$75,000,000 $32,615,000 Kentucky Economic Development Finance Authority

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1 NEW ISSUE BOOK ENTRY ONLY RATINGS: See RATINGS herein S&P: A+ Moody s: A1 Fitch: A+ In the opinion of Bond Counsel, assuming the compliance by the Issuer and the Corporation with certain requirements of the Internal Revenue Code of 1986, as amended (the Code ), subsequent to the issuance of the Series 2010 Bonds, and based upon existing laws, regulations, judicial decisions and rulings, interest on the Series 2010 Bonds is excludable from gross income for federal income tax purposes and is not a tax preference item for purposes of computing the alternative minimum tax imposed on individuals and corporations. In the opinion of Bond Counsel, the Series 2010 Bonds and the interest thereon are presently exempt from all taxation in the Commonwealth of Kentucky, except for inheritance, estate or transfer taxes. For a more complete discussion of tax matters, see TAX EXEMPTION herein. $75,000,000 $32,615,000 Kentucky Economic Development Finance Authority City of Ashland, Kentucky Medical Center Revenue Bonds, Medical Center Revenue Bonds, Series 2010A Series 2010B (Ashland Hospital Corporation d/b/a/ (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) King s Daughters Medical Center Project) Dated: Date of Issuance Due: February 1, as shown on inside cover The Kentucky Economic Development Finance Authority ( KEDFA ) is offering its Medical Center Revenue Bonds, Series 2010A (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) (the Series 2010A Bonds ) and the City of Ashland, Kentucky (the City and together with KEDFA, the Issuers ) is offering its Medical Center Revenue Bonds, Series 2010B (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) (the Series 2010B Bonds, and together with the Series 2010A Bonds, the Series 2010 Bonds ). The Series 2010 Bonds are special and limited obligations of the Issuers pursuant to certain resolutions of their respective legislative authorities and to Bond Indentures as described herein by and between each Issuer and U.S. Bank National Association, as bond trustee (the Bond Trustee ). The proceeds of the Series 2010A Bonds, together with other funds, will be used to pay costs of acquiring, constructing, improving and equipping healthcare facilities and to pay related costs of issuance. The proceeds of the Series 2010B Bonds will be used to pay costs of refunding certain prior obligations on a current basis and to pay related costs of issuance. See PURPOSE AND PLAN OF FINANCING. Interest on the Series 2010 Bonds is payable semiannually on each February 1 and August 1, commencing August 1, The Series 2010 Bonds will be issuable in the denominations of $5,000 or any integral multiple thereof, and will be initially issued as fully registered bonds in book entry form in the name of The Depository Trust Company ( DTC ) or its nominee. There will be no distribution of Series 2010 Bonds to owners of book entry interests. DTC will receive all payments of principal and interest with respect to the Series 2010 Bonds from the Bond Trustee. DTC is required by its rules and procedures to remit such payments to participants in DTC for subsequent disbursement to the owners of book entry interests. So long as DTC or its nominee is the registered owner of the Series 2010 Bonds, references herein to the Bondholders, holders or registered owners (other than under the caption TAX EXEMPTION or CONTINUING DISCLOSURE ) shall mean DTC or its nominee, and not the owners of book entry interest in the Series 2010 Bonds. See THE SERIES 2010 BONDS Book Entry Only System. The Series 2010 Bonds are subject to optional and mandatory redemption prior to maturity as described herein. Payment of the principal of the Series 2010 Bonds, the premium, if any, and the interest thereon are secured by and payable solely from payments to be made by Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center (the Corporation ) pursuant to a Loan Agreement with each Issuer, as described herein, and from Series 2010 Bond proceeds and other moneys pledged to or held by the Bond Trustee under the Bond Indentures for such purposes. In addition, the Series 2010 Bonds will be payable from amounts payable to the Bond Trustee on the Master Notes described herein and issued by the Corporation under the Master Trust Indenture described herein (the Master Indenture ) between the Corporation and U.S. Bank National Association, as master trustee (in such capacity, the Master Trustee ). The Master Notes are secured under the Master Indenture by a pledge and assignment in favor of the Master Trustee of the Gross Receipts of the Corporation, as defined in the Master Indenture. MATURITY DATES, PRINCIPAL AMOUNTS, INTEREST RATES AND PRICES (See Inside Cover Page) The names of the Issuers are on the Series 2010 Bonds for the benefit and convenience of the Corporation. However, the only security which is pledged for the Series 2010 Bonds is the independent revenues and assets of the Corporation. The General Assembly of the Commonwealth of Kentucky ( Kentucky ) will not appropriate any funds of Kentucky to fulfill the financial obligation represented by the Series 2010 Bonds. Likewise, KEDFA has no taxing power and neither Issuer, as a conduit issuer, will be responsible for any payments of principal or interest on the Series 2010 Bonds except to the extent of moneys provided pursuant to its related Loan Agreement and Bond Indenture. The Series 2010 Bonds and the interest payable thereon are special and limited obligations of the Issuers and do not constitute a debt, general obligation, pledge of faith and credit or liability of the Issuers, Kentucky or of any agency or political subdivision thereof within the meaning of the Constitution or statutes of Kentucky, and the Series 2010 Bonds are payable solely from the funds and property pledged therefor. The Series 2010 Bonds are offered when, as and if issued by the Issuers and received by the Underwriter, subject to prior sale and to the approval of legality by Frost Brown Todd LLC, Louisville, Kentucky, Bond Counsel, and to the approval of certain matters for the Ashland Hospital Corporation by Sheryl Mahaney, Esq., Senior Vice President of Legal Services, General Counsel, for KEDFA by Stoll Keenon Ogden PLLC, Louisville, Kentucky, for the City by Richard Martin, City Attorney, and for the Underwriter by Peck, Shaffer & Williams LLP. It is expected that the Series 2010 Bonds in definitive form will be available for delivery through the facilities of DTC in New York, New York on or about April 1, The date of this Official Statement is March 23, 2010.

2 $75,000,000 Kentucky Economic Development Finance Authority Medical Center Revenue Bonds, Series 2010A (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) SERIES 2010A BONDS MATURITY SCHEDULE $11,100,000 Serial Bonds Year Principal Amount Interest Rate Yield CUSIP* 2012 $ 4,555, % 1.690% CX ,375, CY , CZ ,335, DA ,585, CT1 $63,900,000 Term Bonds $4,370, % Term Bonds Due February 1, 2025, Yield 4.740%, CUSIP CU8 $15,355, % Term Bonds Due February 1, 2030, Yield 5.070%, CUSIP CV6 $44,175, % Term Bonds Due February 1, 2040, Yield 5.250%, CUSIP CW4 $32,615,000 City of Ashland, Kentucky Medical Center Revenue Bonds, Series 2010B (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) SERIES 2010B BONDS MATURITY SCHEDULE $32,615,000 Serial Bonds Year Principal Amount Interest Rate Yield CUSIP* 2011 $4,440, % 1.100% AA ,485, % 2.370% AC ,495, % 2.800% AD ,130, % 3.630% AE ,840, % 3.900% AG ,975, % 4.080% AH ,125, % 4.220% AJ ,185, % 4.350% AK ,355, % 4.440% AL ,535, % 4.550% AB ,050, % 4.740% AF5 * Copyright 2008, American Bankers Association. CUSIP data herein is provided by Standard & Poor's CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. The CUSIP number is provided for convenience and reference only, and is subject to change after issuance of the Series 2010 Bonds.

3 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or other similar words. Such forward-looking statements include, among others, certain of the information under the captions MANAGEMENT S DISCUSSION OF RECENT FINANCIAL PERFORMANCE in APPENDIX A to this Official Statement and BONDHOLDERS RISKS in the forepart of this Official Statement. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVES KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE CORPORATION DOES NOT PLAN, AND DOES NOT UNDERTAKE ANY OBLIGATION, TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS CHANGE OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR OR FAIL TO OCCUR.

4 REGARDING THIS OFFICIAL STATEMENT No dealer, broker, salesman or other person has been authorized by the Kentucky Economic Development Finance Authority ( KEDFA ), the City of Ashland (the City and collectively with KEDFA, the Issuers ), Ashland Hospital Corporation d/b/a King s Daughters Medical Center (the Corporation ) or RBC Capital Markets Corporation (the Underwriter ) to give any information or to make any representations, other than those in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy, nor shall there be any sale of, the Series 2010 Bonds by any person in any jurisdiction in which it is unlawful to make such offer, solicitation or sale. The information and descriptions in this Official Statement do not purport to be comprehensive or definitive. Statements regarding specific documents (including the Series 2010 Bonds), instruments and statutes are descriptions of selected provisions of and subject to the detailed provisions of such documents, instruments and statutes, respectively, and are qualified in their entirety by reference to the full text of each such document, instrument or statute. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the KEDFA, the City or the Corporation since the date hereof. This Official Statement does not constitute a contract between the KEDFA, the City, the Corporation or any one or more of the purchasers or registered owners of the Series 2010 Bonds. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The CUSIP numbers are included in this Official Statement for the convenience of the holders and potential holders of the Series 2010 Bonds. No assurance can be given that the CUSIP numbers for the Series 2010 Bonds will remain the same after their date of issuance and delivery. The Series 2010 Bonds have not been registered under the Securities Act of 1933, as amended, or any state securities law and will not be listed on any stock or other securities exchange. The Bond Indenture has not been qualified under the Trust Indenture Act of 1939, as amended. Neither the Securities and Exchange Commission nor any other federal, state, municipal or other governmental entity will have passed upon the accuracy or adequacy of this Official Statement or, except KEDFA with respect to the Series 2010A Bonds and the City with respect to the Series 2010B Bonds, approved such Bonds for sale. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2010 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE SERIES 2010 BONDS TO CERTAIN DEALERS AT PRICES LOWER THAN THE OFFERING PRICES STATED ON THE INSIDE COVER PAGE HEREOF AND SAID OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER WITHOUT NOTICE.

5 TABLE OF CONTENTS INTRODUCTORY STATEMENT...1 Purpose of this Official Statement...1 The Issuers...1 The Corporation...2 Security...2 Bondholders Risks...2 Appendices and Underlying Documents...3 PURPOSE AND PLAN OF FINANCING...3 THE ISSUERS...3 KEDFA...3 City...4 THE CORPORATION...4 THE SERIES 2010 BONDS...4 General Description...4 Book-Entry Only System...5 Redemption Prior to Maturity...8 SECURITY FOR THE SERIES 2010 BONDS...10 General...10 The Bond Indentures...11 The Loan Agreements...11 The Master Indenture...11 Mortgage Lien and Lien on Equipment and Tangible Personal Property; Prospective Release of Liens...12 ESTIMATED SOURCES AND USES OF FUNDS...13 DEBT SERVICE REQUIREMENTS...14 BONDHOLDERS RISKS...15 General...15 Impact of Disruptions in the Credit Markets and General Economic Factors...15 Patient Protection and Affordable Care Act and Healthcare Reform Initiatives...16 General Reimbursement Policies and Regulations Affecting Health Care Providers...17 Medicare Reimbursement of Corporation Operations...17 Medicaid Program...22 State Budgets...24 Participation in Managed Care Programs...24 HIPAA Administrative Simplification Provisions...25 Civil and Criminal Fraud and Abuse Laws and Enforcement...26 Antitrust...30 Kentucky Certificate of Need Program...31 Competition...31 Equipment...32 i

6 Labor...33 Medical Staff...33 Malpractice Insurance...33 Affiliation, Merger, Acquisition, Transfer, and Divestiture...34 Tax-Exempt Status...34 Enforceability of Remedies...37 Environmental Matters...39 Factors That Could Affect the Future Financial Condition of the Corporation...39 Other Factors Affecting Health Care Facilities...41 Tax-Exempt Status of the Series 2010 Bonds; Continuing Legal Requirements...42 TAX EXEMPTION...42 General...42 Original Issue Discount...43 Acquisition Premium...44 CONTINUING DISCLOSURE...44 LEGAL MATTERS...46 LITIGATION...46 Issuer KEDFA...46 Issuer City of Ashland...46 Corporation...46 UNDERWRITING...47 FINANCIAL ADVISOR...47 RATINGS...47 FINANCIAL STATEMENTS...48 MISCELLANEOUS...48 APPENDICES APPENDIX A ASHLAND HOSPITAL CORPORATION d/b/a KING S DAUGHTERS MEDICAL CENTER... A-1 APPENDIX B CONSOLIDATED FINANCIAL STATEMENTS...B-1 APPENDIX C SUMMARY OF PRINCIPAL DOCUMENTS...C-1 APPENDIX D FORM OF BOND COUNSEL OPINIONS... D-1 ii

7 OFFICIAL STATEMENT $75,000,000 Kentucky Economic Development Finance Authority Medical Center Revenue Bonds, Series 2010A (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) $32,615,000 City of Ashland, Kentucky Medical Center Revenue Bonds, Series 2010B (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) Purpose of this Official Statement INTRODUCTORY STATEMENT The purpose of this Official Statement, including the cover page and the appendices hereto, is to provide information in connection with the offering by the Kentucky Economic Development Finance Authority ( KEDFA ) of its $75,000,000 Medical Center Revenue Bonds, Series 2010A (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) (the Series 2010A Bonds ) and by the City of Ashland, Kentucky (the City and together with KEDFA, the Issuers ) of its $32,615,000 Medical Center Revenue Bonds, Series 2010B (Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center Project) (the Series 2010B Bonds, and together with the Series 2010A Bonds, the Series 2010 Bonds ). The Series 2010A Bonds will be issued pursuant to the 2010A Supplemental Indenture of Trust, dated as of March 1, 2010 (the Series 2010A Bond Indenture ), by and between KEDFA and U.S. Bank National Association, with its designated corporate trust office in Louisville, Kentucky, as trustee (the Bond Trustee ). The Series 2010B Bonds will be issued pursuant to the Indenture of Trust, dated as of March 1, 2010 (the Series 2010B Bond Indenture ) (the Series 2010A Bond Indenture and the Series 2010B Bond Indenture are each a Bond Indenture and collectively, the Bond Indentures ), by and between the City and the Bond Trustee, as trustee. For definitions of certain terms used in this Official Statement and not otherwise defined herein and for summaries of certain documents, see APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS. The Issuers KEDFA is a public body corporate and politic created and established within the Cabinet for Economic Development of Kentucky under and acting pursuant to Sections , through and through of the Kentucky Revised Statues ( KRS ) and Resolution 92-1 adopted on October 13, 1992, by the Kentucky Economic Development Partnership (the KEDFA Act ) and Sections through of the KRS (the Industrial Revenue Bond Act and, together with the KEDFA Act, the Act ) and is authorized to issue revenue bonds as provided in the Act to assist in the development of hospital and health care facilities. See THE ISSUERS herein. The Series 2010A Bonds are being issued by KEDFA on behalf of the Ashland Hospital Corporation d/b/a/ King s Daughters Medical Center (the Corporation ) pursuant to the Series 2010A Bond Indenture and the Act. The City is a municipal corporation and political subdivision of the Commonwealth of Kentucky ( Kentucky or the State ), authorized to issue revenue bonds as provided in the Industrial Revenue Bond Act to assist in the development of hospital and health care facilities. See THE ISSUERS herein. The Series 2010B Bonds are being issued by the City on behalf of the Corporation pursuant to the Series 2010B Bond Indenture and the Industrial Revenue Bond Act.

8 The Corporation The Corporation, a non-profit, non-stock charitable corporation organized under the laws of Kentucky, currently operates an acute care hospital with 465-licensed beds, a nursing facility, and certain other healthcare facilities in the City of Ashland, Kentucky (the Medical Center ), together with other healthcare facilities in proximate areas. See THE CORPORATION. For a description of the facilities and operations of the Corporation, see APPENDIX A: ASHLAND HOSPITAL CORPORATION d/b/a KING S DAUGHTERS MEDICAL CENTER and APPENDIX B: CONSOLIDATED FINANCIAL STATEMENTS. Security The Series 2010A Bonds are special and limited obligations of KEDFA, payable from pledged revenues and other moneys held for that purpose under the Series 2010A Bond Indenture, including payments and other revenues to be received by KEDFA under the 2010A Supplemental Loan, Mortgage and Security Agreement dated as of March 1, 2010 (the Series 2010A Loan Agreement ) between KEDFA and the Corporation, and payments made by the Corporation under the Corporation s promissory note (the Master Note - Series 2010A ), issued under the terms of and pursuant to the Master Trust Indenture dated as of March 1, 2010, between the Corporation and U.S. Bank National Association, as master trustee (the Master Trustee ), as supplemented by Supplemental Master Trust Indenture Number One (the Supplemental Master Indenture ) between the Corporation and the Master Trustee dated as of March 1, 2010 (collectively, the Master Indenture ). The Series 2010B Bonds are special and limited obligations of the City, payable from pledged revenues and other moneys held for that purpose under the Series 2010B Bond Indenture, including payments and other revenues to be received by the Issuer under the Loan, Mortgage and Security Agreement dated as of March 1, 2010 (the Series 2010B Loan Agreement ) (the Series 2010A Loan Agreement and the Series 2010B Loan Agreement are each a Loan Agreement and collectively, the Loan Agreements ) between the Issuer and the Corporation, and payments made by the Corporation under the Corporation s promissory note (the Master Note - Series 2010B and collectively with the Master Note - Series 2010A, the Master Notes ), issued under the terms of and pursuant to the Master Indenture. To secure its obligations under the Master Notes, the Corporation (together with such other entities that may hereafter become obligated under the Master Indenture, the Obligated Group ) have granted to the Master Trustee, for the benefit of all holders of any Obligations (as defined in the Master Indenture) issued under the Master Indenture (including, without limitation, the Bond Trustee, as holder of the Master Notes) a security interest in its Gross Receipts (as defined in the Master Indenture). The Loan Agreements further provide for a first lien mortgage and security interest in the Mortgaged Property (as defined in the Loan Agreements), subject to permitted liens and subject to earlier termination and release upon conditions precedent, as described herein. See SECURITY FOR THE SERIES 2010 BONDS. Bondholders Risks Since payment of the principal of and premium, if any, and interest on the Series 2010 Bonds is dependent on the revenues to be derived from the Corporation and its Medical Center, certain risks are inherent in the payment of such principal, premium and interest. Reference is made to the Official Statement as a whole, and particularly to the section entitled BONDHOLDERS RISKS herein, for a description of certain risks. 2

9 Appendices and Underlying Documents Brief descriptions of the Issuers, the Series 2010 Bonds, the Bond Indentures, the Master Indenture, the Loan Agreements and the Tax Certificate and Agreement dated as of March 1, 2010 (the Tax Agreement ) are included in this Official Statement and in APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS. Information concerning the operations and business of the Corporation is contained in APPENDIX A: ASHLAND HOSPITAL CORPORATION d/b/a KING S DAUGHTERS MEDICAL CENTER and APPENDIX B: CONSOLIDATED FINANCIAL STATEMENTS. The descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each document for the complete details of all terms and conditions. All statements herein are qualified in their entirety by reference to each such document. Copies of the Loan Agreements, the Bond Indentures, the Master Indenture and the Tax Agreement are available in reasonable quantities upon request to the Bond Trustee. PURPOSE AND PLAN OF FINANCING The proceeds of the Series 2010A Bonds will be used to finance hospital facilities and pay related costs of issuance, including (a) an expansion to the Corporation s Heart and Vascular Center, (b) an expansion of operating rooms, (c) the renovation of inpatient facilities, (d) an expansion of outpatient diagnostic facilities, and (e) the acquisition of equipment related to these components. The Medical Center plans to undertake the expansion of its existing facilities in early 2010, to be completed in The Heart and Vascular Center expansion will add two new floors to the existing building: a fifth floor, which will provide fifty additional beds in the neurosciences and cardiac medical units, and a sixth floor, which will allow for future expansion capabilities. The proceeds of the Series 2010B Bonds will be used to refund on a current basis the Kentucky Economic Development Finance Authority Medical Center Revenue Refunding and Improvement Bonds, Series 1998 (Ashland Hospital Corporation d/b/a King s Daughters Medical Center Project), currently outstanding in the principal amount of $33,355,000 (the Prior Bonds ) and pay related costs of issuance. The Series 2010 Bonds will mature February 1 in the years, and will bear interest at the rates per annum, as set forth and described on the inside cover hereof, and will have additional terms and provisions as more fully set forth herein and in the Bond Indentures. KEDFA THE ISSUERS Except for the information under this subheading and under LITIGATION - KEDFA, KEDFA has not participated in the preparation of this Official Statement and assumes no responsibility as to the accuracy or completeness of any information in this Official Statement. KEDFA is an independent agency of Kentucky originally created in 1958 pursuant to KRS Chapter 154 as the Kentucky Development Finance Authority and reorganized as the Kentucky Economic Development Finance Authority under KRS Sections to KEDFA is governed by a committee of seven (7) members, including the Secretary of the Finance and Administration Cabinet, who serves ex officio, and six (6) private citizens who are appointed by a board known as the Kentucky Economic Development Partnership, which is in turn appointed by the Governor from lists of candidates submitted to the Governor by organizations representing various business and labor interests in Kentucky. KEDFA has the power to cooperate with local development agencies in their efforts to promote the expansion of business and job opportunities in Kentucky, to foster economic development and prevent unemployment 3

