)
Amortization of bond discounts or premium	865,969			606,238
Depreciation and amortization	1,105,376			1,172,588
Unrealized gains on investments, net	(9,364,776		)	(4,771,714		)
Changes in assets and liabilities:
Premiums receivable	42,600			13,785,713
Due from affiliates	—			1,432,000
Other receivables	(3,101,232		)	(4,614,358		)
Prepaid expenses	(84,275		)	1,218,602
Accrued medical expenses	14,526,398			11,161,917
Premium deficiency reserve	—			(1,280,459		)
Accounts payable and accrued expenses	4,914,436			13,551,274
Other liabilities	23,945			(17,647		)
Total adjustments	1,375,494			29,685,468
Net cash provided by (used in) operating activities	27,859,260			(23,451,748		)
Cash flows from investing activities:
Capital expenditures	(9,240,905		)	(466,924		)
Purchase of marketable securities	(122,160,822		)	(175,039,913		)
Proceeds from sale or maturity of marketable securities	111,255,241			157,453,901
Net cash used in investing activities	(20,146,486		)	(18,052,936		)
Cash flows from financing activities:
CMS and DMS funds administered	6,759,899			(9,811,122		)
Net increase (decrease) in cash and cash equivalents	14,472,673			(51,315,806		)
Cash and cash equivalents:
Beginning of year	172,200,138			223,515,944
End of year	$	186,672,811		$	172,200,138

The accompanying notes are an integral part of these consolidated financial statements.

Exhibit 99.4

UNIVERSITY HEALTH CARE, INC., AND SUBSIDIARIES

d/b/a Passport Health Plan

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

(1)	Organization and Description of Business

During 2017, UHC established Passport Health Plan Foundation, Inc. whose mission is to improve the health and quality of life of underserved communities through innovative partnerships that promote well-being and improved access to health services.

During 2017, UHC established Passport Health Solutions LLC, a wholly-owned subsidiary. This entity will include all financial transactions related to the establishment of a new corporate office headquarters and health and well-being campus on approximately 20 acres in West Louisville.

The consolidated financial statements include all the financial transactions for UHC, Passport Health Plan Foundation, Inc., and Passport Health Solutions LLC. All intercompany balances have been eliminated in consolidation.

Pharmacy benefit management services for Medicaid members are provided to UHC by CaremarkPCS Health, LLC (CVS) through a contract administered by Evolent effective September 1, 2016. Previously, pharmacy benefit management services were provided by Magellan Pharmacy Solutions, Inc. (Magellan) (Note 12).

Prior to October 1, 2017, UHC subcontracted certain administrative services related to the Medicaid program to AmeriHealth Caritas Health Plan (ACHP) (Note 12). These administrative services included claims processing, enrollment services, and information technology. Effective, October 1, 2017, these administrative services are being provided by Evolent. ACHP will continue to provide certain run-out services through March 31, 2018.

Behavioral health benefit management services for Medicaid members are provided to UHC by Beacon Health Strategies, LLC (Beacon) (Note 12).

Exhibit 99.4

Dental benefit management services for Medicaid members are provided to UHC by Avesis Third Party Administrators Inc. (Avesis) through a fully capitated arrangement effective July 1, 2016. Prior to that date Avesis provided dental benefit management on a fee-for-service arrangement that ended June 30, 2016 (Note 12).

UHC subcontracts certain administrative services related to the MA-SNP program to DST Health Solutions (DST) (Note 12). These administrative services include claims processing, enrollment services, and information technology.

Pharmacy benefit management services for MA-SNP members are provided to UHC by CVS through a contract administered by Evolent effective January 1, 2017. Previously, pharmacy benefit management services for MA-SNP were provided by Navitus Health Solutions, LLC (Navitus) (Note 12).

UHC subcontracts utilization and case management services for the MA-SNP program to Health Integrated, Inc. (Note 12).

(2)	Business Concentration

UHC’s premium revenues for the years ended December 31, 2017 and 2016 are comprised of revenue received from DMS and CMS. UHC’s contract with DMS expired on December 31, 2017, but has been renewed through June 30, 2018. UHC’s contract with CMS expired on December 31, 2017, but has been renewed through December 31, 2018. Management expects to reach agreement for new contracts with both parties although there can be no assurance that such agreements can be reached.

