SUPPLEMENT DATED JULY 23, 2007 TO THE OFFICIAL STATEMENT DATED MAY 17, 2007, AS SUPPLEMENTED ON JUNE 21, 2007 WITH RESPECT TO

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1 SUPPLEMENT DATED JULY 23, 2007 TO THE OFFICIAL STATEMENT DATED MAY 17, 2007, AS SUPPLEMENTED ON JUNE 21, 2007 WITH RESPECT TO $752,370,000 ALLEGHENY COUNTY HOSPITAL DEVELOPMENT AUTHORITY HEALTH SYSTEM REVENUE BONDS (WEST PENN ALLEGHENY HEALTH SYSTEM), SERIES 2007A CUSIP Numbers: 01728AF92, 01728AG26, 01728AG34, 01728AG42, 01728AG59, 01728AG67, 01728AG75 and 01728AG83. As described below, one change has occurred in the senior management team of the Parent and one change has occurred in the senior management of the Hospitals since the Supplement to the Official Statement dated June 21, On July 10, 2007, West Penn Allegheny Health System, Inc. (the "Corporation") announced the resignation of Jerry J. Fedele as President and Chief Executive Officer of the Corporation, effective July 13, Mr. Fedele will remain employed by the Corporation in a consulting role until his permanent successor is selected (which is expected to occur following a national search). In the meantime, Mr. Fedele s duties as Chief Executive Officer will be assumed by W. Keith Smith, currently Chairman of the Board of Allegheny General Hospital and a member of the Board of the Corporation. Mr. Smith formerly was Senior Vice Chairman of Mellon Financial Corporation, now The Bank of New York Mellon Corporation. Mr. Smith has been a member of the board of directors of Allegheny General Hospital since 1999 and formerly spent over five years on the board of directors of UPMC St. Margaret. A press release from the System stated that Mr. Fedele s resignation resulted from differences between Mr. Fedele and the System Board "regarding the strategic direction of the organization." During an investor call on July 12, the further integration of the System, including the integration of tertiary services, was identified as a significant element of such strategic direction. 2. On July 18, 2007, the Corporation announced the resignation of Mark Palmer, President and Chief Executive Officer of The Western Pennsylvania Hospital ( West Penn ), effective August 1, Edward Klaman, who formerly served as the Chief Operating Officer of West Penn, has been appointed President and Chief Executive Officer, with his service to commence August 1, 2007.

2 SUPPLEMENT DATED JUNE 21, 2007 TO THE OFFICIAL STATEMENT DATED MAY 17, 2007 WITH RESPECT TO: $752,370,000 ALLEGHENY COUNTY HOSPITAL DEVELOPMENT AUTHORITY HEALTH SYSTEM REVENUE BONDS (WEST PENN ALLEGHENY HEALTH SYSTEM), SERIES 2007A CUSIP Numbers: 01728AF92, 01728AG26, 01728AG34, 01728AG42, 01728AG59, 01728AG67,01728AG75 and 01728AG83 The semi-annual interest payment dates of the Bonds described above are May 15 and November 15, of each year commencing November 15, Accordingly, the first sentence of the second paragraph under the heading "THE BONDS General" on page 5 of the final Official Statement dated May 17, 2007 with respect to the bonds named above (the "Official Statement"), is corrected by replacing "February 15" with "May 15" to read as follows: "The Bonds will be dated as of their date of issue and will bear interest at the rates set forth on the inside cover page hereof, payable on May 15 and November 15 of each year commencing November 15, 2007 (each an Interest Payment Date ) to the Holder thereof as of the Record Date (the first day of the month, whether or not a Business Day, in which an Interest Payment Date occurs) for each Interest Payment Date (except with respect to interest in default, for which a Special Record Date shall be established) by check mailed by first-class mail on each Interest Payment Date to such Holder at the Holder s address as it appears on the registration books maintained by the Trustee or, at the written request of any Holder of at least one million dollars ($1,000,000) in aggregate principal amount of Bonds, received by the Trustee at least one Business Day prior to the Record Date, by wire transfer to an account within the United States of America. Payment of the principal or redemption price of Bonds will be payable upon surrender thereof at the corporate trust office of the Trustee." The electronic version of the Official Statement has been corrected. Purchasers are advised to print and retain a copy of the Official Statement as so corrected. The electronic version of the Official Statement can be obtained at the following web address:

3 NEW ISSUE BOOK-ENTRY ONLY Ratings: Moody s: Ba2 S&P: BB Fitch: BB In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. In the opinion of Bond Counsel, interest on the Bonds is exempt from present Commonwealth of Pennsylvania income taxation under existing statutes as described herein. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See TAX EXEMPTION herein. Dated: Date of Delivery $752,370,000 Allegheny County Hospital Development Authority Health System Revenue Bonds (West Penn Allegheny Health System), Series 2007A Due: November 15, as set forth on the inside cover page The front and inside cover pages contain certain information for quick reference only. Such information is not intended to be a summary of the security or terms of this bond issue. Investors are instructed to read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Allegheny County Hospital Development Authority (the Authority ) is offering the Allegheny County Hospital Development Authority Health System Revenue Bonds (West Penn Allegheny Health System), Series 2007A (the Bonds ) to be issued for the benefit of West Penn Allegheny Health System, Inc. (the Parent ) and certain of its affiliates. The Bonds will be issued in fully registered form only in denominations of $5,000 or any integral multiple thereof and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ) under the book entry only system maintained by DTC. So long as Cede & Co. is the registered owner of the Bonds, principal and premium, if any, and interest on the Bonds will be payable by The Bank of New York Trust Company, N.A., as Bond Trustee (the Trustee ) to DTC, which will in turn remit such payments to its participants for subsequent disbursement to the beneficial owners of the Bonds, as described herein. Prospective purchasers of the Bonds should read and consider the sections SECURITY FOR THE BONDS and BONDHOLDERS RISKS for a discussion of certain risks involved in connection with an investment in the Bonds. The Bonds are limited obligations of the Authority, payable from and secured by the Revenues derived by the Authority under a Loan Agreement dated as of May 1, 2007 (the Loan Agreement ) and the hereinafter described Obligation and by other funds pledged under the Indenture referred to herein. The obligation to make payments due to the Authority under the Loan Agreement will be evidenced by an Obligation (the Obligation ) to be delivered to the Authority by the Parent as Credit Group Representative. The Obligation is being issued and secured under and pursuant to a Master Trust Indenture, dated as of May 1, 2007, as supplemented (the Master Indenture ), among the Obligated Group Members and The Bank of New York Trust Company, N.A., as Master Trustee (the Master Trustee ). As security for their obligations under the Master Indenture, the members of the Obligated Group have pledged the Collateral (as defined in the Master Indenture) to the Master Trustee as described herein. The Bonds are subject to mandatory and optional redemption prior to maturity, and to purchase in lieu of redemption, as described herein. The Bonds are limited obligations of the Allegheny County Hospital Development Authority payable solely from the revenues and other funds provided therefor under the Indenture. Neither the principal of the Bonds, nor the interest accruing thereon, shall ever constitute a general indebtedness of the Authority or an indebtedness of the County of Allegheny, the Commonwealth of Pennsylvania or any political subdivision or instrumentality thereof within the meaning of any constitutional or statutory provision whatsoever or shall ever constitute or give rise to a pecuniary liability of the County of Allegheny, the Commonwealth of Pennsylvania or any political subdivision or instrumentality thereof, nor will the Bonds be, or be deemed to be, an obligation of the County of Allegheny, the Commonwealth of Pennsylvania or any political subdivision or instrumentality thereof. The Authority has no taxing power. Maturities, Principal Amounts, Interest Rates, Yields and Prices (See Inside Front Cover) The Bonds are offered when, as and if issued by the Authority and accepted by the Underwriters, subject to prior sale or withdrawal or modification of the offer without notice, and subject to the approval of the validity of the Bonds and certain other legal matters by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority. Certain legal matters will be passed upon for the Authority by its counsel, Thorp, Reed & Armstrong, LLP; for the Obligated Group by its counsel, Cohen & Grigsby, P.C.; and for the Underwriters by their counsel, Ropes & Gray LLP. Shattuck Hammond Partners LLC has served as financial adviser to the Parent. The Bonds are expected to be available for delivery through the facilities of DTC in New York, New York, on or about June 19, CITIGROUP Dated: May 17, 2007 For an explanation of the ratings, see Ratings. LEHMAN BROTHERS

4 Maturity Schedule $752,370,000 Allegheny County Hospital Development Authority Health System Revenue Bonds (West Penn Allegheny Health System), Series 2007A Consisting of: $54,760,000 Serial Bonds Maturity Date (November 15) Principal Amount Interest Rate Yield Price 2009 $ 9,885, % 4.500% $10,390, % 4.550% $10,925, % 4.600% $11,485, % 4.650% $12,075, % 4.700% $697,610,000 Term Bonds Maturity Date (November 15) Principal Amount Interest Rate Yield Price 2017 $ 54,800, % 4.800% $221,700, % 5.100% * 2040 $421,110, % 5.150% ** * Priced to maturity. **Priced to call date.

5 No broker, dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement in connection with the offering made hereby and, if given or made, such information or representations must not be relied upon as having been authorized by the Authority, the Obligated Group or the Underwriters. Neither the delivery of this Official Statement nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Authority or the Obligated Group since the date hereof. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. The Authority neither has nor assumes any responsibility as to the accuracy of the information in this Official Statement (other than that under the headings THE AUTHORITY and NO LITIGATION The Authority ), all of which has been furnished by others. THE UNDERWRITERS HAVE PROVIDED THE FOLLOWING SENTENCE FOR INCLUSION IN THIS OFFICIAL STATEMENT: THE UNDERWRITERS HAVE REVIEWED THE INFORMATION IN THIS OFFICIAL STATEMENT IN ACCORDANCE WITH, AND AS PART OF, THEIR RESPECTIVE RESPONSIBILITIES TO INVESTORS UNDER THE FEDERAL SECURITIES LAWS AS APPLIED TO THE FACTS AND CIRCUMSTANCES OF THIS TRANSACTION, BUT THE UNDERWRITERS DO NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION FORWARD-LOOKING STATEMENTS CERTAIN INFORMATION CONTAINED IN APPENDIX A TO THIS OFFICIAL STATEMENT UNDER THE HEADING EMPLOYEE RETIREMENT PLANS REFLECTS NOT HISTORICAL FACTS BUT FORECASTS. IN ADDITION, CERTAIN STATEMENTS CONTAINED IN APPENDIX A AND OTHER PORTIONS OF THIS OFFICIAL STATEMENT ARE FORWARD-LOOKING STATEMENTS. IN THIS RESPECT, THE WORDS ESTIMATE, PROJECT, ANTICIPATE, EXPECT, INTEND, BELIEVE AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ALL PROJECTIONS, FORECASTS, ASSUMPTIONS, EXPRESSIONS OF OPINIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT. West Penn Allegheny Health System, Inc. (the Parent ) does not as a matter of course make public projections as to future revenues, earnings, or other results. However, the management of the Parent has prepared the forecasted financial information as set forth in Appendix A of this Official Statement to present an estimate of the Parent s future funding contribution to its defined benefit and defined contribution plans. The accompanying forecasted financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to forecasted financial information, but, in the view of the Parent s management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management s knowledge and belief, the expected course of action and the expected future financial performance of the Obligated Group and its affiliates. However, the forecasted information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this Official Statement are cautioned not to place undue reliance on the forecasted financial information. Neither the Parent s independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the forecasted financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the forecasted financial information. The assumptions and estimates underlying the forecasted financial information under the heading EMPLOYEE RETIREMENT PLANS in Appendix A are inherently uncertain and, though considered reasonable by the management of the Parent as of the date of its preparation, are subject to a wide variety of significant business, economic, and competitive risks and uncertainties that could cause actual results to differ materially from those contained in the forecasted financial information, including, among others, risks and uncertainties as described under the heading BONDHOLDERS RISKS, which includes a discussion of various factors that could materially affect the financial condition, results of operations, business, prospects and securities. Accordingly, there can be no assurance that the forecasted results are indicative of the future performance of the Obligated Group and its affiliates (ii)

6 or that actual results will not differ materially from those presented in the forecasted financial information. Inclusion of the forecasted financial information in this Official Statement should not be regarded as a representation by any person that the results contained in the forecasted financial information will be achieved. ******************************************************************* THE BONDS HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR WITH ANY STATE SECURITIES COMMISSION. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. (iii)

7 TABLE OF CONTENTS Page(s) INTRODUCTION... 1 West Penn Allegheny Health System... 1 Plan of Finance... 1 Security for the Bonds... 2 Limited Obligations... 3 THE AUTHORITY... 3 General... 3 THE BONDS... 4 General... 5 Redemption... 5 Mandatory Purchase in Lieu of Redemption... 7 Book-Entry-Only System... 7 No Assurance Regarding DTC Practices... 9 PLAN OF FINANCE APPLICATION OF PROCEEDS OF THE BONDS SECURITY FOR THE BONDS Limited Obligation Discharge of the 2000 Master Indenture The Master Indenture and Obligation No Reserve Account Limitations on Enforceability DEBT SERVICE REQUIREMENTS BONDHOLDERS RISKS General Nonprofit Healthcare Environment Patient Service Revenues Increased Enforcement Affecting Research Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures Regulatory Environment... 23

8 TABLE OF CONTENTS (continued) Page(s) Business Relationships and Other Business Matters Tax-Exempt Status and Other Tax Exemption Other Risk Factors NO LITIGATION The Authority The Obligated Group RATINGS FINANCIAL ADVISOR UNDERWRITING VERIFICATION OF MATHEMATICAL CALCULATIONS CONTINUING DISCLOSURE TAX EXEMPTION OTHER LEGAL MATTERS MISCELLANEOUS APPENDICES: APPENDIX A WEST PENN ALLEGHENY HEALTH SYSTEM OBLIGATED GROUP... A-1 APPENDIX B FINANCIAL STATEMENTS OF WEST PENN ALLEGHENY HEALTH SYSTEM AND SUBSIDIARIES FOR THE FISCAL YEARS ENDED JUNE 30, 2006 AND B-1 APPENDIX C SUMMARY OF MASTER INDENTURE...C-1 APPENDIX D SUMMARY OF PRINCIPAL BOND DOCUMENTS... D-1 APPENDIX E PROPOSED FORM OF OPINION OF BOND COUNSEL...E-1 APPENDIX F FORM OF CONTINUING DISCLOSURE AGREEMENT... F-1

9 OFFICIAL STATEMENT relating to $752,370,000 Allegheny County Hospital Development Authority Health System Revenue Bonds (West Penn Allegheny Health System), Series 2007A INTRODUCTION This Official Statement of the Allegheny County Hospital Development Authority (the Authority ) is provided to furnish information concerning $752,370,000 aggregate principal amount of the Authority s Health System Revenue Bonds (West Penn Allegheny Health System), Series 2007A (the Bonds or the Series 2007A Bonds ). The Authority is a body corporate and politic, created pursuant to the Municipality Authorities Act, as amended. See THE AUTHORITY hereunder for certain information concerning the Authority. Certain capitalized terms used herein are defined in Appendix D hereto. The Bonds are being issued by the Authority under and pursuant to a Bond Indenture dated as of May 1, 2007 (the Indenture ), between the Authority and The Bank of New York Trust Company, N.A., a national banking association, as trustee (the Trustee ). The Authority will lend the proceeds of the sale of the Bonds to West Penn Allegheny Health System, Inc. pursuant to a Loan Agreement (the Loan Agreement ) dated as of May 1, 2007 between the Authority and West Penn Allegheny Health System, Inc. Pursuant to the Indenture, the Authority will assign and pledge to the Trustee as security for the Bonds all of its respective right, title and interest in and to the Loan Agreement and the Obligation (hereinafter defined) and the payments due thereunder, excluding certain rights to payment of expenses and indemnification. See SECURITY FOR THE BONDS and APPENDIX D SUMMARY OF PRINCIPAL BOND DOCUMENTS. West Penn Allegheny Health System West Penn Allegheny Health System, Inc. (the Parent ) is a Pennsylvania nonprofit corporation that, together with other entities under its direct or indirect control, forms a regional health system operating six hospital campuses and other health care facilities and delivering the services of health care professionals, including over 1,000 employed physicians, to residents of Western Pennsylvania. In the fiscal year ended June 30, 2006, the hospital affiliates of the Parent recorder over 180,000 emergency visits, discharged nearly 78,000 inpatients and delivered nearly 4,700 newborns. From these patient care activities, the Parent recorded on a consolidated basis total net patient service revenue of more than $1.35 billion and an excess of revenues over expenses of $21 million in its fiscal year ended June 30, At June 30, 2006, the Parent s consolidated total assets were approximately $1.25 billion, its total liabilities were approximately $996 million and its net assets were approximately $250 million. For additional information concerning the Parent, its affiliates (including the other Members of the Obligated Group), and the health system s facilities and operations, including certain financial and operating data, see APPENDIX A CERTAIN INFORMATION REGARDING WEST PENN ALLEGHENY HEALTH SYSTEM OBLIGATED GROUP. Plan of Finance The issuance of the Bonds will serve the dual purposes of recapitalizing the Obligated Group and funding $137.5 million of past and future capital needs. Proceeds of the Bonds, together with other available funds, will be applied (1) to refund the Allegheny County Hospital Development Authority Health System Revenue Bonds (West Penn Allegheny Health System), Series 2000A and Series 2000B (the Series 2000 Bonds ) in their entirety; (2) to refund the Dauphin County General Authority Hospital Revenue Refunding Bonds HAPSCO Group, Inc. Tax- Exempt Loan Program, The Western Pennsylvania Hospital Project, 1992 Series A, the Pennsylvania Higher 1