10 through the retention, promotion and development of healthcare and healthcare related facilities, and to issue revenue bonds under KRS Chapters 103 and 154. The Series 2010A Bonds will be special and limited obligations of KEDFA as described under the caption SECURITY FOR THE SERIES 2010 BONDS. City Except for the information under this heading and under LITIGATION - City, the City has not participated in the preparation of this Official Statement and assumes no responsibility as to the accuracy or completeness of any information in this Official Statement. The City is a municipal corporation and political subdivision of Kentucky. The City is governed by a City Commission, comprised of a Mayor, elected to a four year term, and four commissioners who are elected to two-year terms. The City has the power to foster economic development and prevent unemployment through the retention, promotion and development of healthcare and healthcare related facilities, and to issue revenue bonds under KRS Chapter 103. The Series 2010B Bonds will be special and limited obligations of the City as described under the caption SECURITY FOR THE SERIES 2010 BONDS. THE CORPORATION The Corporation is a Kentucky nonprofit, non-stock, charitable corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code ). The Corporation owns and operates a 465-licensed bed acute care hospital and related facilities located in the City of Ashland, Kentucky, providing both inpatient and outpatient services for the residents of the City of Ashland, Kentucky, much of the northeastern region of Kentucky and portions of southern Ohio. The Corporation also owns and operates a nursing facility in the City of Ashland, Kentucky and certain other healthcare facilities, as well as additional healthcare facilities in proximate areas. A description of the facilities and operations of the Corporation is included in APPENDIX A: ASHLAND HOSPITAL CORPORATION d/b/a KING S DAUGHTERS MEDICAL CENTER. General Description THE SERIES 2010 BONDS The Series 2010 Bonds will be dated their date of issuance, will bear interest from that date and will be issuable as fully registered bonds without coupons in authorized denominations of integral multiples of $5,000, not in excess of a scheduled maturity. The Series 2010 Bonds will mature on the dates, and bear interest at the rates, set forth on the inside cover hereof, such interest to be payable each February 1 and August 1, commencing August 1, 2010 (each an Interest Payment Date ). Principal of, and premium, if any, on the Series 2010 Bonds will be payable upon presentation and surrender thereof at the designated corporate trust office of the Bond Trustee in Louisville, Kentucky. Payment of interest on Series 2010 Bonds will be made by check or draft mailed by the Bond Trustee to the registered owners at the addresses shown on the registration books maintained by the Bond Trustee, as of the Record Date, defined in the Bond Indentures as the fifteenth day of the month immediately preceding an Interest Payment Date, or as of any special record date fixed by the Bond Trustee for the payment of defaulted interest. While held by DTC, interest on the Series 2010 Bonds shall be paid by wire transfer to DTC or its nominee in immediately available funds. 4

11 Book-Entry Only System General. The Series 2010 Bonds initially will be issued solely in book-entry form to be held in the book-entry only system maintained by The Depository Trust Company ( DTC ), New York, New York. So long as such book-entry system is used, only DTC will receive or have the right to receive physical delivery of Series 2010 Bonds and, except as otherwise provided herein with respect to Beneficial Owners, as hereinafter defined, Beneficial Owners will not be or be considered to be, and will not have any rights as, owners or holders of the Series 2010 Bonds under the Bond Indentures. The following information about the book-entry only system applicable to the Series 2010 Bonds has been supplied by DTC. None of the Issuers, the Bond Trustee, the Corporation or the Underwriter makes any representations, warranties or guarantees with respect to its accuracy or completeness. DTC will act as securities depository for the Series 2010 Bonds. The Series 2010 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered security certificate will be issued for each maturity of the Series 2010 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC or with the Bond Trustee as the agent for DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of Series 2010 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2010 Bonds on DTC s records. The ownership interest of each actual purchaser of each Security ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2010 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive 5

12 certificates representing their ownership interests in Series 2010 Bonds, except in the event that use of the book entry system for the Series 2010 Bonds is discontinued. To facilitate subsequent transfers, all Series 2010 Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2010 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2010 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Series 2010 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Series 2010 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2010 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Agreement. For example, Beneficial Owners of Series 2010 Bonds may wish to ascertain that the nominee holding the Series 2010 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Series 2010 Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Series 2010 Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the applicable Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Series 2010 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, interest or other payments on the Series 2010 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the applicable Issuer or Bond Trustee, on the payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, the Bond Trustee, the Corporation, or the Issuers, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, interest or other payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Corporation or the Bond Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. Neither the Issuers, the Corporation nor the Bond Trustee will have any responsibility or obligation to any Direct Participant, Indirect Participant or any Beneficial Owner or any other person not shown on the registration books of the Bond Trustee as being a holder with respect to: (1) the 6

13 Series 2010 Bonds; (2) the accuracy of any records maintained by DTC or any Direct Participant or Indirect Participant; (3) the payment by DTC or any Direct Participant or Indirect Participant of any amount due to any Beneficial Owner in respect of the purchase price of tendered Series 2010 Bonds or the principal or redemption price of or interest on the Series 2010 Bonds; (4) the delivery by any Direct Participant or Indirect Participant of any notice to any Beneficial Owner which is required or permitted under the terms of the Bond Indentures to be given to holders; (5) the selection of the Beneficial Owners to receive payment in the event of any partial redemption of the Series 2010 Bonds; or (6) any consent given or other action taken by DTC as holder. Beneficial Owners may be charged a sum sufficient to cover any tax, fee, or other governmental charge that may be imposed in relation to any transfer or exchange of their interests in the Series 2010 Bonds. DTC Letter of Representations. Certain duties of DTC and procedures to be followed by DTC and the Bond Trustee are set forth in DTC s operational arrangements (the Operational Arrangements ). In the event of any conflict between the provisions of a Bond Indenture and the provisions of the Operational Arrangements relating to delivery of Series 2010 Bonds to the Bond Trustee, the provisions of the Operational Arrangements shall control. Each Issuer has executed a blanket letter of representations (the DTC Letter of Representations ) enabling the Series 2010 Bonds to be eligible for DTC s book entry only system. Discontinuation of Book-Entry System; Replacement Series 2010 Bonds. Each Bond Indenture provides for the issuance and delivery of fully registered Bonds (the Replacement Series 2010 Bonds ) directly to owners other than DTC only in the event that DTC determines not to continue to act as securities depository for either series of the Series 2010 Bonds. Upon occurrence of such event, the applicable Issuer may attempt to establish a securities depository book-entry relationship with another securities depository. If the applicable Issuer does not do so, or is unable to do so, and after the Bond Trustee has notified the owners of book-entry interests with respect to the applicable Series 2010 Bonds by appropriate notice to DTC, the Issuer will issue and the Bond Trustee will authenticate and deliver Replacement Series 2010 Bonds in minimum authorized denominations to the assignees of DTC or its nominee. Such withdrawal, authentication and delivery (including printing and delivery costs) will be at the expense of the Corporation. In the event that the book-entry only system is discontinued, the principal or redemption price of and interest on the Series 2010 Bonds will be payable in the manner described above under THE SERIES 2010 BONDS - General Description, and the following provisions would apply. The Series 2010 Bonds may be transferred or exchanged for one or more Series 2010 Bonds for each maturity, in authorized denominations, upon surrender thereof at the designated office of the Bond Trustee as Registrar by the registered owners or their duly authorized attorneys or legal representatives. Upon surrender of any Series 2010 Bonds to be transferred or exchanged, the applicable Issuer will execute, and the Registrar will record the transfer or exchange in its registration books and shall authenticate and deliver new Series 2010 Bonds appropriately registered and in appropriate authorized denominations. Neither an Issuer nor the Registrar shall be required to transfer or exchange any Series 2010 Bond during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of the Series 2010 Bonds and ending at the close of business on the day of such mailing, nor any Series 2010 Bond all or part of which has been selected for redemption. 7

14 Redemption Prior to Maturity The Series 2010 Bonds are callable for redemption in the circumstances and in the manner described below under Optional Redemption, Extraordinary Optional Redemption and Mandatory Sinking Fund Redemption. Optional Redemption. The Series 2010 Bonds maturing after February 1, 2020 are subject to optional redemption by the applicable Issuer at the direction of the Corporation prior to maturity on or after February 1, 2020, in whole at any time or in part on any Interest Payment Date, at a redemption price equal to the principal amount thereof, plus interest accrued to the date fixed for redemption. Extraordinary Optional Redemption. The Series 2010 Bonds are subject to redemption as a whole or in part at any time at a redemption price equal to the principal amount of such Series 2010 Bonds to be redeemed, plus accrued interest thereon to the date of redemption, and without premium, in the event of damage to, destruction or condemnation of the Medical Center or any part thereof. Mandatory Sinking Fund Redemption. The Series 2010B Bonds are not subject to mandatory sinking fund redemption. The Series 2010A Bonds maturing on February 1, 2025 are subject to redemption prior to maturity by lot on each February 1, commencing February 1, 2024, under the mandatory sinking fund provisions of the Series 2010A Bond Indenture, at a redemption price equal to the principal amount thereof plus interest accrued to the redemption date, without premium, as set forth below: * Maturity Year Principal Amount 2024 $3,615, * 755,000 The Series 2010A Bonds maturing on February 1, 2030 are subject to redemption prior to maturity by lot on each February 1, commencing February 1, 2026, under the mandatory sinking fund provisions of the Series 2010A Bond Indenture, at a redemption price equal to the principal amount thereof plus interest accrued to the redemption date, without premium, as set forth below: * Maturity Year Principal Amount 2026 $3,910, ,035, ,275, ,535, * 1,600,000 The Series 2010A Bonds maturing on February 1, 2040 are subject to redemption prior to maturity by lot on each February 1, commencing February 1, 2031, under the mandatory sinking fund provisions of the Series 2010A Bond Indenture, at a redemption price equal to the principal amount thereof plus interest accrued to the redemption date, without premium, as set forth below: Year Principal Amount Year Principal Amount 2031 $1,625, $1,960, ,640, ,035, ,735, ,115, ,805, ,325, ,875, * 15,060,000 * Maturity 8

15 At its option, to be exercised on or before the forty-fifth day next preceding any such mandatory redemption date, the Corporation, on behalf of KEDFA, may (i) deliver to the Bond Trustee for cancellation Series 2010A Term Bonds (as defined in the Series 2010A Bond Indenture) maturing on the same date as those scheduled to be retired in any aggregate principal amount desired, or (ii) receive a credit in respect of its mandatory redemption obligation for any such Series 2010A Term Bonds maturing on the same date as those scheduled to be retired which prior to said date have been purchased (in the open market) or redeemed (otherwise than through the operation of the sinking fund) and cancelled by the Bond Trustee and not theretofore applied as a credit against any mandatory redemption obligation. Each such Series 2010A Term Bond so delivered or previously purchased or redeemed shall be credited by the Bond Trustee at 100% of the principal amount thereof against the obligation of KEDFA on such mandatory redemption date and any excess shall be credited on future sinking fund redemption obligations with respect to Series 2010A Term Bonds maturing on the same date in chronological order, and the principal amount of such Series 2010A Bonds to be redeemed by operation of the sinking fund shall be accordingly reduced. The Corporation, on behalf of KEDFA, shall on or before the forty-fifth day next preceding each mandatory redemption date furnish the Bond Trustee with its certificate indicating whether or not and to what extent the provisions of clauses (i) and (ii) of the preceding paragraph are to be availed of with respect to such mandatory redemption and confirm that such funds for the balance of the next succeeding prescribed mandatory redemption will be paid on or before the fifth business day next preceding February 1. The Bond Trustee shall redeem such an aggregate principal amount of such Series 2010A Term Bonds at 100% of the principal amount thereof plus accrued interest to the redemption date as will exhaust as nearly as practicable such credit. Mandatory Redemption upon Determination of Taxability. Upon the occurrence of a Determination of Taxability, as defined below, the Series 2010 Bonds are subject to mandatory redemption in whole by the Issuer thereof at a redemption price of 100% of the outstanding principal amount thereof, plus accrued interest to the redemption date, at the earliest practicable date selected by the Bond Trustee, after consultation with the Corporation, but in no event later than 45 days following the Bond Trustee s notification of the Determination of Taxability. The occurrence of a Determination of Taxability with respect to the Series 2010 Bonds will not constitute an Event of Default under the Bond Indentures and the sole remedy of the Bondholders will be mandatory redemption of the Series 2010 Bonds in accordance with the applicable Bond Indenture. No redemption premium will be payable and no increase in the interest payable with respect to the Series 2010 Bonds will occur in the event a Determination of Taxability occurs. Determination of Taxability means and shall occur when, (i) the Bond Trustee receives written notice from the Corporation, supported by an opinion of Bond Counsel, that interest on the Series 2010 Bonds is included in the gross income of Bondholders for federal income tax purposes or (ii) the Internal Revenue Service ( IRS ) shall claim in writing that interest on the Series 2010 Bonds is included in the gross income of Bondholders for federal income tax purposes; provided, that such a claim shall not be deemed a Determination of Taxability unless the Corporation is afforded reasonable opportunity (at its sole expense and for a period not to exceed 2 years) to pursue any judicial or administrative remedy available to the Corporation with respect to such claim. Notice of Redemption and Payments. Notice of redemption with respect to the Series 2010 Bonds is to be given by the Bond Trustee on behalf of the applicable Issuer to the registered owner of each Series 2010 Bond being redeemed by first class mail, addressed to the last known address of such Bondholder as it appears upon the register (the Register ) maintained by the Registrar, or at such other address as is furnished in writing by the Bondholder to the Registrar, not less than 30 days nor more than 60 days prior to redemption (except in the case of mandatory redemption upon the occurrence of a Determination of Taxability, in which case notice shall be given at least five days and not more than 9

16 fifteen days prior to the date fixed for redemption). Failure to receive any such notice or any defect therein shall not affect the validity of any proceeding for the redemption of any other Series 2010 Bond. Notice of the call for redemption of Series 2010 Bonds held under a book entry system will be sent by the Bond Trustee only to DTC or its nominee as registered owner. Selection of book entry interests in the Series 2010 Bonds called, and notice of call to the owners of those interests called, is the responsibility of DTC, Direct Participants and Indirect Participants. Any failure of DTC to advise any Direct Participant, or of any Direct Participant or any Indirect Participant to notify the book entry interest owners, of any such notice and its content or effect will not affect the validity of any proceedings for the redemption of the Series 2010 Bonds. See THE SERIES 2010 BONDS - Book Entry Only System herein. If fewer than all the outstanding Series 2010 Bonds of a series are called for redemption at one time, those bonds called shall be selected for redemption in the order determined by the Corporation without regard to the order of maturity. When less than the entire unmatured portion of the Series 2010 Bonds are called for redemption at any time or from time to time, the selection of such Series 2010 Bonds or portions of Series 2010 Bonds is to be made by lot in such manner as determined by the Bond Trustee. Except as provided in the preceding sentence, if less than all of an outstanding Series 2010 Bond of one maturity held under a book entry system is to be called for redemption, the Bond Trustee will give notice of redemption only to DTC or its nominee as registered owner. The selection of the book entry interests in that Series 2010 Bond to be redeemed, and notice of call to the owners of those interests called, is the responsibility of DTC, Direct Participants and Indirect Participants. If any Series 2010 Bonds are not presented for payment at the date fixed for their redemption and the funds for such payment are available therefor, the Bondholders of such Series 2010 Bonds will thereafter be restricted exclusively to the funds available for redemption for the satisfaction of any claim relating to such Series 2010 Bonds. Any such funds remaining unclaimed for four years after becoming due and payable shall be paid to the Corporation, and the Bondholders of such Series 2010 Bonds shall thereafter be entitled to look only to the Corporation for payment and only in an amount equal to the amounts received by or paid to or on behalf of the Corporation, without any interest thereon. General SECURITY FOR THE SERIES 2010 BONDS The Series 2010 Bonds and the interest payable thereon will be special and limited obligations of the applicable Issuer and, except to the extent payable from the proceeds of the Series 2010 Bonds or moneys derived from the investment thereof, will be payable solely from, and secured by, the payments to be made by the Corporation under the respective Loan Agreement and Master Note. Neither the principal of, nor premium, if any, on the Series 2010 Bonds, nor the interest accruing thereon, shall ever constitute an indebtedness of the Issuers, Kentucky or any agency or political subdivision thereof within the meaning of any constitutional or statutory provision whatsoever or, except as to the limited sources of payment described herein, shall ever constitute or give rise to a pecuniary liability of the Issuers. The Series 2010 Bonds will neither constitute nor give rise to a general obligation or liability of, or a charge against, the general credit of the Issuers, Kentucky or any agency or political subdivision thereof or a charge against the general credit or taxing powers of the Issuers, Kentucky or any agency or political subdivision thereof. The General Assembly of Kentucky will not appropriate any funds of Kentucky to fulfill the financial obligation represented by the Series 2010 Bonds. Likewise, KEDFA has no power to levy taxes for any purposes whatsoever and the City will not levy taxes for the payment of the bonds, and each Issuer, as a conduit issuer, will not be responsible for any payments of principal or interest on the Series 2010 Bonds. 10

17 The Bond Indentures Under the terms of each respective Bond Indenture, each Issuer will assign and pledge to the Bond Trustee in trust and grant to the Bond Trustee a continuing security interest in: (a) the rights, title and interest of such Issuer under its related Loan Agreement and all payments, revenues, rents and receipts received or receivable by such Issuer thereunder (except for Unassigned Rights, as defined in such Bond Indenture), (b) the respective Master Note and (c) the right, title and interest of such Issuer in and to all funds (other than the Rebate Fund) and accounts established under such Bond Indenture and all moneys and investments held therein. The Loan Agreements Pursuant to each respective Loan Agreement, each Issuer will loan the proceeds of the related series of Series 2010 Bonds to the Corporation for the purposes described herein, and the Corporation will agree to pay loan payments in amounts sufficient, together with certain investment earnings on certain of the funds held under the related Bond Indenture, to provide for the timely payment of the debt service requirements on the related series of Series 2010 Bonds. The payment obligations of the Corporation under the Loan Agreements with respect to the Series 2010 Bonds will be evidenced and secured by the delivery by the Corporation to the Bond Trustee of the Master Notes issued under the Master Indenture. Each Issuer will assign its related Loan Agreement (except for its Unassigned Rights) to the Bond Trustee for the benefit of the related Bondholders. The Master Indenture The Corporation will issue the Master Notes pursuant to the Master Indenture. The Master Notes, and any other obligations issued and outstanding under the Master Indenture, are the general obligations of the Corporation and any future members of the Obligated Group and are secured by a security interest in the Gross Receipts of the Obligated Group. Gross Receipts means all revenues, receipts, income, rents and other moneys received by or cash and other receipts, present and future accounts, receivables, contracts and contract rights (including particularly contracts, agreements, contract rights and agreement rights, particularly those between any member of the Obligated Group and Kentucky with respect to Medicaid, any member of the Obligated Group and third-party insurers of patients of any member of the Obligated Group and the United States of America with respect to Medicare, and all other equivalent insurance programs, or any state or federal program substituted in lieu thereof), general intangibles, documents and instruments, which are now owned or hereafter acquired by the Obligated Group, and all proceeds therefrom, whether cash or noncash, derived by the Obligated Group from the conduct of all or any part of its operations of its Property, and all revenue and income of the Obligated Group from whatever source derived, including not only that derived by the Obligated Group from the existing Property but also from any and all facilities hereafter acquired, leased or used by the Obligated Group, income from and the principal of investments, leases and income received from leases, and grants received by the Obligated Group from any source and excluding only (i) grants, gifts, bequests, contributions and other donations, to the extent specifically restricted by the donor or grantor to a special object or purpose so as to preclude use thereof for payment of principal or interest on the Master Notes, (ii) the proceeds of any borrowing or any funds held in trust by a trustee as security for such borrowing, (iii) revenues, income, receipts and money received by a member of the Obligated Group as agent for and on behalf of a Person other than a member of the Obligated Group, and (iv) any Property that is the subject of a lien or encumbrance permitted by the Master Indenture or that has been conveyed or otherwise disposed of as permitted by the Master Indenture. See APPENDIX C SUMMARY OF PRINCIPAL DOCUMENTS DEFINITIONS. 11

18 The Master Indenture provides that payments on any obligations issued and outstanding thereunder, including the Master Notes, are the joint and several obligations of each member of the Obligated Group. Notwithstanding limitations on and uncertainties as to enforceability of the covenant of each member of the Obligated Group in the Master Indenture to be jointly and severally liable for each Obligation, the accounts of the Corporation and any future members of the Obligated Group will be combined for financial reporting purposes and will be used in deciding whether the covenants and tests contained in the Master Indenture are met. See BONDHOLDERS RISKS--Enforceability of Remedies herein. Upon the date of issuance of the Series 2010 Bonds, the Corporation is the sole member of the Obligated Group. Upon the satisfaction of certain conditions, however, any person may become a member of the Obligated Group and in the future such other members of the Obligated Group may incur indebtedness secured by obligations of the Obligated Group. Under certain conditions and upon meeting certain tests set forth in the Master Indenture, members of the Obligated Group may withdraw from the Obligated Group and be released from any obligations under the Master Indenture. Under certain conditions specified in the Master Indenture, members of the Obligated Group may issue obligations in addition to the Master Notes (the Obligations ), which additional Obligations will not be pledged under the Bond Indentures, but will be equally and ratably secured by the Master Indenture with the Master Notes. Concurrently with the issuance of the Master Notes, the Corporation will issue Obligations to secure the payment of debt service charges on certain prior bonds issued by KEDFA for the benefit of the Corporation. The Master Indenture permits additional Obligations to be secured by security in addition to that provided for in the Master Notes, including letters or lines of credit or insurance, which additional security need not be extended to secure any other Obligations (including the Master Notes). In addition, the Master Indenture permits each member of the Obligated Group to (i) incur other indebtedness, (ii) enter into additional Obligations, and (iii) sell, lease or otherwise dispose of facilities all upon the terms and conditions specified therein. The Master Indenture provides that supplements to the Master Indenture, pursuant to which one or more series of Obligations may be issued, may provide for such amendments to the provisions of the Master Indenture, including the provisions thereof relating to the exercise of remedies upon the occurrence of an event of default, and including those to permit Obligations to be secured by security which is not extended to all holders of Obligations. Such terms include, among others, restrictions on Liens, as defined in the Master Indenture, on the Property of the Corporation and any other member of the Obligated Group, restrictions on the incurrence of Additional Indebtedness, as defined therein, and provisions governing the transfer of the Property of the Corporation and any other member of the Obligated Group. The Master Indenture contains various financial covenants of the Obligated Group for the security of all Obligations issued thereunder. Mortgage Lien and Lien on Equipment and Tangible Personal Property; Prospective Release of Liens As further security for the obligations of the Corporation under the Loan Agreements and pursuant to the Loan Agreements, the Corporation will grant in favor of the Bondholders a first mortgage lien on a portion of the Medical Center, including the acute care hospital, and a first lien upon the Corporation s equipment and tangible personal property, subject to Permitted Encumbrances (as defined in the Loan Agreements). Such liens will secure the Series 2010 Bonds and certain prior bonds issued for the benefit of the Corporation (the Secured Bonds ), pari passu. Notwithstanding, the Loan Agreements provide that such mortgage liens and the liens on the Corporation s equipment and tangible personal 12