(3)	Summary of Significant Accounting Policies

Basis of Accounting

Cash and Cash Equivalents

UHC considers all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. UHC maintains a bank account with a required minimum balance of $50,000 at December 31, 2017 and 2016. Cash equivalents totaled $3,444,715 and $8,999,474 at December 31, 2017 and 2016, respectively. At various times throughout the year, UHC maintained balances in excess of federally insured limits.

Marketable Securities

Investments in marketable equities with readily determinable fair values and investments in debt securities are recorded at fair value, as determined based on methods and assumptions described more fully in Note 6. All categories of securities are classified as available-for-sale. Unrealized holding gains and losses are reported on the statements of operations and statements of changes in unrestricted net assets as a change in unrestricted net assets. Realized gains and losses on the sale of investments are determined on a specific identification basis as of the trade date. Interest and dividend income is recognized when earned.

Exhibit 99.4

Fair Value of Financial Instruments

Assets Limited as to Use

Furniture and Equipment

Exhibit 99.4

$1,000 but are capitalized. Similar assets purchased in bulk may also be capitalized as a group even if individual assets do not meet the minimum dollar threshold for capitalization. When property and equipment are retired or otherwise disposed of, cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations. Depreciation is computed using the straight-line method, half-year convention, over the estimated useful life of the asset, which ranges from three to seven years.

Furniture and Equipment 7 Years

Computer Hardware 3 Years

Software 3 Years

Long-Lived Assets

Premium Revenues

Effective July 1, 2015, the DMS contract included a provision where a 1% assessment of capitation revenue paid to UHC would be refunded to DMS on an annual basis. Initially, UHC’s interpretation and position was the contract provision and related Kentucky state statutes did not apply to UHC and thus no provision was recorded within the 2015 financial statements. Ultimately, this contract provision was determined to apply to UHC and in 2016 UHC refunded $8,382,933 for the period of

July 1, 2015 - December 31, 2015. The 1% assessment is recorded as a charge to administrative expense each month establishing a corresponding liability, included in accounts payable and accrued expenses, to be paid in the following calendar year.

Other Income

Other income in 2016 of $15,032,500 represents common stock received by UHC through non-cash transactions. UHC received $15,000,000 in Evolent common stock in exchange for certain assets, employees, and business functions

Exhibit 99.4

transferred to Evolent in the creation of The Medicaid Center of Excellence. An additional $32,500 of other income was recorded in 2016 associated with the Lucina Health, Inc. common stock obtained by UHC in connection with services provided for under a Development and Master Services Agreement. There was no additional stock received or recognized during 2017. The $11,000 of other income recorded in 2017 was attributable to donations received by the Passport Health Plan Foundation, Inc.

Medical Expenses and Related Liabilities

Premium Deficiency Reserve

A premium deficiency reserve was recorded during 2015 as the contracted rates from DMS in effect through June 30, 2016 were determined to be insufficient to provide for estimated medical and administrative expenses related to such period. Anticipated investment income was utilized in the calculation of such premium deficiency reserve. The premium deficiency reserve of $1,280,459 at December 31, 2015 was used to offset expected underwriting losses through June 30, 2016. Due to the December 31, 2017 and December 31, 2016 contract ending dates for both the DMS and CMS contracts, a premium deficiency reserve was not required as of December 31, 2017 or December 31, 2016.

Risk Corridor Reserve

To ensure the individual rate cells in the ACA capitation rates effective January 1, 2014 were within an acceptable actuarial range, a symmetrical risk corridor was established. A target medical loss ratio was established of eighty-seven percent of total capitation paid by DMS on behalf of the ACA expansion membership for each calendar year with a five percent plus or minus margin range. UHC has received DMS communication in December of 2017 that UHC’s ACA medical loss ratio for calendar year 2014 was below the risk corridor boundaries by $1,964,835. At this time management believes UHC’s ACA medical loss ratio for calendar year 2015 will be within the risk corridor range. The traditional risk corridor range was included in the January 1, 2016 - June 30, 2016 DMS contract for the ACA membership. At this time management believes UHC’s ACA medical loss ratio for this six month period will be higher than the ninety-two percent higher end corridor boundary and has established a $6,280,103 receivable relative to that

Exhibit 99.4

period. The DMS contracts for the six month periods ending December 31, 2016, June 30, 2017, and December 31, 2017 have a provision requiring a refund of revenue should the overall medical loss ratio for these periods fall below ninety percent. At this time management believes the medical loss ratio for these periods of time will exceed the ninety percent threshold.