10 Educational Facilities Authority Revenue Bonds (Allegheny General Hospital), 1991 Series A, and the Monroeville Hospital Authority Forbes Health System, Series of 1992 and Series of 1995; (3) to prepay a portion of a loan made to the Parent by Highmark Blue Cross-Blue Shield in 2000 (the Highmark Loan ); (4) to finance or refinance the acquisition, construction, improvement, renovation and equipping of capital improvement projects at various facilities of the Members of the Obligated Group operating health facilities; (5) to fund a debt service reserve fund; and (6) to pay certain costs of issuing the Bonds. Security for the Bonds To evidence its obligation to repay the loan of the proceeds of the Bonds under the Loan Agreement, the Parent will execute and deliver to the Trustee, as assignee of the Authority, an Obligation, dated the date of issuance of the Bonds (the Obligation or Obligation No. 1 ). The Obligation will be issued and secured under and pursuant to a Master Trust Indenture, dated as of May 1, 2007, as supplemented (the Master Indenture ), among the Parent and certain other corporations named therein (collectively, the Members of the Obligated Group or the Obligated Group ) and The Bank of New York Trust Company, N.A., a national banking association, as Master Trustee (in such capacity, the Master Trustee ) and a supplemental master trust indenture for Obligation No. 1, dated as of May 1, As security for their obligations under the Master Indenture, the Members of the Obligated Group have mortgaged the Mortgaged Property and pledged their Gross Revenues to the Master Trustee as described herein in trust for the protection and benefit of the Holders of all Obligations, including the Trustee. The Obligation will require the Members of the Obligated Group jointly and severally to make payments sufficient to provide for the full payment of principal and premium, if any, and interest on the Bonds. Under the Master Indenture, the Members of the Obligated Group, as it may exist from time to time, jointly and severally guarantee the payment of all Obligations secured under the Master Indenture ( Obligations ), including the Obligation and any other Obligations Outstanding thereunder from time to time. The Master Indenture permits others to become Members of the Obligated Group under certain circumstances and permits Members of the Obligated Group to be released from their obligations under the Master Indenture under certain circumstances. The Master Indenture also permits the Parent to designate other entities as Designated Affiliates or as Limited Affiliates. For detailed descriptions of Designated Affiliates, Limited Affiliates and other provisions of the Master Indenture, see SECURITY FOR THE BONDS The Master Indenture and Obligation No. 1 Limited Affiliates. See SECURITY FOR THE BONDS The Master Indenture and Obligation No. 1 and APPENDIX C SUMMARY OF MASTER INDENTURE. Certain information with respect to the Obligated Group is furnished in this Official Statement. See APPENDIX A WEST PENN ALLEGHENY HEALTH SYSTEM OBLIGATED GROUP and APPENDIX B FINANCIAL STATEMENTS OF WEST PENN ALLEGHENY HEALTH SYSTEM AND SUBSIDIARIES FOR THE FISCAL YEARS ENDED JUNE 30, 2006 AND All information in this Official Statement concerning the Obligated Group has been provided by the Parent on behalf of the Obligated Group and has not been independently verified by the Authority, and the Authority makes no representations or warranties, express or implied, as to the accuracy or completeness of such information. Additionally, in connection with the issuance of the Bonds, the Parent will undertake to provide certain annual and quarterly financial information and notices of the occurrence of certain events, if material. See CONTINUING DISCLOSURE herein and APPENDIX F FORM OF CONTINUING DISCLOSURE AGREEMENT. 2

11 Limited Obligations The Bonds will be issued as special, limited obligations of the Authority and will be payable solely from and secured solely by the Revenues pledged under the Indenture, which includes a pledge of the revenues derived by the Authority from the Loan Agreement (except for certain indemnification payments and certain fees and expenses), the Obligation (including the payments made thereunder) and by other funds and accounts pledged under the Indenture. See SECURITY FOR THE BONDS. THE BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE ALLEGHENY COUNTY HOSPITAL DEVELOPMENT AUTHORITY PAYABLE SOLELY FROM THE REVENUES AND OTHER FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. NEITHER THE PRINCIPAL OF THE BONDS, NOR THE INTEREST ACCRUING THEREON, SHALL EVER CONSTITUTE A GENERAL INDEBTEDNESS OF THE AUTHORITY OR AN INDEBTEDNESS OF THE COUNTY OF ALLEGHENY, THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION OR INSTRUMENTALITY THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISION WHATSOEVER OR SHALL EVER CONSTITUTE OR GIVE RISE TO A PECUNIARY LIABILITY OF THE COUNTY OF ALLEGHENY, THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION OR INSTRUMENTALITY THEREOF, NOR WILL THE BONDS BE, OR BE DEEMED TO BE, AN OBLIGATION OF THE COUNTY OF ALLEGHENY, THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION OR INSTRUMENTALITY THEREOF. THE AUTHORITY HAS NO TAXING POWER. Information under the captions THE AUTHORITY and NO LITIGATION The Authority herein has been supplied by the Authority and has not been verified by the Obligated Group, and the Obligated Group makes no representations or warranties, express or implied, as to the accuracy or completeness of such information. Information under the remaining captions has been supplied by others, and the Authority makes no representations or warranties, express or implied, as to the accuracy or completeness of such information. This Official Statement speaks only as of its date, and the information herein is subject to change, completion or amendment without notice. Brief descriptions of the Authority, the Parent, the Obligated Group, the Project, the Bonds and certain other documents relating to the Bonds are included in this Official Statement. Such information and descriptions do not purport to be comprehensive or definitive. All references herein to specified documents are qualified in their entirety by reference to each such document, copies of which are available from the Parent and the Underwriters during the initial offering period and thereafter from the Trustee, and all references to the Bonds are qualified in their entirety by reference to the definitive forms thereof and the information with respect thereto included in the aforesaid documents. See APPENDIX C SUMMARY OF MASTER INDENTURE and APPENDIX D SUMMARY OF PRINCIPAL BOND DOCUMENTS. There are risks associated with the purchase of the Bonds. See SECURITY FOR THE BONDS and BONDHOLDERS RISKS for a discussion of certain of these risks. The foregoing Introduction contains only a brief summary of certain information contained in this Official Statement. It is not intended to be complete and is qualified by the more detailed information contained elsewhere in this Official Statement. General THE AUTHORITY The Authority, which is the issuer of the Bonds, is a body corporate and politic created pursuant to a Resolution of the Board of Commissioners of the County of Allegheny (the County ) under the Pennsylvania Municipality Authorities Act, as amended and supplemented (the Act ). Pursuant to the Act, the Authority may acquire, finance, hold, construct, improve, maintain, own, operate and lease, in the capacity of either lessor or lessee, 3

12 hospitals and related facilities and other projects acquired, constructed or improved for hospital purposes. The Authority s existence continues beyond the final maturity date of the Bonds. The Authority s address is Suite 800, 425 Sixth Avenue, Pittsburgh, Pennsylvania THE AUTHORITY HAS NOT PREPARED OR ASSISTED IN THE PREPARATION OF THIS OFFICIAL STATEMENT, EXCEPT THE STATEMENTS UNDER THIS HEADING AND UNDER THE HEADING ABSENCE OF MATERIAL LITIGATION, IN RESPECT OF THE AUTHORITY, AND EXCEPT AS AFORESAID, THE AUTHORITY IS NOT RESPONSIBLE FOR ANY STATEMENTS MADE HEREIN. ACCORDINGLY, EXCEPT AS AFORESAID, THE AUTHORITY DISCLAIMS RESPONSIBILITY FOR THE DISCLOSURE SET FORTH HEREIN MADE IN CONNECTION WITH THE OFFER, SALE AND DISTRIBUTION OF THE BONDS. The Parent has agreed pursuant to the Loan Agreement to indemnify the Authority and to hold it harmless from and against any liabilities which may arise out of (i) the Authority s participation in the Loan Agreement and (ii) the issuance of the Bonds. Reference must be made to the applicable documents for a more complete description of these provisions. See APPENDIX D hereto. Members of the Authority Board. The governing body of the Authority is a Board (the Authority Board ) of up to twelve members appointed by the elected Chief Executive of the County with the approval of County Council. Members of the Authority Board are appointed for staggered five-year terms and may be reappointed, but they may not hold an elective County office. The present members of the Authority Board (five seats are vacant) are as follows: Member James M. Edwards John Brown, Jr. Jacques Moye Barney C. Guttman Marilyn Liggett Glenn R. Flickinger Victor Diaz Office Chairman Vice Chairman Secretary Member Treasurer Assistant Treasurer Assistant Secretary Previous Authority Revenue Bond Issues. The Authority has issued and is authorized to issue revenue bonds and notes for various hospital and health care facility projects. Each such bond or note issue is payable from receipts and revenues derived by the Authority from the hospital or health care facility on whose behalf the bonds or notes were issued and is secured separately and distinctly from the issue for every other hospital or health care facility. The Authority expects from time to time to enter into separate indentures or other agreements for projects for the same or other hospitals or health care facilities that will provide for the issuance of bonds or notes to be secured by revenues derived from such hospitals or health care facilities. THE BONDS The following is a summary of certain provisions of the Bonds. Reference is made to the Bonds and to the Indenture for a more detailed description of such provisions. The discussion herein is qualified by such reference. See APPENDIX D SUMMARY OF PRINCIPAL BOND DOCUMENTS. 4

13 General The Bonds are being issued in the aggregate principal amount set forth on the inside cover of this Official Statement. The Bonds will be delivered in fully registered form without coupons in denominations of $5,000 and in integral multiples thereof. The Bonds will be transferable and exchangeable as set forth in the Indenture and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only, in the denominations hereinafter set forth. See THE BONDS Book-Entry System. The Bonds will be dated as of their date of issue and will bear interest at the rates set forth on the inside cover page hereof, payable on February 15 and November 15 of each year commencing November 15, 2007 (each an Interest Payment Date ) to the Holder thereof as of the Record Date (the first day of the month, whether or not a Business Day, in which an Interest Payment Date occurs) for each Interest Payment Date (except with respect to interest in default, for which a Special Record Date shall be established) by check mailed by first-class mail on each Interest Payment Date to such Holder at the Holder s address as it appears on the registration books maintained by the Trustee or, at the written request of any Holder of at least one million dollars ($1,000,000) in aggregate principal amount of Bonds, received by the Trustee at least one Business Day prior to the Record Date, by wire transfer to an account within the United States of America. Payment of the principal or redemption price of Bonds will be payable upon surrender thereof at the corporate trust office of the Trustee. So long as Cede & Co. is the registered owner of the Bonds, principal of and interest on the Bonds are payable by wire transfer by the Trustee to Cede & Co., as nominee for DTC, which, in turn, will remit such amounts to DTC Participants for subsequent disbursement to the Beneficial Owners. Redemption Optional Redemption. The Bonds maturing on or before November 15, 2017 are not subject to redemption prior to maturity except as described herein under the heading Extraordinary Optional Redemption. The Bonds maturing after November 15, 2017 are subject to redemption prior to their respective stated maturities at the option of the Authority (which option shall be exercised upon written request of the Parent) in whole or in part (in such amounts as may be specified in writing by the Parent or, if the Parent fails to specify such maturities, in inverse order of maturity, and by lot within a maturity), on any date on or after November 15, 2017, at the principal amount thereof, together with interest accrued to the date fixed for redemption, without premium. Mandatory Redemption. The Bonds maturing on November 15, 2017, November 15, 2028 and November 15, 2040 are subject to redemption prior to their respective stated maturities, in part, by lot, from Mandatory Sinking Account Payments on the dates set forth below, at the principal amount thereof and interest accrued thereon to the date fixed for redemption in the amounts indicated below. 5

14 Mandatory Sinking Account Payment Dates (November 15) Bonds Maturing on November 15, 2017 Mandatory Sinking Account Payments 2014 $12,690, ,340, ,025, ,745,000 Mandatory Sinking Account Payment Dates (November 15) Bonds Maturing on November 15, 2028 Mandatory Sinking Account Payments 2018 $15,500, ,295, ,130, ,010, ,935, ,905, ,925, ,000, ,125, ,315, ,560,000 Mandatory Sinking Account Payment Dates (November 15) Maturity Bonds Maturing on November 15, 2040 Mandatory Sinking Account Payments 2029 $26,925, ,410, ,980, ,635, ,380, ,225, ,170, ,225, ,390, ,680, ,090, ,000,000 Extraordinary Optional Redemption. The Bonds are subject to redemption prior to their respective stated maturities, at the option of the Authority (which option shall be exercised upon request of the Parent), as a whole or in part on any date (in such amounts and maturities as may be specified by the Parent or, if the Parent fails to specify such maturities, in inverse order of maturity, and by lot among Bonds within a maturity), from certain hazard insurance or condemnation proceeds received with respect to the facilities of any Member of the Obligated Group, at 6

15 a redemption price equal to the principal amount thereof, together with interest accrued thereon to the date fixed for redemption. The Bonds are also subject to redemption prior to their respective stated maturities at the option of the Authority (which option shall be exercised upon request of the Parent) as a whole (but not in part) on any date at the principal amount thereof and interest accrued thereon to the date fixed for redemption if, as a result of any changes in the Constitution of the United States of America or any state, or legislative or administrative action or inaction by the United States of America or any state, or any agency or political subdivision thereof, or by reason of any judicial decisions there is a good faith determination by the Parent that (a) the Master Indenture has become void or unenforceable or impossible to perform, or (b) unreasonable burdens or excessive liabilities have been imposed on such Member, including without limitation, federal, state or other ad valorem property, income or other taxes being then imposed which were not being imposed on the date of issuance of the Bonds. Notice of Redemption; Rescission of Notice; Effect of Redemption. Notice of redemption will be mailed by first-class mail by the Trustee, not less than 30 days and not more than 60 days prior to the redemption date, to the Holders of any Bonds designated for redemption at their addresses appearing on the registration books of the Trustee. Any notice of optional redemption under the Indenture may be rescinded by written notice given by the Parent to the Trustee no later than five Business Days prior to the date specified for redemption. The Trustee will give notice of such rescission as soon thereafter as practicable to the same parties and in the same manner as the initial notice of redemption was given in accordance with the Indenture. The failure by the Trustee to mail notice of redemption to any one or more of the Holders of any Bonds designated for redemption shall not affect the sufficiency of the proceedings for the redemption of the Bonds with respect to the Holder or Holders to whom such notice was mailed. The Bonds so called for redemption shall become due and payable at the redemption price (together with interest accrued thereon, if any) specified in such notice; interest on such Bonds shall cease to accrue from and after the redemption date; said Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture; and the Holders of said Bonds shall have no rights in respect thereof except to receive payment of said redemption price and accrued interest to the date fixed for redemption from funds held by the Trustee for such payment. Neither the Authority nor the Trustee shall have any responsibility for any defect in the CUSIP number that appears on any Bond or in any redemption notice with respect thereto. Mandatory Purchase in Lieu of Redemption Each Holder, by purchase and acceptance of any Bond, irrevocably grants to the Parent the option to purchase such Bond at any time such Bond is subject to optional redemption as described in the Indenture. Such Bond is to be purchased at a purchase price equal to the then applicable redemption price of such Bond plus accrued interest. The Parent may only exercise such option after the Parent shall have delivered a Favorable Opinion of Bond Counsel to the Trustee, and shall have directed the Trustee to provide notice of mandatory purchase (such notice to be provided, as and to the extent applicable, in accordance with the notice of redemption provisions of the Indenture). On the date fixed for purchase of any Bond in lieu of redemption as described in this paragraph, the Parent shall pay the purchase price of such Bond to the Trustee in immediately available funds, and the Trustee shall pay the same to the Holders of the Bonds being purchased against delivery thereof. No purchase of any Bond in lieu of redemption as described in this paragraph shall operate to extinguish the indebtedness of the Authority evidenced by such Bond. No Holder may elect to retain a Bond subject to mandatory purchase in lieu of redemption. Book-Entry-Only System. The Bonds, when issued, will be registered in the name of Cede & Co., DTC s partnership nominee. When the Bonds are issued, ownership interests will be available to purchasers only through a book-entry system maintained by DTC (the Book-Entry-Only System ). One fully-registered bond certificate will be issued for each maturity of the Bonds in the aggregate principal amount of such maturity and will be deposited with DTC. DTC and its Participants. DTC is a limited-purpose trust company organized under the New York Bank 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 7