19 property shall be released upon the delivery to the Trustee of a certificate (the Release Certificate ) evidencing the consent of the providers of the letters of credit, if any, with respect to such release, and of the holders of such outstanding Secured Bonds. RBC Capital Markets, as initial purchaser of the Series 2010 Bonds, has consented to such release and, therefore, no additional consent from holders of the Series 2010 Bonds is required for such release to become effective. ESTIMATED SOURCES AND USES OF FUNDS The estimated proceeds of the sale of the Series 2010 Bonds (exclusive of accrued interest and investment income) and the estimated uses of such funds are shown below: SOURCES OF FUNDS: Principal Amount of Series 2010A Bonds $ 75,000, Principal Amount of Series 2010B Bonds 32,615, Net Original Issue Premium 53, Trustee Held Funds from Prior Bonds 237, TOTAL SOURCES $107,906, USES OF FUNDS: Deposit to Project Fund $ 72,511, Deposit to Escrow Fund for the Prior Bonds 33,716, Issuance and Other Costs* 1,678, TOTAL USES $107,906, *Includes the Issuers fees, Underwriter s discount, legal fees, rating agency fees, trustee fees, accounting fees, printing, title evidence and other costs of issuance. [This space intentionally left blank] 13

20 DEBT SERVICE REQUIREMENTS The following table sets forth, for each fiscal year ending September 30, commencing with the fiscal year ending September 30, 2010, the total principal and interest requirements (rounded to dollars) with respect to the Series 2010 Bonds and outstanding bonds issued on a parity therewith. Year Series 2010A Principal Requirements Series 2010A Interest Requirements Series 2010B Principal Requirements Series 2010B Interest Requirements Outstanding Bonds Debt Service Requirements* Total Debt Service Requirements $1,203, $ 477, $5,999, $ 7,680, ,610, $4,440, ,388, ,000, ,438, $4,555, ,542, ,343, ,999, ,441, ,375, ,426, ,343, ,296, ,441, ,379, ,485, ,294, ,282, ,440, ,379, ,495, ,194, ,373, ,441, ,585, ,315, ,144, ,393, ,438, ,585, ,212, ,130, ,116, ,397, ,441, ,173, ,840, ,017, ,411, ,441, ,173, ,975, , ,417, ,437, ,173, ,125, , ,424, ,442, ,173, ,185, , ,517, ,437, ,173, ,355, , ,515, ,441, ,173, ,535, , ,506, ,439, ,615, ,091, , ,596, ,440, , ,993, ,050, , ,572, ,439, ,910, ,878, ,653, ,442, ,035, ,680, ,725, ,440, ,275, ,472, ,693, ,440, ,535, ,327, ,576, ,438, ,600, ,248, ,591, ,439, ,625, ,168, ,647, ,440, ,640, ,086, ,710, ,436, ,735, ,002, ,698, ,435, ,805, ,913, ,719, ,437, ,875, ,821, ,738, ,434, ,960, ,725, ,750, ,436, ,035, ,625, ,776, ,437, ,115, ,522, ,799, ,437, ,325, ,111, ,436, ,060, , ,436,500 TOTAL $75,000, $79,155, $32,615, $13,300, $270,784, $470,855,688 *Assumes an interest rate of 3.10% for outstanding bonds bearing interest at a variable rate. 14

21 BONDHOLDERS RISKS The following is a discussion of material risks that could affect payments to be made with respect to the Series 2010 Bonds. This discussion is not, and is not intended to be, exhaustive, should be read in conjunction with all other parts of this Official Statement and should not be considered as a complete description of all risks that could affect payments on the Series 2010 Bonds. Prospective purchasers of the Series 2010 Bonds should analyze carefully the information contained in this Official Statement, including the appendices hereto, and additional information in the form of the complete documents summarized herein, copies of which are available as described herein. General The purchase and ownership of the Series 2010 Bonds involve certain investment risks that are discussed throughout this Official Statement. Each prospective purchaser of the Series 2010 Bonds (or a beneficial ownership interest in therein) should make an independent evaluation of the information presented in this Official Statement. Some of the risks that could affect the Series 2010 Bonds and the future financial condition of the Corporation are described below. The description of various risks is not, and is not intended to be, exhaustive. The effect on the Corporation of the laws and regulations described below and of future changes in Federal and State laws and policies cannot be fully or accurately determined at this time. The payment of principal of and interest on each series of Series 2010 Bonds will depend on the payment by the Corporation to the related Issuer of sufficient loan payments and on the funds (other than the Rebate Fund) held by the Bond Trustee and maintained pursuant to the related Bond Indenture. No representation or assurance can be given that revenues will be realized by the Corporation in amounts sufficient to pay principal of and any premium and interest on the Series 2010 Bonds. Purchasers of the Series 2010 Bonds should bear in mind that the Corporation s ability to make payments on the Series 2010 Bonds is dependent upon the overall financial condition of the Corporation and the ability of the Corporation to generate revenues from its operations. The ability of the Corporation to generate revenues and the overall financial condition of the Corporation may be adversely affected by a wide variety of future events and conditions, including: the ability of the Corporation to provide services required or expected by patients; the confidence of physicians in and their use of the facilities and services of the Corporation; changes in the economic conditions or demand for medical treatment in the service area of the Corporation; increased competition from other health care providers; rising costs; governmental regulation; and controls established or changes in the method of payment by third-party payors, both governmental and private; care provided to indigent or uninsured patients who do not pay the Corporation s charges, and malpractice claims and other litigation. Currently both the Federal and State governments have extensive powers to regulate the operation of the Corporation, control the flow of revenues thereto, limit its expansion and control and restrict the services now being provided by the Corporation. As discussed below, these Federal and State powers may be expanded or limited in the future. The operations and financial results of the Corporation could be adversely affected by the foregoing factors, as well as those discussed below, or other unanticipated events. Impact of Disruptions in the Credit Markets and General Economic Factors The current domestic and international financial crisis has had, and is expected to continue to have, negative repercussions upon the national and global economies, including a scarcity of credit, lack of confidence in the financial sector, extreme volatility in the financial markets, increase in interest rates, 15

22 reduced business activity, increased consumer bankruptcies and increased business failures and bankruptcies. In response, the Emergency Economic Stabilization Act of 2008 was enacted in October 2008, which authorizes the U.S. Treasury to purchase up to $700 billion of mortgage debt and other securities from financial institutions and take other actions for the purpose of stabilizing the financial markets. The Federal Reserve Board and other agencies of the federal government and foreign governments have taken various actions that are designed to enhance liquidity, improve the performance and efficiency of credit markets and generally stabilize securities markets. There can be no assurance these actions will be effective. Furthermore, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 ( ARRA ) was enacted, which includes several provisions that are intended to provide financial relief to the health care sector, including an increase through December 31, 2010 in federal payments to states to fund the Medicaid program, a requirement that states promptly reimburse health care providers, and a subsidy to the recently unemployed for health insurance premium costs. The financial crisis has had a particularly acute impact upon the financial sector, and has caused many banks and other financial institutions, including banks in Kentucky, to seek additional capital, to merge, and in some cases, to fail. Additionally, substantial amounts have been withdrawn from taxexempt money market funds, one of the largest purchasers of variable rate tax-exempt bonds. The Corporation is the beneficiary of outstanding variable rate tax-exempt bonds issued by KEDFA. A continued weakening of the economy could have a material adverse effect upon the Corporation. The financial crisis has also had a material adverse impact on many commercial insurers. A continuation of the financial crisis could have an adverse effect on the commercial insurers from which the Corporation obtains insurance and reinsurance, and could adversely impact both the cost and availability of insurance and reinsurance. The Corporation has significant holdings in a broad range of investments. Market fluctuations have affected and will continue to affect materially the value of those investments and those fluctuations may be and historically have been material. See APPENDIX A Trends in Liquidity and Investment Policy for a discussion of the Corporation s recent investment portfolio performance and investment strategy. The market disruption has exacerbated the market fluctuations and has negatively affected the investment performance of securities in the Corporation s portfolios. Investment income (including both realized and unrealized gains on investments) has contributed significantly to the Corporation s financial results over recent years. Current and future market volatility may have a material adverse impact on the Corporation s investment portfolio. The financial condition of the Corporation is also threatened by particular pressures resulting from the current economic crisis, including risks of: increased inflation, increased interest rates, increased pressure on the federal government to decrease Medicare funding, on the federal and state governments to decrease Medicaid funding and on employers to reduce healthcare coverage and increase deductibles; increased unemployment, uncompensated care and bad debt; and decrease in return on investments. Patient Protection and Affordable Care Act and Healthcare Reform Initiatives On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (together with the Reconciliation Agreement referred to below, the PPAC Act ). The PPAC Act is intended to address disparities in the cost and delivery of healthcare to United States citizens. Certain of the provisions of the PPAC Act are contained in a bill passed by the House of Representatives and currently under consideration in the Senate and expected to be acted upon before April 2010 (the Reconciliation Agreement ). The changes to various aspects of the healthcare system in the PPAC Act are far-reaching and include, among many others, substantial adjustments to Medicare reimbursement, establishment of individual mandates for health care coverage, extension of coverage to certain 16

23 populations, provision of incentives for employer-provided health care insurance, restrictions on physician-owned hospitals, and increased efficiency and oversight provisions. In addition, implementation of the various provisions of the PPAC Act are subject to delay, either pursuant to the terms of the provisions themselves, the consideration of the Reconciliation Agreement or court challenges from opponents to the PPAC Act. Broadly speaking, the provisions of the PPAC Act which encourage or mandate health care coverage for individuals can be expected to reduce the amount of uncompensated care the Corporation provides. However, revisions to the Medicare reimbursement program could reduce revenues. Therefore, the impact of the PPAC Act on the operations of the Corporation cannot be currently ascertained, and it may have a material impact, either positive or negative, on the Corporation's operations. General Reimbursement Policies and Regulations Affecting Health Care Providers Health care, especially at the hospital level, is a highly regulated industry with complicated and frequently changing regulations arising both from payment programs and governmental police power generally. Health care providers such as the Corporation are subject to Federal, state, and local laws and regulations. Future changes in those laws or regulations, particularly relating to reimbursement under the Medicare and Medicaid programs, could adversely affect the operations or financial results of the Corporation. Any future action by Federal or state government that limits or reduces the total funds available under the Medicare and Medicaid programs or alters reimbursement methodologies could lower the amount of reimbursement available to the Corporation. Health care providers are increasingly subject to audits, investigations, fines and litigation that may threaten access to governmental reimbursement programs, require substantial repayments of funds received, require payment of fines and penalties, generate adverse publicity and create significant legal and other transaction costs. In response to perceived abuses and actual violations of the terms of existing Federal, state and local health care payment programs, these agencies have increased their audit and enforcement activities, and Federal and state legislation has been considered or enacted providing for or expanding existing civil and criminal penalties against certain activities. Federal, state and local agencies have increased their scrutiny of transactions involving not-for-profit, tax exempt organizations and are focusing in particular upon limitations on the use of charitable assets and revenues. Additionally, other legislation restructuring the delivery and financing of health care could be considered by Congress or state legislatures in the future. No prediction can be made about the final passage of Federal or state legislation or its impact, if any, on any particular health care service or provider. Therefore, no assurance can be given that any such legislation, if enacted, will not materially adversely affect the revenues of the Corporation and its ability to make payments on the Series 2010 Bonds. Medicare Reimbursement of Corporation Operations General. Approximately 49.3% of the gross patient charges of the Corporation were derived from the Medicare program for the fiscal year ended The Medicare program is consistently the most important payment source of gross patient charges for the Corporation. See APPENDIX A Financial Information Sources of Revenue. Any revisions to the Medicare program or to the Corporation s classification under the Medicare program may significantly affect the Corporation s revenues. The PPAC Act would increase the number of people covered by Medicare, and presumably decrease uncompensated care provided by the Corporation. However, decreased reimbursement, efficiency provisions and reduced disproportionate share funding could reduce revenues of the Corporation. 17

24 Medicare is a Federal program administered by the Centers for Medicare and Medicaid Services ( CMS ), formerly the Health Care Financing Administration, an agency of the United States Department of Health and Human Services ( HHS ) through contracts with fiscal intermediaries and carriers. Hospital benefits are available under the Medicare program, within prescribed limits, to persons meeting certain minimum income or other eligibility requirements including children, the aged, the blind and/or disabled. Medicare provides certain health care benefits to beneficiaries who are age 65 or older, disabled, or qualify for the End Stage Renal Disease Program. In general, Medicare Part A covers inpatient hospital services, skilled nursing care, and some home health care, while Medicare Part B covers physician services, outpatient hospital services, diagnostic tests, and various health-related supplies. However, such coverage includes certain deductible and coinsurance obligations imposed on Medicare beneficiaries. The Corporation has been and will be affected significantly by changes made in the last several years to Federal health care laws and regulations, particularly those pertaining to Medicare and Medicaid, including the PPAC Act. The purpose of much of the recent statutory and regulatory activity has been to limit or reduce government health care costs, particularly costs under the Medicare and Medicaid programs. Diverse and complex mechanisms to limit the amount of money paid to health care providers under both the Medicare and Medicaid programs have been enacted, and have caused significant reductions in these programs. The laws and regulations governing Medicare reimbursement are extremely complex and subject to interpretation. In addition, there is no guarantee that the reimbursement methodologies described below for Medicare inpatient and outpatient services will continue in their present format, since those methodologies and the associated payment rates have been the frequent subject of Congressional action, including in the PPAC Act. Payment for Inpatient Services. A substantial portion of the Medicare revenues of the Corporation are derived from payments made for services rendered to Medicare beneficiaries under a prospective payment system ( PPS ). Under the inpatient PPS, Medicare pays a predetermined base payment rate for each covered hospitalization and separate PPS payments are made for capital-related costs. Each hospitalization of a Medicare beneficiary is classified into one of several hundred diagnosisrelated groups ( DRGs ), which determines the PPS base payment rate for that hospitalization. The PPS payment rate is not correlated to the hospital s actual cost of treating a particular patient. It is a fixed sum, generally based on national DRG rates (reflecting national average costs for treatment weighted for the complexity of different cases and the intensity of hospital resources necessary to furnish care), a hospital wage index intended to reflect geographic differences in the costs of labor, certain quality indicators and the hospital s geographic location. In addition, for certain Medicare beneficiaries who have unusually long or costly hospital stays, referred to as outliers, additional payments may be provided above those specified for the applicable DRG. Annual increases in the DRG payments had been based upon the hospital market basket index, which generally measured changes in the cost of providing health care services. However, DRG rates may be adjusted annually as part of the Federal budget reconciliation process and are subject to deficit reduction activities and Congressional action. Every year since 1983, Congress has modified the increases and given substantially less than the increase in the market basket index. CMS also adjusts DRG classifications and weights in order to reflect changes in treatment patterns, patient severity, technology, and other factors. Such adjustments may change the relative use of Corporation resources. Any such changes, though, must be made in a manner that will not increase aggregate payments under the Medicare program, a requirement which is generally referred to as budget neutrality. On August 1, 2006 CMS released a final rule which further modified the PPS, effective October 1, Future modifications should be expected. In compliance with new rules, CMS is phasing in over a three-year period beginning in 2007 a transition to a cost-based DRG weighting 18

25 methodology from a charge-based methodology. The changes will redistribute Medicare payments among the various DRGs, with the intent to make the major diagnostic categories more similar in terms of profitability. The shift towards a cost-based weighting system from a charge-based system for the development of Medicare s case weights for DRG payments will continue to negatively impact the Corporation in fiscal year 2010, as compared to fiscal years during which such rules were not in place. CMS is considering proposing additional changes to its DRG weighting system. There is no assurance that the Corporation will be paid amounts that will reflect adequately its costs incurred in providing inpatient hospital services to Medicare beneficiaries, as well as any changes in the cost of providing health care or in the cost of health care technology being made available to Medicare beneficiaries. The ultimate effect of the inpatient PPS on the Corporation will depend on its ability to control its costs involved in providing inpatient hospital services. Inpatient Capital Costs. Similar to PPS for inpatient operating costs, CMS has been implementing a prospective system in order to reimburse hospitals for their capital costs (including depreciation, interest, taxes, and similar expenses) related to the provision of inpatient services to Medicare beneficiaries. Since October 1, 2001, inpatient capital costs have been reimbursed exclusively on the basis of a standard Federal rate, which is based on the weighted average capital costs per discharge incurred by all hospitals. Capital cost payments will be based on the Federal rate times the DRG weight for the particular discharge, subject to certain adjustments and add-on amounts which are specific to the particular hospital. There can be no assurance that the inpatient capital cost prospective payments will be sufficient to cover the actual capital costs to the Corporation allocable to Medicare beneficiary stays, or will provide adequate flexibility in meeting the Corporation s future capital needs. Payment for Outpatient Services. Historically, Medicare payment for outpatient operating and capital-related costs was based on the reasonable costs incurred by a hospital. However, the Balanced Budget Act of 1997 ( BBA ) required CMS to implement a PPS for outpatient services which would cover both operating and capital-related costs. On August 1, 2000, the new outpatient PPS became effective. The outpatient PPS system categorizes outpatient visits into groups according to the clinical characteristics, the typical resources used, and the costs associated with the diagnoses and the procedures performed. These categories are called ambulatory payment classifications ( APCs ). Under the outpatient PPS, hospitals bill Medicare for the services they provide using the healthcare common procedure coding system ( HCPCS ). Each HCPCS code that is paid under the outpatient PPS is linked to an APC, is bundled with one of the APCs, or in some cases be paid under another payment mechanism. For each APC, a payment amount is established by CMS (although subject to adjustment), and the hospital s payment for the item or service assigned to the APC is derived from that payment. Additionally, the outpatient PPS established a coinsurance amount for each APC paid by the beneficiary. CMS is to review the components of the outpatient PPS on an annual basis and revise the APCs and the relevant payment weights (as well as various adjustment factors) to take into account changes in medical practice and technology, new services, cost data, and other relevant factors. Hospitals will also receive additional payments to cover certain high cost cases (i.e., outlier adjustments), as well as transitional pass through payments for certain drugs, biologicals, and medical devices. Patient treatment is continuing to shift towards outpatient services for the Corporation as well as for most health care providers. As with the inpatient PPS, there is no assurance that the Corporation will be paid amounts under the outpatient PPS that will reflect adequately the Corporation s costs incurred in providing outpatient hospital services to Medicare beneficiaries, as well as any changes in the cost of providing health care or in the cost of health care technology being made available to Medicare 19

26 beneficiaries. The ultimate effect of the outpatient PPS on the Corporation will depend on its ability to control its costs involved in providing outpatient hospital services and to respond to changes in CMS payment policies. Medicare Advantage Plans. The Balanced Budget Act of 1997 substantially expanded the health plan options for Medicare beneficiaries by creating a new Medicare Part C program called Medicare Advantage Plans (formerly Medicare+Choice). The purpose of the program was to allow for the creation of a wider variety of plans in which Medicare beneficiaries may elect to participate, including health maintenance organizations ( HMOs ), preferred provider organizations ( PPOs ), provider-sponsored organizations ( PSOs ), and high-deductible plans coupled with medical savings accounts. Notwithstanding such new plans, a Medicare beneficiary may elect to remain in traditional fee-for-service Medicare. Although a number of programs were established in response to Medicare Advantage, many insurers who instituted Medicare HMO products have discontinued them, citing factors such as losses due to insufficient payment rates from Medicare. In addition, very few other types of insurance plans for Medicare beneficiaries, such as PPO and PSO plans, have been created. In the face of such losses, it is unlikely that insurers and other entities will create any new managed care plans under Medicare Advantage unless the funding for such plans is increased or some other restructuring occurs that would allow such plans to operate profitably. Legislation to restructure the Medicare Advantage program is being considered by Congress. It is impossible to determine the effect on the Corporation and its revenues of Medicare managed care programs which may be instituted in the future. Additional Payments. Additional payments may be made to individual providers. For example, hospitals that treat a disproportionately large number of low income patients (Medicare and Medicaid patients eligible to receive supplemental Social Security income) are known as disproportionate share hospitals ( DSH ). DSH hospitals currently receive additional payments in the form of disproportionate share payments. Additional payments are also made to hospitals that treat patients who are more costly to treat than the average patient; these additional payments are referred to as outlier payments. Additionally, hospitals are paid for a portion of their direct and indirect graduate medical education ( GME ) costs. These forms of additional payments are also subject to reductions and modifications in otherwise scheduled increases as a result of amendments to relevant statutory provisions. The Corporation has from time to time qualified for DSH payments and may be adversely affected by reductions to such payments. The PPAC Act reduces disproportionate share funding starting in federal fiscal year The costs of providing a unit of care may exceed the revenues realized from Medicare for providing that service. Additionally, the aggregate costs to a provider of providing care to Medicare beneficiaries may exceed the aggregate Medicare revenues received during the relevant fiscal period. Anti-dumping Obligations. In response to concerns regarding inappropriate hospital transfers of emergency patients based on the patient s ability to pay for services, Congress enacted the Emergency Medical Treatment and Active Labor Act ( EMTALA ), the so-called anti-dumping statute. Generally, EMTALA requires that hospitals provide appropriate medical screening to all patients who come to the emergency department to determine if an emergency medical condition exists. If such a condition exists, the hospital must provide treatment within its capabilities until the patient s condition is stabilized. This screening and treatment requirement applies with regard to all persons, not just Medicare beneficiaries, and applies regardless of the person s ability to pay. A hospital may not delay the provision of a medical screening examination in order to inquire abut the patient s method of payment. 20

27 Over the last few years, the Federal government has increased its enforcement of EMTALA. Failure to comply with this law can result in exclusion from the Medicare and Medicaid programs as well as civil and criminal penalties. Additionally, any patient who suffered injuries as a result of a violation of EMTALA may obtain judgment requiring payment of those damages from the hospital in a civil action. Any failure of the Corporation to meet its responsibilities under this law could materially affect its financial condition. Management of the Corporation believes its policies and procedures are in material compliance with EMTALA, but no assurance can be given that a violation of EMTALA will not be found. Any sanctions imposed as a result of an EMTALA violation could have a material adverse effect on the future operations or financial condition of the Corporation. Medicare Conditions of Participation; Utilization Review. Hospitals must comply with standards called Conditions of Participation in order to be eligible for Medicare and Medicaid reimbursement. CMS is responsible for ensuring that hospitals meet these regulatory Conditions of Participation. Failure to comply with any of the Conditions of Participation can result in the loss of moneys received pursuant to the Medicare and Medicaid program or the continued participation in the Medicare and Medicaid programs, and ultimately, the financial condition and results of operations of the Corporation. To participate in the Federal Medicare program, the Corporation is required to be reviewed by a utilization and quality improvement organization ( QIO ). Unlike previous review procedures by other professional standards review organizations, QIO reviews may not be delegated to hospitals, and certain non-emergency procedures are subject to preadmission review. The QIO may recommend denial of payment, and in certain circumstances, suspension or termination of participation in Medicare, for unnecessary, substandard or inappropriate medical care. See also Licensing, Surveys, Accreditation, and Audits below. Licensing, Surveys, Accreditation, and Audits. Health facilities, including the Corporation, are subject to numerous legal, regulatory, professional and private licensing, reimbursement, certification and accreditation requirements. These include, but are not limited to, requirements relating to Medicare conditions of participation, requirements for participation in Medicaid, state licensing agencies, private payors, and the accreditation standards of the Joint Commission, formerly the Joint Commission on the Accreditation of Healthcare Organizations. Although the Joint Commission is a private organization, it plays an important role in the Medicare program. A hospital will be deemed to have met the Medicare Conditions of Participation (and be eligible for Medicare payment) if it is accredited by the Joint Commission. The loss of such accreditation by a provider results in a loss of this deemed status, which means representatives of the Medicare program must survey the provider, which can be a very rigorous process. However, at any time, CMS may still require a survey of a hospital by a state agency to determine whether the hospital actually meets the Conditions of Participation. The Joint Commission recently completed an overhaul of its accreditation process, as well as the addition of new accreditation standards. Additional overhauls and the addition of new standards are unpredictable. The Corporation cannot predict what affect new regulations, accreditation standards, and/or certification standards may have on its future operations. The Corporation is fully accredited by the Joint Commission, which accreditation, as is the case for all hospitals, is subject to renewal. The Corporation s accreditation is subject to renewal in February The management of the Corporation presently anticipates no difficulty in renewing its Joint Commission accreditation; however the loss of accreditation could adversely affect the Corporation s ability to make payments on the Series 2010 Bonds. 21