Advertising

Advertising costs are expensed as incurred. In an effort to expand UHC’s brand recognition and membership base, advertising costs of $2,745,981 and $2,979,586 were incurred for the years ended December 31, 2017 and 2016, respectively.

Income Taxes

December 31, 2017. UHC did not have asserted and unsettled or unasserted income tax contingencies during 2017 or 2016. UHC did not recognize any benefits or provisions from uncertain tax positions during 2017 or 2016.

Net Assets

Unrestricted net assets are those that are available for the support of operations and whose use is not externally restricted, although their use may be limited by other factors such as by contract or board designation. Temporarily restricted net assets are those for which use has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity. UHC had no temporarily or permanently restricted net assets as of and for the years ended December 31, 2017 and 2016.

Net Operating Income (Loss)

The consolidated statements of operations include net operating income (loss). Changes in net assets that are excluded from net operating income (loss) include unrealized gains and losses on investments.

Other Changes in Unrestricted Net Assets

Changes in unrestricted net assets include net operating income (loss) and unrealized gains and losses on investments arising during the period.

Use of Estimates

Regulation

Exhibit 99.4

Financial statements prepared for the Kentucky Department of Insurance in accordance with statutory accounting practices differ from the financial statements prepared in accordance with GAAP. The principal differences are (1) certain assets, such as accounts receivable from non-governmental entities greater than 90 days old and prepaid expenses, are excluded from the statutory balance sheet and (2) debt securities are carried at amortized cost, not fair value as required under GAAP. As a result of the foregoing, statutory net worth at December 31, 2017 and 2016 is $213,438,304 and $196,756,765, respectively. Statutory net income (loss) was $17,107,991 and ($57,908,930) in 2017 and 2016, respectively.

Under applicable Kentucky state laws and regulations, UHC is required to maintain the greater of a minimum net worth of $1,250,000, determined in accordance with statutory accounting practices, or the minimum capital requirements as calculated by the risk-based capital (RBC) calculation. The RBC requirements are designed to measure the acceptable amount of capital an insurer should have based on the inherent specific risks to each insurer. Within certain ratio ranges, regulators have increasing authority to take action as the RBC ratio decreases. There are four levels of regulatory action, ranging from requiring insurers to submit a comprehensive plan to the state insurance commissioner to requiring the state insurance commissioner to place the insurer under regulatory control. At December 31, 2017 and 2016, UHC’s statutory net worth exceeds that required by the RBC calculation for health insurers in Kentucky.

Recent Accounting Pronouncements

In August 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The updated guidance changes presentation and disclosure requirements for not-for-profit entities to provide more relevant information about their resources (and the changes in those resources) to donors, grantors, creditors, and other users. Both qualitative and quantitative requirements will be updated in the following areas: a) Net Asset Classes; b) Investment Return; c) Expenses; d) Liquidity and Availability of Resources; and e) Presentation of Operating Cash Flows. The new guidance is effective for not-for-profit organizations for annual financial statements issued for fiscal years beginning after December 15, 2017, with early application permitted. Management intends to adopt this guidance on the effective date listed and is currently evaluating the related impact on the financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The updated guidance provides new requirements for leases to be recognized in the financial statements. In general, the guidance requires the lessee to recognize liabilities on the balance sheet for the obligation to make lease payments and an asset for the right to use the underlying assets for the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right to use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities. The updated guidance is to be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. Management intends to adopt this guidance upon the effective date listed and is currently evaluating the related impact on the financial statements.

Exhibit 99.4

In May 2015, the FASB issued ASU No. 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. This guidance requires insurance entities to disclose, for annual reporting periods incurred and paid claims development information by accident year, after reinsurance, for the number of years for which claims typically remain open. Disclosures should also include quantitative information about claim frequency and a qualitative description of methodologies used for determining claim frequency information. This guidance is effective for 2017 (Note 13).