16 agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for securities that its participants (the Direct Participants ) deposit with DTC. DTC also facilitates the settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry-only changes in DTC Participants accounts, thereby eliminating 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, in turn, is owned by a number of its Direct Participants and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (the NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc. (the NYSE ), the American Stock Exchange LLC and the N.A. of Securities Dealers, Inc. Access to the DTC system is also available to others, such as both U.S. and non-u.s. securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct DTC Participant, either directly or indirectly (the Indirect Participants and, together with the Direct Participants, the Participants ). DTC has S&P s highest rating: AAA. The rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchase of Ownership Interests. Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond (a 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, but beneficial owners are 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 whom such beneficial owners entered into the transaction. Transfers of ownership interests in the 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 certificates representing their ownership interests in the Bonds, except as specifically provided in the Indenture in the event that use of the book-entry-only system is discontinued. Payments of Principal, Premium, if any, and Interest. Redemption proceeds, principal and interest payments on the 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 Trustee on the payable date in accordance with their respective holdings shown on DTC s records, unless DTC has reason to believe it will not receive payment on such date. Payments by Direct and Indirect Participants to beneficial owners will be governed by standing instructions and customary practices, as is the case with municipal 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, the Trustee, the Parent or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the beneficial owners shall be the responsibility of Direct and Indirect Participants. Notices. 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 Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Bonds, such as redemptions, defaults, and proposed amendments to the bond documents. Beneficial owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to beneficial owners, or in the alternative, beneficial owners may wish to provide their names and addresses to the Trustee and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the 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. 8

17 Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as practicable after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). NONE OF THE AUTHORITY, THE TRUSTEE OR THE PARENT WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO SUCH PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE PAYMENT TO, OR THE PROVIDING OF NOTICE FOR, SUCH PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES. Transfers of Bonds. To facilitate subsequent transfers, all 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 the Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual beneficial owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such 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. None of the Authority, the Parent, the Underwriters or the Trustee will have any responsibility or obligation, legal or otherwise, to any party other than to the registered owners of any Bond on the registration books of the Trustee. Discontinuance of Book-Entry-Only System. The Bonds will be originally registered in the name of Cede & Co., as nominee of DTC. The Bonds may thereafter be transferred only to (i) any successor of DTC or its nominee, (ii) any substitute depository designated by the Authority upon (1) the resignation of DTC or its successor from its functions as depository or (2) a determination by the Authority that DTC or its successor is no longer able to carry out its functions as depository; or (iii) any Person upon (1) the resignation of the DTC or its successor from its functions as depository; provided that no substitute depository can be obtained or (2) a determination by the Authority that it is in the best interests of the Authority and the Holders to remove DTC or its successor from its functions as depository. No Assurance Regarding DTC Practices The foregoing information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the Parent and the Authority believe to be reliable, but the Parent, the Authority, the Underwriters and the Trustee do not take any responsibility for the accuracy thereof. So long as Cede & Co. is the registered owner of the Bonds as nominee of DTC, references herein to the holders or registered owners of the Bonds will mean Cede & Co. and will not mean the beneficial owners of the Bonds. None of the Authority, the Parent, the Trustee or the Underwriters will have any responsibility or obligation to the Participants, DTC or the persons for whom they act with respect to (i) the accuracy of any records maintained by DTC or by any Direct or Indirect Participant of DTC, (ii) payments or the providing of notice to Direct Participants, the Indirect Participants or the beneficial owners, (iii) the selection by DTC or by any Direct or Indirect Participant of any beneficial owner to receive payment in the event of a partial redemption of the Bonds or (iv) any other action taken by DTC or its partnership nominee as owner of the Bonds. 9

18 PLAN OF FINANCE The issuance of the Bonds will serve the dual purposes of recapitalizing the Obligated Group and funding $137.5 million of past and future capital needs. Proceeds of the Bonds, together with other available funds, will be applied (1) to refund the Allegheny County Hospital Development Authority Health System Revenue Bonds (West Penn Allegheny Health System), Series 2000A and Series 2000B (the Series 2000 Bonds ) in their entirety; (2) to refund the Dauphin County General Authority Hospital Revenue Refunding Bonds HAPSCO Group, Inc. Tax- Exempt Loan Program, The Western Pennsylvania Hospital Project, 1992 Series A, the Pennsylvania Higher Educational Facilities Authority Revenue Bonds (Allegheny General Hospital), 1991 Series A, and the Monroeville Hospital Authority Forbes Health System, Series of 1992 and Series of 1995 (the Prior Bonds ); (3) to prepay a portion of a loan made to the Parent by Highmark Blue Cross-Blue Shield in 2000 (the Highmark Loan ); (4) to finance or refinance the acquisition, construction, improvement, renovation and equipping of capital improvement projects at various facilities of the Members of the Obligated Group operating health facilities; (5) to fund a debt service reserve; and (6) to pay certain costs of issuing the Bonds. For the purpose of refunding the Prior Bonds and the Series 2000 Bonds, a portion of the proceeds of the Bonds, together with other available funds, will be deposited into escrow funds each to be established under a refunding escrow agreement between the Parent and each refunding trustee. The money on deposit in the refunding trust funds will be used to purchase certain direct obligations of the United States of America. APPLICATION OF PROCEEDS OF THE BONDS The proceeds to be received from the sale of the Bonds, together with other funds of the Parent, are expected to be applied as shown below, subject to the alternatives described above with respect to the Plan of Finance: Sources of Funds Total Par Amount of Bonds $752,370, Net Original Issue Premium on Bonds 6,356, Funds on Deposit with Prior Trustees 59,830, Corporation Contribution 54,190, Total $872,747, Uses of Funds Deposits to Refunding Trust Funds $548,307, Deposit to Project Fund 137,460, Repayment of Highmark Loan 121,092, Deposit to the Reserve Account 48,836, Issuance Costs (1) 17,049, Total $ 872,747, (1) Issuance costs include (i) underwriting discount and (ii) authority, rating agency, legal, accounting, consulting, financial advisory, trustee, printing, and other fees and expenses. 10

19 SECURITY FOR THE BONDS Limited Obligation THE BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM THE REVENUES AND OTHER FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. NEITHER THE PRINCIPAL OF THE BONDS, NOR THE INTEREST ACCRUING THEREON, SHALL EVER CONSTITUTE A GENERAL INDEBTEDNESS OF THE AUTHORITY OR AN INDEBTEDNESS OF THE COUNTY OF ALLEGHENY, THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION OR INSTRUMENTALITY THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISION WHATSOEVER OR SHALL EVER CONSTITUTE OR GIVE RISE TO A PECUNIARY LIABILITY OF THE COUNTY OF ALLEGHENY, THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION OR INSTRUMENTALITY THEREOF NOR WILL THE BONDS BE, OR DEEMED TO BE, AN OBLIGATION OF THE COUNTY OF ALLEGHENY, THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION OR INSTRUMENTALITY THEREOF. THE AUTHORITY HAS NO TAXING POWER. The Bonds are being issued by the Authority under and pursuant to the Indenture. Pursuant to the Indenture, the Authority will assign and pledge to the Trustee as security for the Bonds all of its respective right, title and interest in and to the Loan Agreement and the Obligation No. 1 and the payments due thereunder, excluding certain rights to payment of expenses and indemnification. Discharge of the 2000 Master Indenture At the time of the issuance of the Bonds, the Prior Bonds secured by a Master Indenture of Trust dated as of July 1, 2000 by and among the Parent, certain other entities comprising an obligated group thereunder and The Bank of New York Trust Company, N. A., as successor to Chase Manhattan Trust Company, National Association, as original Master Trustee (the 2000 Master Indenture ) will be defeased as described above under the heading PLAN OF FINANCE. Upon such defeasance, no obligations will remain outstanding under the 2000 Master Indenture. The Parent intends to replace the 2000 Master Indenture in its entirety. The Master Indenture and Obligation No. 1 To evidence its obligation to repay the loan of the proceeds of the Bonds made by the Authority to the Parent under the Loan Agreement, the Parent will execute and deliver Obligation No. 1 to the Trustee, as assignee of the Authority. The Obligation will be issued and secured under and pursuant to the Master Indenture among the Parent and certain other nonprofit corporations named therein (collectively, the Members of the Obligated Group or the Obligated Group ) and The Bank of New York Trust Company, N.A., a national banking association, as Master Trustee (in such capacity, the Master Trustee ) and a supplemental master trust indenture for Obligation No. 1, dated as of May 1, As security for their obligations under the Master Indenture, the Members of the Obligated Group will mortgage the Mortgaged Property and pledge their Gross Revenues to the Master Trustee as described herein in trust for the protection and benefit of the Holders of all Obligations including the Trustee. The Obligation will require the Members of the Obligated Group jointly and severally to make payments sufficient to provide for the full payment of principal and premium, if any, and interest on the Bonds. See APPENDIX C SUMMARY OF MASTER INDENTURE. Under the Master Indenture, the Members of the Obligated Group, as it may exist from time to time, jointly and severally guarantee the payment of all obligations secured under the Master Indenture ( Obligations ), including the Obligation and any other Obligations Outstanding from time to time. The Master Indenture permits others to become Members of the Obligated Group under certain circumstances and permits Members of the Obligated Group to be released from their obligations under the Master Indenture under certain circumstances. Joint and Several Obligations. Under the Master Indenture, the Parent, acting as Credit Group Representative, may incur, for itself and on behalf of the other Members of the Obligated Group, Indebtedness and other liabilities that may be evidenced and secured by Obligations issued under the Master Indenture. All Members 11

20 of the Obligated Group are jointly and severally liable with respect to all payments required to be made under the Master Indenture, any Related Supplement and each Obligation issued under the Master Indenture. Obligation No. 1 is being issued by the Parent under and pursuant to the Master Indenture on a parity with all other Obligations to be issued on behalf of the Members of the Obligated Group thereunder. All Members of the Obligated Group are required to make payments on Obligation No. 1 in amounts sufficient to pay the principal of, redemption premium, if any, and interest on the Bonds when due. For a discussion of entry into or withdrawal from the Obligated Group, see APPENDIX C SUMMARY OF MASTER INDENTURE Membership in Obligated Group and Withdrawal from Obligated Group or Redesignation. Designated Affiliates and Credit Group Membership. Under the Master Indenture, the Parent, as the Credit Group Representative, may by resolution designate entities other than Members of the Obligated Group as Designated Affiliates from time to time, and may rescind such designation at any time. As of the date of issue of the Bonds, the Parent has not designated any Designated Affiliates and has no plans to designate any Designated Affiliates. The Members of the Obligated Group and all Designated Affiliates comprise the Credit Group under the Master Indenture. The Master Indenture provides that calculations of various financial ratios, debt incurrence tests, reporting requirements and other matters are to be determined based upon the financial results of operations, assets and liabilities, and other indicia of financial condition of the Credit Group as a whole rather than the Obligated Group alone; however, only those entities that are Obligated Group Members are jointly and severally liable to the Master Trustee for payment and performance of all obligations under the Master Indenture, including payments with respect to Obligation No. 1, and only the Obligated Group Members have pledged the Collateral. The Master Indenture requires that the Parent, as Credit Group Representative, must, by resolution, designate a Controlling Member (who must be a Member of the Obligated Group) for each Designated Affiliate. Each such Controlling Member is required under the Master Indenture to cause each of its Designated Affiliates to pay or otherwise transfer to the Credit Group Representative or other Member amounts necessary to enable the Members to pay when due the principal of, premium, if any, and interest on the Outstanding Obligations. However, the Designated Affiliates, if any, are not obligated under Obligation No. 1 or the Obligations, nor may the Trustee or any Holder seek to enforce compliance with the Master Indenture against any Designated Affiliate. Compliance with the Master Indenture by a Designated Affiliate may only be enforced by its Controlling Member or the Credit Group Representative and the ability of such Controlling Member or the Credit Group Representative to enforce compliance with the Master Indenture will vary and the available remedies may be limited depending on the nature of the relationship between the Designated Affiliate and the Controlling Member. See SUMMARY OF MASTER INDENTURE Designation of Designated Affiliates and Transfers from Designated Affiliates in Appendix C. Limited Affiliates. Under the Master Indenture, the Parent, as the Credit Group Representative, may also by resolution designate entities other than Members of the Credit Group as Limited Affiliates from time to time, and may rescind such designation at any time. Limited Affiliates are not Credit Group Members. Any Person may be designated a Limited Affiliate if the following conditions are met: (i) the unsecured long-term obligations of the Person shall be rated at least A by one of the Rating Agencies (which rating shall be confirmed following the execution of the guaranty or similar agreement) and (ii) the Person shall execute a guaranty, contribution or similar agreement enforceable by the Credit Group Representative or the Master Trustee as a general unsecured obligation of such Person whereby such Person agrees to pay or transfer annually to the Credit Group Representative, promptly following its receipt of a written request from the Credit Group Representative (or the Master Trustee) an amount equal to a specified dollar amount or a specified percentage of the Debt Service Requirements of all or a specified portion of the Long-Term Indebtedness of the Credit Group. As of the date of issue of the Bonds, the Parent has not designated any Limited Affiliates and has no plans to designate any Limited Affiliates. The Master Indenture provides that for the purpose of determining compliance with the provisions of the Master Indenture governing the incurrence of additional indebtedness or guaranties and the rate covenant, Income Available for Debt Service of the Credit Group shall be increased by the specified dollar amount which can be requested to be paid or transferred during such Fiscal Years by such Limited Affiliate or the Debt Service Requirements of the Long-Term Indebtedness of the Credit Group for the Fiscal Years during the term of the agreement shall be reduced by the specified percentage of such Debt Service Requirements which can be requested to be paid or transferred during such Fiscal Years by such Limited Affiliate, as appropriate. In the case of the provisions of the Master Indenture relating to the incurrence of Indebtedness, the adjustment to Income Available for Debt Service or Debt Service Requirements may only be made if the Contribution Agreement has a term which equals or exceeds the term of existing Long-Term Indebtedness or of the Long-Term Indebtedness being incurred and must identify such Long- 12