28 Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require affirmative action by the Corporation. Management of the Corporation currently anticipates no difficulty renewing or continuing currently held licenses, certifications or accreditations, nor does management anticipate a reduction in third party payments from such events that would materially adversely affect the operations or financial condition of the Corporation. Nevertheless, actions in any of these areas could result in the loss of utilization or revenues, or the ability of the Corporation to operate all or a portion of its health care facilities and, consequently, could have a material adverse effect on the Corporation s operations. Medicare Audits and Withholds. Health care providers participating in Medicare are subject to audits and retroactive adjustments by fiscal intermediaries, who contract with CMS to administer the Medicare program. From an audit, a fiscal intermediary may make certain determinations with regard to Medicare claims submitted by a hospital, such as a conclusion that a discharge has been assigned an improper DRG, that services may not have been provided under the direct supervision of a physician (to the extent so required), that a patient should not have been characterized as an inpatient, that certain services provided prior to an admission as an inpatient should not have been billed as outpatient services, or that certain required procedures or processes were not satisfied. As a consequence, payments to a hospital may be retroactively disallowed. Medicare payments may also be withheld from a hospital to offset alleged overpayments. In addition, under certain circumstances, payments made may be determined to have been made as a consequence of improper claims which are subject to the Federal False Claims Act or other Federal statutes, thereby possibly subjecting a hospital to substantial civil or criminal sanctions. Further, contracts between hospitals and third-party payors often have contractual audit, setoff and withhold language that may cause substantial, retroactive adjustments. Such contractual provisions also could have a material adverse effect on the financial condition and results of operations of the Corporation. Management is unaware of any situation which may lead to potential audits or adjustments which in turn may have a material adverse effect on the operations or financial condition of the Corporation. Medicaid Program General. The Corporation is a participating provider in the Kentucky Medicaid program, a combined Federal and State program that provides reimbursement for medical care provided to qualifying indigent Kentucky residents. Approximately 15.6% of the gross patient charges of the Corporation were derived from the Medicaid program for the fiscal year ended However, due to the Corporation s close proximity, the Corporation also provides services to beneficiaries covered under the Medicaid programs of the State of Ohio and, to a much lesser degree, West Virginia. Approximately 23.1% of the patient discharges in fiscal year 2009 in the Corporation s primary service area were Ohio residents. While Federal laws impose certain basic requirements on the individual Medicaid plans developed by Kentucky and other states, each state develops its own payment system; determines the type, amount, duration and scope of services; establishes eligibility standards, and administers its own program. Payments for services rendered to Kentucky and Ohio Medicaid beneficiaries remain subject to an appropriation by the Kentucky General Assembly and Ohio General Assembly, respectively, of sufficient funds to pay the incurred payment obligations for the Medicaid program. Delays in appropriations and state budget deficits, which may occur from time to time, create a risk that payment for services to Medicaid beneficiaries will be delayed or withheld. As a response to the Federal Deficit Reduction Act of 2005, Kentucky recently restructured its Medicaid program to address the separate health care needs of children, the elderly and people with 22

29 disabilities who need institutional care, and the general Medicaid population, through four new benefit packages: (i) the Family Choices program which will serve healthy children; (ii) the Comprehensive Choices and Optimum Choices program which will serve individuals with complex health care needs; (iii) the Global Choices program, similar to Kentucky s traditional Medicaid program, which will serve other vulnerable populations; and (iv) a new disease management program with incentives to encourage healthier behavior by chronically ill beneficiaries. After successfully participating in a disease management program for one year, participants will be eligible for services not otherwise available, such as dental or vision services. The restructured Kentucky Medicaid program will also help Medicaid recipients buy employersponsored coverage. If a beneficiary chooses an employer s plan instead of Medicaid, the State will help cover the premium. Over the last several years, as a result of budgetary and staffing constraints, the Kentucky Medicaid program has frequently amended its payment methodologies. Payments made to health care providers under the Medicaid program are also subject to change as a result of Federal or state legislative and administrative actions, including changes in the methods for calculating payments, the amount of payments that will be made for covered services, the types of services that will be covered under the program and criteria establishing eligibility for the program. Such changes have occurred in the past and are expected to occur in the future, particularly in response to continuing Federal and state budgetary constraints. As such, no assurance can be given that payments under the Medicaid program will be sufficient to cover the Corporation s operating and capital costs incurred in providing services to Medicaid beneficiaries or that further significant changes to the Medicaid program may not be implemented by the Kentucky General Assembly or Ohio General Assembly. Provider Tax. Since 1993 Kentucky has imposed a tax on certain health care providers to help fund the State s portion of the Medicaid program. The State law imposes a tax of 2.5% on the gross receipts of hospitals and 2% on nursing facility services, intermediate care facility services, services for the mentally retarded, home health care services, and health maintenance organization services. Although tax receipts have grown, the percentage of hospital costs reimbursed by Medicaid payments have declined. There is no guarantee that hospitals will receive a greater proportion of such receipts in the future. Medicaid Managed Care Program. It is uncertain whether Kentucky will attempt to utilize a managed care system to cover Medicaid beneficiaries at some time in the future, and whether such system may impact the Corporation s revenues derived from the Medicaid program. The Kentucky Children s Health Insurance Program (CHIP) Congress amended the Social Security Act to implement the State Children s Health Insurance Program ( CHIP ) with the purpose of providing increased access to health coverage for children in families with income too high to qualify for Medicaid but too low to afford private coverage. The Federal government matches state spending for CHIP at a higher rate than that for Medicaid. Kentucky implemented CHIP in multiple phases as an expansion of the already existing Medicaid program. The first phase, which began July 1, 1998, extended Medicaid coverage to children 14 through 18 years of age who were in families at or below 100% of the Federal Poverty Level ( FPL ). The second phase, which began on July 1, 1999, expanded coverage to eligible children from age one through 18 years who did not already have health insurance and whose family income fell at or below 150% of the FPL. Phase III began in November 1999, and as a separate insurance program providing reduced coverage to children in families whose incomes are above 150% of the FPL and up to and including 200% of the FPL. Phase III offers the same benefits as Medicaid, except for non-emergency transportation and Early Periodic Screening Diagnosis and Treatment special services, which are not covered. Children enrolled in CHIP are served through the same service delivery system 23

30 and use the same health care providers as Medicaid. Eligibility is determined by Kentucky s Department for Community Based Services. Kentucky must periodically submit its CHIP plan for review to determine if it meets the Federal requirements. If it does not meet the Federal requirements, Kentucky could lose its Federal funding for its program. A decision to tighten the eligibility requirements, thereby decreasing the number of individuals eligible for CHIP, the loss of Federal approval for Kentucky s program, or the failure of the Federal government to appropriate funds for CHIP, could have an adverse financial effect on the Corporation. State Budgets Many states, including Kentucky, face financial challenges, including erosion of general fund tax revenues. For example, Kentucky officials have stated that the State faces a shortfall of between $818 million and $1.094 billion in its budget for the 2010 fiscal year. These factors have resulted in a shortfall between revenue and spending demands. The financial challenges facing states may negatively affect hospitals in a number of ways, including, but not limited to, a greater number of indigent patients who are unable to pay for their care and a greater number of individuals who qualify for Medicaid and/or reductions in Medicaid reimbursement rates. Participation in Managed Care Programs Health care, including hospital services, is increasingly paid for by various managed care plans which generally use discounts and other economic incentives to reduce or limit the cost and utilization of health care services such as inpatient hospital care. Such plans include health maintenance organizations ( HMOs ) and preferred provider organizations ( PPOs ). The Corporation currently has contractual agreements with managed care entities such as HMOs and PPOs to serve as a participating provider with regard to their managed care programs. Managed care entities negotiate directly with the hospitals for discounted rates or rates based on anticipated utilization of hospital services. Payments from managed care plans typically are lower than those received from traditional indemnity/commercial insurers. In many markets, managed care plans, including HMOs and PPOs, are readily replacing indemnity insurance as a prime source of nongovernmental payment for hospital services. In these markets, it is probable that hospital inpatient utilization and hospital inpatient revenues per admission will decline as managed care plans penetrate regional markets. Under PPO plans, there may be financial incentives for subscribers to use only those hospitals which contract with the plans. Under an exclusive provider plan, which includes most HMOs, private payors limit coverage to those services provided by selected hospitals. With this contracting authority, private payors, including health plans and HMOs, may direct patients away from non-selected hospitals by denying coverage for services provided by them. Most PPOs and HMOs currently pay hospitals on a discounted fee-for-service basis or on a discounted fixed rate per day. Many health care providers, including the Corporation, do not have complete information about the actual costs of providing specific future types of care, particularly since each patient requires a different mix of services and length of stay. Consequently, the discounts offered to HMOs and PPOs may result in payment at less than actual costs and the volume of patients directed to a hospital may vary significantly from projections. Changes in utilization of certain services may be dramatic and unexpected, thus further jeopardizing the provider s ability to contain costs. 24

31 Some HMOs mandate a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned to, or otherwise directed to receive care at, a particular hospital. In a capitation payment system, the hospital assumes an insurance risk for the cost and scope of care given to such HMO s enrollees. In some cases, the capitated payment covers total patient care provided, including physician charges. If payment under an HMO contract is insufficient to meet the hospital s costs of care, the financial condition of the hospital could erode rapidly and significantly. Often, contracts are enforceable for a stated term, regardless of hospital losses. Further, HMO contracts may contain a requirement that the hospital care for admitted enrollees for a certain period of time regardless of whether the HMO has funds to make payment to a hospital. Increasingly, physician practice groups, independent practice associations and physician management companies have become a part of the process of negotiating payment rates to hospitals. This involvement has taken many forms, but typically increases the competition for limited payment resources from health plans and HMOs. In regions where managed care is becoming prevalent, hospitals must be capable of attracting and maintaining managed care business, often on a regional basis. To do so, regional coverage and aggressive pricing may be required. However, it is also essential that contracting hospitals be able to provide the contracted services without significant operating losses, which may in turn require innovative cost containment efforts. There is no assurance that the Corporation will maintain managed care contracts or obtain other similar contracts in the future. Failure to maintain contracts could have the effect of reducing the Corporation s market share, patient base and Gross Receipts. Conversely, participation may maintain or increase the patient base but could result in lower net income or operating losses to the Corporation if it is unable to adequately contain its costs. HIPAA Administrative Simplification Provisions The Federal Health Insurance Portability and Accountability Act of 1996 ( HIPAA ) includes administrative simplification provisions that require standardization of electronic transactions, specific security protections for medical information and processes, privacy protections for patient medical records, and establishment of national employer and provider identifiers. HHS and CMS have promulgated rules related to electronic transactions, national employer identifiers, national provider identifiers, security, and medical records privacy. These rules require the implementation of policies and procedures by health care providers for coding, maintaining, storing and transmitting medical information, as well as policies and procedures designed to protect the security, data integrity and confidentiality of patient medical information and to permit patients to exercise their specific rights under HIPAA. The penalty for violating HIPAA s administrative simplification requirements includes imposition of civil monetary penalties of not more than $100 per person, per violation up to a maximum of $25,000 for violation of the same standard within any calendar year. Criminal penalties may also be imposed on any person who knowingly obtains or discloses protected health information in violation of HIPAA. These penalties range from up to $50,000 and one year in prison for obtaining or disclosing protected health information; up to $100,000 and up to five years in prison for obtaining or disclosing protected health information under false pretenses; and up to $250,000 and up to 10 years in prison for obtaining protected health information with the intent to sell, transfer or use it for commercial advantage, personal gain or malicious harm. The Secretary of HHS (the Secretary ) and the Secretary s designees have the authority to conduct compliance reviews to determine whether any covered entity is complying with HIPAA requirements, and to investigate complaints filed by any person who believes a covered entity is not complying with those requirements. HIPAA requires the Secretary of HHS, however, to the extent practicable, to seek cooperation in obtaining compliance prior to formal action for civil monetary 25

32 or criminal penalties. Except for the privacy rule, which is enforced by the Office for Civil Rights of HHS, the standards promulgated pursuant to HIPAA s administrative simplification provisions are enforced by CMS. HIPAA also added to an existing criminal statute a provision that prohibits the knowing and willful falsification or concealment of a material fact or the making of a materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. HIPAA also extended the Federal government s criminal authority to certain fraudulent acts committed against health care benefit programs. Congress mandated changes to the privacy rule and the security rule in the Health Information Technology for Economic and Clinical Health ( HITECH ) Act, part of the American Recovery and Reinvestment Act of Among other things, HITECH extends certain privacy and security obligations directly to many vendors that provide services to covered entities; enacts specific notification requirements when confidential health information is breached; establishes additional administrative requirements pertaining to electronic health records maintained by covered entities; and strengthens enforcement and penalties associated with violations of the privacy and security rules. Many of the new provisions became effective on February 17, The Corporation maintains a formal plan for compliance with all applicable HIPAA requirements, has trained its staff and employees in these requirements and maintains specified HIPAA Compliance Officers for Privacy and Security who have been provided the authority to supervise, update and enforce policies and procedures designed to assure HIPAA compliance. To date, all HIPAA investigations of the Corporation have resulted in either minimal corrective action plans or determinations that the Corporation s policies and procedures complied with HIPAA standards. No fine or penalty has been imposed on the Corporation for any HIPAA-related matter. While the Corporation believes it has taken reasonable and appropriate steps in the design of policies and procedures and in its supervision so as to maintain HIPAA compliance, it cannot be predicted when or to what extent complaints may be filed or investigations undertaken, which could involve the expenditure of possibly substantial sums to defend, and the possibility of fines or other penalties should HHS determine that any covered component of the Corporation is not in compliance with HIPAA requirements. Civil and Criminal Fraud and Abuse Laws and Enforcement Federal and state health care fraud and abuse laws regulate both the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to such beneficiaries. Under these laws, individuals and organizations can be penalized for submitting claims for services that are not provided, billed in a manner other than as actually provided, not medically necessary, provided by an improper person, accompanied by an illegal inducement to utilize or refrain from utilizing a service or product, or billed in a manner that does not otherwise comply with applicable government requirements. Congress has extended the scope of certain fraud and abuse laws to include violations against private health care plans. Federal and State governments have a range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud and abuse, including recoveries of amounts paid to the provider or multiples thereof, exclusion of the provider from participation in the Medicare/Medicaid programs, fines, civil monetary penalties, and suspension of payments and, in the case of individuals, imprisonment. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available penalties may be imposed for each violation. The Federal government has made the investigation and prosecution of health care fraud and abuse a priority, and Congress has authorized significant funding of this effort. As a result, there have been a substantial 26

33 number of investigations, prosecutions and civil enforcement proceedings of health care-related fraud and abuse in recent years. Additionally, many states prohibit remuneration (in cash or kind) for patient referrals where ultimately an insurance company will pay claims. Laws governing fraud and abuse apply to all individuals and healthcare enterprises with which a hospital does business, including other hospitals, home health agencies, long term care entities, infusion providers, pharmaceutical providers, insurers, health maintenance organizations, preferred provider organizations, third party administrators, physicians, physician groups, and physician practice management companies. Fraud and abuse prosecutions can have a catastrophic effect on a provider and potentially a material adverse impact on the financial condition of other entities in the health care delivery system of which that entity is a part. Based on the prohibited activity in which a provider has engaged, governmental agencies and officials may bring actions against providers under the civil or criminal False Claims Acts, statutes prohibiting referrals for compensation or fee-splitting, or the Stark law, which prohibits certain referrals by a physician to certain organizations in which the physician has a financial relationship. The civil and criminal monetary assessments and penalties may be substantial. If and to the extent the Corporation engaged in a prohibited activity and judicial or administrative proceedings concluded adversely to the Corporation, such outcome could materially adversely affect the Corporation. The following discussion of criminal and civil laws is not intended to be a complete list of all criminal and civil fraud statutes related to health care but rather a representative sample of various laws aimed at prohibiting and enforcing violations related to health care. Criminal Fraud and Abuse Liability. Both individuals and organizations are subject to prosecution under the criminal fraud and abuse statutes. Criminal conviction for an offense may result in substantial fines and/or the provider s exclusion and debarment from all government programs. Criminal False Claims Act. The Criminal False Claims Act ( Criminal FCA ) prohibits anyone from knowingly submitting a false, fictitious or fraudulent claim to the Federal government. There are numerous specific rules that a health care provider must follow with respect to the submission of claims. Violation of the Criminal FCA can result in imprisonment of five years and a fine of up to $250,000 for an individual or $500,000 for an organization. Anti-Kickback Law. The Federal Anti-Kickback Law is a criminal statute that prohibits anyone from knowingly and willfully soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce (1) a referral or (2) the purchasing, leasing, ordering or arranging for recommending the purchase, lease or order of any item or service that is covered by a Federal or state health care program. The Anti-Kickback Law applies to virtually every person and entity with which a hospital does business. In recent years, it has been aggressively enforced. The criminal sanctions for a conviction under the anti-kickback provisions are imprisonment for not more than five years, a fine of not more than $25,000 for each offense, or both, for each incident or offense, although this fine may be increased to $250,000 for individuals and $500,000 for organizations. If a party is convicted of a criminal offense related to participation in the Medicare program or any state health care program, or is convicted of a felony relating to health care fraud, the Secretary of HHS is required to bar the party from participation in Federal health care programs and to notify the appropriate state agencies to bar the individual from participation in the state health care programs. In addition, the Office of Inspector General ( OIG ) of HHS has the authority to impose civil assessments and fines and to exclude hospitals engaged in prohibited activities from the Medicare, 27

34 Medicaid, TRICARE (a health care program providing benefits to dependents of members of the uniformed services), and other Federal health care programs for not less than five years. In addition to certain statutory exceptions to the Anti-Kickback Law, the OIG has promulgated a number of regulatory safe harbors under the Anti-Kickback Law designed to protect certain payment and business practices. Health Care Fraud. HIPAA added additional health care fraud statutes. These statutes impose fines under the Federal Sentencing Guidelines or imprisonment for up to 10 years for anyone who is convicted of Federal health care offenses. These offenses include violations of, or a criminal conspiracy to violate, a variety of activities involving fraud, theft, or embezzlement perpetrated with regard to any health care benefit program. Health care benefit programs include not only Medicare and Medicaid but any public or private health benefit plan. As such, prosecutors will no longer need to rely only upon the False Claims Act, or use the mail and wire fraud or similar Federal criminal statutes, in order to attack health care fraud. Civil Fraud and Abuse Liability. Unlike criminal statutes, which require the government to prove that the health care provider intended to violate the law, civil statutes may be violated simply by the provider s participation in a prohibited financial arrangement or the provider having knowledge that its claims procedures are not in full compliance with the law. Civil False Claims Act. The Civil False Claims Act ( Civil FCA ) allows the Federal government to recover significant damages from persons or entities that submit fraudulent claims for payment to a Federal agency. It also permits private individuals to initiate actions on behalf of the government in lawsuits called qui tam actions. These qui tam plaintiffs, or whistleblowers, can recover significant amounts from the damages awarded to the government. Under the Civil FCA, health care providers may be liable if they take steps to obtain improper payments from the government by knowingly submitting false claims. In several cases, Civil FCA violations have been alleged solely on the existence of alleged kickback or self-referral arrangements, even in the absence of evidence that false claims had been submitted as a result of those arrangements. The Department of Justice has also begun using the Civil FCA in its prosecutions of nursing homes for providing substandard care. If the courts ultimately determine that the Civil FCA applies to these alleged violations, the financial costs necessary for even an innocent health care provider to fight or settle a matter could be material. If found liable under the Civil FCA, a health care provider is subject to repay up to triple the actual damages incurred by the Federal government and mandatory financial penalties ranging from $5,500 up to $11,000 for each violation of the Civil FCA. On May 20, 2009, President Obama signed into law the Fraud Enforcement Recovery Act of 2009 (the FERA ), which modifies and clarifies certain provisions of the Civil FCA. In part, the FERA amends the Civil FCA such that the Civil FCA penalties may now apply to any person, including an organization that does not contract directly with the government, who knowingly makes, uses or caused to be made or used, a false record or statement material to a false or fraudulent claim paid in part by the Federal Government. On February 24, 2009, Senator Charles Grassley (R-Iowa) introduced Senate Bill 458, The False Claims Clarification Act of The bill was referred to the Senate Judiciary Committee and, as of March 23, 2010, has not been reported out of the Committee. The legislation seeks to amend the Civil FCA to expand potential liability, which could effectively eliminate several longstanding defenses intended to protect against speculative lawsuits. In particular, Senate Bill 458, among other changes, eliminates the public disclosure bar (which currently prohibits a qui tam relator from bringing a complaint that is based on information already available to the public) as a jurisdictional defense to qui 28