Exhibit 99.4

(4) Marketable Securities and Assets Limited As To Use

The following is a summary of marketable securities stated at fair value as of December 31, 2017 and 2016:

	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Treasury Securities and obligations of U.S. Government corporations and agencies	$	23,261,984	$	60,140	$	245,955	$	23,076,169
Municipal bonds	898,113		2,013		6,890		893,236
Other government obligations	1,620,937		58,545		2,688		1,676,794
Other debt securities	5,662,083		72,009		21,997		5,712,095
Corporate debt securities	39,709,864		817,413		137,433		40,389,844
Commercial mortgage-backed securities	28,694,712		157,594		102,514		28,749,792
Residential mortgage-backed securities	30,207,571		128,144		285,099		30,050,616
Small cap equity securities	30,708,701		8,037,776		1,996,226		36,750,251
Equity mutual funds	40,305,970		29,640,732		—		69,946,702
Total marketable securities	$	201,069,935	$	38,974,366	$	2,798,802	$	237,245,499
	December 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Treasury Securities and obligations of U.S. Government corporations and agencies	$	19,534,025	$	12,503	$	459,293	$	19,087,235
Municipal bonds	1,227,062		7,204		9,510		1,224,756
Other government obligations	2,729,460		31,258		7,971		2,752,747
Other debt securities	4,659,390		32,313		70,839		4,620,864
Corporate debt securities	36,864,160		568,447		388,315		37,044,292
Commercial mortgage-backed securities	21,779,994		170,378		181,883		21,768,489
Residential mortgage-backed securities	23,646,047		128,937		282,205		23,492,779
Small cap equity securities	31,217,110		8,041,084		141,565		39,116,629
Equity mutual fund	41,944,624		19,442,781		—		61,387,405
Total marketable securities	$	183,601,872	$	28,434,905	$	1,541,581	$	210,495,196

In order to meet the deposit requirement described in Note 3, the following assets are limited as to use at December 31, 2017 and 2016:

	2017		2016
U.S. Treasury Note (3.875% due May 15, 2018)	$	504,490	$	519,555
Money market account	21,875		2,427
Assets limited as to use	$	526,365	$	521,982

Exhibit 99.4

The amortized cost and estimated fair value of marketable debt securities by contractual maturity date at December 31, 2017 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

	Amortized		Estimated
	Cost		Fair Value
Due within one year or less	$	3,803,927	$	3,800,075
Due after one year through five years	18,933,812		18,963,091
Due after five years through ten years	31,852,110		31,977,973
Due after ten years	16,563,132		17,006,999
	71,152,981		71,748,138
Commercial mortgage-backed securities	28,694,712		28,749,792
Residential mortgage-backed securities	30,207,571		30,050,616
Total debt securities	$	130,055,264	$	130,548,546

Proceeds from the sale of available-for-sale securities aggregated $111,255,241 in 2017, resulting in gross realized gains of $8,410,135 and gross realized losses of $743,638. Proceeds from the sale of available-for-sale securities aggregated $157,453,901 in 2016, resulting in gross realized gains of $3,773,620 and gross realized losses of $762,933.

UHC has determined that the following amounts are temporarily impaired at December 31, 2017 and 2016 summarized by asset class and length of time that a security has been in a continuous unrealized loss position:

2017	Less Than 12 Months				12 Months or Longer				Total
Description of Securities	Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses
U.S. Treasury securities and obligations of U.S. Government corporations<br><br>and agencies	$	15,540,389	$	217,777	$	3,679,001	$	28,178	$	19,219,390	$	245,955
Municipal bonds	406,317		6,890		—		—		406,317		6,890
Other government obligations	256,503		2,348		19,630		340		276,133		2,688
Other debt securities	524,352		1,762		2,265,258		20,235		2,789,610		21,997
Corporate debt securities	8,026,480		55,368		7,451,427		82,065		15,477,907		137,433
Commercial mortgage-backed securities	7,278,884		38,866		5,420,609		63,648		12,699,493		102,514
Residential mortgage-backed securities	8,919,748		56,748		13,548,381		228,351		22,468,129		285,099
Total debt securities	40,952,673		379,759		32,384,306		422,817		73,336,979		802,576
Small cap equity securities	2,664,542		108,246		13,873,329		1,887,980		16,537,871		1,996,226
Total temporarily impaired securities	$	43,617,215	$	488,005	$	46,257,635	$	2,310,797	$	89,874,850	$	2,798,802