21 Term Indebtedness. In the case of the provisions of the Master Indenture relating to the annual rate covenant, the adjustments may only be made if the Limited Affiliate actually shall have paid or transferred to the Parent an amount sufficient to cause the Annual Debt Service Coverage Ratio to be not less than 1.0:1.0 if such Ratio otherwise would be less than 1.0:1.0. The Limited Affiliates, if any, are not Credit Group Members, are not obligated under Obligation No. 1 or the Obligations, nor may the Trustee or any Holder seek to enforce compliance with the Master Indenture against any Limited Affiliate. See SUMMARY OF MASTER INDENTURE Designation of Limited Affiliates in Appendix C. Security for Obligations. All Obligations Outstanding from time to time under the Master Indenture, including Obligation No. 1, will be secured by security interests in the Gross Revenues of each Member of the Obligated Group (collectively, the Security Interests ). All such Obligations also will be secured by and entitled to the benefit of mortgage liens on certain real property of the Members, including the principal hospital facilities of the Obligated Group (the Mortgaged Property ). Security Interests in Gross Revenues. Pursuant to the Master Indenture, the Parent and each of the other Members of the Obligated Group will create Security Interests in favor of the Master Trustee in each Member s Gross Revenues under Article 9 of the Uniform Commercial Code as in effect in the Commonwealth of Pennsylvania (the UCC ). The Security Interests in Gross Revenues will be perfected to the extent, and only to the extent, that the same may be perfected by filing under the UCC; i.e. the Security Interests will be perfected only in those items and types of Gross Revenues consisting of accounts and general intangibles (as defined in the UCC). The UCC does not permit perfection by filing with respect to certain items included in Gross Revenues, such as the proceeds of accounts, cash or bank deposits, which generally permits perfection only by possession by the Master Trustee or a depository bank under a control agreement. The Master Indenture does not create a gross revenue fund or account in the possession of the Master Trustee or under its control by means of account control agreements. Creation and enforcement of any right to receive payments under the Medicare and Medicaid programs may be subject to limitations under federal and state laws and regulations. Under certain circumstances, the Security Interests in Gross Revenues may be subordinated to the interests of creditors other than the Holders of Obligations. Some instances of subordination of prior interests and claims are (i) statutory liens, (ii) rights arising in favor of the United States of America or any agency thereof, (iii) present or future prohibitions against assignment in any federal statutes or regulations, (iv) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction, (v) federal or state bankruptcy or insolvency laws that may affect the enforceability of the Master Indenture or the grant of any Security Interest, and (vi) rights of third parties in Gross Revenues converted to cash and not in the possession of the Master Trustee. The Mortgages. In addition to the Security Interests, liens on certain real property of the Members of the Obligated Group will be granted for the benefit of the Master Trustee and the holders of all Obligations pursuant to Open End Mortgage and Security Agreements each dated May 1, 2007 (the Mortgages ). The Mortgaged Property will consist of the principal hospital facilities, medical office buildings, parking structures comprising the main campuses of the Hospitals as defined and described in APPENDIX A, and tangible personal property on those campuses. The Mortgaged Property will include, among other properties, the land, buildings and personalty comprising The Western Pennsylvania Hospital, the Forbes Regional Campus, Allegheny General Hospital and the Allegheny General Hospital Suburban Campus, Alle-Kiski Medical Center and Canonsburg General Hospital. For a description of the operations of such facilities, see relevant portions of APPENDIX A CERTAIN INFORMATION REGARDING WEST PENN ALLEGHENY HEALTH SYSTEM OBLIGATED GROUP. For a discussion of risks that relate to mortgage security generally and the Mortgaged Property in particular, see the heading Risks Related to the Mortgages and the Mortgaged Property below in this section. The Mortgaged Property may be released, subordinated, disposed of or subjected to Permitted Liens, all as more fully discussed in APPENDIX C - MORTGAGES/AGAINST ENCUMBRANCES. Additional Indebtedness. The Parent and each of the other Members of the Obligated Group, if any, are permitted under the Master Indenture to incur additional Indebtedness, either unsecured or secured by Permitted Liens, subject to the financial tests and limitations contained in the Master Indenture. Additional Indebtedness need not be evidenced by Obligations issued under the Master Indenture. However, only Indebtedness represented by Obligations will be secured by the Security Interests on a parity with other Obligations. For a description of the financial tests and limits on additional indebtedness in the Master Indenture, see SUMMARY OF MASTER INDENTURE Limitations on Additional Indebtedness in Appendix C attached hereto. 13

22 Other Master Indenture Covenants. In addition to the security and other provisions described above, the Master Indenture contains provisions, covenants and restrictions related to rates and charges, mergers and other corporate combinations and divestitures, sales, leases or other dispositions of assets and other matters. See APPENDIX C SUMMARY OF MASTER INDENTURE. Reserve Account The Trustee will create a separate account within the Revenue Fund designated the Reserve Account. Upon delivery of the Bonds, the Trustee shall deposit an amount equal to the initial Reserve Account Requirement in the Reserve Account. All amounts in the Reserve Account shall be used and withdrawn by the Trustee solely for the purpose of making up any deficiency in the Interest Account or Principal Account or (together with any other money available therefor) for the redemption of all Bonds then Outstanding. See APPENDIX D SUMMARY OF PRINCIPAL BOND DOCUMENTS Indenture Reserve Account. Limitations on Enforceability Risks Related to Master Indenture Financings. There are circumstances under which it is possible that the Master Indenture would not be enforced by courts, especially as to future Members of the Obligated Group. Also there are a number of circumstances under which the Security Interests, especially the Security Interest in Gross Revenues and the lien of one or more of the Mortgages, may not be enforced or may be subordinated to the claims of others. Fraudulent Transfer or Conveyance Statutes. The state of insolvency, fraudulent transfer or conveyance and bankruptcy laws relating to the enforceability of obligations of one corporation in favor of the creditors of another, or the obligation of one member of an obligated group to make debt service payments on behalf of another member or the ability of a corporate parent to compel its affiliates or subsidiaries to make such payments is unsettled. The ability of the Obligated Group to compel one Member of the Obligated Group to make payment on behalf of another Member could be subject to challenge if such Member would, by making such payment, be rendered insolvent. In particular, such efforts by the Obligated Group may not be enforced under the Federal Bankruptcy Code or applicable state fraudulent transfer or conveyance statutes if the obligation to pay is incurred without fair consideration or reasonably equivalent value to the obligor-member and if the incurrence of the obligation renders the Member insolvent. The standards for determining the fairness of consideration and the manner of determining insolvency are matters of judicial discretion based upon subjective standards and may vary under the Bankruptcy Code and other statutes that may be applicable. In addition a court could determine, in the event of a bankruptcy of a Member, that payments made on Obligation No. 1 by a bankrupt Member could constitute payments to or for the benefit of an insider, within the meaning of Section 547(b) of the Bankruptcy Code, which payments, if made within one year of the filing of the bankruptcy petition, might be recoverable by the bankruptcy court from the owners of the Bonds. If a court were to find that a Member did not receive fair consideration or reasonably equivalent value for the incurrence of the indebtedness evidenced by Obligation No. 1 and such Member: (i) was insolvent; (ii) was rendered insolvent by such incurrence; (iii) was engaged in a business activity for which its remaining assets were unreasonably small; or (iv) intended (or believed) to incur, assume or issue, debt beyond its ability to pay, a court could determine to invalidate, the indebtedness represented by Obligation No. 1. Enforceability of the Loan Agreement. The legal right and practical ability of the Trustee to enforce rights and remedies under the Loan Agreement may be limited by laws relating to bankruptcy, insolvency, reorganization, fraudulent conveyance or moratorium and by other similar laws affecting creditors rights. In addition, enforcement of such rights and remedies will depend upon the exercise of various remedies specified by such documents, which, in many instances, may require judicial actions that are subject to discretion and delay, that otherwise may not be readily available or that may be limited by certain legal principles. There exists common law authority and authority under certain statutes for the ability of the courts to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, 14

23 including a finding that such corporation has insufficient assets to carry out its stated charitable purposes. Such court action may arise on the court s own motion or pursuant to a petition of the state or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses. The various legal opinions delivered concurrently with the issuance of the Bonds are qualified as to the enforceability of the various legal instruments by limitations imposed by state and federal laws, rulings, policy and decisions affecting remedies and by bankruptcy, reorganization or other laws of general application affecting the enforcement of creditors rights or the enforceability of certain remedies or document provisions. Risks Related to the Mortgages and the Mortgaged Property. Under the Master Indenture, the Members of the Obligated Group may encumber or permit encumbrance of the Mortgaged Property by Permitted Liens. Permitted Liens on the Mortgaged Property having priority over the Lien created by the Mortgages may reduce the amount that can be realized by the Master Trustee in the event of a foreclosure of the Mortgages. The Parent has obtained a commitment from a nationally recognized title insurance company to issue a title policy to the Master Trustee solely to provide confirmation of the creation of the liens of the Mortgages on the Mortgaged Property. No appraisal of the Mortgaged Property has been completed in connection with the title policy issued to the Master Trustee. Purchasers of the Bonds should not rely on title insurance as a source of recovery if the Master Trustee is unable for any reason related to the condition of title to realize value from the Mortgaged Property when exercising remedies for an Event of Default. The Mortgaged Property is not comprised of general purpose buildings and would not generally be suitable for industrial or commercial use. Consequently, it would be difficult to find a buyer or lessee for the Mortgaged Property if it were necessary to foreclose on the Mortgaged Property. Thus, upon any default, it may not be possible to realize the outstanding interest on and principal of the Bonds from a sale or a lease of the Mortgaged Property. In order to operate the Mortgaged Property as health care facilities under present law, a purchaser of the Mortgaged Property at foreclosure sale would have to obtain approval of the Pennsylvania Department of Health and the State Attorney General and licenses for the facilities. The Members of the Obligated Group are not granting a lien on equipment or furnishings at the Mortgaged Property. Therefore, the ability to operate Mortgaged Property as health care facilities might be adversely affected. Under applicable federal and state environmental statutes, in the event of part or future releases of pollutants or contaminants on or near the Mortgaged Property, a lien superior to the lien of the Mortgage could attached to the Mortgaged Property affected to secure the costs of removing or otherwise treating pollutants or contaminants. Such a lien would adversely affect the Master Trustee s ability to realize sufficient amounts to pay the Bonds in full. Furthermore, in determining whether to exercise any foreclosure rights with respect to the Mortgaged Property, the Master Trustee may be required to take into account the potential liability of any owner of the Mortgaged Property, including an owner by foreclosure, for clean-up costs with respect to such pollutants and contaminants. No environmental assessment of the Mortgaged Property has been made prior to the issuance of the Bonds. 15

24 DEBT SERVICE REQUIREMENTS The following table sets forth below, for each year ending on June 30, the amounts required to be paid by the Parent with respect to principal, whether by payment at maturity or upon mandatory sinking account redemption, and interest on the Bonds. The table does not include debt service on any other long-term indebtedness of the Obligated Group that is not evidenced by Obligations. For a complete description of the long-term indebtedness of the Obligated Group and related entities, see Note 8 to APPENDIX B hereto. Year Ending June 30 The Bonds Principal Interest Total 2008 $35,495, $35,495, ,197, ,197, $ 9,885,000 38,950, ,835, ,390,000 38,443, ,833, ,925,000 37,910, ,835, ,485,000 37,350, ,835, ,075,000 36,761, ,836, ,690,000 36,142, ,832, ,340,000 35,491, ,831, ,025,000 34,807, ,832, ,745,000 34,088, ,833, ,500,000 33,332, ,832, ,295,000 32,537, ,832, ,130,000 31,701, ,831, ,010,000 30,823, ,833, ,935,000 29,899, ,834, ,905,000 28,928, ,833, ,925,000 27,907, ,832, ,000,000 26,834, ,834, ,125,000 25,706, ,831, ,315,000 24,520, ,835, ,560,000 23,273, ,833, ,925,000 21,911, ,836, ,410,000 20,423, ,833, ,980,000 18,854, ,834, ,635,000 17,198, ,833, ,380,000 15,451, ,831, ,225,000 13,607, ,832, ,170,000 11,662, ,832, ,225,000 9,609, ,834, ,390,000 7,442, ,832, ,680,000 5,156, ,836, ,090,000 2,743, ,833, ,000, , ,752, Total $752,370,000 $864,919, $1,617,289,

25 BONDHOLDERS RISKS The purchase of the Bonds involves risks that are discussed below and elsewhere in this Official Statement. Each prospective purchaser of the Bonds should make an independent evaluation of all of the information presented in this Official Statement to make an informed investment decision. General As set forth under SECURITY FOR THE BONDS above, the Parent is obligated to pay when due the Loan Repayments that are required to be at least equal to the principal of, premium (if any), and interest, on the Bonds. The Parent s obligation to make the Loan Repayments with respect to the Bonds will be further evidenced and secured by Obligation No. 1 issued under the Master Indenture. All Obligations issued and Outstanding under the Master Indenture are secured by the lien on Gross Revenues and the Mortgages. No representation or assurance can be made that revenues will be realized by the Parent or the Obligated Group in amounts sufficient to make the Loan Repayments or payments under Obligation No. 1 and hence the debt service on the Bonds. For a description of certain limitations on enforceability of the Master Indenture, the Loan Agreement, the lien on Gross Revenues, the Mortgages and other similar matters, see SECURITY FOR THE BONDS Limitations on Enforceability above. The Members of the Obligated Group are subject to a wide variety of federal and state regulatory actions and legislative and policy changes by those governmental and private agencies that administer Medicare, Medicaid and other payors and are subject to actions by, among others, the National Labor Relations Board, the Joint Commission on Accreditation of Healthcare Organizations ( JCAHO ), the Centers for Medicare & Medicaid Services ( CMS ) of the U.S. Department of Health and Human Services ( DHHS ), and other federal, state and local government agencies. The future financial condition of the Members of the Obligated Group could be adversely affected by, among other things, changes in the method and amount of payments to the Members of the Obligated Group by nongovernmental payors, the financial viability of these payors, increased competition from other health care entities, demand for health care, other forms of care or treatment, changes in the methods by which employers purchase health care for employees, capability of management, future changes in the economy, demographic changes, availability of physicians and nurses, and malpractice claims and other litigation. These factors and others may adversely affect payment by the Parent under the Loan Agreement and the Obligated Group under Obligation No. 1 and, consequently, payment of the Bonds. Nonprofit Healthcare Environment The Members of the Obligated Group benefiting from the proceeds of the Bonds are nonprofit corporations, exempt from federal income taxation as organizations described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. As nonprofit, tax-exempt organizations, such Members are subject to federal, state and local laws, regulations, rulings and court decisions relating to their respective organization and operation, including operation for charitable purposes. At the same time, such Members conduct large-scale complex business transactions and are major employers in their geographic area. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of a complex healthcare organization. Recently, an increasing number of the operations or practices of health care providers have been challenged or questioned to determine if they are consistent with the regulatory requirements. These challenges and examinations raise broader and more fundamental concerns about the core business practices of the nonprofit, taxexempt hospitals and health care systems. Areas which have come under examination have included pricing practices, billing and collection practices, charitable care, executive compensation and exemption of property from real property taxation. These challenges and questions have come from many sources, including state attorneys general, the Internal Revenue Service, labor unions, Congress, state legislatures, and patients, and in many forums, including hearings, audits and litigation. These challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on the tax-exempt Members of the Obligated Group. 17

26 Congressional Hearings. Since 2004, three Congressional Committees have conducted hearings and other proceedings inquiring into various practices of nonprofit hospitals and health agencies. The House Committee on Energy and Commerce (the House Committee ) launched a nationwide investigation of hospital billing practices and prices charged to uninsured patients. The Senate Finance Committee (the Senate Committee ) conducted hearings on reforms to the nonprofit sector and released a staff discussion draft on proposals for reform in the area of tax-exempt organizations, including a proposal for a five-year review of tax-exempt status by the IRS, requesting information from nonprofit hospitals and hospital systems regarding their charitable activities, patient billing and ventures with for-profit corporations and hospitals. The House Committee on Ways and Means has held several hearings to examine the tax-exempt sector, hospital tax-exemptions and the use of tax-preferred bond financing. It is uncertain whether any of these Committees will pursue further investigations or will recommend legislative changes as a result of their inquiries. IRS Examinations of Compensation and Community Benefit Practices. In 2004 through 2005, the IRS conducted a national review of compensation arrangements for executives and other highly compensated individuals at tax-exempt hospitals. In June 2006, the IRS sent compliance check questionnaires to hundreds of randomly selected tax-exempt hospitals, including Allegheny General Hospital, to review compliance with the community benefit standard under Revenue Ruling , which sets forth the current standards under which tax-exempt health care providers qualify for federal tax-exemption under Section 501(c)(3) of the Code, and other issues. The IRS has not initiated any examinations of tax-exempt Members of the Obligated Group. Class Action Litigation. In recent years, lawsuits have been filed in both federal and state courts against certain nonprofit hospitals and health care systems, alleging, among other things, that such hospitals and health care systems failed to fulfill their obligations to provide charity care to uninsured patients and have overcharged uninsured patients or insured patients with certain cost-share obligations. Although many of those cases have since been dismissed by the courts, some hospitals and health systems have chosen to settle the cases. Actions by Purchasers of Hospital Services and Consumers. Major purchasers of hospital services also could take action to restrain hospital charges or charge increases. Additionally and as a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services. Decreased utilization could result, and hospitals revenues may be negatively impacted. Challenges to Real Property Tax Exemptions. Recently, the real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the grounds that the health care providers were not engaged in charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. Pennsylvania Health Care Reform Act. The Governor of the Commonwealth of Pennsylvania has recently proposed legislation that, if enacted, would, among other things, provide uninsured individuals and small employers with access to health care coverage; impose additional community benefit requirements on hospitals; promote drug and hospital pricing transparency; and strengthen governmental oversight of health insurance rate increases. The proposal to cover all Pennsylvanians would be funded in part through imposition of a fair share tax on all employers within the Commonwealth of Pennsylvania, with credits provided to employers that meet various criteria. With respect to its community benefit provisions, the proposal would require each hospital to file an annual community benefits report specifying the level of uncompensated goods and services provided pursuant to a specific methodology outlined in the legislation. In the event a hospital s community benefit falls short of standards outlined in Pennsylvania s Institutions of Purely Public Charity Act, the hospital would be required to pay the shortfall to the Department of Health. In addition, the legislation sets forth standards for hospital admission criteria, as well as for hospital billing practices. The proposal additionally contains a number of patient safety initiatives, including measures requiring implementation of health information technology relating to e-prescribing and reporting of hospital-acquired infections. At this time, it is not clear whether or in what form the proposed legislation will be enacted, nor what impact the proposal would have on the health care industry. The foregoing are some examples of the challenges and examinations facing nonprofit health care organizations. They are indicative of a greater scrutiny of the billing, collection and other business practices of 18