35 tam suits, extends the statute of limitations to ten years in all cases, and generally expands liability for false claims. The effect of such legislation, if enacted, cannot be determined at this time. There can be no assurances that regulatory authorities or investigators will not determine that certain activities or operations of the Corporation violate those laws because in some cases the scope of those laws may be vague and subject to interpretation. Stark Law. The Physician Self-Referral Statute ( Stark ) prohibits a physician from referring a Medicare or Medicaid patient to an entity with which the physician has a financial relationship for certain designated health services, unless the financial relationship meets the requirements of certain exceptions. Stark defines financial relationship broadly to include ownership and compensation arrangements. Unlike the Anti-Kickback Statute, Stark does not require wrongful intent or culpable conduct on the part of one or both parties. If a prohibited financial relationship exists, the physician may not refer Medicare or Medicaid patients to an entity for certain designated health services and the entity may not present a claim for such services. If a Medicare fiscal intermediary or carrier determines that there has been a Stark violation, it must deny payment, and the physician and entity must refund any amounts collected from any individual. Further, HHS may seek substantial civil monetary penalties for each illegal referral and for any scheme designed to circumvent the Stark requirements. If Stark violations are prosecuted under the Civil FCA, the potential liability would be increased. Because the Stark law is subject to interpretation, there can be no assurance that in the future regulatory authorities will not determine that one or more aspects of the operations of the Corporation violate the Stark law. Civil Monetary Penalties Law. The Federal Civil Monetary Penalties Law ( CMPL ) provides for administrative sanctions against health care providers for a broad range of billing and other abuses. A health care provider is liable under the CMPL if it knowingly presents, or causes to be presented, improper claims for reimbursement to a Federal or state agency, such as those that administer the Medicare and Medicaid programs. A hospital that participates in arrangements known as gainsharing, through which the hospital pays physicians to limit or reduce services to Medicare fee-for-service beneficiaries also may be subject to substantial civil monetary penalties. A health care provider may be found liable under the CMPL even if it did not have actual knowledge of the impropriety of the claim. It is sufficient that the provider should have known that the claim was false. Ignorance of the Medicare regulations is no defense. The Secretary of HHS, acting through the OIG, also has both mandatory and permissive authority to exclude individuals and entities from participation in Federal health care programs pursuant to CMPL. Mitigation. Providers may act to reduce their exposure to Federal criminal fines and penalties pursuant to Federal Sentencing Guidelines and also reduce their practical exposure to such claims, Stark referral law violations, and civil penalties by establishing effective corporate compliance programs (including periodic review of hospital/physician relationships, billing and coding practices and compliance with the requirements of Federal criminal and civil laws and regulations), preparing policies and procedures for promptly returning to the government any payments received by way of inappropriate or illegal referrals, and responding in an effective manner to complaints regarding potentially illegal financial and other arrangements. Implementation and enforcement of an effective compliance program can substantially reduce the level of Federal criminal fines and penalties if, in fact, a violation is determined to exist. No assurance can be given that, as a result of the existence of a corporate compliance program, the potential liability will be eliminated. 29

36 Exclusions from Medicare or Medicaid Participation. The term exclusion means that no Medicare or state health care program reimbursement (including Medicaid and the Maternal and Child Health programs) will be made for any services rendered by the excluded party or for any services rendered on the order or under the supervision of an excluded physician. The Secretary of HHS is required to exclude from program participation for not less than five years any individual or entity who has been convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program; any criminal offense relating to patient neglect or abuse in connection with the delivery of health care; a felony relating to fraud, theft, embezzlement, breach of fiduciary responsibility or other misdemeanor in connection with the delivery of health care services financed or with respect to any act or omission in a health care program (other than Medicare or a state health care program) operated by or financed in whole or in part by a governmental agency; or a felony offense relating to the illegal manufacture, distribution, prescription or dispensing of a controlled substance. The Secretary also has permissive authority to exclude individuals or entities under certain other circumstances, such as a misdemeanor conviction for fraud in connection with delivery of health care services or conviction for obstruction of an investigation of a health care violation. The minimum period of exclusion for certain permissive exclusions is three years. Enforcement Activity. Enforcement activity against health care providers is increasing, and enforcement authorities are adopting more aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to investigation, audit or inquiry regarding billing practices or false claims. As with other health care providers, the Corporation may be the subject of Medicare intermediary or carrier, the Office of Inspector General, U.S. Attorney General, Department of Justice Medicaid fraud control unit and/or state attorney general or other state investigations, audits or inquiries in the future. Because of the complexity of these laws, the instances in which an alleged violation may arise to trigger such investigations, audits or inquiries are increasing and could result in expensive and prolonged enforcement action against the Corporation. Because these laws may be vague and subject to interpretation, there can be no assurance that regulatory authorities will not determine that one or more aspects of the operations of the Corporation violate these laws. The Corporation has internal policies and procedures and has developed and implemented a compliance program that the management of the Corporation believes will effectively reduce exposure for violations of these laws. However, because the government s enforcement efforts presently are widespread within the industry and may vary from region to region, there can be no assurance that the compliance program will significantly reduce or eliminate the exposure of the Corporation to civil or criminal sanctions or adverse administrative determinations. Additionally, the Corporation s management does not believe that the Corporation s activities and operations violate these fraud and abuse laws or constitute a Federal health care offense. However, there can be no assurance that in the future regulatory authorities or investigators will not determine that certain activities or operations violate those laws because in some cases the scope of those laws may be vague and subject to interpretation. Antitrust Enforcement of the antitrust laws against health care providers has become more common in recent years. Antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, third party contracting, physician relations, joint ventures, mergers and affiliations, and acquisition activities. While the application of Federal and State antitrust laws to health care is still evolving, enforcement activities by Federal and State agencies appear to be increasing. In particular, the Federal Trade Commission has publicly acknowledged increasing enforcement action in the area of physician joint contracting. Likewise, increased enforcement action exists relating to a retrospective review of completed hospital mergers. Violations of the antitrust laws could subject a hospital to criminal and civil enforcement by Federal and State agencies, as well as treble damages liability by private 30

37 litigants. At various times, a hospital may be subject to an investigation by a governmental agency charged with the enforcement of the antitrust laws, or may be subject to administrative or judicial action by a Federal or state agency or a private party. The most common areas of potential liability are joint activities among providers with respect to payor contracting, medical staff credentialing, and use of a hospital s local market power for entry into related health care businesses. From time to time, an affiliate may be involved in joint contracting activity with other hospitals or providers. The precise degree to which this or similar joint contracting activities may expose the Corporation to antitrust risk from governmental or private sources is dependent on specific facts which may change from time to time. A U.S. Supreme Court decision now allows physicians who are subject to adverse peer review proceedings to file Federal antitrust actions against hospitals. Hospitals, including the Corporation, regularly have disputes regarding credentialing and peer review, and may be subject to antitrust liability in such a capacity. In addition, hospitals occasionally indemnify medical staff members who are involved in such credentialing and peer review activities, and therefore hospitals may also be liable with respect to such indemnity. Also, court decisions have established private causes of action against hospitals that use their local market power to promote ancillary health care businesses in which they have an interest. Such activities may result in liability for the hospitals under certain circumstances where a competitor suffers business damage. The ability of hospitals to consummate mergers, acquisitions, or affiliations may also be impaired by the antitrust laws. Liability in any of these or other antitrust areas may be substantial, depending on the facts and circumstances of each case. From time to time, the Corporation is or will be involved in a variety of activities which may be subject to scrutiny under the antitrust laws, and it cannot be predicted when or to what extent liability may arise. The precise degree to which certain activities may expose the Corporation to antitrust risk from governmental or private sources is dependent on a myriad of factual matters which may change from time to time. Kentucky Certificate of Need Program Kentucky regulates the health care industry within the State by administering a program requiring health care facilities to obtain a Certificate of Need ( CON ) before making certain capital expenditures, adding certain new health care services, or making substantial changes in existing services. The criteria for determining whether to issue a CON include the project s consistency with the State Health Plan (which is revised annually) and any biennial state budget authorizations and limitations directly affecting the proposal; need and accessibility in the defined service area; interrelationships and linkages with existing providers; costs, economic feasibility and resource availability; and the quality of services. After receiving a CON, the holder may be subject to biennial review to determine that the holder is in compliance with the terms as listed in its CON. One cannot predict whether the Corporation will receive approval for any health care services that are regulated by the CON process which the Corporation may deem desirable or necessary in order to compete in its service area. Competition Hospitals and health facilities providing services to residents and employees in the Corporation s service area are the major source of competition for the Corporation. Competition from a variety of potential sources, including, but not limited to, inpatient and outpatient health care facilities, clinics and physicians, may adversely affect the utilization and/or revenues of the Corporation. In addition, nontraditional competitors, such as physician management companies, disease management companies and outpatient service providers, could have the same effect. Certain new competitors, such as home health and infusion providers, and certain niche providers, such as specialized cardiology, dialysis or oncology companies, specifically target hospital patients as their prime source of revenue growth. 31

38 Furthermore, because existing and potential competitors may not be subject to the regulations and restrictions applicable to the Corporation, these competitors may be more flexible in their ability to adapt to competitive opportunities and risks. If these competitors and any future competitors are successful, some of the most profitable aspects of hospital operations may be stripped away and/or overall hospital utilization may decline. Additionally, mergers or affiliations of existing competitors may create larger, more viable entities that may be more formidable competitors than the original constituent entities. While the effect of such actions is uncertain, mergers and acquisitions can be expected to increase competition in the health care field, and the utilization and revenues of the Corporation could be adversely affected. Alternatively, existing competitors could fail, which could decrease competition in a particular region, but which could force the Corporation to accommodate significantly higher volumes, including significantly higher volumes of uninsured or under-insured patients and charity care. The Corporation is likely to face increased competition in the future from other general hospitals, skilled nursing facilities, home health agencies, rehabilitation and therapy centers, increasingly sophisticated physician group practices, and from other health care providers that offer comparable health care services. There also is significant concern regarding the proliferation of specialty hospitals and, in particular, physician-owned specialty hospitals, due to the potential for those hospitals to attract selected profitable services from full-service community hospitals, thereby adversely impacting the ability of those community hospitals to continue offering adequate quality and quantity of services for the communities they serve. There have been recent initiatives at the Federal level to stop or significantly limit the development of these specialty hospitals, including in the PPAC Act, but at this time the effect of this initiative is uncertain. As such, management of the Corporation cannot fully assess the impact of the development of specialty hospitals on its future operations. The growth of e-commerce also may result in a shift in the way that health care is delivered. Persons residing in the Corporation s service area may be able to receive certain health services from remote providers. For example, physicians will be able to provide certain services over the internet (e.g., teleradiology and second opinions). Pharmaceuticals and other health services may also now be ordered on-line. Additionally, other service providers in competition with the Corporation may now compete through this new medium by advertising their services and providing easy registration for competing services over the internet. Also, alternative forms of health care payment including managed care organizations and consumer-driven care, as well as expanded preventive medicine and outpatient treatment, could affect the Corporation s ability to maintain its market share at current levels. Equipment Scientific and technological advances, new procedures, drugs and devices, preventive medicine, occupational health and safety, and outpatient health care delivery may reduce utilization and revenues of the Corporation in the future. Technological advances in recent years have accelerated the trend toward the use by hospitals of sophisticated and costly equipment and services, and the Corporation may have to incur significant costs to acquire the equipment needed to maintain or enhance its competitive position. The ARRA includes funds to assist states and certain high risk hospitals in establishing a nationwide electronic medical records system and the Secretary appointed a National Coordinator for Health Information Technology to lead the effort. The costs to acquire and implement an electronic medical records system are significant but it is widely believed that such systems will lead to greater efficiencies in the provision of patient care and improved quality of care. The acquisition and operation of certain equipment and services may continue to be a significant factor in hospital utilization, but the ability of the Corporation to offer such equipment or services may be subject to the availability of equipment and specialists, governmental approval and the ability to finance such acquisitions and operations. 32

39 Labor At the present time, the Corporation s service and maintenance employees, but not its nurses, are represented by a labor organization. See APPENDIX A Medical Staff Medical Center Employees. Adverse labor actions, or a shortage of qualified professional personnel, could cause a larger than expected increase in payroll costs. In addition, the Corporation cannot control the prevailing wage rates in its service area and any increase in such rates will directly affect its costs of operation. The ability of the Corporation to employ and retain qualified employees, and its ability to maintain good relations with such employees and the unions they may be represented by, affect the quality of services to patients and the financial condition of the Corporation. Nursing Shortages. In recent years, the health care industry has suffered from a scarcity of nursing and other qualified health care technicians and personnel. Factors underlying this trend include a decrease in the number of persons entering the nursing profession and an increase in the number of nurses specializing in home healthcare. Any of these factors may be expected to intensify in the future, aggravating the shortage of nursing personnel or other qualified health care personnel. This trend could force the Corporation to pay higher salaries to nursing and other qualified health care personnel as competition for such employees intensifies and, in an extreme situation, could lead to difficulty in keeping the Corporation s facilities licensed to provide nursing care and thus eligible for reimbursement under Medicare and Medicaid. Medical Staff Physician Relations. The primary relationship between a hospital and physicians who practice in it is through the hospital s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may be awarded medical staff membership and privileges, or may have his or her membership and/or privileges curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges, or who have such membership or privileges curtailed, denied or revoked often file legal actions against hospitals. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties. All hospitals, including the Corporation, are subject to such risk. An emerging area of potential risk for all hospitals surrounds the appropriate management of physician conflicts of interest with hospitals that grant practice privileges. Described as economic credentialing by physicians who oppose efforts of hospitals to manage the presence of direct competitors within the leadership or boardroom, the issue requires all hospitals to thoughtfully manage these potential conflicts to maintain a healthy, collegial and professional relationship required with the independent medical staff, while ensuring the organization is not suffering irreversible harm from a competitor gaining specific or specialized information not available to the public regarding the Corporation s plans. In the worst circumstances, such efforts have led to litigation and potentially material impacts on the practice patterns of physicians at a specific facility. It is not possible to predict the course of such decisions or make any assurances that the Corporation will be successful in managing such conflicts without causing some changes in physician practice patterns, which could have a material effect on the Corporation. Malpractice Insurance In the last decade, the number of malpractice suits and the dollar amounts of patient damage recoveries have increased nationwide, resulting in substantial increases in professional liability insurance premiums. The Corporation is self-insured, with aggregate coverage limits varying from $1,000,000 for an individual occurrence to $3,000,000 aggregate. The Corporation also maintains an umbrella 33

40 commercial malpractice policy, renewable annually, providing excess coverage of $20,000,000 per occurrence and aggregate. The Corporation considers this coverage to be adequate, and the Corporation does not have knowledge of any claim that would jeopardize its insurance coverage limits. However, the prosecution of a successful claim in excess of the Corporation s insurance coverage during the time that the Series 2010 Bonds are outstanding remains a risk and could have an adverse effect on the Corporation. Over the past few years, the cost for health care providers to obtain professional malpractice coverage has increased drastically. Federal legislation proposed to address this issue has not been acted upon. In some cases, new and non-traditional insurance vehicles are being started to fill the void created by the diminished availability of traditional coverage. Additionally, the cost and the availability of professional medical malpractice liability insurance to hospitals and physicians could increase operating expenses and could result in increased exposure to liability. See APPENDIX A Other Medical Center Information Insurance. Affiliation, Merger, Acquisition, Transfer, and Divestiture Significant numbers of affiliations, mergers, acquisitions, transfers, and divestitures have occurred in the health care industry in recent years. As part of its ongoing planning process, the Corporation is considering and will continue to consider the potential acquisition of operations or properties which may become affiliated with or become part of the Corporation, as well as the potential disposition of certain existing Corporation operations or properties. As a result, it is possible that the organizations and assets which currently make up the Corporation and its subsidiaries may change from time to time, subject to the provisions in the financing documents which apply to merger, sale, disposition, or purchase of assets. Additionally, any such initiative may involve significant capital commitments and/or capital or operating risk and there can be no assurance that these projects, if pursued, will not lead to material adverse consequences to the Corporation. Certain real and personal property of the Corporation, including the nursing facility, may be transferred by the Corporation without regard to the restrictions on transfers of Property contained in the Loan Agreements. Any property transferred by the Corporation will not be available to pay the principal of, or premium, if any, or interest on the Series 2010 Bonds or any other indebtedness of the Corporation. Tax-Exempt Status The Corporation is exempt from Federal income tax as a charitable organization under Section 501(c)(3) of the Code. The exclusion of interest on the Series 2010 Bonds from gross income for Federal tax purposes is dependent upon the status of the Corporation as an organization described under Section 501(c)(3) of the Code (a 501(c)(3) Organization ). A loss by the Corporation of its status as a 501(c)(3) Organization could result in interest on the Series 2010 Bonds becoming included in gross income for Federal tax purposes retroactive to the date of issuance of the Series 2010 Bonds. The status of an organization as a 501(c)(3) Organization and the exclusion from taxation of the property and income of such organizations has been the subject of increased scrutiny by Federal, state and local legislatures and regulatory authorities. The IRS has expressed increased interest in the status of hospitals and other types of health care providers as 501(c)(3) Organizations, particularly with respect to the impact on such status of hospital involvement in physician recruitment or retention arrangements, acquisition of physician practices, joint ventures with for-profit entities, and patient referral patterns. In addition, taxing authorities in certain jurisdictions have sought to impose or increase taxes related to the 34

41 property and operations of non-profit organizations, including health care organizations, particularly where such authorities are dissatisfied with the amount of service provided to indigent residents. Currently, the primary penalty available to the IRS under the Code for use against 501(c)(3) Organizations is the revocation of tax-exempt status. Although the IRS has rarely taken such a step with regard to a tax-exempt hospital, it could increase these revocations in the future. Loss of status as a 501(c)(3) Organization would result in loss of tax exemption of the Series 2010 Bonds, and defaults in covenants regarding the Series 2010 Bonds. It would also trigger the loss of tax-exempt status of related tax-exempt debt of the Corporation. Loss of tax-exempt status could also result in substantial tax liabilities on Corporation income. In some cases, the IRS has imposed substantial monetary penalties on tax-exempt hospitals. In these cases, the IRS and the hospitals in question have entered into a closing agreement regarding the IRS s investigation into alleged activities which may jeopardize the hospital s tax-exempt status. Such closing agreements usually require the hospital to make substantial penalty payments, agree to cease the activities in question, and agree to comply with a list of other requirements and restrictions. In addition, Congress has amended the Code to allow the imposition of intermediate sanctions for certain excess benefit transactions undertaken by tax-exempt organizations. In such cases, the intermediate sanctions provisions permit the IRS to impose a penalty excise tax on (i) any disqualified person (similar to an insider of the organization) who receives an excess benefit from the organization, and (ii) any organization manager, such as officers, trustees, and directors, who knowingly participated in the transaction that resulted in the payment of an excess benefit to the disqualified person. These penalty excise taxes will generally be imposed in lieu of revocation of the organization s tax-exempt status, and will be imposed on the disqualified person and the participating managers personally, rather than on the tax-exempt organization. In certain cases, the IRS has imposed future charity care or public benefit obligations on tax-exempt hospitals in lieu of revoking their tax-exempt status, as well as requiring that certain transactions be altered, terminated, or avoided in the future and/or requiring governance or management changes. It is difficult to predict the scope of any future legislation or the course of any future regulatory actions which may relate to 501(c)(3) Organizations, or which may affect the exclusion from taxation of income earned and property owned by such organizations. There can be no assurance that future changes in Federal, state, or local laws, rules, regulations, and policies governing the tax treatment of the property and operations of 501(c)(3) Organizations in general, and of hospitals in particular, will not materially affect the future operations of the Corporation. The Corporation is not aware of any action regarding, or investigation of, its status as a 501(c)(3) Organization. The tax-exempt status of nonprofit corporations and exclusion of income earned by them from taxation has been the subject of review by various Federal, state and local legislative, regulatory and judicial bodies. This review has included proposals to broaden and strengthen existing Federal and state law with respect to unrelated business income of nonprofit corporations, private use of nonprofit corporation assets, executive compensation, board conflicts of interest, the provision of charity care and community benefit, and the use of tax-exempt financing. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to the regulation and taxation of nonprofit corporations, since such actions and proposals as have been made have been vigorously challenged and contested. There can be, however, no assurance that future changes in the laws and regulations of the Federal, state or local governments will not materially and adversely affect the operations and revenues of the Corporation by requiring the Corporation to pay 35

42 income or real estate taxes, by restricting its access to tax-exempt financing, or by requiring the increased provision of uncompensated healthcare service. Bond Examinations. In recent years the IRS has increased the resources dedicated to the audit of Federally tax-exempt organizations, including large tax-exempt health care systems. The IRS intends to concentrate, among other matters, on the taxable subsidiary activities and unrelated business income producing activities of health care systems with specific review of private use of hospital assets. The IRS has sent post-issuance compliance questionnaires to several hundred nonprofit corporations that have been the beneficiaries of the proceeds of tax-exempt bonds regarding their post-issuance compliance with various requirements for maintaining the federal tax exemption of interest on such bonds, and the IRS has indicated additional questionnaires will be sent once analysis of the initial sample is completed. The questionnaire included questions relating to such corporation s (i) record retention, (ii) private use of bond-financed assets, (iii) arbitrage yield restriction and rebate requirements, (iv) debt management policies, and (v) voluntary compliance and education. The IRS has also added a new schedule to the IRS Form 990 requesting detailed information related to all outstanding bond issues of nonprofit borrowers, including information regarding operating, management and research contracts as well as private use compliance. In addition, the IRS has commenced examinations of bonds issued for the benefit of nonprofit corporations. Although the Corporation has not received such a questionnaire, has not received notice of any audit by the IRS of tax-exempt bonds issued for its benefit, and believes that its expenditure and investment of bond proceeds, use of property financed with tax-exempt debt and record retention practices have complied with all applicable laws and regulations, there can be no assurance that the IRS initiative, in general, will not adversely affect the market value of the Series 2010 Bonds or of other outstanding bonds of the Corporation. Bond Counsel anticipates rendering an opinion with respect to the tax-exempt status of the Series 2010 Bonds, as described in the appendices hereto. The Corporation has not sought to obtain a private letter ruling from the IRS with respect to the Series 2010 Bonds, however, and the opinions of Bond Counsel are not binding on the IRS or the courts. There is no assurance that any IRS examination of the Series 2010 Bonds will not adversely affect the market value of the Series 2010 Bonds. See TAX EXEMPTION below. Class Action Lawsuits Seeking Standing to Enforce Community Benefit Standards. In 2004, Federal class action suits were filed challenging the billing and collections practices of tax-exempt hospitals as they related to the charges for services provided to uninsured persons; asserting that such practices violated the community benefit standards attendant to designation as a 501(c)(3) corporation, and asserting standing to bring suit to force hospitals to change their practices and reimburse excessive amounts paid by uninsured individuals. While almost all of the Federal suits have been dismissed, plaintiffs have re-filed their claims in state courts throughout the country, where similar allegations and relief are being sought under allegations of violations of contract law, quantum meruit, and/or violation of state consumer sales practices acts. The Corporation was not named in any of the suits filed. Local Government Challenges to Property Tax-Exemptions. Recent years have seen significantly increased efforts by local governments in many states to challenge the exempt status of nonprofit corporations real property. The bases for these challenges generally have been either nonuse of real property for the charitable object of the tax-exempt organization or inadequate levels of public benefit or uncompensated care. Several of these challenges have resulted in litigation. Unrelated Business Income. The IRS and state, county and local taxing authorities may undertake audits and reviews of the operations of tax-exempt hospitals with respect to the generation of unrelated business taxable income. The Corporation engages in activities that may generate unrelated 36