Exhibit 99.4

2016	Less Than 12 Months				12 Months or Longer				Total
Description of Securities	Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses		Fair Value		Unrealized<br><br>Losses
U.S. Treasury securities and obligations of U.S. Government corporations<br><br>and agencies	$	16,481,908	$	431,236	$	991,796	$	28,057	$	17,473,704	$	459,293
Municipal bonds	—		—		282,781		9,510		282,781		9,510
Other government obligations	411,446		4,808		481,532		3,163		892,978		7,971
Other debt securities	1,924,325		59,640		918,919		11,199		2,843,244		70,839
Corporate debt securities	12,393,487		324,065		4,707,945		64,250		17,101,432		388,315
Commercial mortgage-backed securities	5,286,207		97,812		6,071,946		84,071		11,358,153		181,883
Residential mortgage-backed<br><br>securities	12,918,875		236,791		4,985,155		45,414		17,904,030		282,205
Total debt securities	49,416,248		1,154,352		18,440,074		245,664		67,856,322		1,400,016
Small cap equity securities	1,485,902		98,558		860,148		43,007		2,346,050		141,565
Total temporarily impaired securities	$	50,902,150	$	1,252,910	$	19,300,222	$	288,671	$	70,202,372	$	1,541,581

For the years ended December 31, 2017 and 2016, a credit-related impairment charge of $113,550 and $452,001, respectively, was recorded within the consolidated statements of operations. There were no non-credit related impairment charges in 2017 or 2016.

(5)	Derivative Instruments

UHC uses deferred settlement mortgages as a cost efficient way to invest in mortgage-backed securities. In this approach, the investor accepts delayed settlement on the purchase of mortgage-backed securities in return for a modest reduction in the price paid for those mortgage-backed securities. The price differential is directly related to the fact that the investor does not experience the higher yield typically offered by mortgage-backed securities relative to the interest rate earned on cash equivalents held for the period between normal settlement and the agreed upon deferred settlement. Such deferred settlement mortgages are not designated as hedging instruments under ASC 815, Derivatives and Hedging. UHC reported net realized gains/(losses) from these securities of $17,023 and ($147,683), respectively, for the years ended December 31, 2017 and 2016 within realized gain from sale of investments, net on the consolidated statements of operations. There are no significant derivative instruments held at December 31, 2017 and 2016.

(6)	Fair Value Measurements

ASC 820-10 establishes a fair value hierarchy comprised of three priority levels, which are as follows:

Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets.

Level 2 - Other observable inputs, either directly or indirectly, including:

•	Quoted prices for similar assets/liabilities in active markets;
•	Quoted prices for identical or similar assets in non-active markets;
---	---
•	Inputs other than quoted prices that are observable for the asset/liability; and
---	---
•	Inputs that are derived principally from or corroborated by other observable market data.
---	---

Level 3 - Unobservable inputs that cannot be corroborated by observable market data.

Exhibit 99.4

UHC’s equity securities trade on a major exchange in an active market. Accordingly, such equity securities are disclosed in Level 1. The one exception is common stock obtained in 2016 in connection with services provided for under a Development and Master Services Agreement. The value is based on unobservable inputs and represents the amount disclosed in Level 3.

There were no transfers between any levels of the fair value hierarchy during 2017 or 2016. UHC’s policy is to recognize transfers between Levels as of the end of the reporting period.