27 these organizations and may indicate an increasingly more difficult operating environment for health care organizations, including the Members of the Obligated Group. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on hospitals operating revenue and their continued financial viability. Patient Service Revenues The Medicare Program. Medicare is the federal health insurance system under which hospitals and other health care providers are paid for services provided to eligible persons who are elderly, disabled or subject to certain chronic conditions. Medicare is administered by CMS, which delegates to the states the process for certifying hospitals to which CMS will make payment. In order to achieve and maintain Medicare certification, hospitals must meet CMS s Conditions of Participation on an ongoing basis. Compliance is determined by the state, but hospitals with JCAHO accreditation are deemed compliant. The requirements for Medicare certification are subject to change, and, therefore, it may be necessary for hospitals to effect changes from time to time in their facilities, equipment, personnel, billing, policies and services to address such changing requirements. For example, revised Conditions of Participation addressing medical staff, nursing services, medical record services, pharmaceutical services and anesthesia services took effect in January Over the past several years, various laws and regulations have modified Medicare payment methodologies and levels. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 mandates substantial and wide ranging changes to the Medicare program to be implemented over a number of years. Some significant changes include, without limitation, the expansion of outpatient prescription drug coverage through the creation of a new voluntary prescription drug benefit, the replacement of the current Medicare managed care program with a new program that offers additional health plan options, modifications to coverage and payment for various providers under traditional fee-for-service Medicare, changes to combat waste, fraud and abuse, and reforms to regulatory procedures. The Deficit Reduction Act of 2005 was enacted to slow the growth of Medicare and Medicaid funding and contains provisions that affect Medicare reimbursement for hospital and physician services. Significant changes include, for example, extending and revising the requirement that hospitals submit quality data to obtain a full market basket increase in inpatient and outpatient rates (and avoid a 2% reduction in the increase). CMS has also, by regulation, proposed a significant reform to the current payment system for inpatient care. The reforms are intended to ensure that payments more accurately reflect the costs of services provided by hospitals. See Hospital Inpatient Payments below. The individual or collective impact of these federal laws and regulations cannot be determined. Furthermore, additional actions by the federal government in future years affecting Medicare coverage and payment may occur. The Obligated Group s hospitals are Medicare-certified and for the fiscal years ended June 30, 2005 and June 30, 2006, Medicare represented approximately 47% and 46%, respectively, of the Obligated Group s gross patient service revenue for each year. See APPENDIX A SOURCES OF REVENUE. Hospital Inpatient Payments. Hospitals are generally paid a pre-determined payment amount for inpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as diagnosis related groups, or DRGs. The DRG rate covers all care provided to a beneficiary during an inpatient stay. The actual cost of care, including capital costs, may be more or less than the DRG rate. DRG rates are subject to adjustment by CMS and are subject to federal budget considerations. The Medicare program adjusts its payment rates to hospitals for the geographic difference in the labor rates across the country (called a Wage Index adjustment). The Western Pennsylvania Core Based Statistical Areas (CBSA) has experienced cumulative declines in this adjustment of greater than 10% between the periods of federal fiscal year 2001 through federal fiscal year There can be no assurance that this adjustment will not decline further in future years. A revised prospective payment system implemented by CMS beginning October 1, 2006 weights DRGs based on hospital costs rather than charges. By no later than 2008, CMS will also replace the current 526 DRGs with either a system of 861 consolidated severity-adjusted DRGs or an alternative severity-adjusted DRG system developed in response to public comments the agency is soliciting. There is no guarantee that DRG rates, as they change from time to time, will cover actual costs of providing services to Medicare patients. 19

28 Hospital Outpatient Payments. Hospitals are also paid a pre-determined payment amount for most outpatient services based upon ambulatory payment classification ( APC ) groups. An APC group includes various services and procedures determined to be similar. There can be no assurance that the hospital APC payment, which bases payment on APC groups rather than on individual services, will be sufficient to cover the actual costs of the outpatient services. Hospital Graduate Medical Education Payments. Certain hospitals, including certain Obligated Group hospitals, receive additional payment from Medicare to reimburse them for the direct costs of graduate medical education ( GME ). Direct medical education costs ( DGME ) are reimbursed under a prospective methodology based on a hospital-specific approved amount per resident. Additional payments are available to teaching hospitals reimbursed under the DRG system for the indirect medical education ( IME ) costs attributable to their approved graduate medical education programs. The IME payment is an additional yearly payment calculated as a percentage add-on to the inpatient DRG payment. The payment is based on a formula that incorporates the hospital s ratio of residents to beds in use and inpatient revenue. DGME and IME reimbursement is subject to certain limitations, including a cap on a hospital s reimbursable residents based on the number of residents in a base year. In 2006, Obligated Group hospitals collectively received reimbursement in the amount of $54.7 million for DGME and IME. These additional funds are subject to appropriation and funding each year, and may not be funded in the future. Congress has repeatedly sought to limit GME reimbursement. Other Medicare Service Payments. Medicare payment methodologies are based on the type of provider providing the service as well as the service itself. The Obligated Group operates various ancillary providers, including ambulatory care centers, rehabilitation centers, dialysis centers and home health agencies. Medicare payment for ambulatory care services, rehabilitation services, dialysis services and home health services are based on regulatory formulas or pre-determined rates. There is no guarantee that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to Medicare patients. Physician Reimbursement. Medicare s payments for physician services are made according to a fee schedule, under which services are given relative weights that reflect resource requirements. These weights are adjusted for geographic differences in practice costs and are multiplied by a payment rate, a conversion factor and a site of service differential to determine payment. CMS conversion factors are updated annually, and take into account sustainable growth rates, budget neutrality factors, changes in input prices and other changes required by Medicare law. The fiscal year 2007 physician fee schedule reflects an overall payment increase of 1.8%. The update is based on a statutory formula contained in the Medicare law. Every year beginning with 2002, in response to rising spending, the statutory update formula would have operated to impose payment cuts. The negative update went into effect in 2002, but for 2003 to 2007, Congress intervened and temporarily suspended the requirements of the formula in favor of specific, statutory updates. There is no assurance that such legislation will occur in 2008 or in future years. As with other non-cost based payment systems, there can be no assurance that the payments under this system will be sufficient to cover all of the actual costs of providing physician services to Medicare patients. Medicaid Program. Medicaid is a jointly administered federal/state program providing payment of hospital benefits within prescribed limits within each state to persons meeting certain income limitations or other eligibility standards. The Pennsylvania Medicaid program, known as the Medical Assistance ( MA ) program, which is administered by the Department of Public Welfare ( DPW ), generally reimburses hospitals in Pennsylvania for providing services to covered patients as described below. Because it is partially funded by, and its funding is administered through the Commonwealth, the timing and amount of payments under the MA program may be particularly affected by Pennsylvania budgetary constraints. The Hospital and Healthsystem Association of Pennsylvania ( HAP ) engaged the Lewin Group to perform a financial impact analysis regarding overall payment shortfalls for Pennsylvania, and the results indicate that Pennsylvania hospitals are paid about 82% of hospital inpatient cost and only 54% of hospital outpatient costs. Historically, Pennsylvania has been ranked 46th nationally in regard to Medicaid payment. A potential reconfiguration of the MA payment system is being developed by the DPW in conjunction with HAP and representatives from the provider community within the Commonwealth of Pennsylvania, and current estimates are that this new system could be operational by Fiscal Year The financial impacts of this potential change to the MA payment system are unknown at this time. 20

29 The Obligated Group s hospitals are participants in the Pennsylvania MA program and for the fiscal years ended June 30, 2005 and June 30, 2006, Medicaid represented approximately 11% and 12%, respectively, of gross patient service revenues of the Obligated Group for each year. See APPENDIX A SOURCES OF REVENUE. Hospital Inpatient Payments. MA payment for acute care services historically has been based on a prospective payment system similar to the federal Medicare DRG-based prospective payment system. However, as a result of mandated managed care in many counties of Pennsylvania (including the Southwest Zone (Allegheny, Armstrong, Beaver, Butler, Fayette, Green, Indiana, Lawrence, Washington and Westmoreland counties)) all patients residing in these counties must be covered and their care paid for by MA health maintenance organizations ( HMOs ) participating in the HealthChoices program. Payment from these organizations is based solely on negotiation and follows no mandated formula. Payment for services rendered to patients residing outside the mandated managed care counties is covered by the traditional Medicaid fee-for-service ( FFS ) contract or other voluntary HMO contracts. FFS rates for 2007 contained a 4.1% increase for MA payments. While traditional FFS rate agreements are negotiated statewide, MA HMO contracts are negotiated on a hospital specific basis and may not contain rate revisions consistent with the MA FFS agreements. There can be no assurance the MA payments will be sufficient to cover all of the actual costs of providing services to hospitals for inpatient MA services. Hospital Outpatient Payments. Traditional MA pays for hospital outpatient services rendered based on the lower of the usual charge to the general public for the same service or the MA maximum allowable fee. Managed care MA pays based on the negotiated contract rate. Other MA Service Payments. MA payment for ambulatory care services, rehabilitation services, dialysis services and home health services are based on regulatory formulas or pre-determined rates. There is no guarantee that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to MA patients. Physician Reimbursement. Similar to hospital inpatient payments described above, MA payment for physician services are made on a fee-for-service or negotiated rate basis, depending on whether the patient is covered by the HealthChoices program. Disproportionate Share Payments. The federal Medicare and the Pennsylvania Medicaid programs provide additional payment for hospitals that serve a disproportionate share of certain low income patients. As of June 30, 2006, Allegheny General Hospital and The Western Pennsylvania Hospital were the only Obligated Group Members that qualified for these payments from Medicare, receiving a total of $10.5 million in For the Pennsylvania MA program, supplemental payments are provided for the treatment of low income residents and for providing community access to services, based on the threshold of uncompensated care provided. The Member of the Obligated Group received $6.7 in supplemental payments under the Pennsylvania MA program in There can be no assurance that the participating Obligated Group hospitals will qualify for disproportionate share status in the future. There also can be no assurance that disproportionate share payments will not be decreased or eliminated in the future. Health Plans and Managed Care. Most private health insurance coverage is provided by various types of managed care plans, including health maintenance organizations, or HMOs, and preferred provider organizations, or PPOs. To control costs, managed care plans typically contract with hospitals and other providers for discounted prices, review medical services for medical necessity, require members to pay copayments and deductibles, and channel patients to contracted providers of health care services. Medicare and Medicaid also purchase hospital care using managed care options. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers. For the fiscal years ended June 30, 2005 and June 30, 2006, managed care (excluding MA patients covered under HMO contracts) constituted approximately 12% and 11%, respectively, of gross patient service revenues of the Obligated Group for each year. See APPENDIX A SOURCES OF REVENUE. Many HMOs and PPOs currently pay providers on a negotiated fee-for-service basis or, for institutional care, on a fixed rate per day of care or per inpatient stay, which, in each case, usually is discounted from the typical charges for the care provided. As a result, the discounts offered to HMOs and PPOs may result in payment to a 21

30 provider that is less than its actual cost. Additionally, the volume of patients directed to a provider may vary significantly from projections, and/or changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider s ability to manage this component of revenue and cost. Some HMOs employ a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned or otherwise directed to receive care at a particular hospital. A hospital may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet a hospital s actual costs of care, or if utilization by such enrollees materially exceeds projections, the financial condition of a hospital could erode rapidly and significantly. The Obligated Group does not have any material HMO contracts under which it is paid a capitated payment. Often, HMO contracts are enforceable for a stated term, regardless of hospital losses and may require hospitals to care for enrollees for a certain time period, regardless of whether the HMO is able to pay a hospital. Hospitals from time to time have disputes with managed care payors concerning payment and contract interpretation issues. Failure to maintain contracts could have the effect of reducing the Obligated Group s market share and net patient services revenues. Conversely, participation may result in lower net income if participating hospitals are unable to adequately contain their costs. Increased Enforcement Affecting Research In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. DHHS elevated and strengthened its Office of Human Research Protection, one of the agencies with responsibility for monitoring federally funded research. In addition, the National Institutes of Health significantly increased the number of facility inspections that these agencies perform. The Food and Drug Administration ( FDA ) also has authority over the conduct of clinical trials performed in hospitals when these trials are conducted on behalf of sponsors seeking FDA approval to market the drug or device that is the subject of the research. Moreover, the OIG, in its recent Work Plans, has included several enforcement initiatives related to reimbursement for experimental drugs and devices (including kickback concerns). The United States Department of Justice may also become involved in enforcement actions relating to the use of federal funds or submission of information to federal agencies. There have been a number of recent government investigations and settlements involving hospital use of federal grant funding in connection with clinical trials and also a settlement involving the submission of claims to Medicare for services provided in a clinical trial. These agencies enforcement powers range from substantial fines and penalties to exclusion of researchers and suspension or termination of entire research programs, and errors in billing of the Medicare or Medicaid programs for care provided to patients enrolled in clinical trials that is not eligible for Medicare reimbursement can subject the Obligated Group to sanctions as well as repayment obligations. Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and physicians. Published rankings such as score cards tiered hospital networks with higher co-payments and deductibles for non-emergent use of lower-ranked providers, pay for performance and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals and the members of their medical staffs and to influence the behavior of consumers and providers such as the Members of the Obligated Group. Prevalent currently are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction, and investment in health information technology. Measures of performance set by others that characterize a hospital negatively may adversely affect its reputation and financial condition. 22

31 Regulatory Environment Fraud and False Claims. Health care fraud and abuse laws have been enacted at the federal and state levels to broadly regulate the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to the beneficiaries. Under these laws, hospitals and other health care providers can be penalized for a wide variety of conduct, including submitting claims for services that are not provided, billing in a manner that does not comply with government requirements or including inaccurate billing information, billing for services deemed to be medically unnecessary, or billings accompanied by an illegal inducement to utilize or refrain from utilizing a service or product. Federal and state governments have a broad range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud, including the exclusion of a hospital or other health care provider from participation in the Medicare/Medicaid programs, civil monetary penalties, and suspension of Medicare/Medicaid payments. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available sanctions may be, and often are, imposed for each violation. Laws governing fraud and abuse may apply to hospitals and other health care providers, and to nearly all individuals and entities with which a hospital or other health care provider does business. Fraud investigations, settlements, prosecutions and related publicity can have a catastrophic effect on hospitals and other health care providers. See Enforcement Activity below. Major elements of these often highly technical laws and regulations are generally summarized below. False Claims Act. The federal False Claims Act, or FCA makes it illegal to submit or present a false, fictitious or fraudulent claim to the federal government, and may include claims that are simply erroneous. FCA investigations and cases have become common in the health care field and may cover a range of activity from intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Violation or alleged violation of the FCA can result in settlements that require multi-million dollar payments and compliance agreements. The FCA also permits individuals to initiate civil actions on behalf of the government in lawsuits called qui tam actions. Qui tam plaintiffs, or whistleblowers, can share in the damages recovered by the government or recover independently if the government does not participate. The FCA has become one of the government s primary weapons against health care fraud. FCA violations or alleged violations could lead to settlements, fines, exclusion or reputation damage that could have a material adverse impact on a hospital or other health care provider. Recent federal legislation creates financial incentives for states to enact analogous false claims acts. The legislation also imposes financial penalties on any state that does not require health care providers receiving more than $5 million in annual Medicaid revenues to adopt policies and train employees on the federal and state false claims acts. Anti-Kickback Law. The federal Anti-Kickback Law is a criminal statute that prohibits anyone from soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for a referral (or to induce a referral) for any item or service that may be paid by any federal or state health care program. The Anti-Kickback Law applies to many common health care transactions between persons and entities with which a hospital or health care system does business, including hospital-physician joint ventures, hospital-physician integration vehicles (such as a medical foundation), medical director agreements, physician recruitment agreements, physician office leases, purchases from vendors, and other transactions. Violation or alleged violation of the Anti-Kickback Law can result in settlements that require multi-million dollar payments and compliance agreements. The Anti-Kickback Law can be prosecuted either criminally or civilly. Each violation is a felony, subject to a fine of up to $25,000 for each act (which may be each item or each bill sent to a federal program), imprisonment and/or exclusion from the Medicare and Medicaid programs. In addition, civil monetary penalties of $10,000 per item or service in noncompliance (which may be each item or each bill sent to a federal program) or an assessment of three times the amount claimed may be imposed. Stark Referral Law. The federal Stark statute prohibits the referral by a physician of Medicare and Medicaid patients for certain designated health services (including inpatient and outpatient hospital services, clinical laboratory services, and various diagnostic imaging services) to entities with which the referring physician has a financial relationship. It also prohibits a hospital or other health care provider furnishing the designated services from billing Medicare, or any other payor or individual, for services performed pursuant to a prohibited referral. 23