43 business taxable income. Management of the Corporation believes that it has properly accounted for and reported unrelated business taxable income generally; nevertheless, an investigation or audit could lead to a challenge that could result in taxes, interest and penalties with respect to such income and, in some cases, ultimately could affect the tax-exempt status of the Corporation, as well as the exclusion from gross income for Federal income tax purposes of the interest payable on the Series 2010 Bonds. Indigent Care. Tax-exempt organizations that own and operate hospitals often treat large numbers of indigent patients who, for various reasons, are unable to pay for their medical care. These hospitals may be susceptible to economic and political changes that could increase the number of indigents or the hospital s responsibility for caring for this population. General economic conditions that affect the number of employed individuals who have health coverage affect the ability of patients to pay for their care. Similarly, changes in governmental policy, which may result in coverage exclusions under local, state and Federal health care programs (including Medicare and Medicaid), may increase the frequency and severity of indigent treatment in such hospitals. It is also possible that future legislation could require that tax-exempt organizations that own and operate hospitals maintain minimum levels of indigent care as a condition to Federal income tax exemption or exemption from certain state or local taxes. Therefore, the Corporation s indigent care commitments could constitute a material and adverse risk in the future. Enforceability of Remedies Enforcement of remedies under the Master Indenture, the Bond Indentures and the Loan Agreements may be limited or restricted by fraudulent conveyance laws, laws relating to bankruptcy and rights of creditors and by application of general principles of equity. Under its related Loan Agreement and Master Note, each Issuer is entitled to payments from the Corporation and certain other amounts. Each Issuer will assign the right to receive such payments to the Bond Trustee under the related Bond Indenture for the payment of the related series of Series 2010 Bonds. Unless such payments constitute a preference in bankruptcy proceedings, the Bond Trustee has a valid and binding first lien on those payments once they are in the possession of the Bond Trustee. The practical realization of any rights upon any default will depend on the exercise of various remedies specified in the Master Indenture, the Bond Indentures and the Loan Agreements. These remedies, in certain respects, may require judicial action which is often subject to discretion and delay. Under existing law, certain of the remedies specified in these documents may not be readily available or may be limited. A court may decide not to order the specific performance of the covenants contained in these documents. The various legal opinions to be delivered concurrently with the issuance of the Series 2010 Bonds will be qualified as to the enforceability of the various legal documents by limitations imposed by bankruptcy, reorganization, insolvency, fraudulent conveyance or other similar laws affecting the rights of creditors generally and by general principles of equity and certain public policy considerations. If any of such limitations are imposed, they may adversely affect the ability of the Master Trustee, the Bond Trustee and the holders of the Series 2010 Bonds to enforce their claims and assert their rights against the Obligated Group member. In a bankruptcy proceeding, such member of the Obligated Group could file a plan for the adjustment of its debts which modifies the rights of creditors generally, or the rights of any class of creditors, secured or unsecured. The plan, when confirmed by the court, would bind all creditors who had notice or knowledge of the plan and discharge all claims against the debtor provided for in the plan. No plan may be confirmed unless, among other conditions, the plan is in the best interests of creditors, is 37

44 feasible and has been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if at least two-thirds in dollar amount and more than one-half in number of the allowed claims of the class that are voted with respect to the plan are cast in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly. In addition, a member of the Obligated Group may not be required to make a payment or use its assets to make a payment in order to provide for the payment of an obligation (including the Master Notes), or portions thereof, the proceeds of which were not lent or otherwise disbursed to such member, to the extent that such payment or use would render such member insolvent or would conflict with, not be permitted by or which is subject to recovery for the benefit of other creditors of such member of the Obligated Group because such payment is considered a fraudulent conveyance under the United States Bankruptcy Code or Ohio fraudulent conveyance statutes. There is no clear precedent as to whether such a payment under those circumstances would be considered a fraudulent conveyance. Each Master Note provides that the members of the Obligated Group will make payments to the Bond Trustee sufficient to pay the principal of and premium, if any, and interest on the related Series 2010 Bonds as the same become due. The obligation of the members of the Obligated Group to make such payments is secured by, in addition to a mortgage of the Mortgaged Property pursuant to the Loan Agreements, a lien granted to the Master Trustee by the Obligated Group, pursuant to the Master Indenture, on the Gross Receipts of the members of the Obligated Group. This lien may become subordinate to certain Permitted Encumbrances under the Master Indenture. Gross Receipts sold by the members of the Obligated Group to other parties under conditions permitted by the Master Indenture will no longer be subject to the lien of the Master Indenture and might therefore be unavailable to the Master Trustee. Further, enforcement of any right to receive payments under the Medicare and Medicaid programs may be subject to restrictions under federal and state statutes and regulations concerning the assignability of such payments. In the event of bankruptcy of the members of the Obligated Group, pursuant to the Bankruptcy Code, any receivable coming into existence and any Gross Receipts received on or after the date which is 90 days (or, in some circumstances, one year) prior to the commencement of the case in bankruptcy court might not be subject to the lien of the Master Indenture, and under certain circumstances a bankruptcy court or a court of equity may have power to direct the use of Gross Receipts to meet expenses of the members of the Obligated Group before paying debt service. With respect to receivables and Gross Receipts not subject to the lien, the Issuers would occupy the position of an unsecured creditor. The value of the security interest in Gross Receipts would also be diluted by the issuance of additional Obligations. The security interest in Gross Receipts granted by the Obligated Group to the Master Trustee under the Master Indenture is intended to be a perfected first priority security interest under the Uniform Commercial Code to the extent that such security interest may be perfected by filing. However, the enforceability of that security interest may be subordinated by operation of law to the interests and claims of other creditors in certain circumstances. Among certain claims and interest that may defeat the security interest are: (a) federal statutory and regulatory provisions limiting assignment of amounts due to health care providers from Medicaid and Medicare programs to persons other than the providers; (b) the absence of an express provision permitting assignment of receivables due under the contracts with third party payors, and present and future prohibitions against assignment contained in applicable statutes or regulations; (c) certain judicial decisions that cast doubt upon the right of the Master Trustee, in the event of the bankruptcy of a member of the Obligated Group, to collect and retain accounts receivable of such member of the Obligated Group from Medicare, Medicaid and other governmental programs; (d) commingling of the proceeds of accounts with other moneys not so pledged; (e) statutory liens; (f) rights arising in favor of the United States or any agency thereof; (g) constructive trusts, equitable or other rights impressed or conferred by a Federal or state court in the exercise of its equitable jurisdiction; (h) Federal 38

45 bankruptcy laws that may affect the security interest in accounts that are earned within 90 days (in certain cases, one year) preceding and after any effectual commencement of bankruptcy proceedings; (i) rights of third parties in accounts converted to cash and not in the possession of the Master Trustee; and (j) claims that might arise if appropriate financing or continuation statements are not filed in accordance with the Uniform Commercial Code as from time to time in effect. Environmental Matters Health care providers are subject to a wide variety of federal, state, and local environmental and occupational health and safety laws and regulations which address, among other things, provider operations or facilities and properties owned or operated by providers. The types of regulatory requirements faced by health care providers include, but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos, polychlorinated biphenyls, and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at facilities of health care providers; and requirements for training employees in the proper handling and management of hazardous materials and wastes. In their role as owners and/or operators of properties or facilities, health care providers may be subject to liability for investigating and remedying any hazardous substances which have come to be located on the property, as well as for any such substances that may have migrated off of the property. Typical health care provider operations include, but are not limited to, in various combinations, the handling, use, storage, transportation, disposal, and/or discharge of hazardous, infectious, toxic, radioactive, flammable, and other hazardous materials, wastes, pollutants, or contaminants. As such, health care provider operations are particularly susceptible to the practical, financial, and legal risks associated with compliance with such laws and regulations. Those risks may result in damage to individuals, property, or the environment; may interrupt operations and/or increase their costs; and may result in legal liability which could in turn result in significant damages, injunctions, or fines, and may result in investigations, administrative proceedings, penalties, or other governmental agency actions. There is no guarantee that the Corporation will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of the Corporation. At the present time, management of the Corporation is not aware of any pending or threatened claim, investigation or enforcement action regarding such environmental issues that, if determined adversely to the Corporation, would have a material adverse effect on the Corporation s operations or financial condition. Factors That Could Affect the Future Financial Condition of the Corporation The future financial condition of the Corporation could be affected adversely by, among other things, legislation, regulatory actions, including governmental investigations, technology changes, increased competition from other health care providers, changes in demand for health care services, demographic changes and malpractice claims and other litigation. Some of such changes might include the following: Continued Utilization of the Facilities of the Corporation. Physicians have the option of admitting patients, with the patients consents, to the Corporation s facilities or to other acute care hospitals or similar facilities that are not controlled by the Corporation. The revenues of the Corporation could decrease if medical staff members admit patients to such other facilities instead of admitting such patients to facilities operated by the Corporation. 39

46 The Corporation faces competition from other hospitals and health care facilities and could face additional competition in the future as a result of the construction of new, or the renovation of existing, hospitals in the areas served by them. No assurance can be given that occupancy of the Corporation s facilities will not be adversely affected by the availability of other hospital and health care facilities in the service areas of the Corporation s facilities and elsewhere. Moreover, other non-hospital providers are increasingly delivering services in direct competition with hospitals. Possible Future Legislation. In each recent session of the United States Congress, bills have been introduced or considered for introduction that would affect the means and amount of payment for health care services, encourage alternate care delivery methods, impose more onerous regulation of taxexempt entities, provide additional patient protections and address many other subjects affecting health care delivery. The PPAC Act is the most recent attempt to address the complete reform of the national health care delivery system. Because of the importance of the national health care delivery system and its cost to the Federal government, it is expected that potential legislation will continue to be introduced. Generally, potential legislation will limit increases to the amount the Federal government pays for health care while requiring that participating health care providers maintain or increase the services provided by them. Therefore, most, if not all, potential legislation could have a negative effect on the revenues and costs of health care providers. To the extent that potential legislation becomes law, it is likely to have an adverse effect on the financial condition of the Corporation and such effect could be material. Some states have adopted and many more have considered adopting health care reform legislation that would change the payment for health care services, including specifically patients covered by Medicaid or similar programs, and the way health care services are delivered. Though these legislative efforts are different in scope and form, most include one or more of the following: (i) cost reduction measures, using budget or cost increase approval as enforcement mechanisms; (ii) creation of health purchasing alliances; (iii) modification of payment provisions under Medicaid or similar programs; (iv) taxes or assessments on hospitals to fund the costs of such programs and the cost of providing care to uninsured persons; (v) bans on certain self-referrals by physicians; (vi) limits on the authority of hospital boards to take action on medical staff credentialing matters; (vii) penalties for offering, paying, soliciting or receiving consideration for referring patients covered by Medicaid or other payor contracts; (viii) any willing provider laws that require a managed care network to accept as part of the network any provider that makes an application and is located within the applicable geographic area; (ix) transparency and competition measures requiring hospitals to disclose pricing and/or provide discounts at specified levels to uninsured patients, and (x) regulation of direct managed care agreements between providers and selfinsured employers. Because most state health care reform legislation has been adopted or is being considered only recently, management of the Corporation is unable to assess the impact of such legislation on its future financial condition. Provider-Based Standards. The Medicare program pays certain facilities and services, including, for example, SNFs and physician offices and clinics, differently depending upon whether they are provider-based or freestanding. A provider-based facility or service is an integral part of another provider, such as a hospital. Certain administrative costs and overheads of the provider organization may or must be allocated in part to the provider-based organization. In addition, provider-based designation can result in additional Medicare payments for services furnished at the provider-based facility and also may increase the co-insurance liability of Medicare beneficiaries for those services. Freestanding providers are not considered part of another provider under the Medicare program and stand on their own for purposes of Medicare payments. For any given facility or service, it is probable that one classification or the other will result in higher aggregate Medicare payments for the system as a whole. 40

47 Effective October 1, 2002, the mandatory requirement to obtain provider-based designation was replaced with a voluntary attestation process. Nevertheless, providers may elect to obtain a determination of provider-based status prior to billing in that manner, thereby eliminating the risk of incorrect billing and reimbursement for services provided to Medicare beneficiaries. Management of the Corporation believes that all facilities or services, which currently are or have been treated as provider-based, met and continues to meet all applicable criteria for such designation. However, should a determination be made to the contrary, reclassification of entities now characterized as provider-based to freestanding may adversely affect those entities payments under the Medicare Program. Other Factors Affecting Health Care Facilities In the future, the following additional factors, among others, may affect the operations and financial performance of health care facilities, including those operated by the Corporation, to an extent that cannot be determined at this time: 1. Future medical and scientific advances, changes in third-party reimbursement programs, the development of and the requirement for the option for health maintenance organizations in labor contracts, preventive medicine, improved occupational health and safety, and improved outpatient care, all of which could result in decreased usage of inpatient facilities of the Corporation. 2. Possible introduction and adoption in the State of legislation or other requirements (private or governmental) which would establish a rate-setting agency with statutory control over hospitals and hospital costs and rates or which would require hospitals to justify the appropriateness of existing medical services on the basis of national or State criteria. 3. An inflationary economy and difficulties in increasing room charges and other fees, while at the same time maintaining the amount and quality of health services, may affect the ability of the Corporation to maintain sufficient operating margins. 4. Imposition of wage and price controls for the health care industry could affect the ability of the Corporation to maintain sufficient operating margins. 5. Demand for the services of the Corporation might be reduced if the population residing in the service area of the Corporation should decline or alternative health care delivery systems are developed. 6. Increased unemployment or other adverse economic conditions in the service area of the Corporation could increase the proportion of patients who are unable to pay fully for the cost of their care. In addition, increased unemployment caused by a general downturn in the economy of the service area or the State or by the closing of operations of one or more major employers in the area may result in a loss of health insurance benefits for a portion of the patients of the Corporation. 7. The Corporation is not a general purpose building and would not generally be suitable for industrial or commercial use. If it were necessary to foreclose a judgment lien on any of the facilities under forced sale conditions that are present in a bankruptcy context, the sale of the Corporation might provide less than full value to the Bond Trustee. 41

48 Tax-Exempt Status of the Series 2010 Bonds; Continuing Legal Requirements As described herein under the caption TAX EXEMPTION, failure to comply with certain legal requirements may cause the interest on the Series 2010 Bonds to become included in gross income for Federal income tax purposes. In such event, the Series 2010 Bonds may be accelerated at the discretion of the Bond Trustee or at the written request of holders of not less than a majority of the aggregate principal amount of an outstanding series of Series 2010 Bonds. The Bond Indentures do not provide for the payment of any additional interest or penalty to the holders of Series 2010 Bonds in the event the interest on the Series 2010 Bonds becomes included in gross income for Federal income tax purposes. General TAX EXEMPTION In the opinion of Frost Brown Todd LLC, Bond Counsel for the Series 2010 Bonds, based upon an analysis of existing laws, regulations, rulings and court decisions, interest on the Series 2010 Bonds will be excludible from gross income for Federal income tax purposes. Bond Counsel for the Series 2010 Bonds is also of the opinion that interest on the Series 2010 Bonds will not be a specific item of tax preference under Section 57 of the Internal Revenue Code of 1986 (the Code ) for purposes of the Federal individual or corporate alternative minimum taxes. Furthermore, Bond Counsel for the Series 2010 Bonds is of the opinion that the Series 2010 Bonds, and the interest thereon, are presently exempt from all taxation within Kentucky except for inheritance, estate or transfer taxes. Copies of the opinions of Bond Counsel for the Series 2010 Bonds are set forth in APPENDIX D, attached hereto. The Code imposes various restrictions, conditions, and requirements relating to the exclusion from gross income for Federal income tax purposes of interest on obligations such as the Series 2010 Bonds. Both the Issuers and the Corporation have covenanted to comply with certain restrictions designed to ensure that interest on Series 2010 Bonds will not be includible in gross income for Federal income tax purposes. Failure to comply with these covenants could result in interest on the Series 2010 Bonds being included in income for Federal income tax purposes and such inclusion could be required retroactively to the date of issuance of the Series 2010 Bonds. The opinion of Bond Counsel assumes compliance with these covenants. However, Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring) after the date of issuance of the Series 2010 Bonds may adversely affect the tax status of the interest on the Series 2010 Bonds. Certain requirements and procedures contained or referred to in the Bond Indentures, the Tax Agreement and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Series 2010 Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to any Series 2010 Bonds or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of bond counsel other than Frost Brown Todd LLC. Although Bond Counsel for the Series 2010 Bonds is of the opinion that interest on the Series 2010 Bonds will be excludible from gross income for Federal income tax purposes and the Series 2010 Bonds will be exempt from taxation within Kentucky, as described above, the ownership or disposition of, or the accrual or receipt of interest on, the Series 2010 Bonds may otherwise affect a Bondholder s Federal, state or local tax liabilities. The nature and extent of these other tax consequences may depend upon the particular tax status of the Bondholder or the Bondholder s other items of income or deduction. 42

49 Bond Counsel expresses no opinions regarding any tax consequences other than what is set forth in its opinion and each Bondholder or potential Bondholder is urged to consult with tax counsel with respect to the effects of purchasing, holding or disposing of the Series 2010 Bonds on the tax liabilities of the individual or entity. For example, although Bond Counsel for the Series 2010 Bonds is of the opinion that interest on the Series 2010 Bonds is not a specific item of tax preference for the federal alternative minimum tax, corporations are required to include all tax-exempt interest in determining adjusted current earnings under Section 56(c) of the Code, which may increase the amount of any alternative minimum tax owed. Receipt of tax-exempt interest, ownership or disposition of the Series 2010 Bonds may result in other collateral Federal, state or local tax consequences for certain taxpayers. Such effects may include, without limitation, increasing the federal tax liability of certain foreign corporations subject to the branch profits tax imposed by Section 884 of the Code, increasing the federal tax liability of certain insurance companies, under Section 832 of the Code, increasing the federal tax liability and affecting the status of certain S Corporations subject to Sections 1362 and 1375 of the Code, increasing the federal tax liability of certain individual recipients of Social Security or Railroad Retirement benefits, under Section 86 of the Code and limiting the use of the Earned Income Credit under Section 32 of the Code that might otherwise be available. Ownership of any Series 2010 Bonds may also result in the limitation of interest and certain other deductions for financial institutions and certain other taxpayers, pursuant to Section 265 of the Code. Finally, residence of the holder of Series 2010 Bonds in a state other than Kentucky or being subject to tax in a state other than Kentucky, may result in income or other tax liabilities being imposed by such states or their political subdivisions based on the interest or other income from the Series 2010 Bonds. Original Issue Discount The Series 2010A Bonds maturing February 1, 2025, 2030 and 2040 and Series 2010B Bonds maturing February 1, 2025 (collectively, the Discount Bonds ) are being initially offered and sold to the public at a discount ( OID ) from the amounts payable at maturity thereon. OID is the excess of the stated redemption price of a bond at maturity (the face amount) over the issue price of such bond. The issue price is the initial offering price to the public (other than to bond houses, brokers or similar persons acting in the capacity of underwriters or wholesalers) at which a substantial amount of bonds of the same maturity are sold pursuant to that initial offering. For federal income tax purposes, OID on each bond will accrue over the term of the bond. The amount accrued will be based on a single rate of interest, compounded semiannually (the yield to maturity ) and, during each semi-annual period, the amount will accrue ratably on a daily basis. The OID accrued during the period that an initial purchaser of a Discount Bond at its issue price owns it is added to the purchaser s tax basis for purposes of determining gain or loss at the maturity, redemption, sale or other disposition of that Discount Bond. In practical effect, accrued OID is treated as stated interest is treated, that is, as excludible from gross income for federal income tax purposes. In addition, original issue discount that accrues in each year to an owner of a Discount Bond is included in the calculation of the distribution requirements of certain regulated investment companies and may result in some of the collateral federal income tax consequences discussed above. Consequently, owners of any Discount Bond should be aware that the accrual of original issue discount in each year may result in an alternative minimum tax liability, additional distribution requirements or other collateral federal income tax consequences although the owner of such Discount Bond has not received cash attributable to such original issue discount in such year. 43

50 Bondholders of Discount Bonds should consult their own tax advisors as to the treatment of OID and the tax consequences of the purchase of such Discount Bonds other than at the issue price during the initial public offering and as to the treatment of OID for state tax purposes. Acquisition Premium Acquisition Premium is the excess of the cost of a bond over the stated redemption price of such bond. All Series 2010 Bonds other than the Discount Bonds (collectively, the Premium Bonds ) are being initially offered and sold to the public with Acquisition Premium. For federal income tax purposes, the amount of Acquisition Premium on the Premium Bonds must be amortized and will reduce the bondholder s adjusted basis in that bond. However, no amount of amortized Acquisition Premium on the Premium Bonds may be deducted in determining bondholder s taxable income for federal income tax purposes. The amount of any Acquisition Premium paid on the Premium Bonds that must be amortized during any period will be based on the constant yield method, using the original bondholder s basis in such Premium Bonds and compounding semiannually. This amount is amortized ratably over that semiannual period on a daily basis. Please note that because the Premium Bonds that mature after February 1, 2020 are callable prior to their stated maturity, the required amortization period for the Acquisition Premium will depend on which call dates produces the greatest diminution in the yield to the holder. The Premium Bonds that mature in years on or prior to February 1, 2020 are not callable prior to their stated maturity date, which will determine the amortization period. Bondholders of any Premium Bonds, both original purchasers and any subsequent purchasers, should consult their own tax advisors as to the actual effect of any Acquisition Premium with respect to their own federal income tax situation and as to the treatment of the Acquisition Premium for state tax purposes. CONTINUING DISCLOSURE In accordance with the Securities and Exchange Commission Rule 15c2-12 (the Rule ) and so long as the Series 2010 Bonds are outstanding, the Corporation (the Obligated Person ) has agreed pursuant to a Continuing Disclosure Agreement dated as of March 1, 2010, with the Bond Trustee, as disclosure agent (the Disclosure Agent ), to be delivered on the date of delivery of the Series 2010 Bonds, to cause the following information to be provided through the Disclosure Agent: (i) to the Municipal Securities Rulemaking Board through the Electronic Municipal Market Access System ( EMMA ), the designated Nationally Recognized Municipal Securities Information Repository ( NRMSIR ), audited financial statements generally consistent with the information described in APPENDIX B of this Official Statement and annual operating data generally consistent with the information described in APPENDIX A of this Official Statement under the captions Utilization, Medical Staff, Financial Information and Other Medical Center Information -- Pending Litigation (the annual financial information ); such information shall be provided not later than 150 days after the end of each fiscal year during which the Series 2010 Bonds are outstanding; (ii) to the Municipal Securities Rulemaking Board through EMMA, unaudited financial statements of the Corporation for the relevant fiscal quarter and quarterly operating data consisting of an update of the operating data contained in APPENDIX A of this Official Statement under the heading ORGANIZATION OF THE CORPORATION Medical Center Utilization (the quarterly financial information ); such information to be provided not later than 45 days after the end of each fiscal quarter during which the Series 2010 Bonds are outstanding beginning with the quarter ending June 30, 2010; 44