The following is a table of the fair value measurements of UHC’s applicable assets by level within the fair value hierarchy as of December 31, 2017 and 2016:

	December 31, 2017
	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs<br><br>(Level 2)		Unobservable Inputs<br><br>(Level 3)		Total Fair Value
Marketable securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	—	$	23,076,169	$	—	$	23,076,169
Municipal bonds	—		893,236		—		893,236
Other government obligations	—		1,676,794		—		1,676,794
Other debt securities	—		5,712,095		—		5,712,095
Corporate debt securities	—		40,389,844		—		40,389,844
Commercial mortgage-backed securities	—		28,749,792		—		28,749,792
Residential mortgage-backed securities	—		30,050,616		—		30,050,616
Small cap equity securities	36,717,751		—		32,500		36,750,251
Equity mutual funds	69,946,702		—		—		69,946,702
Assets limited as to use:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	—		504,490		—		504,490
Total investment securities	$	106,664,453	$	131,053,036	$	32,500	$	237,749,989

Exhibit 99.4

	December 31, 2016
	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs<br><br>(Level 2)		Unobservable Inputs<br><br>(Level 3)		Total Fair Value
Marketable securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	—	$	19,087,235	$	—	$	19,087,235
Municipal bonds	—		1,224,756		—		1,224,756
Other government obligations	—		2,752,747		—		2,752,747
Other debt securities	—		4,620,864		—		4,620,864
Corporate debt securities	—		37,044,292		—		37,044,292
Commercial mortgage-backed securities	—		21,768,489		—		21,768,489
Residential mortgage-backed securities	—		23,492,779		—		23,492,779
Small cap equity securities	39,084,129		—		32,500		39,116,629
Equity mutual funds	61,387,405		—		—		61,387,405
Assets limited as to use:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	—		519,555		—		519,555
Total investment securities	$	100,471,534	$	110,510,717	$	32,500	$	211,014,751

The fair value of other financial instruments approximates their carrying values at December 31, 2017 and 2016 due to the short maturity of such instruments.

(7) Premiums Receivable

Premiums receivable represents amounts due from DMS and CMS and consists of the following at December 31, 2017 and 2016:

	2017		2016
Membership premiums	$	11,508,400	$	11,551,000

Exhibit 99.4

(8)	Other Receivables

The following is a summary of other receivables as of December 31, 2017 and 2016:

	2017		2016
Pharmacy rebates receivable	$	8,679,119	$	8,901,159
Note receivable	4,000,000		—
Reinsurance receivable	875,473		1,578,106
Interest receivable	868,598		775,212
Encounter penalties from TPAs	761,272		450,065
Receivable from Evolent Health	367,068		192,135
DMS penalties	—		369,278
Magellan audit receivable	—		202,932
Other	26,731		8,142
	$	15,578,261	$	12,477,029

(9) Land and construction in progress

Land and construction in progress consists of the following as of December 31, 2017 and 2016:

	2017		2016
Land	$	7,852,615	$	—
Construction in Progress	908,019		—
	$	8,760,634	$	—

Land represents parcels of property purchased for the future UHC corporate headquarters and health and well-being campus in West Louisville. The construction in progress is cost associated with the initial design phase of the project. The first phase including the corporate headquarters is scheduled for completion in 2020.

(10) Furniture and Equipment

Furniture and equipment consists of the following as of December 31, 2017 and 2016:

	2017		2016
Equipment and software	$	4,822,210	$	4,839,443
Furniture and fixtures	739,489		726,509
Leasehold improvements	419,669		405,777
Equipment and furniture under capital lease	159,202		159,202
	6,140,570		6,130,931
Less accumulated depreciation and amortization	4,721,658		4,086,914
	$	1,418,912	$	2,044,017

Depreciation and amortization expense charged to operations was $1,105,376 and $1,172,588 in 2017 and 2016, respectively. Accumulated amortization of furniture and equipment under capital leases amounted to $159,202 at both December 31, 2017 and 2016, respectively.

Exhibit 99.4

(11)	Related-Party Transactions

UHC sponsors and affiliated entities provide health care services to UHC members at contracted rates. Estimated amounts incurred by UHC for services provided by UHC sponsors and affiliates for the years ended December 31, 2017 and 2016 were approximately as follows:

	2017		2016
ULP	$	64,245,000	$	63,631,000
Norton	222,749,000		234,223,000
Jewish	101,903,000		77,374,000
UMC	122,538,000		111,345,000
Primary Care	9,366,000		12,216,000

At December 31, 2017 and 2016, accrued medical expenses include amounts due to the sponsors for unpaid medical and related services.