32 The government does not need to prove that the entity knew that the referral was prohibited to establish a Stark violation. Many ordinary business practices and economically desirable arrangements between physicians and hospitals or other health care providers arguably constitute financial relationships within the meaning of the Stark statute. The prohibition on referrals and billing is triggered by the financial relationship unless the relationship fully complies with one of several exceptions. Most providers of the designated health services with physician relationships have some exposure to liability under the Stark statute. Medicare may deny payment for all services related to a prohibited referral and a hospital or other health care provider that has billed for prohibited services may be obligated to refund the amounts collected from the Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons is found to violate Stark, a hospital could be obligated to repay CMS for the payments received from Medicare for all of the heart surgeries performed by all of the physicians in the group for the duration of the lease; a potentially significant amount. The government may also seek substantial civil monetary penalties, and in some cases, a hospital or other health care provider may be liable for fines up to three times the amount of any monetary penalty, and/or be excluded from the Medicare and Medicaid programs. Potential repayments to CMS, settlements, fines or exclusion for a Stark violation or alleged violation could have a material adverse impact on a hospital or other health care provider. HIPAA. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, adds additional criminal sanctions for health care fraud and applies to all health care benefit programs, whether public or private. HIPAA also provides for punishment of a health care provider for knowingly and willfully embezzling, stealing, converting or intentionally misapplying any money, funds or other assets of a health care benefit program. A health care provider convicted of health care fraud could be excluded from Medicare. Exclusions from Medicare or Medicaid Participation. The government may exclude a hospital or other health care provider from Medicare/Medicaid program participation that is 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, felony fraud against any federal, state or locally financed health care program or a felony offense relating to the illegal manufacture, distribution, prescription or dispensing of a controlled substance. The government also may exclude individuals or entities under certain other circumstances, such as an unrelated conviction of fraud or other financial misconduct relating either to the delivery of health care in general or to participation in a federal, state or local government program. Exclusion from the Medicare/Medicaid program means that a hospital or other health care provider would be terminated from participation and no program payments can be made. Any hospital exclusion could be a materially adverse event, even within a large hospital system. Administrative Enforcement. Administrative regulations may require less proof of a violation than do criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of administrative enforcement actions. Compliance with Conditions of Participation. CMS, in its role of monitoring participating providers compliance with conditions of participation in the Medicare program, may determine that a provider is not in compliance with its conditions of participation. In that event, a notice of termination of participation may be issued or other sanctions potentially could be imposed. Enforcement Activity. Enforcement activity against hospitals and health care providers has increased and enforcement authorities have adopted aggressive approaches. Hospitals and other health care providers are frequently subject to audits, investigations or other enforcement actions regarding the health care fraud laws mentioned above. In addition, enforcement agencies increasingly pursue sanctions for violations of health care fraud and abuse laws through civil administrative actions. Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and/or similar payments and/or by instituting criminal action. In addition, the cost of defending such an action, the time and management attention consumed, and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a hospital or other health care provider could experience materially adverse settlement costs, as 24

33 well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and business of a hospital or other health care provider, regardless of outcome. Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above and, therefore, penalties or settlement amounts can be compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals or health care providers in a health system, as the government often extends enforcement actions regarding health care fraud to other hospitals or health care providers in the same organization. Therefore, Medicare fraud related risks identified as being materially adverse as to a hospital or other health care provider could have materially adverse consequences to a health system taken as a whole. Liability Under State Fraud Laws. Hospitals and other health care providers in Pennsylvania also are subject to enforcement actions by the Pennsylvania Medicaid Fraud Unit, which pose the possibility of material adverse impact for the same reasons as the federal fraud statutes. Privacy Requirements. Federal and state laws address the confidentiality of individuals health information. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of relevant federal and state statutes and regulations or authorized by the patient. HIPAA s confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial information where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability. HIPAA imposes civil monetary penalties for violations and criminal penalties for knowingly obtaining or using individually identifiable health information. The penalties range from $50,000 to $250,000 and/or imprisonment if the information was obtained or used with the intent to sell, transfer or use the information for commercial advantage, personal gain or malicious harm. EMTALA. The Emergency Medical Treatment and Active Labor Act, or EMTALA, is a federal civil statute that requires hospitals to conduct a medical screening for emergency conditions and to stabilize a patient s emergency medical condition before releasing, discharging or transferring the patient. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per offense and exclusion from Medicare and Medicaid programs. In addition, a hospital may be liable for any claim by an individual who has suffered harm as a result of a violation of EMTALA. Licensing, Surveys, Investigations and Audits. Health facilities are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements of state licensing agencies and the JCAHO. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections or other reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations imposed on, hospital licenses, certifications or accreditations could reduce hospital utilization or revenues, or a hospital s ability to operate all or a portion of its facilities. Environmental Laws and Regulations. Hospitals are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. These include but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at a hospital; and requirements for training employees in the proper handling and management of hazardous materials and wastes. Hospitals may be subject to requirements related to investigating and remedying hazardous substances located on their property, including such substances that may have migrated off the property. Typical hospital operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with the environmental laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt 25

34 operations and/or increase their cost; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance. Business Relationships and Other Business Matters Integrated Physician Groups. Hospitals and health care systems often own, control or have affiliations with relatively large physician groups. Generally, the sponsoring hospital or health care system will be the primary capital and funding source for such alliances and may have an ongoing financial commitment to provide growth capital and support operating deficits. The Obligated Group contains six Members that are physician groups: Allegheny Medical Practice Network, Allegheny Specialty Practice Network, West Penn Physician Practice Network, West Penn Allegheny Oncology Network, West Penn Corporate Medical Services, Inc. and West Penn Specialty MSO, Inc.; for a description of these groups, see APPENDIX A MEMBERS OF THE OBLIGATED GROUP Physician Network Organizations. These types of alliances are generally designed to respond to trends in the delivery of medicine to better integrate hospital and physician care, to increase physician availability to the community and/or to enhance the managed care capability of the affiliated hospitals and physicians. These goals may not be achieved, however, and an unsuccessful alliance may be costly and counterproductive to all of the above-stated goals. Integrated delivery systems carry with them the potential for legal or regulatory risks in varying degrees. The ability of hospitals or health care systems to conduct integrated physician operations may be altered or eliminated in the future by legal or regulatory interpretation or changes, or by health care fraud enforcement. In addition, participating physicians may seek their independence for a variety of reasons, thus putting a hospital or health care system s investment at risk, and potentially reducing its managed care leverage and/or overall utilization. Indigent Care, Underinsured and Uninsured Patients. Tax-exempt hospitals may be susceptible to economic and political changes that could increase the number of indigents or their responsibility for caring for this population. General economic conditions that affect the number of employed individuals who have health coverage affects 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 by such hospitals and other providers. It also is possible that future legislation could require that tax-exempt hospitals and other providers maintain minimum levels of indigent care as a condition to federal income tax exemption or exemption from certain state or local taxes. Physician Medical Staff. The primary relationship between a hospital and physicians who practice in it is through a hospital s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may obtain medical staff membership and clinical privileges, and criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges or who have such membership or privileges curtailed or revoked often file legal actions against hospitals and medical staffs. 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 a hospital s governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties. Physician Supply. Sufficient community-based physician supply is important to hospitals. CMS annually reviews overall physician reimbursement formulas. Changes to physician compensation formulas could lead to physicians locating their practices in communities with lower Medicare populations. Hospitals may be required to invest additional resources in recruiting and retaining physicians, or may be required to increase the percentage of employed physicians in order to continue serving the growing population base and maintain market share. Competition Among Health Care Providers. Increased competition from a wide variety of sources, including specialty hospitals, other hospitals and health care systems, inpatient and outpatient health care facilities, long-term care and skilled nursing services facilities, clinics, physicians and others, may adversely affect the utilization and revenues of hospitals. Existing and potential competitors may not be subject to various restrictions applicable to hospitals, and competition, in the future, may arise from new sources not currently anticipated or 26

35 prevalent. For a description of the competition facing the Members of the Obligated Group, see APPENDIX A SERVICE AREA AND COMPETITION - Competitors. Specialty hospital developments that attract away an important segment of an existing hospital s admitting specialists may be particularly damaging. For example, some large hospitals may have significant dependence on cardiovascular and/or orthopedic surgery programs, as revenue streams from those programs may cover significant fixed overhead costs. If a significant component of such a hospital s cardiovascular or orthopedic surgeons develop their own specialty hospital (alone or in conjunction with a growing number of specialty hospital operators and promoters) taking with them their patient base, a hospital could experience a rapid and dramatic decline in net revenues that is not proportionate to the number of patient admissions or patient days lost. It is also possible that the competing specialty hospital, as a for-profit venture, would not accept indigent patients or other payors and government programs, leaving low-pay patient populations in the full-service hospital. In certain cases, such an event could be materially adverse to a hospital. Likewise, freestanding ambulatory surgery centers may attract away significant commercial outpatient services traditionally performed at hospitals. Commercial outpatient services, currently among the most profitable for hospitals, may be lost to competitors who can provide these services in an alternative, less costly setting. Fullservice hospitals rely upon the revenues generated from commercial outpatient services to fund other less profitable services, and the decline of such business may result in the significant reduction of profitable income. Competing ambulatory surgery centers, more likely a for-profit business, may not accept indigent patients or low paying programs and would leave these populations to receive services in the hospital setting. Consequently, hospitals are vulnerable to competition from ambulatory surgery centers. Additionally, scientific and technological advances, new procedures, drugs and devices, preventive medicine and outpatient health care delivery may reduce utilization and revenues of a hospital in the future or otherwise lead the way to new avenues of competition. In some cases, hospital investment in facilities and equipment for capital-intensive services may be lost as a result of rapid changes in diagnosis, treatment or clinical practice brought about by new technology or new pharmacology. Antitrust. Antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, payor contracting, physician relations, joint ventures, merger, affiliation and acquisition activities, certain pricing or salary setting activities, and anticompetitive business conduct or practices. The application of the federal and state antitrust laws to health care is evolving, and therefore not always clear. Currently, the most common areas of potential liability for hospitals and other health care providers are joint action among providers with respect to payor contracting, medical staff credentialing disputes and anticompetitive business conduct or practices by hospitals and other health care providers with sufficiently large market share. Violation of the antitrust laws could result in criminal and/or civil enforcement proceedings by federal and state agencies, as well as actions by private litigants. In certain actions, private litigants may be entitled to treble damages, and in others, governmental entities may be able to assess substantial monetary fines. Moreover, successful private or governmental litigants may obtain injunctive relief that can affect the defendant s ability to conduct or continue certain business practices or activities. Labor Relations and Collective Bargaining. Hospitals are large employers with a wide diversity of employees. Increasingly, employees of hospitals are becoming unionized, and many hospitals have collective bargaining agreements with one or more labor organizations. Employees subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Renegotiation of such agreements upon expiration may result in significant cost increases to hospitals. Employee strikes or other adverse labor actions may have an adverse impact on operations, revenue and hospital reputation. Certain employees of the Members of the Obligated Group currently are covered by collective bargaining agreements. See APPENDIX A EMPLOYEES. Health Care Worker Classification. Health care providers, like all businesses, are required to withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the employer becomes 27

36 liable for payment of the tax imposed on the employee. On the other hand, businesses are not required to withhold federal taxes from amounts paid to a worker classified as an independent contractor. The Internal Revenue Services (the IRS ) has established criteria for determining whether a worker is an employee or an independent contractor for tax purposes. If the IRS were to reclassify a significant number of hospital independent contractors (e.g., physicians) as employees, back taxes and penalties could be material. Staffing. In recent years, the health care industry has suffered from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. A significant factor underlying this trend includes a decrease in the number of persons entering such professions. This is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. Competition for employees, coupled with increased recruiting and retention costs will increase hospital operating costs, possibly significantly, and growth may be constrained. This trend could have a material adverse impact on hospitals. Professional Liability Claims and General Liability Insurance. In recent years, the number of professional and general liability suits and the dollar amounts of damage recoveries have increased in health care nationwide, resulting in substantial increases in malpractice insurance premiums, higher deductibles and generally less coverage. Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against hospitals and other health care providers. Insurance does not provide coverage for judgments for punitive damages. Litigation also arises from the corporate and business activities of hospitals, from a hospital s status as an employer or as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims or business disputes are not covered by insurance or other sources and may, in whole or in part, be a liability of the hospital or other health care provider if determined or settled adversely. There is no assurance that the Obligated Group will be able to maintain coverage amounts currently in place in the future, that the coverage will be sufficient to cover malpractice judgments rendered against the Members of the Obligated Group or that such coverage will be available at a reasonable cost in the future. For a description of insurance coverage maintained by the Obligated Group, see APPENDIX A INSURANCE. Tax-Exempt Status and Other Tax Exemption Maintenance of the Tax-Exempt Status of the Obligated Group. The tax-exempt status of the Bonds depends upon those Members of the Obligated Group benefiting from the use of Bond proceeds maintaining their status as organizations described in section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and other permissible purposes and their avoidance of transactions that may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities that do not conduct large-scale business operations and activities, they often do not adequately address the myriad of operations and transactions entered into by a modern health care organization. Although traditional activities of health care providers, such as medical office building leases, have been the subject of interpretations by the IRS in the form of Private Letter Rulings, many activities or categories of activities have not been fully addressed in any official opinion, interpretation or policy of the IRS. The IRS has periodically conducted audit and other enforcement activity regarding tax-exempt health care organizations. The IRS conducts special audits of large tax-exempt health care organizations with at least $500 million in assets or $1 billion in gross receipts. Such audits are conducted by teams of revenue agents, often take years to complete and require the expenditure of significant staff time by both the IRS and taxpayers. These audits examine a wide range of possible issues, including tax-exempt bond financings, partnerships and joint ventures, retirement plans and employee benefits, employment taxes, political contributions and other matters. If the IRS were to find that a hospital or health care system has participated in activities in violation of certain regulations or rulings, the tax-exempt status of such entity could be in jeopardy. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit health care organizations, it could do so in the 28

37 future. Loss of tax-exempt status by a 501(c)(3) Member of the Obligated Group potentially could result in loss of tax exemption of the Bonds and of other tax-exempt debt of the Obligated Group. Defaults in covenants regarding the Bonds and other related tax-exempt debt and obligations likely would be triggered. Loss of tax-exempt status also could result in substantial tax liabilities on income of the Obligated Group. In some cases, the IRS has imposed substantial monetary penalties on tax-exempt hospitals in lieu of revoking their tax-exempt status. In those cases, the IRS and exempt hospitals entered into settlement agreements requiring substantial payments to the IRS. In lieu of revocation of exempt status, the IRS may impose penalty excise taxes on certain excess benefit transactions involving 501(c)(3) organizations and disqualified persons. An excess benefit transaction is one in which a disqualified person or entity receives more than fair market value from the exempt organization or pays the exempt organization less than fair market value for property or services, or shares the net revenues of the tax-exempt entity. A disqualified person is a person (or an entity) who is in a position to exercise substantial influence over the affairs of the exempt organization during the five years preceding an excess benefit transaction. The statute imposes excise taxes on the disqualified person and any organization manager who knowingly participates in an excess benefit transaction. These rules do not penalize the exempt organization itself, so there would be no direct impact on the Obligated Group or the tax status of the Bonds if an excess benefit transaction were subject to IRS enforcement, pursuant to these intermediate sanctions rules. State and Local Tax Exemption. Until recently, the Commonwealth of Pennsylvania has not been as active as the IRS in scrutinizing the income tax exemption of health care organizations. In Pennsylvania, it is possible that legislation may be proposed to strengthen the role of the Pennsylvania Department of Revenue and the Attorney General in supervising nonprofit health systems. It is likely that the loss by the Obligated Group of federal income tax exemption would also trigger a challenge to its state income tax exemption. Depending on the circumstances, such event could be material and adverse. State, county and local taxing authorities undertake audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where authorities are dissatisfied with the amount of services provided to indigents, the real property tax-exempt status of the health care providers has been questioned. The majority of the real property of the Obligated Group is currently treated as exempt from real property taxation. Although the real property tax exemptions of the Obligated Group with respect to their core hospital facilities, have not, to the knowledge of management, been under challenge or investigation, an audit could lead to a challenge that could adversely affect the real property tax exemptions of the Obligated Group. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the financial condition of the Obligated Group by requiring payment of income, sales, local property or other taxes. Unrelated Business Income. In recent years, the IRS and state, county and local tax authorities have audited the operations of tax-exempt hospitals and health care systems with respect to their exempt activities and the generation of unrelated business taxable income, or UBTI. Most hospitals and health care systems participate in activities that may generate UBTI. An investigation or audit could result in assessment of taxes, interest and penalties with respect to unreported UBTI and in some cases ultimately could affect the tax-exempt status of such entity, as well as the exclusion from gross income for federal income tax purposes of the interest payable on the Bonds and other tax-exempt debt of the Obligated Group. Maintenance of Tax-Exempt Status of Interest on the Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds, limitations on the investment earnings of bond proceeds prior to expenditure, a requirement that certain investment earnings on bond proceeds be paid periodically to the United States Treasury, and a requirement that the Authority file an information report with the IRS. The Parent has covenanted in the Loan Agreement that it will comply with such requirements. Future failure by the Obligated Group to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance. The Authority has covenanted in the Indenture that it will not take any action 29