51 (iii) to the NRMSIR, notice of the occurrence of the following events, if material, with respect to the Series 2010 Bonds: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Principal and interest payment delinquencies; Non-payment related defaults; Unscheduled draws on debt service reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers or their failure to perform; Adverse tax opinions or events affecting the tax-exempt status of the security; Modifications to rights of security holders; Bond calls, except for mandatory scheduled redemptions not otherwise contingent upon the occurrence of an event; Defeasances; Release, substitution or sale of property securing repayment of the securities; and Rating changes; and (iv) to the NRMSIR, notice of a failure (of which the Obligated Person or the Disclosure Agent has knowledge) of an Obligated Person to provide the required annual financial information or quarterly financial information on or before the date specified in its written continuing disclosure undertaking. The Continuing Disclosure Agreement provides Bondholders with certain enforcement rights in the event of a failure by the Obligated Persons to comply with the terms thereof; however, a default under the Continuing Disclosure Agreement does not constitute a default under the Bond Indentures. The Continuing Disclosure Agreement may be amended or terminated under certain circumstances in accordance with the Rule as more fully described therein. Bondholders are advised that the Continuing Disclosure Agreement, copies of which are available at the office of the Bond Trustee, should be read in its entirety for more complete information regarding its contents. No financial or operating data concerning the Issuers is material to any decision to purchase, hold or sell the Series 2010 Bonds, and no such information has been provided herein or will be provided in the future. The Corporation has undertaken all responsibility for any continuing disclosure to the holders of the Series 2010 Bonds as described below, and the Issuers have no liability to such holders or any other person with respect to such disclosures. The Corporation has undertaken to provide disclosure in accordance with the Rule in connection with the issuance of certain of its outstanding bonds. The Corporation has complied with such undertakings. 45

52 LEGAL MATTERS Legal matters incident to the authorization, issuance, validity and sale of the Series 2010 Bonds are subject to the approving opinion of Frost Brown Todd LLC, Bond Counsel. Signed copies of those opinions, dated as of the date of original delivery of the Series 2010 Bonds, substantially in the form set forth in APPENDIX D hereto, will be delivered to the Underwriter at the time of original delivery of the Series 2010 Bonds. Certain legal matters will be passed upon by Sheryl Mahaney, Esq. as Senior Vice President of Legal Services, General Counsel for the Corporation, by Stoll Keenon Ogden PLLC, Louisville, Kentucky as counsel for KEDFA, by Richard Martin as counsel for the City, and by Peck, Shaffer & Williams LLP as counsel for the Underwriter. Issuer KEDFA LITIGATION To the knowledge of KEDFA, there is no pending or threatened litigation seeking to restrain or enjoin the issuance, sale, execution or delivery of the Series 2010A Bonds, or contesting or adversely affecting the validity of the Series 2010A Bonds or any proceeding of KEDFA taken with respect to the issuance or sale thereof, the pledge or application of any moneys or security provided for the payment of the Series 2010A Bonds, or existence or powers of KEDFA, or the authority of KEDFA to enter into any document relating to the Series 2010A Bond Indenture or the Series 2010A Bonds. Issuer City of Ashland To the knowledge of the City, there is no pending or threatened litigation seeking to restrain or enjoin the issuance, sale, execution or delivery of the Series 2010B Bonds, or contesting or adversely affecting the validity of the Series 2010B Bonds or any proceeding of the City taken with respect to the issuance or sale thereof, the pledge or application of any moneys or security provided for the payment of the Series 2010B Bonds, or existence or powers of the City, or the authority of the City to enter into any document relating to the Series 2010B Bond Indenture or the Series 2010B Bonds. Corporation With respect to the Corporation, no litigation or proceedings are pending or, to the knowledge of the Corporation threatened against it except (i) litigation involving claims for hospital professional liability in which the aggregate of the probable recoveries and the estimated costs and expenses of defense, in the opinion of management of the Corporation, are not in excess of the total reserves under the applicable self-insurance program of the Corporation and (ii) litigation involving other types of claims which if adversely determined would not, in the opinion of management of the Corporation, adversely affect the Corporation in a manner material to the properties, business or financial condition of the Corporation as a whole or to the transactions contemplated by this Official Statement. See also BONDHOLDERS RISKS - Medicare Reimbursement of Corporation Operations -- Compliance and Enforcement. 46

53 UNDERWRITING The Series 2010 Bonds are being purchased by RBC Capital Markets Corporation (the Underwriter ). The Underwriter has agreed to purchase $75,000,000 aggregate principal amount of the Series 2010A Bonds at a purchase price of $73,000, (representing the par amount of the Series 2010A Bonds, less $1,318, net original issue discount and less $681, of underwriter s discount) pursuant to a purchase contract with KEDFA and the Corporation. The Underwriter has agreed to purchase $32,615,000 aggregate principal amount of the Series 2010B Bonds at a purchase price of $33,693, (representing the par amount of the Series 2010B Bonds, plus $1,371, net original issue premium and less $293, of underwriter s discount) pursuant to a purchase contract with the City and the Corporation. Each purchase contract provides that the Underwriter will purchase all the related series of Series 2010 Bonds if any of such Series 2010 Bonds are available for purchase and requires the Corporation to indemnify the Underwriter against losses, claims, damages and liabilities arising out of any incorrect or incomplete statements or information contained in this Official Statement pertaining to the Corporation and other matters. The initial public offering prices set forth on the cover page of this Official Statement may be changed by the Underwriter and the Underwriter may offer and sell the Series 2010 Bonds to certain dealers (including dealers depositing Series 2010 Bonds into investment trusts) and others at prices lower than the offering prices set forth on the cover page. FINANCIAL ADVISOR Kaufman, Hall & Associates, Inc., Skokie, Illinois ( Kaufman Hall ), was engaged by the Corporation to provide financial advisory services for the development and implementation of a capital financing plan for the Corporation. Kaufman Hall is a national consulting firm that acts as capital advisor to health care organizations, particularly in the areas of short and long term debt financings, joint ventures and overall capital planning. RATINGS As noted on the cover page of this Official Statement, Standard & Poor s Rating Services, a division of The McGraw-Hill Companies, Inc. ( S&P ) has given the Series 2010A Bonds and the Series 2010B Bonds a rating of A+, Moody s Investors Service, Inc. ( Moody s ) has given the Series 2010A Bonds and the Series 2010B Bonds a rating of A1 and Fitch IBCA, Inc. ( Fitch ) has given the Series 2010A Bonds and the Series 2010B Bonds a rating of A+ on the basis of information supplied to them by the Corporation. No application was made to any other rating agency for the purpose of obtaining an additional rating on the Series 2010 Bonds. The ratings assigned to the Series 2010 Bonds by Moody s were issued on Moody s municipal rating scale. Moody s has announced its plans to recalibrate all U.S. municipal ratings to its global scale beginning in April, 2010 and therefore, upon implementation of the methodology published by Moody s in conjunction with this initiative, all Moody s ratings will be recalibrated to a global scale rating comparable to other credits with a similar risk profile. Moody s has indicated that ratings for private, 501(c)(3), not-for-profit organizations such as hospitals are unlikely to change when recalibrated to the global scale. Any recalibration does not reflect an improvement in credit quality or a change in Moody s credit opinion for rated municipal debt issuers. For further details regarding the recalibration please visit The ratings reflect only the view of S&P, Moody s and Fitch, respectively, and any desired explanation of the significance of such ratings should be obtained from them. Certain information and materials not included in this Official Statement were furnished to S&P, Moody s and Fitch. Generally, 47

54 rating agencies base their rating on the information and materials so furnished and on investigations, studies and assumptions by the rating agencies. There is no assurance that a particular rating will be maintained for any given period of time or that it will not be lowered or withdrawn entirely if, in the judgment of the rating agency originally establishing the rating, circumstances so warrant. Any change in or withdrawal of such ratings could have an adverse effect on the market price of the Series 2010 Bonds. The Corporation expects to furnish the rating agencies with information and materials that they may request. However, the Corporation assumes no obligation to furnish requested information and materials, and may issue debt for which a rating is not requested. Failure to furnish requested information and materials, or the issuance of debt for which a rating is not requested, may result in the suspension or withdrawal of a rating on the Series 2010 Bonds. FINANCIAL STATEMENTS The consolidated financial statements of the Corporation and its subsidiaries as of September 30, 2008 and 2009, and for the years then ended appearing in APPENDIX B to this Official Statement, have been prepared by management and audited by BKD, LLP, independent auditors, as stated in their report which appears in APPENDIX B. The audited consolidated financial statements of the Corporation and its subsidiaries include the accounts of subsidiaries that are not obligated in respect of the Series 2010 Bonds and the outstanding Bonds. MISCELLANEOUS The references herein and in the Appendices hereto to the Bond Indentures, the Master Indenture, the Loan Agreements, the Master Notes, the Continuing Disclosure Agreement and the Tax Agreement are brief outlines of certain provisions thereof. Such outlines do not purport to be complete. For full and complete statements of such provisions, reference is made to the Series 2010 Bonds, the Bond Indentures, the Master Indenture, the Loan Agreements, the Master Notes, the Continuing Disclosure Agreement and the Tax Agreement. All statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Obligated Group or the Issuers and the purchasers or owners of any of the Series 2010 Bonds. Pursuant to each purchase contract under which the related Issuer has agreed to sell and the Underwriter has agreed to purchase the related series of Series 2010 Bonds, the Corporation has agreed to indemnify such Issuer and the Underwriter against certain liabilities, including liabilities under the federal securities laws. The execution and delivery of this Official Statement have been duly authorized by the Issuers. Neither Issuer has, however, prepared or made any independent investigation of the information contained in the Official Statement except the information relating to it under the captions THE ISSUER and LITIGATION. The cover page and the attached Appendices are integral parts of this Official Statement and should be read together with all of the foregoing statements. [This space intentionally left blank] 48

55 The execution and delivery of this Official Statement has been duly authorized by the Issuers and approved by the Corporation. KENTUCKY ECONOMIC DEVELOPMENT FINANCE AUTHORITY By: /s/ Jean R. Hale Title: Chairman CITY OF ASHLAND, KENTUCKY By: /s/ Thomas E. Kelley Title: Mayor THIS OFFICIAL STATEMENT IS APPROVED: ASHLAND HOSPITAL CORPORATION d/b/a KING S DAUGHTERS MEDICAL CENTER By: /s/ Paul L. McDowell Senior Vice President of Finance/ Chief Financial Officer 49

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57 APPENDIX A ASHLAND HOSPITAL CORPORATION d/b/a KING S DAUGHTERS MEDICAL CENTER

58 TABLE OF CONTENTS Page ORGANIZATION OF THE CORPORATION... A-1 The Corporation... A-1 History & Current Services of the Medical Center... A-1 Medical Center Utilization... A-3 Related Corporations... A-4 GOVERNANCE AND MANAGEMENT... A-5 Board of Directors and Officers of the Corporation... A-5 Management of King s Daughters Medical Center... A-6 ACCREDITATIONS AND MEMBERSHIPS... A-8 HONORS AND AWARDS... A-9 EDUCATION PROGRAMS AND AFFILIATIONS... A-9 MEDICAL STAFF... A-9 Medical Center... A-9 Top Ten Medical Center Admitters...A-11 Medical Center Physician Recruitment... A-11 Medical Center Employees... A-12 SERVICE AREA... A-12 The City... A-12 Patient Origin and Service Areas... A-13 Population... A-16 Population by Age... A-16 Major Employers... A-17 Employment Data... A-17 Competition... A-18 FINANCIAL INFORMATION... A-19 Sources of Revenue... A-19 Summary of Condensed Consolidated Revenues and Expenses... A-20 MANAGEMENT S DISCUSSION OF RECENT FINANCIAL PERFORMANCE... A-21 General... A-21 Trends in Liquidity and Investment Policy... A-24 Projected Capital Expenditures... A-25 OTHER MEDICAL CENTER INFORMATION... A-26 Insurance... A-26 Retirement Benefits... A-26 Pending Litigation... A-27

59 ORGANIZATION OF THE CORPORATION The Corporation Ashland Hospital Corporation (the Corporation ) was incorporated in 1941 for the purpose of owning and operating King s Daughters Medical Center (the Medical Center ). Since then it has expanded its mission to include other healthcare services, including skilled nursing, physician practices, and medical transportation. The Corporation is a not for profit, non-stock Kentucky corporation and has been determined by the Internal Revenue Service to be an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code ) and exempt from taxation under Section 501(a) of the Code. The Corporation operates on an October 1 to September 30 fiscal year basis. History & Current Services of the Medical Center King s Daughters Medical Center was founded in 1899 as the King s Daughters Hospital. The Medical Center commenced operations as an emergency hospital in three rooms on the second floor of a building in Ashland, Kentucky. In 1917, the Medical Center moved to its present location, which consists of approximately two square city blocks in Ashland, Kentucky. The Medical Center has undertaken a number of expansion projects during its existence and is currently a 465 staffed-bed, acute care, regional referral center. Its primary, secondary, and tertiary service areas in Kentucky, Ohio, and West Virginia have a population of approximately 725,000 people. The Medical Center is the largest hospital in its market area and is a growing tertiary regional referral center for certain medical and surgical specialties, notably for heart and vascular procedures. The Medical Center continues to focus on its growth as a regional referral center, with various access points throughout its primary and secondary service areas, including 16 family care center locations, an urgent care center, 14 cardiology outreach locations, air ambulatory services, and medical transport services. The Medical Center s Heart and Vascular Center was opened in 2006 and continues to be very successful. In 2009, the Medical Center finished the fourth floor of the Heart & Vascular Center, which provided the Intermediate Unit and Chest Pain Center. The Medical Center campus is composed of a multi-storied main facility, three medical office buildings, an Outpatient Surgery Center, a Heart & Vascular Center, an Outpatient Imaging Center, an Outpatient Services/Physical Therapy building, a Hospitality House, a Child Development Center, an administration building, and two parking garages. A partial list of the facilities, equipment and programs at the Medical Center includes: a 34-bed intensive care unit; a Heart & Vascular Center including catheterization and vascular laboratories, 56 preand post-procedure beds, 26-bed chest pain unit, and three cardiac nursing units with 74 beds; a 24-bed dedicated cancer unit with specialized nursing care; a 13-bed Level III neonatal intensive care unit; a 27-bed modern psychiatric unit with open and closed subsections and complete occupational therapy and psychiatric social work services; a remodeled 45-bed emergency room with 24-hour staffing by board certified emergency department physicians; a same-day surgery program, including an Outpatient Surgery Center with six operating rooms; a 10-bed skilled nursing unit; A - 1

60 ten major operating rooms, including specialized orthopedic, microsurgery, and neurosurgery, as well as 5 endoscopy and 3 cystoscopy suites; four cardiac surgery operating room suites, with a dedicated Cardiovascular Surgical ICU recovery unit; a 27-bed rehabilitation unit offering comprehensive treatment for stroke victims and for victims of brain and accident-related injuries; an 18,000 square foot Outpatient Imaging Center used for outpatient imaging procedures; and a rooftop helicopter landing pad. The Medical Center offers advanced technology and equipment, including: a DaVinci surgical robot for urological and gynecological procedures; seven heart catheterization laboratories performing drug eluting stent placements and electrophysiology procedures, and four vascular laboratories; an open-heart surgery program including transmyocardial revascularization, off pump coronary arterial bypass graft and endovascular vein harvesting; seven magnetic resonance imaging machines including cardiac MRI capabilities and a 3- Tesla MRI; three CT scanners including a 64-slice scanner and a 256-slice scanner with advanced cardiac capabilities; echocardiography; electromyography; PET/CT scanner; pulmonary function laboratory; digital subtraction angiography; and digital mammography units. The Medical Center also operates a fully-equipped College of American Pathologists ( CAP )- accredited laboratory capable of complete clinical and pathology services. The laboratory includes an outpatient division (the Ashland Med Lab) which provides laboratory services to medical offices through a courier service. Specialties represented at the Medical Center include: orthopedics urology gastroenterology neurology family practice cardiology psychiatry pediatrics pathology general surgery dermatology neurosurgery vascular and endovascular- surgery oral surgery cardiothoracic surgery otorhinolaryngology neonatology pulmonary medicine oncology/hematology obstetrics anesthesiology radiation oncology gynecology nephrology endocrinology ophthalmology occupational medicine radiology internal medicine pediatric dentistry rheumatology surgical weight loss allergy & immunology dentistry emergency medicine infectious diseases physical medicine plastic surgery teleradiology hyperbaric oxygen chambers colorectal surgery A - 2

61 The Medical Center instituted an outreach program in 1995, which currently includes sixteen primary and specialty clinics ( Family Care Centers ) in the service area. Since 2005, clinic visits have steadily increased. Fiscal Years Ended September (1) 2006 (2) 2007 (3) 2008 (3) 2009 (4) Clinic Visits 131, , , , ,516 (1) Includes 10 Family Care Centers. (2) Includes 11 Family Care Centers. (3) Includes 14 Family Care Centers (4) Includes 16 Family Care Centers. The set up and staffed beds in the Medical Center as of December 31, 2009 total 465, comprised as set forth below: Unit Number of Beds Medical/Surgical 303 Intensive/Coronary Care 42 Obstetrics 19 Pediatrics 24 Psychiatry 27 Rehabilitation 27 Skilled Nursing 10 Neonatal 13 TOTAL 465 Medical Center Utilization The following table presents the Medical Center s key utilization trends for the fiscal years ending September 30, 2007, 2008 and 2009: Medical Center Historical Utilization Trends Licensed Beds (1) Staffed Beds Admissions (2) 25,664 25,886 25,780 Observation Days 10,027 14,233 15,744 Patient Days 113, , ,035 Average Length of Stay (Days) Staffed Occupancy (%) 78.4% 79.7% 65.8% Emergency Room Visits 74,409 74,879 75,111 Same Day Surgery 26,058 26,082 29,705 Diagnostic Cardiac Caths 6,836 7,594 7,736 MRI Procedures 13,274 15,101 16,385 CT Scans 44,426 50,047 53,805 Medicare Case Mix Index (1) Includes 10 skilled nursing beds. (2) Includes newborns. Source: Medical Center records. A - 3

62 Related Corporations Ashland Nursing Home Corporation. Ashland Nursing Home Corporation d/b/a Kingsbrook Lifecare Center ( Kingsbrook ) is a not for profit, non-stock Kentucky corporation established in 2000, the sole member of which is the Corporation. Kingsbrook has been determined by the Internal Revenue Service to be an organization described in Section 501(c)(3) of the Code and exempt from taxation under Section 501(a) of the Code. The facility is located at 2500 State Route 5 in western Boyd County, approximately five miles from the Medical Center and consists of a 151-bed skilled nursing facility of approximately 80,000 square feet. The gross receipts of Kingsbrook are not pledged as security for the Series 2010 Bonds. Ashland Medical Properties, Inc. Ashland Medical Properties, Inc. ( AMP ), a wholly-owned subsidiary of the Corporation, is a for-profit Kentucky corporation subject to federal and state taxation that currently owns several condominium units in the Ashland Medical Arts Building. The Ashland Medical Arts Building is located on the campus of the Medical Center and is currently occupied by over two dozen physicians. The gross receipts of AMP are not pledged as security for the Series 2010 Bonds. King s Daughters Health Foundation, Inc. King s Daughters Health Foundation, Inc. (the Foundation ) is a non-stock, not for profit Kentucky corporation established in 1983 exclusively for the benefit of the Corporation and any related not for profit health care institution in the Ashland, Kentucky area. The Foundation by-laws provide that gifts may be received at the absolute discretion of the Board of Directors of the Foundation on a restricted or unrestricted basis. Restricted funds are used only for the purposes stipulated by the donors of such funds. Income and principal of unrestricted funds may be paid to or applied for the benefit of the Medical Center from time to time and upon such conditions as the Foundation Board may deem appropriate. Income of unrestricted funds may be used for any purpose the Foundation Board deems appropriate and is primarily utilized for acquisition of new equipment, organizing new medical programs, research and education. The gross receipts of the Foundation are not pledged as security for the Series 2010 Bonds, although its financial statements are consolidated with those of the Corporation. Child Development Center Corporation. Child Development Center Corporation ( CDCC ), a wholly-owned subsidiary of the Corporation, is a non-profit, non-stock Kentucky corporation and has been determined by the Internal Revenue Service to be an organization described in Section 501(c)(3) of the Code and exempt from taxation under Sections 501(a) of the Code. CDCC owns and operates a child care facility available to employees of the corporation. CDCC currently has approximately 100 children enrolled at the center. The gross receipts of CDCC are not pledged as security for the Series 2010 Bonds. Kentucky Heart Foundation. Kentucky Heart Foundation ( KHF ), a wholly-owned subsidiary of the Corporation, is a non-stock, non-profit Kentucky corporation established in KHF brings national cardiovascular research studies to the region in order to improve the life expectancy of people affected by cardiovascular disease and is actively involved in various clinical trials. The gross receipts of KHF are not pledged as security for the Series 2010 Bonds. Kentucky Heart Institute. Kentucky Heart Institute ( KHI ) is a non-profit, non-stock whollyowned subsidiary of the Corporation established in KHI operates two cardiology practices in fourteen locations employing a total of 19 cardiologists in the Corporation s service area. KHI also employs three cardiothoracic surgeons. The gross receipts of KHI are not pledged as security for the Series 2010 Bonds. King s Daughters Medical Transport. King s Daughters Medical Transport ( KDMT ), a wholly-owned subsidiary of the corporation, is a non-profit, non-stock Kentucky corporation established in June KDMT provides ambulance services in Boyd and Greenup Counties in Kentucky and A - 4