(12)	Transactions with Subcontractors

Subcontractor Name	Service Provided	2017		2016
Evolent	Administrative and pharmacy	$	88,217,818	$	55,480,832
ACHP	Administrative	27,248,762		32,761,286
Beacon	Behavioral Health	7,118,950		6,684,141
HMS	Administrative	2,364,503		—
CVS	Pharmacy	1,503,647		2,158,694
Health Integrated	Administrative	1,459,221		835,859
DST	Administrative	1,326,628		853,413
Magellan	Pharmacy	8,580		5,627,616
Avesis	Dental	—		828,342
Navitus	Pharmacy	—		215,355
		$	129,248,109	$	105,445,538

Prior to October 1, 2017, ACHP provided administrative services including Medicaid claims processing, enrollment services, and information technology. From October 1, 2017 through March 31, 2018, ACHP will continue to provide certain run-out services.

Beacon provides behavioral health benefit management services to UHC under a contact which expires on December 31, 2018.

Health Management Systems provided third party liability services to UHC through a contract with ACHP which expired on December 31, 2017.

Exhibit 99.4

Evolent administers a pharmacy benefits management services contract with CVS through a three year contract that expires on August 31, 2019.

Health Integrated provides utilization and case management services to UHC through a contract that expires December 31, 2018.

DST provides administrative services including Medicare claims processing, enrollment services, and information technology under a contract that is being terminated by UHC on June 30, 2018. UHC has contracted with TMG Health Inc. to provide these same services for Medicare effective July 1, 2018 through a contract with an expiration date of December 31, 2023.

Magellan provided pharmacy benefit management services to UHC through a three year contract that was terminated by UHC effective August 31, 2016.

Navitus provided pharmacy benefit management services to UHC’s MA-SNP members through a contract that expired December 31, 2016. UHC did not renew this contract and has contracted with CVS to provide this service to the MA-SNP membership effective January 1, 2017.

(13)	Accrued Medical Expenses

Activity in accrued medical expenses is summarized as follows:

	2017			2016
Balance, January 1	$	185,471,506		$	174,309,589
Incurred related to:
Current year	1,773,494,656			1,679,838,200
Prior years	(28,826,736		)	(16,044,068		)
Total incurred	1,744,667,920			1,663,794,132
Paid related to:
Current year	1,577,918,582			1,502,159,667
Prior years	152,222,940			150,472,548
Total paid	1,730,141,522			1,652,632,215
Balance, December 31	$	199,997,904		$	185,471,506

The medical expenses for prior years decreased by a total of $28,826,736 and $16,044,068 in 2017 and 2016, respectively, due to lower than anticipated medical cost and favorable utilization trends. These adjustments are generally the result of ongoing analysis and recent loss development trends. Original estimates are increased or decreased, as additional information becomes known regarding individual claims.

Accrued medical expenses are developed by utilizing actuarial based methodology including claim lag studies, pended claim information, trended historical per member per month levels, and expected loss ratio calculations. There has been no significant changes to the basis or methodologies in this process. The charts above and below include Medicaid and since January 1, 2016 Medicare. UHC has chosen for presentation to not disaggregate between Medicaid and Medicare since Medicaid consist of approximately 99.5% of the consolidated membership since January 1, 2016.

Exhibit 99.4

The following tables provide information about incurred and paid claims development for Medicaid and Medicare as of December 31, 2017, net of reinsurance.

	2015		2016		2017
Ultimate Incurred	(Unaudited)		(Unaudited)
Incurred dates 2015	$	1,512,765,804	$	1,506,030,404	$	1,503,779,095
Incurred dates 2016	—		1,679,838,200		1,653,262,773
Incurred dates 2017	—		—		1,773,494,656
	$	1,512,765,804	$	3,185,868,604	$	4,930,536,524
Total Paid
Incurred dates 2015	$	1,341,426,391	$	1,499,815,537	$	1,503,641,870
Incurred dates 2016	—		1,502,159,667		1,649,853,642
Incurred dates 2017	—		—		1,577,918,582
	$	1,341,426,391	3,001,975,204		4,731,414,094
Ultimate incurred less total paid			183,893,400		199,122,430
Reinsurance recoverables			1,578,106		875,474
Accrued medical expenses			$	185,471,506	$	199,997,904

At December 31, 2017, accrued medical expense included incurred but not reported claims of $199,997,904, which are primarily associated with claims incurred in 2017.