38 or refrain from taking any action that would cause interest on the Bonds to be included in gross income for federal income tax purposes. IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds, including the use of their proceeds, in the charitable organization sector. The Bonds may be, from time to time, subject to audits by the IRS. Bond Counsel will render an opinion with respect to the tax-exempt status of the Bonds, as described under the caption TAX EXEMPTION. The Obligated Group has not sought to obtain a private letter ruling from the IRS with respect to the Bonds, and the opinion of Bond Counsel is not binding on the IRS. There is no assurance that an IRS examination of the Bonds will not adversely affect the market value of the Bonds. See TAX EXEMPTION herein. Limitations on Contractual and Other Arrangements Imposed by the Internal Revenue Code. As taxexempt organizations, the 501(c)(3) Members of the Obligated Group are limited with respect to their use of practice income guarantees, reduced rent on medical office space, low interest loans, joint venture programs and other means of recruiting and retaining physicians. The IRS scrutinizes a broad variety of contractual relationships commonly entered into by hospitals and health care systems and has issued a detailed audit guide suggesting that field agents scrutinize numerous activities of hospitals and health care systems in an effort to determine whether any action should be taken with respect to limitations on or revocation of their tax-exempt status or assessment of additional tax. Any suspension, limitation, or revocation of any 501(c)(3) Member of the Obligated Group s tax-exempt status or assessment of significant tax liability would have a materially adverse effect on the Obligated Group and might lead to loss of tax exemption of interest on the Bonds. Other Risk Factors Investments. The Members of the Obligated Group have significant holdings in a broad range of investments. Market fluctuations may affect the value of those investments and those fluctuations may be and historically have been at times material. Bankruptcy and Insolvency. In the event that the Members of the Obligated Group filed for protection from creditors under the United States Bankruptcy Code, the rights and remedies of the Owners of the Bonds would be subject to various provisions of the United States Bankruptcy Code. If the Members of the Obligated Group were to commence a proceeding in bankruptcy, payments made by such Members of the Obligated Group during the 90- day period immediately preceding such commencement (or, under certain circumstances, during the preceding oneyear period) may be voided as preferential transfers to the extent such payments allow the recipients thereof to receive more than they would have received in the event of the liquidation of the Members of the Obligated Group. Security interests and other liens granted by the Obligated Group to the Trustee or the Master Trustee and perfected during such preference period may also be voided as preferential transfers to the extent such security interest or other lien secures obligations that arose prior to the date of such grant or perfection. A bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against Members of the Obligated Group and their property and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property as well as various other actions to enforce, maintain or enhance the rights of the Trustee and the Master Trustee. If the bankruptcy court so ordered, the property of the Members of the Obligated Group, including their Gross Revenues, could be used for the financial rehabilitation of the Members of the Obligated Group despite any security interest of the Trustee therein. The rights of the Trustee and the Master Trustee to enforce their respective interests and other liens could be delayed during the pendency of the rehabilitation proceeding. The Members of the Obligated Group could also file a plan for the adjustment of its debts in any such proceeding which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are conditions that the plan be feasible and that it shall have 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 class cast votes 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 30

39 with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly. Any such plan could adversely affect the Owners and Beneficial Owners of the Bonds. Pennsylvania law also authorizes a debtor to seek protection under state insolvency statutes, and authorizes the appointment of a receiver as alternatives to federal bankruptcy proceedings. Because there are few state insolvency proceedings or receiverships to provide guidance, and substantial discretion to interpret the law and compromise claims exists in the powers of an insolvency court or receiver, there is substantial uncertainty about the rights of creditors and secured parties in such proceedings. In the event of bankruptcy or insolvency of Members of the Obligated Group, there is no assurance that certain covenants, including tax covenants, contained in the Indenture, the Loan Agreement or the Master Indenture and certain other documents would survive. Accordingly, the Members of the Obligated Group, as debtors in possession, or a bankruptcy trustee could take action which might adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. In addition, the bankruptcy of a health plan or physician group that is a party to a significant managed care arrangement with the Obligated Group or any of its affiliates, or that of any significant contract payor obligated to any one or more of the Obligated Group or its affiliates, could have material adverse effects on the Obligated Group. Construction Delays and Cost Overruns. The Members of the Obligated Group are currently undertaking a number of construction projects, including certain of the projects to be financed with Bond proceeds, and are expected to undertake additional projects in the future. Completion of such projects is subject to approval by the appropriate governmental bodies. In addition, numerous risks are involved in any such projects, including delays and increased costs due to strikes, shortages of materials, adverse weather conditions, changes in project design, inflation, and numerous other factors. Therefore, there can be no assurances that the projects currently pursued or undertaken in the future by the Members of the Obligated Group will be finished on time or within budget. Other Future Risks. In the future, the following factors, among others, may adversely affect the operations of hospitals and other health care providers, including the Obligated Group, or the market value of the Bonds, to an extent that cannot be determined at this time. (a) Adoption of legislation that would establish a national or statewide single-payor health program or that would establish national, statewide or otherwise regulated rates applicable to hospitals and other health care providers. (b) Reduced demand for the services of the Members of the Obligated Group that might result from decreases in population. (c) (d) Consolidation of managed care plans or other payors. Bankruptcy of an indemnity/commercial insurer, managed care plan or other payor. (e) Efforts by insurers and governmental agencies to limit the cost of hospital services, to reduce the number of beds and to reduce the utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety and outpatient care, or comparable regulations or attempts by third-party payors to control or restrict the operations of certain health care facilities. (f) Efforts by employers to shifts costs of medical care to employees through increased deductibles and restrictions on covered services. (g) The occurrence of a pandemic or a natural or man-made disaster that could damage the Obligated Group s facilities, interrupt utility service to the facilities, result in an abnormally high demand for health care services or workforce loss or otherwise impair the Obligated Group s operations and the generation of revenues from the facilities. 31

40 (h) Limitations on the availability of, and increased compensation necessary to secure and retain, nursing, technical and other professional personnel. The Authority NO LITIGATION There is no controversy or litigation of any nature now pending against the Authority for which service has been perfected restraining or enjoining the issuance or delivery of the Bonds or questioning or affecting the validity of the Bonds or the proceedings and authority under which they are issued nor, to the knowledge of the Authority, is any such litigation threatened. There is no litigation pending for which service has been perfected which in any manner questions the power of the Authority to issue the Bonds and to secure the Bonds in accordance with the provisions of the Indenture, nor is there now pending any litigation which in any manner questions the powers of the Authority nor, to the knowledge of the Authority, is any such litigation threatened. The Obligated Group There is no action, suit, proceeding, inquiry or investigation at law or before or by any court, public board or body known to the Obligated Group to be pending, or threatened, against any Member of the Obligated Group nor, to its knowledge, is there any basis therefor, wherein an unfavorable decision, ruling or finding would adversely affect the validity of the Bonds, the Loan Agreement, the Obligation, the Master Indenture or the Indenture. RATINGS Moody s, S&P and Fitch have provided ratings for the Bonds of Ba2, BB and BB, respectively. These ratings reflect only the view of such organizations, and an explanation of the significance of such ratings may be obtained only from the rating agency furnishing such rating. There is no assurance that such ratings will be maintained for any given period of time or that such ratings will not be revised downward, suspended or withdrawn entirely by such rating agencies, if in their sole judgment, circumstances so warrant. Any such downward revision, suspension or withdrawal of such ratings may have an adverse effect on the market price of the Bonds. FINANCIAL ADVISOR Shattuck Hammond Partners LLC (New York, New York) has served as Financial Advisor to the Parent on matters related to the structuring and negotiations related to the Bonds. UNDERWRITING The Underwriters will agree, subject to certain conditions, to purchase the Bonds from the Authority at an aggregate price of $746,613,115.80, being the principal amount of the Bonds of $752,370,000, plus a net original issue premium of $6,356, and less an underwriters' discount of $12,113, The Underwriters will be obligated to purchase all Bonds if any are purchased. The Bonds may be offered and sold by the Underwriters to certain dealers and others at prices lower than such public offering prices, and such public offering prices may be changed, from time to time, by the Underwriters. The Parent and the other Members of the Obligated Group will agree to indemnify the Authority and the Underwriters against certain liabilities, including certain liabilities under federal securities laws. VERIFICATION OF MATHEMATICAL CALCULATIONS Causey, Demgen & Moore (the Verification Agent ) will verify from the information provided to it the mathematical accuracy, as of the date of delivery of the Bonds, of (a) the computations to determine that the 32

41 anticipated receipts from the investments and cash deposits to be held in escrow under the various escrow arrangements will be sufficient to pay, when due, the principal, interest and call premium payment requirements, if any, of the Bonds to be refunded and (b) the computations of yield on both the Bonds and the investments held under the various escrow arrangements used by Bond Counsel in its determination that interest on the Bonds is not included in gross income of the owners thereof for federal income tax purposes. The Verification Agent will express no opinion on the assumptions provided to it or as to the exemption from taxation of interest on the Bonds. CONTINUING DISCLOSURE Because the Bonds are limited obligations of the Authority, payable solely from amounts received from the Parent and other Obligated Group Members, financial or operating data concerning the Authority is not material to an evaluation of the offering of the Bonds or to any decision to purchase, hold or sell the Bonds. Accordingly, the Authority is not providing any such information. The Parent has undertaken all responsibilities for any continuing disclosure to Holders of the Bonds, as described below, and the Authority shall have no liability to the Holders of the Bonds or any other Person with respect to Rule 15c2-12, referred to in this Official Statement as the Rule, promulgated under the Securities Exchange Act of 1934 by the Securities and Exchange Commission. The Parent will covenant for the benefit of Holders and Beneficial Owners of the Bonds to provide to the Trustee, as dissemination agent, for dissemination (i) certain financial information and operating data relating to the Parent by not later than 120 days following the end of the Parent s fiscal year (which currently is June 30) (referred to as the Annual Report ), commencing with the report for the June 30, 2007 fiscal year (due October 28, 2007), (ii) within 60 days after the end of each of the first three fiscal quarters of each year, commencing with the fiscal quarter ending September 30, 2007, certain unaudited financial information relating to the Parent, and (iii) notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed by the dissemination agent on behalf of the Parent with each Nationally Recognized Municipal Securities Information Repository and with a repository designated by the Commonwealth of Pennsylvania as the state depository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission (referred to as the State Repository). As of the date of this Official Statement, there is no State Repository. The notices of material events will be filed by the dissemination agent on behalf of the Parent with each Nationally Recognized Municipal Securities Information Repository and with the State Repository, if any. See APPENDIX F PROPOSED FORM OF CONTINUING DISCLOSURE AGREEMENT. These covenants have been made in order to assist the Underwriters in complying with the Rule. The Parent has never failed to comply with its obligations under any previous undertaking to provide annual reports or notices of material events. TAX EXEMPTION In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the Code ) and is exempt from present Commonwealth of Pennsylvania income taxation. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in APPENDIX E hereto. To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes original issue discount, the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and present Commonwealth of Pennsylvania income taxation. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the 33

42 Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium Bonds ) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. 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 Bonds. The Authority and the Parent have made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. 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), or any other matters coming to Bond Counsel s attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. In addition, Bond Counsel has relied, among other things, on the opinion of Cohen & Grigsby, P.C., counsel to the Members of the Obligated Group, regarding the current qualification of certain Members of the Obligated Group as organizations described in Section 501(c)(3) of the Code. Such opinion is subject to a number of qualifications and limitations. Bond Counsel has also relied upon representations of the Parent concerning the Members of the Obligated Group s unrelated trade or business activities as defined in Section 513(a) of the Code. Neither Bond Counsel nor counsel to the Members of the Obligated Group has given any opinion or assurance concerning Section 513(a) of the Code and neither Bond Counsel nor counsel to the Members of the Obligated Group can give or has given any opinion or assurance about the future activities of the Members of the Obligated Group, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the resulting changes in enforcement thereof by the Internal Revenue Service. Failure of certain Members of the Obligated Group to be organized and operated in accordance with the Internal Revenue Service s requirements for the maintenance of their status as organizations described in Section 501(c)(3) of the Code, or to operate the facilities financed and refinanced by the Bonds in a manner that is substantially related to their charitable purposes under Section 513(a) of the Code, may result in interest payable with respect to the Bonds being included in federal gross income, possibly from the date of the original issuance of the Bonds. Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from present Commonwealth of Pennsylvania income taxation, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Beneficial Owner s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Future legislation, if enacted into law, or clarification of the Code may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Code may also affect the market price for, or marketability of, the Bonds. Prospective purchasers 34

43 of the Bonds should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to which Bond Counsel expresses no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service ( IRS ) or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority or the Members of the Obligated Group, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The Authority and the Parent have covenanted, however, to comply with the requirements of the Code. Bond Counsel s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority, the Parent or the Beneficial Owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the Authority, the Parent and their appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Authority or the Parent legitimately disagree, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the Authority, the Members of the Obligated Group or the Beneficial Owners to incur significant expense. OTHER LEGAL MATTERS The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the Authority by its counsel, Thorp Reed & Armstrong LLP; for the Obligated Group by its counsel, Cohen & Grigsby, P.C.; and for the Underwriters by their counsel, Ropes & Gray LLP. 35

44 MISCELLANEOUS The summaries and descriptions herein and incorporated herein of the Loan Agreement, Obligation No. 1, the Master Indenture, the Indenture, the Continuing Disclosure Agreement and any other documents relating to the Bonds and not purporting to be quoted in full are qualified in their entirety by reference to the complete provisions of such documents, copies of which may be obtained from the Parent and from the Underwriters during the period of the offering and from the Trustee thereafter. The distribution of this Official Statement by the Authority has been duly authorized by the Authority and approved by the Parent. ALLEGHENY COUNTY HOSPITAL DEVELOPMENT AUTHORITY By: /s/ James M. Edwards Authorized Officer i Approved by: WEST PENN ALLEGHENY HEALTH SYSTEM, INC. By: /s/ Jerry J. Fedele, Esq. Authorized Officer i 36

45 APPENDIX A Certain Information Regarding West Penn Allegheny Health System Obligated Group The information included below has been obtained from the Parent And the Other Obligated Group Members

46 [THIS PAGE INTENTIONALLY LEFT BLANK]

47 TABLE OF CONTENTS Page INTRODUCTION...1 GOVERNANCE OF THE SYSTEM...7 STRATEGIC INITIATIVES...12 CAPITAL PLANNING AND NEEDS...15 ALLEGHENY GENERAL HOSPITAL...16 THE WESTERN PENNSYLVANIA HOSPITAL...18 ALLE-KISKI MEDICAL CENTER...20 CANONSBURG GENERAL HOSPITAL...21 PHYSICIAN ORGANIZATIONS...22 SERVICE AREA AND COMPETITION...23 MARKET SHARE AND CLINICAL PRODUCT LINES...29 MEDICAL STAFF...32 EMPLOYEES...34 LICENSES AND ACCREDITATION...35 SOURCES OF REVENUES...35 HEALTH SYSTEM FINANCIAL AND OPERATING INFORMATION...37 EMPLOYEE RETIREMENT PLANS...55 LITIGATION...57 INSURANCE...57 (i)

48 West Penn Allegheny Health System 6 Acute Care Hospital Campuses B E A V E R B U T L E R A R M S T R O N G W E S T M O R E L A N D 3 Ambulatory Care Center/Imaging Centers 19 Cancer Network Locations (7 additional locations outside the PSA) 4 Dialysis Center (2 additional locations outside the PSA) 213 Physician Practice Locations (20 additional locations outside the PSA) NOTE: Symbols may designate more than one location W A S H I N G T O N NEW YORK OHIO

