Cleveland Clinic Health System Obligated Group - FMSbonds.com

Other operating expenses (all categories other than salaries, benefits, interest and depreciation) increased$44.7 million (5.4%) in the first six months of 2008, compared to the same period in 2007. Facility costs increased$14.9 million (12.4%). That increase was comprised primarily of increases in utilities, maintenance contracts on theSystem’s information technology, real estate taxes and lease expense particularly associated with the occupancy ofthe Beachwood Campus and the opening of two new Family Health Centers in 2008. Costs of administrativeservices increased $12.2 million (19.4%) mainly from increased costs associated with strategic planning projects,research projects and the decision by the College of Medicine to provide full tuition scholarships to all of its students,which included a retroactive adjustment for students currently enrolled in the program. Purchased servicesincreased $12.1 million (9.7%), compared to 2007 primarily due to increases in costs related to continuing medicaleducation programs, outside lab services and bank and collection fees. Pharmaceuticals increased $10.9 million(8.8%) in the first six months of 2008, compared to 2007 as a result of higher costs and increased utilization of morecostly drugs. Offsetting these increases was a decrease in the cost of medical supplies of $1.1 million (0.5%). Thedecrease in medical supply costs is partially due to the realization of management initiatives to reduce costs throughcontract negotiations by leveraging the System’s spending power, creating strategic supplier relationships andcapitalizing on technology to improve processes, while continually benchmarking quality and service levels.Additionally, insurance expense decreased $4.5 million (9.0%) in the first six months of 2008, compared tothe same period in 2007, primarily due to the System initiatives relating to managing medical malpractice costsdiscussed earlier.D. BALANCE SHEET – DECEMBER 31, 2007 COMPARED TO DECEMBER 31, 2006Cash and Investments. At December 31, 2007, total cash and investments for the System (includingrestricted funds) were $2.913 billion, an increase of $218.1 million from $2.695 billion at December 31, 2006. Thisincrease is comprised of the net cash provided by operating activities, excluding transactions from tradinginvestments of $621.0 million, an increase in restricted gifts of $112.3 million, and a net increase in proceeds fromlong-term borrowings of $1.3 million, offset by capital expenditures of $506.7 million and principal payments onlong-term debt of $9.8 million.The System’s objectives related to its investment portfolio are preservation of principal and investmentreturns competitive with market-related and peer benchmarks. The System maintains three separate investmentpools to accommodate varying degrees of liquidity and return expectations. The three pools have different assetallocation guidelines and employ multiple asset classes (equity, fixed income, private equity, real estate and hedgefunds) and multiple asset styles (growth vs. value; large cap vs. small cap). The System increased the portfolio’sdiversification by investing $323.9 million and $170.3 million in 2006 and 2007, respectively, in alternativeinvestments. Alternative investments are primarily limited partnerships that invest in marketable securities, privatelyheld securities, real estate, and derivative products and are reported using the equity method of accounting based oninformation provided by the respective partnership.[Balance of Page Left Blank Intentionally]A-36