Claims frequency is measured as medical fee-for-service claims for each service encounter with a unique provider identification number. Claims frequency measure includes claims covered by deductables as well as claims under capitated arrangements. The following table is unaudited supplementary information about the number of reported claims by accident year:

2015	18,325,579
2016	20,015,237
2017	22,603,880
(14)	Reinsurance
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UHC maintains reinsurance (stop-loss) coverage for hospital inpatient medical expenses with commercial insurance carriers. Under UHC’s policies relating to the Medicaid and Medicare programs, the maximum lifetime reinsurance indemnity under these policies is $2,000,000 for eligible hospital services for each insured member, subject to certain annual deductibles of $325,000 (increased to $350,000 effective November 1, 2017) for Medicaid and $250,000 for Medicare as stated in the agreements. The reinsurance coverage does not relieve UHC of its primary obligation to the policy members. Reinsurance premiums were $7,173,700 and $4,627,929 in 2017 and 2016, respectively. Reinsurance recoveries amounted to $6,329,948 and $10,326,744 for the years ended December 31, 2017 and 2016, respectively.

(15)	401(k) Defined Contribution Plan and 457(b) Deferred Compensation Plan

UHC’s employees are eligible to participate in the University Health Care 401(k) Plan (401(k) Plan), a defined contribution plan covering substantially all employees of UHC. UHC matches employee contributions with an amount equal to 100% of such contribution up to 1% of the eligible employee’s salary, plus 50% of such contribution on the next 5% of the eligible employee’s salary. UHC’s expense for the 401(k) Plan was $328,299 and $372,090 for the years ended December 31, 2017 and 2016, and is included in salaries and benefits on the accompanying consolidated statements of operations.

Exhibit 99.4

(16) Lease Commitments

UHC has three non-cancelable operating leases for office space. The first lease involves supplemental meeting space where the lease expires on December 31, 2018. The second lease involves a regional office in eastern Kentucky where the lease expires on February 28, 2021. The third lease covers the primary UHC office space which expires on June 30, 2021. UHC is also responsible for real estate taxes, utilities, and all other expenses associated with the operation of its leased office space. Recognition of lease expense on a straight‑line basis in accordance with ASC 840‑20‑25‑1, Leases, results in deferred rent of $39,830 and $15,885 at December 31, 2017 and 2016, respectively, which is included in other liabilities on the accompanying balance sheets. Pursuant to the terms of the sublease, UHC acquired equipment and furniture under capital lease (note 10). UHC also leases copier equipment through a lease expiring October of 2018, a company vehicle through a lease expiring December 2018, and postage equipment through a lease expiring September of 2019.

Future minimum rental commitments under these non-cancellable lease agreements are as follows:

	Operating
	Leases
Year ending December 31:
2018	$	1,236,702
2019	1,226,509
2020	1,235,730
2021	634,667
Minimum lease commitments	$	4,333,608

Total rent expense for noncancelable operating leases amounted to $1,706,622 and $1,558,232 in 2017 and 2016, respectively, which is included within other administrative and general on the accompanying consolidated statements of operations.

(17)	Commitments and Contingencies

Exhibit 99.4

(18)	Other Changes in Unrestricted Net Assets

Other changes in unrestricted net assets for the years ended December 31, 2017 and 2016 consists of the following:

	2017			2016
Balance, January 1	$	26,889,659		$	22,117,945
Net unrealized gains on investments arising during period	16,917,721			7,330,400
Less: reclassification adjustment for gains on marketable securities included in net operating income	(7,552,947		)	(2,558,686		)
Unrealized gains on investments, net	9,364,774			4,771,714
Balance, December 31	$	36,254,433		$	26,889,659
(19)	Subsequent Events
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In January 2018, it was announced that CMS had approved DMS’s Section 1115 Medicaid waiver known as Kentucky HEALTH. The acronym HEALTH stands for “Helping to Engage and Achieve Long Term Health.” The goals of this new program are to improve the health of its participants, strengthen Medicaid’s long-term fiscal sustainability, and promote personal responsibility for health and well-being. Management is currently evaluating the impact this program will have on the financial statements.

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Exhibit 99.4