63 Lawrence and Scioto Counties in Ohio. Operating an ambulance service allows the Medical Center to bring its nationally recognized clinical quality to patients at the point of transport. The gross receipts of KDMT are not pledged as security for the Series 2010 Bonds. King s Daughters Medical Specialties. King s Daughters Medical Specialties ( KDMS ), a wholly-owned subsidiary of the corporation, is a non-profit, non-stock Kentucky corporation established in December KDMS currently operates a urology physician practice with four urologists; a neurosurgical specialists practice with two neurosurgeons; a colorectal surgeon; and an ear nose and throat specialist. The gross receipts of KDMS are not pledged as security for the Series 2010 Bonds. GOVERNANCE AND MANAGEMENT Board of Directors and Officers of the Corporation The charter of the Corporation provides for a 25-member Board of Incorporators which holds annual meetings to elect the Corporation s Board of Directors, the governing body of the Corporation, and to approve any sale, exchange, lease, mortgage or other disposal of real estate owned by the Corporation. Currently, the Board of Directors consists of 16 voting members. The Articles of Incorporation permit the number of directors to vary from 9 to 17. The President of the Medical Staff and the President of the Corporation serve as ex-officio voting members of the Board of Directors. With the exception of one voting member, elected members of the Board of Directors may serve no more than four consecutive three-year terms but may be reelected after having been off the Board of Directors for at least one year. The Board of Directors elects its own officers for one-year terms. The current members and officers of the Board of Directors and their occupations are shown below. King s Daughters Medical Center Board of Directors Member Professional Affiliation Years on Board Expiration of Term (December) Jones, David, Chairman (1) Retired, National City Bank of Kentucky Addington, Stephen (1) Appalachian Fuels Blair, Jack (1) Retired, Lawrence Federal Savings Bank Blanton, Ken Boyd County Ford Borders, Charlie KY Public Service Commissioner Boykin, Mayola, M.D. President, Medical Staff, KDMC Ex Officio Ex Officio 2011 Burnette, Thomas L. (1) Ashland Office Supply, Inc Cantrell, Jim (1) Catlettsburg Refining, LLC Cassidy, Dan Berndt & Murfin Insurance Agency Hammonds, Donald Tri-State Nephrology Assoc Hillman, Tracy Griffith, Delaney, Hillman & Co Jackson, Fred L. (1) President/CEO, KDMC Ex Officio Ex Officio Light, Michael D. Light s Enterprises & Fencing Mecca, Raymond, M.D. (1) Mecca Eye Clinic Rice, Lynn Super Quik, Inc Stewart, John Big Sandy Furniture, Inc (1) Executive Committee Member. The Standing Committees of the Board of Directors consist of the Executive Committee, the Planning and Finance Committee, the Personnel and Compensation Committee, the Quality Committee, and the Audit Committee. In addition, the Board of Directors or the Chairman may establish other standing or special committees as appropriate to exercise a designated portion of the authority of the Board of Directors when it is not in session. The Executive Committee consists of the Board Chair, the Vice Chair, if any, the Chief Executive Officer and the Chair of the Planning and Finance, Personnel and Compensation, and Quality Committees. The members of the remaining Standing Committees are A - 5

64 selected by the Chair of the Board for approval by the Board. The Chair of the Board of Directors is an ex-officio voting member of all Board and management committees. Management of King s Daughters Medical Center The operating officers of the Medical Center, who are responsible for the Medical Center s dayto-day operations, are listed below: NAME Fred L. Jackson Paul L. McDowell Mark Detherage, M.D. Phil Fioret, M.D. Larry Higgins Robert T. Lucas Sheryl S. Mahaney Kristie Michele Whitlatch Cathy Cooper-Weidner RobRoy Walters Elaine Corbitt Susan Graham Howard Harrison Scott Hill Jarrod Johnson Sara Marks Andrea McKay Ramona K. Thompson POSITION President and Chief Executive Officer Senior Vice President of Finance/Chief Financial Officer Senior Vice President of Quality and Chief Quality Officer Senior Vice President of Medical Affairs and Chief Medical Officer Senior Vice President of Organizational Effectiveness and Chief Leadership Officer Senior Vice President of Operations Senior Vice President of Legal Services, General Counsel Senior Vice President of Service Line Development Vice President, Information Services and Chief Information Officer Vice President of Finance Vice President of Marketing and Community Services Vice President of Service Excellence/Organization Development Vice President of Facilities Vice President of Safety/Security/Transportation Vice President of Clinical Services Vice President of the Kentucky Heart Institute Vice President of Ambulatory Services Vice President of Patient Services Selected biographies are provided below: Fred L. Jackson, has served as President and Chief Executive Officer of the Medical Center since July Mr. Jackson previously was President, Central Region and Senior Vice President, Operations, at Meridia Health Systems, a five-hospital, 1,219-bed health delivery system based in Mayfield, Ohio. Prior to that he was President/Chief Operating Officer of Meridia Euclid Hospital, Euclid, Ohio, a 371-bed community hospital within Meridia Health Systems. He had served two years prior as Vice President of Operations at that facility. Mr. Jackson is a Fellow of the American College of Healthcare Executives. He is a Board Member of Kingsbrook Lifecare Center, the King s Daughters Health Foundation, Kentucky Heart Institute, Kentucky Heart Foundation, King s Daughters Medical Specialties, King s Daughters Medical Transport, and the Child Development Center. He holds a B.S. in Microbiology and Chemistry from The Ohio State University and an M.B.A. from the University of Alabama at Birmingham. Paul L. McDowell, serves as Senior Vice President of Finance/Chief Financial Officer. Mr. McDowell joined the Medical Center as Vice President of Finance/Chief Financial Officer in October Mr. McDowell previously served as Chief Financial Officer for Midwest Regional Medical Center, Midwest City, Oklahoma (1998 to 2000) and Lake Norman Regional Medical Center, Mooresville, North Carolina ( ), hospitals owned and operated by the for-profit corporation Health Management Associates, Inc. Prior to that he held various finance positions within Promina Health System, Atlanta, Georgia from 1990 to He also worked in Public Accounting for Ernst & Young (1989 to 1990) and Pannell Kerr and Forster (1987 to 1989). Mr. McDowell received his B.B.A. in accounting in 1986 from Georgia Southern University, and his Masters Degree in Business Administration from Kennesaw State A - 6

65 University in Mr. McDowell is a member of the Health Care Financial Management Association and American College of Healthcare Executives, and is a member of the Board of Directors of the King s Daughters Health Foundation, Kingsbrook Lifecare Center, Kentucky Heart Foundation, Kentucky Heart Institute, King s Daughters Medical Transport, King s Daughters Medical Specialties, and the Child Development Center. Mark Detherage, M.D., serves as Senior Vice President of Quality and Chief Quality Officer. Dr. Detherage joined the Medical Center in 2001 as a Family Physician at the Flatwoods Family Care Center and became Medical Director for the Family Care Centers in November of In March 2007, Dr. Detherage became Chief Quality Officer and was appointed to Vice President of Quality in October Dr. Detherage received his M.D. from the University of Louisville School of Medicine and is Board Certified by the American Board of Family Medicine. He is a member of the American Academy of Family Physicians, the Kentucky Academy of Family Physicians and the American College of Physician Executives. Phil Fioret, M.D., serves as Senior Vice President of Medical Affairs and Chief Medical Officer. Dr. Fioret served as Vice President of Medical Affairs since January Dr. Fioret also has an interest in geriatrics and is the Medical Director for two local nursing homes. Dr. Fioret previously worked for Our Lady of Bellefonte Hospital as Medical Director of their Outreach Centers. Prior to that, Dr. Fioret had been a physician at the King s Daughters Family Care Center in Grayson, Kentucky. Dr. Fioret has also been a private practitioner in Tecumseh, Ontario, Canada, and an industrial medicine consultant to local industries in the Windsor area. He also served as the medical officer for health at the Windsor Essex County health unit in Windsor, Ontario. Dr. Fioret received his medical degree from the University of Toronto. He is board certified both in Family Practice and in Community Medicine and has a Masters of Health Sciences degree. Larry Higgins, serves as Senior Vice President of Organizational Effectiveness and Chief Leadership Officer. Mr. Higgins joined the Medical Center in January 1999 as Vice President of Learning, Human Resources, and Support Services. He previously held the position of Corporate Director of Human Resources and Education for 10 years at Firelands Regional Health Systems, Sandusky, Ohio, which included a 187-bed acute care hospital, 49-bed skilled nursing facility and a sixcounty behavioral health business unit. Prior to that he was Director of Personnel at Cedar Point Theme Park and Resort, Sandusky, Ohio. Mr. Higgins earned a Bachelor s Degree in Business Administration from Ashland University, and a Master of Organization Development from Bowling Green State University, Bowling Green, Ohio. Mr. Higgins received professional certification from and is a member of the Society for Healthcare Human Resource Administration. He is a member of the American College of Healthcare Executives. Robert T. Lucas, serves as Senior Vice President of Operations. Mr. Lucas joined the organization in August of 1995 as the Director of Pharmacy Services. He then became the Director of Business Development in June 1998, and was appointed to Vice President of Operations in January Earlier in his career, Mr. Lucas served as Assistant Administrator of the 106-bed Wythe County Community Hospital (Wytheville, Virginia), as Assistant Administrator of the 260-bed HCA Raleigh General Hospital (Beckley, West Virginia), and as Administrator/CEO at the 90-bed Plateau Medical Center (Oak Hill, West Virginia). Mr. Lucas is a Fellow of the American College of Healthcare Executives (FACHE). He holds a Bachelor s Degree in Pharmacy and a Master s Degree in Health Administration from the University of Pittsburgh. Sheryl S. Mahaney, serves as Senior Vice President of Legal Services, General Counsel at the Medical Center. Ms. Mahaney joined the Medical Center in January of 1997 as Director of Risk Management and Privacy Officer, and later Vice President and General Counsel. Ms. Mahaney was previously with the law firm of Huddleston, Bolen, Beatty, Porter and Copen in Huntington, West Virginia ( ) and with the law firm of Rodey, Dickason, Sloan, Akin and Robb in Albuquerque, A - 7

66 New Mexico ( ). Ms. Mahaney received her B.A. from the University of Michigan, Ann Arbor, Michigan, and received her J.D. in 1990 from Washington & Lee School of Law in Lexington, Virginia. Ms. Mahaney is a member of the American, Kentucky and New Mexico Bar Associations, and a member of the National Health Lawyers Association. Kristie Michele Whitlatch serves as Senior Vice President of Service Line Development. Mrs. Whitlatch previously was appointed Vice President, Heart and Vascular Center in She previously served as Vice President, Clinical Services commencing 2001 and as Director of Quality Management commencing Prior to that position, Mrs. Whitlatch s experience at the Medical Center included serving as nurse manager of the Neuro-pulmonary unit and staff nurse in the Intensive Care Unit and Cardiac Stepdown unit. Prior to joining the Medical Center, Mrs. Whitlatch was a staff nurse at Central Baptist Hospital, Lexington, Kentucky. Mrs. Whitlatch earned an Associate Degree in Nursing at Ashland Community College, Bachelors Degree in Nursing at Bellarmine College, and Masters Degree at the University of Phoenix. Mrs. Whitlatch is certified in Healthcare Quality and Clinical Case Management. Cathy Cooper-Weidner became Vice President, Information Services and Chief Information Officer in January Ms. Cooper-Weidner previously served as chief information officer for Memorial Health System, in South Bend, Indiana, for Oakwood Health System, in Dearborn, Michigan, for Cincinnati Children's Hospital, in Cincinnati, Ohio and for Clarion Health Partners in Indianapolis, Indiana. She received a Bachelor of Science in chemistry and a Masters of Science in information technology from the University of Kentucky at Lexington, Kentucky. RobRoy Walters serves as Vice President of Finance. Mr. Walters joined the Medical Center in 2006 and served as Financial Operations Director and Revenue Cycle Director. Prior to joining the Medical Center, Mr. Walters held multiple executive officer positions within the financial services industry. He served as Chief Financial Officer and Executive Vice President for Lawrence Financial Holdings, Inc. ( ); President and Chief Executive Officer of Peoples Bank FSB ( ); Controller of Peoples Bancorp Inc. ( ); and various management positions within the finance area of The Peoples Bank and Trust Company ( ). Prior to his experience in the financial services industry, he held finance positions with Pennzoil Products Company ( ) and Borg- Warner Chemicals ( ). He holds a Bachelor s of Business Administration in accounting from Glenville State College. ACCREDITATIONS AND MEMBERSHIPS The Corporation is licensed to operate a 465-bed hospital by the Cabinet for Human Resources, Commonwealth of Kentucky. The Medical Center is accredited by the Joint Commission on Accreditation of Health Care Organizations ( JCAHO ); its current accreditation expires on February 28, The Corporation is a member of the Kentucky Hospital Association and Bluegrass Hospital District of the Kentucky Hospital Association. The Corporation is also certified for participation in the Health Insurance for the Aged Program (Medicare) administered by the United States Department of Health and Human Services and in the Medicaid program administered jointly by the Commonwealth of Kentucky and the federal government. See BONDHOLDERS RISKS in this Official Statement for a discussion of the Medicare and Medicaid programs. Other notable accreditations of the Medical Center include accreditations from the Healthcare Accreditation Colloquium, American Association of Cardiovascular and Pulmonary Rehabilitation, American Association of Blood Banks, American College of Radiology, American College of Surgeons, American Diabetes Association, College of American Pathology, Commission on Accreditation of Rehabilitation Facilities, Joint Review Committee on Education in Radiologic Technology, Mammography Quality Standards Act (FDA Program), Society of Chest Pain Centers, American Society for Bariatric Surgery and American Academy of Pain Management. A - 8

67 HONORS AND AWARDS As a result of the Medical Center s long-term commitment to high quality healthcare and team member retention, the Medical Center has received significant recognition on a national and state level in the following areas: HealthGrades, 5-Star Cardiac Surgery, Top 5% of Cardiac Surgery Programs in the Nation - Cardiac surgery, Coronary bypass surgery, Valve replacement surgery and heart failure, Thomson Reuters, Nation s 100 Top Hospitals, Thomson Reuters, Nation s 100 Top Hospitals for Cardiovascular Care, Fortune s 100 Best Companies to Work For, #50 in 2010, #45 in 2009 and #63 in 2008 Modern Healthcare Top 100 Employer, 2008 and 2009 Best Places to Work in Kentucky, Joint Commission s Gold Seal of Approval, EDUCATION PROGRAMS AND AFFILIATIONS The Corporation is affiliated with Ashland Community and Technical College, Shawnee State University, Marshall University, Morehead State University, Rio Grande University, Eastern Kentucky University, Kentucky Christian University, Ball State, Bellarmine, Mountain State, and Ohio University Southern to provide clinical experiences for student registered nurses. The Corporation participates in the Ohio Board of Regents Planning Grant to pilot an LPN to RN collaborative program with Collins Career Center and Ohio University Southern. An active affiliation arrangement also exists between the Corporation and the Ashland State Vocational School and Collins Career Center for the training of licensed practical nurses. Affiliations are also maintained for training in other health programs including EMT, physical therapy, occupational therapy, respiratory therapy, and physician assistant. The Corporation provides financial support, which includes student scholarships, tuition reimbursement, stipend dollars, and faculty support to Ashland Community and Technical College, Kentucky Christian University, Ohio University (Southern Campus), Morehead State University, and Marshall University. The Corporation also operates a School of Radiologic Technology approved by the American Medical Association. To provide continuing education for its nursing personnel, the Corporation maintains an active in-service education program certified by the Kentucky Board of Nursing. MEDICAL STAFF Medical Center As of December 31, 2009, there were 268 physicians and dentists on the Medical Center s medical staff, compared to 235 as of December 31, The Medical Center employed 88 physicians as of December 31, 2009 compared to 41 as of December 31, The following table shows, as of December 31, 2009, the number of physicians and dentists classified as active or provisional, or associate or courtesy staff members, and also the number of physicians with respect to each specialty who are Board Certified. Active staff members are those members of the medical staff who regularly admit patients to (or otherwise actively practice at) the Medical Center and who may exercise approved clinical privileges and vote and hold office in the medical staff organization. Provisional members represent new medical staff members serving an initial one-year appointment to the staff who may not vote or hold office on the medical staff during such time. Courtesy members include those physicians who use the Medical Center services infrequently and may admit no more than twelve patients per year. Courtesy staff members may not vote or hold office in the medical staff organization. Of the 244 active and provisional staff members, 207 (85%) are Board Certified. This is in comparison to 214 active and provisional staff members at December 31, 2005, of whom 86% were Board Certified. A - 9

68 Specialty King s Daughters Medical Center Average Age By Primary Specialty Active and Provisional Staff Courtesy and Associate Staff Total Staff Total Board Certified Staff Average Age Total Staff Allergy & Immunology Anesthesiology Cardiology Cardiothoracic Surgery Denistry Dermatology Emergency Medicine Endocrinology Family Practice Gastroenterology General Surgery Gynecology Hematology/Oncology Internal Medicine Infectious Diseases Neonatology Nephrology Neurology Neurosurgery Obstetrics & Gynecology Occupational Medicine Ophthalmology Oral & Maxillo Surgery Orthopedics Otolaryngology Pathology Pediatrics Pediatrics Dentistry Physical Medicine Plastic Surgery Psychiatry Pulmonary Medicine Radiation Oncology Radiology Rheumatology Urology Vascular/Endovas. Surgery Total Source: Medical Center records as of December 31, A - 10

69 The following table shows the distribution of admissions and the percent of calendar-year admissions by physician age group for the calendar year ended December 31, King s Daughters Medical Center Admissions by Physician Age Group Age Group Number of Admissions Percent of Total < % , , , , Over Total 25, % Top Ten Medical Center Admitters The Medical Center s ten most active physicians, whose average age was 49.9, accounted for 26.4% of total admissions for the calendar year ended December 31, Shown below is a list of number of admissions for these physicians, along with their specialties and ages. Specialty King s Daughters Medical Center Top Ten Admitting Physicians Number of Admissions Percent of Admissions Age Cardiology 1, % 62 Family Practice Internal Medicine Obstetrics & Gynecology Family Practice Family Practice Internal Medicine Cardiology Psychiatry Family Practice Total 6, % Total Admissions 25, % Medical Center Physician Recruitment In the area of physician recruitment, since 2005, coordinated and active efforts by the Medical Center s management and medical staff resulted in 33 net additions to the active and provisional medical staff in thirty specialty areas. Management and medical staff continue their recruiting efforts to ensure that the Medical Center has an adequate supply of physicians to meet projected community needs. The Medical Center employs four full-time physician recruiters and three full-time physician liaisons to assist with recruitment efforts. A - 11

70 Medical Center Employees The Medical Center currently employs, in the aggregate, approximately 3,745 full-time equivalent employees. Included in this group are registered nurses, licensed practical nurses, pharmacists, laboratory technicians, dieticians, and other support personnel. Approximately 598 service and maintenance employees are covered under a collective bargaining agreement between the Corporation and District 1199 SEIU WV/KY/OH, The Health Care and Social Services Union. That contract expires in November 2010 and negotiations to renew the contract are expected to begin in September The Corporation enjoys positive relations with its employees and does not foresee any difficulties arising during negotiations. As of December 31, 2009, the Medical Center employs 1,849 nursing personnel as follows: 1,347 registered nurses, 242 licensed practical nurses, and 260 other nursing personnel. There are presently 22 nursing vacancies. The Medical Center s relationships with Ashland Community and Technical College, Shawnee State University, Kentucky Christian University, Marshall University, Morehead State University, Rio Grande University, Eastern Kentucky University, Ball State, Bellarmine, Mountain State, and Ohio University Southern are an important recruitment resource for nursing personnel, and the Medical Center has not experienced any significant problem with recruiting competent nursing staff. The City SERVICE AREA The City of Ashland, Kentucky ( Ashland ) is located in Boyd County, Kentucky, approximately 120 miles east of Lexington, Kentucky, and 20 miles northwest of Huntington, West Virginia. Ashland, situated on the Ohio River, is eight miles north of Interstate 64 and is intersected by U.S. Highways 23 and 60. Ashland forms one link of a tri-state hub which includes Huntington, West Virginia, and Ironton, Ohio, and is 65 miles west of Charleston, West Virginia; 120 miles south of Columbus, Ohio; 145 miles east of Cincinnati, Ohio; 185 miles east of Louisville, Kentucky and 280 miles north of Knoxville, Tennessee. The U.S. Census estimates that the 2008 population of Ashland was 21,346, compared to a 2000 census population of 21,981. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] A - 12

71 Patient Origin and Service Areas The following table summarizes Medical Center patient origin data for the fiscal years ending September 30, 2007, 2008 and This analysis indicates that the Medical Center s primary service area encompasses Boyd, Greenup, and Carter counties in Kentucky in addition to Lawrence County and Scioto County in Ohio, and that its secondary service area covers the additional Kentucky counties of Martin, Lawrence, Johnson and Floyd. The primary and secondary service areas of the Medical Center are hereinafter collectively referred to as the service area. Although, as the following charts demonstrate, population in the service area has been stable, total patient discharges continue to increase. King s Daughters Medical Center Patient Origin FY 2007 FY 2008 FY 2009 Number of Patient Percent Discharges of Total Number of Patient Percent of Discharges Total Number of Patient Percent of Discharges Total Primary Service Area Boyd County, KY 8, % 7, % 7, % Carter County, KY 2, , , Greenup County, KY 3, , , Lawrence County, OH 4, , , Scioto County, OH 1, % 1, % 1, % Total Primary Service Area 19, % 20, % 19, % Secondary Service Area Lawrence County, KY 1, % 1, % 1, % Johnson County, KY Martin County, KY Floyd County, KY % % % Total Secondary Service Area 3, % 3, % 3, % Total Other Areas 2, % 2, % 2, % Total All Areas 25,590 25,866 25,780 Source: Medical Center Records. A - 13

72 Below is a map of the Medical Center s service area: Map of Service Area Pike Jackson Ohio Scioto Gallia Mason Lawrence Lewis Greenup Cabell Carter Boyd Kentucky Rowan Elliott Lawrence Wayne West Virginia Primary Secondary Tertiary King s Daughters Medical Center Magoffin Johnson Floyd Martin Pike A - 14

73 Below is a map of the Medical Center s service area showing the Ohio River and major highways: A - 15