49 INTRODUCTION West Penn Allegheny Health System, Inc. (the "Parent") provides the following information in connection with the issuance of the Allegheny County Hospital Development Authority Health System Revenue Bonds (West Penn Allegheny Health System), Series 2007A and 2007B (collectively, the "Bonds"). Except as otherwise specified, all references herein to years with respect to financial and statistical data refer to the Parent's fiscal year ended June 30. The information provided in this Appendix A about the Obligated Group, the Parent, the Health System as a whole, and certain matters concerning the health care industry is intended to be read together with the information provided in the front part of this Official Statement and Appendix B. Capitalized terms used in this Appendix A and not otherwise defined are used as defined in the front part and in Appendix C of this Official Statement. Overview The Parent, headquartered in Pittsburgh, Pennsylvania, controls and oversees the operation of seventeen affiliates which together comprise West Penn Allegheny Health System (the "Health System"). The Health System is a diversified nonprofit integrated health care delivery system providing primary, tertiary and quaternary health care services to residents of Western Pennsylvania, Eastern Ohio and Northern West Virginia. The Health System carries out its mission of community-oriented health care through six tertiary and community hospital campuses operating over 2,000 licensed beds, over 35 outpatient and diagnostic treatment facilities, home health and hospice care providers and affiliated multi-specialty physician groups. Although the Health System itself was formed in 2000, several hospital constituents of the Health System are institutions in the greater Pittsburgh area with long histories, two of which, Allegheny General Hospital and The Western Pennsylvania Hospital, were founded in 1885 and 1848, respectively. During 2006, the Health System s six hospital campuses (the Hospitals ) discharged more than 78,000 inpatients, recorded over 180,000 emergency visits and delivered over 4,700 newborns. Based on combined revenues and hospital discharges, the Health System is the second-largest provider of inpatient services in the Pittsburgh market, with a 19.4% market share of discharges in 2006 (see Service Area and Competition ). The Health System reported net patient service revenue from patient care activities of more than $1.35 billion, net operating income of $16.5 million and an excess of revenues over expenses of $21 million on a consolidated basis in At June 30, 2006, the Health System s total consolidated assets were $1.25 billion, its total consolidated liabilities were $996 million, and its consolidated net assets were $250 million. In addition to providing hospital, hospice and home health services, the Health System provides residents of Western Pennsylvania with clinical services through a community-focused ambulatory care network that includes, as of December 31, 2006, three ambulatory care sites (two with comprehensive imaging services), nine rehabilitation sites, four dialysis centers, 21 oncology treatment sites, 155 primary care physicians in 68 locations, and 379 specialty physicians in 139 locations. A-1

50 The Health System has a long-standing commitment to academic medicine. Two members of the Health System, Allegheny General Hospital and The Western Pennsylvania Hospital, sponsor 46 medical and surgical residency and fellowship programs for graduate medical training in specialties and subspecialties currently accredited by the Accreditation Council for Graduate Medical Education. In addition, Allegheny General Hospital is a sponsor of undergraduate medical education rotations as an affiliate of Drexel University College of Medicine, and The Western Pennsylvania Hospital is affiliated with Temple University School of Medicine. Both are teaching affiliates of Lake Erie College of Osteopathic Medicine. The Parent oversees the operations of eighteen affiliates, fifteen of which are members of the Obligated Group. The Parent is a Member and is the Credit Group Representative. History of the Health System The Parent formed the Health System in 2000 by becoming the common corporate parent of two previously existing health care systems: The Healthcare Alliance of Western Pennsylvania ( HAWP ) and The Western Pennsylvania Healthcare System ( WPHS ). HAWP was formed in 1999 to become the sole member of Allegheny General Hospital, Allegheny University Medical Center (the predecessor of Forbes Health System, now part of The Western Pennsylvania Hospital, and Alle-Kiski Medical Center), Allegheny University Medical Center- Canonsburg (predecessor of Canonsburg General Hospital) and Allegheny-Singer Research Institute, as well as Allegheny Medical Practice Network and Allegheny Specialty Practice Network, entities incorporated in 1999 to employ and manage physician practices. The HAWP entities were previously part of the Western Pennsylvania operations of the Allegheny Health, Education, and Research Foundation ( AHERF ), which filed for bankruptcy in WPHS was the former parent organization for Suburban General Hospital (now part of Allegheny General Hospital), Suburban Health Foundation, The Western Pennsylvania Hospital, West Penn Corporate Medical Services, Inc., West Penn Specialty MSO, Inc., Friendship Insurance Company, Ltd. and The Western Pennsylvania Hospital Foundation. At the time when the Parent established the Health System, it also formed an obligated group with certain of its affiliates and entered into financing arrangements now being refinanced as a major portion of the Project described in the forepart of this Official Statement. (See The Project. ) From the inception of the Health System in 2000, its members have worked to integrate their operations strategically under the Parent s oversight as system parent. The Hospitals have focused on developing services to meet certain identified needs in their markets and have coordinated their pursuit of the strategic goals set by the Parent. Since the formation of the Health System in 2000, the Parent has reconfigured the operations of certain Members for efficiency and had developed programs and services in response to changes in market demands. For a discussion of these developments, see the descriptions below under the headings STRATEGIC INITIATIVES, ALLEGHENY GENERAL HOSPITAL Overview of Services, THE WESTERN PENNSYLVANIA HOSPITAL Overview of Services, ALLE- KISKI MEDICAL CENTER Overview of Services and CANONSBURG GENERAL HOSPITAL Overview of Services. A-2

51 Organization of the Health System and the Obligated Group The following chart depicts the entities that comprise the Health System. Shaded boxes indicate the Members of the Obligated Group. The Parent is the Credit Group Representative under the Master Trust Indenture to be executed simultaneously with the issuance of the Bonds. West Penn Allegheny Health System, Inc. Allegheny General Hospital (1) Suburban Health Foundation The Western Pennsylvania Hospital (2) West Penn Allegheny Oncology Network The Western Pennsylvania Hospital Foundation Forbes Health Foundation Canonsburg General Hospital Canonsburg General Hospital Ambulance Service Alle-Kiski Medical Center (3) Alle-Kiski Medical Center Trust Allegheny Specialty Practice Network Allegheny Medical Practice Network West Penn Allegheny Foundation, LLC (4) West Penn Corporate Medical Services, Inc. Allegheny- Singer Research Institute West Penn Physician Practice Network West Penn Specialty MSO, Inc. Friendship Insurance Company, Ltd. Key: denotes not-for-profit entity and member of the Obligated Group denotes not-for-profit entity denotes for-profit entity and member of the Obligated Group denotes for-profit entity Notes: (1) Includes AGH-Suburban (2) Includes Forbes Regional Campus (3) Includes Citizen s Ambulatory Care Center (4) Limited liability company; exempt status tied to Parent All entities comprising the Health System are Pennsylvania nonprofit corporations, with the exception of West Penn Specialty MSO, Inc. and West Penn Corporate Medical Services, Inc, which are Pennsylvania for-profit, taxable corporations, Friendship Insurance Company, Ltd. ("Friendship"), a Cayman Islands corporation (collectively, the Taxable Corporations ), and West Penn Allegheny Foundation, LLC ("WPAF"), a single-member limited liability company that is a disregarded entity for tax purposes. Other than the Taxable Corporations, WPAF and West Penn Physician Practice Network ("WPPPN"), each corporation has been determined by the Internal Revenue Service to be a charitable organization described in Section 501(c)(3) of the Code, exempt from federal income tax to the extent provided under Section 501(a) of the Code and to be a non-private foundation under Section 509(a) of the Code. WPPPN is a nonprofit corporation that is in the process of applying for tax-exempt status. A-3

52 Members of the Obligated Group As of the 2006 fiscal year, the Obligated Group accounted for approximately 99.9% of the revenues, 98.3% of the total assets, and 98.7% of the excess of revenue over expenses of the Health System. The chart below lists the Members of the Obligated Group by name and principal activity, grouping them by supporting relationship or other affiliation. Name of Obligated Group Member West Penn Allegheny Health System, Inc. Allegheny General Hospital and Suburban Health Foundation The Western Pennsylvania Hospital, West Penn Allegheny Oncology Network, West Penn Physician Practice Network, and West Penn Specialty MSO, Inc. Alle-Kiski Medical Center Canonsburg General Hospital and Canonsburg General Hospital Ambulance Service Allegheny Medical Practice Network Allegheny Specialty Practice Network West Penn Corporate Medical Services, Inc. The Western Pennsylvania Hospital Foundation Allegheny-Singer Research Institute Forbes Health Foundation Principal Activity Health System parent Acute care hospital with two campuses; supporting charitable foundation Acute care hospital with two campuses; physician practices and physician support Acute care hospital Acute care hospital; emergency medical transport Physician practices Physician practices Physician practice support Charitable foundation; medical research Medical research Charitable foundation West Penn Allegheny Health System, Inc. The Parent was incorporated in 1999 and serves as the sole corporate member of nine of the non-profit entities comprising the Health System and sole stockholder of two for-profit entities, and through its reserved powers as sole corporate member, oversees certain decisions of the boards of its directly-controlled affiliates, hence governing the remaining six indirect affiliates comprising the balance of the Health System. See GOVERNANCE OF THE SYSTEM below for further information about the Parent s reserved powers with respect to the operations of its controlled affiliates, corporate governance, board of directors and senior management team. A-4

53 Allegheny General Hospital. Allegheny General Hospital was organized in It owns and operates two hospital campuses: a medical, teaching and research institution known as Allegheny General Hospital ( AGH ) located on Pittsburgh s Northside, and Allegheny General Hospital - Suburban Campus ( AGH-Suburban ), located in nearby Bellevue. Collectively, the campuses comprise a 754 licensed-bed academic medical center primarily serving Pittsburgh and the surrounding six counties of Southwestern Pennsylvania. Capabilities at AGH include neurosurgery, cardiology and cardiothoracic surgery, transplant, orthopedics, trauma, neonatal intensive care and advanced treatment for cancer. AGH-Suburban offers surgical, medical, emergency care services, pediatrics and specializes in outpatient orthopedics. For additional information see ALLEGHENY GENERAL HOSPITAL below. The Western Pennsylvania Hospital. Organized in 1848 to operate Pittsburgh s first chartered public hospital, The Western Pennsylvania Hospital, is a medical, teaching and research institution. The corporation owns and operates two hospitals: The Western Pennsylvania Hospital ( West Penn ) in Pittsburgh, having 504 licensed beds, and the Forbes Regional Campus ( Forbes Regional ) in Monroeville, having 340 licensed beds. West Penn provides a range of services including treatments for cancer, cardiovascular disease, diabetes, high-risk pregnancies and burn care. It also operates a bone marrow transplant center and sponsors graduate and undergraduate medical rotations and residency training programs. Forbes Regional offers cardiology, diabetes, emergency medicine, gynecology, hospice care, neurology, obstetrics, oncology, orthopedics, outpatient surgery, pediatrics and psychiatry. For additional information see THE WESTERN PENNSYLVANIA HOSPITAL below. Alle-Kiski Medical Center. Alle-Kiski Medical Center ( AKMC ) operates a 250 licensed bed acute care hospital, as well as Citizen s Ambulatory Care Center ( CACC ) in Natrona Heights, Pennsylvania. AKMC was previously known as Allegheny Valley Hospital, which was established in AKMC entered into a long-term lease in 2001 to open CACC on the site of the former Citizen s General Hospital, which closed in AKMC provides a wide range of services including cardiology, chemotherapy, radiation oncology, orthopedics, neurosurgery, psychiatric care, sports medicine, gynecology, ambulatory surgery, medical imaging and diagnostic laboratory studies. CACC offers outpatient programs, including ambulatory surgery and endoscopy, laboratory studies, cardiac diagnostics and radiology services, an outpatient medical oncology center, and a diabetic treatment/education center (through affiliation with Joslin Diabetes Center). For additional information see ALLE-KISKI MEDICAL CENTER below. Canonsburg General Hospital. Established in 1904, Canonsburg General Hospital ( Canonsburg ) is a 104-licensed bed acute care hospital located in North Strabane Township, Washington County. In addition to inpatient medical and surgical services, Canonsburg offers an ambulatory care program along with emergency services, orthopedics, cardiac catheterization services, home care and occupational health programs. For additional information see CANONSBURG GENERAL HOSPITAL below. Physician Network Organizations. Allegheny Medical Practice Network ( AMPN ), Allegheny Specialty Practice Network ( ASPN ), West Penn Allegheny Oncology Network ( WPAON ), West Penn Corporate Medical Services, Inc. ( WPCMS ), WPPPN, and West Penn Specialty MSO, Inc. ( WPSMSO ) are physician networks and physician support organizations that A-5

54 employ and provide management, clinical and administrative support to the Health System s employed physicians. These physician practices include both primary care and most specialties and subspecialties. These practices are located both on the main campuses of each Hospital location, as well as at community-based locations throughout the six county service area in southwestern Pennsylvania. Fund-raising Organizations. Forbes Health Foundation ( FHF ), Suburban Health Foundation ( SHF ), and The Western Pennsylvania Hospital Foundation ( WPHF ) focus on philanthropy, and federal and state grants that are used to fund capital projects and enhance endowments. Each foundation has been organized to support one or more specified affiliates as identified in the following table: Fund-raising Entity Charitable Mission Forbes Health Foundation Support of Forbes Regional Suburban Health Foundation Support of AGH-Suburban The Western Pennsylvania Hospital Support of West Penn and the Parent Foundation Research Organizations. Allegheny-Singer Research Institute ("ASRI") and WPHF provide clinical and administrative support for medical research projects. Medical research projects are typically funded by federal and state grants, as well as pharmaceutical companies and private endowments. Non-Obligated Group Members Friendship Insurance Company, Ltd. Friendship was incorporated in 1988 in Bermuda as a captive insurance company. It provided the primary layer of claims-made professional and general liability insurance coverage for West Penn through December 31, At that time Friendship ceased writing additional policies. Friendship was reactivated on January 1, 2002 and the domicile was changed to the Cayman Islands. Friendship provided the primary layer of claims-made professional and general liability insurance coverage for the Health System for the period January 1, 2002 December 31, Friendship has not written additional policies under this program since December 31, For further information, see Note 11 to the consolidated financial statements as of and for the years ended June 30, 2006 and 2005 of the West Penn Allegheny Health System and Subsidiaries included in this Official Statement as Appendix B. West Penn Allegheny Foundation, LLC. West Penn Allegheny Foundation, LLC ("WPAF") is a Pennsylvania limited liability company; the Parent is its sole member. WPAF acquires certain assets that it then leases, pursuant to operating leases, to other Health System entities. See "HEALTH SYSTEM FINANCIAL AND OPERATING INFORMATION Management's Discussion and Analysis Six Month Period Ended December 31, 2006 Compared to Six Month Period Ended December 31, 2005" for a discussion of recent transactions. A-6

55 Alle-Kiski Medical Center Trust. Alle-Kiski Medical Center Trust focuses on philanthropy and federal and state grants that are used to fund capital projects and enhance endowments. The Alle-Kiski Medical Center Trust has been organized to support AKMC. GOVERNANCE OF THE SYSTEM Board of Directors of the Parent Board Composition. The Parent is governed by a Board of Directors. The bylaws of the Parent provide that all corporate powers of the Parent and its business and affairs are managed under the direction of the Parent s Board. The Parent has no corporate members. The bylaws provide that the Parent s Board consists of at least 10 but no more than 24 voting members, as determined by the Board from time to time, including the President, who is ex officio a voting member of the Board. The Parent's Board currently consists of 18 members, including the chairs of the boards of directors of its four hospital affiliate corporations. The directors elect their successors, elect the officers of the Parent, appoint the President and Chief Executive Officer of the Parent, prescribe the duties and powers of special committees of the Board of Directors, and oversee the exercise of the Parent s reserved powers over its affiliates. Elected board members serve three-year terms; there are no term limits. The Board generally meets six times per year. The following table lists the current members of the Board of Directors of the Parent, their initial years of election, and principal business and affiliations. Member David L. McClenahan, Esq. (Chairman) Year Of Initial Election Principal Business Affiliation and Hospital Board Leadership 2000 Partner, Kirkpatrick & Lockhart Preston Gates Ellis, LLP, Pittsburgh David Burstin 2000 Partner, Brand, Burstin & Runnette, Pittsburgh; Chairman, The Western Pennsylvania Hospital Board of Directors John F. Delaney, Ph.D, M.D Associate Professor, Psychiatry and Behavioral Sciences, Temple University, Pittsburgh Emanuel V. DiNatale, CPA 2005 Partner, Alpern, Rosenthal & Company, Pittsburgh George F. Eichleay 2003 President & Chief Executive Officer, Penn Avenue Associates, Pittsburgh Jerry J. Fedele, Esq President & Chief Executive Officer of the Parent John D. Finnegan, Esq Finnegan Law Offices, Monroeville M. Stephen Heilman, M.D Chairman & Chief Executive Officer, Vascor and Lifecor, Pittsburgh Chairman, Alle-Kiski Medical Center Board of Directors Don L. Hennon, M.D Physician, Allegheny General Hospital-Suburban Campus, Pittsburgh A-7

56 Member Year Of Initial Election Principal Business Affiliation and Hospital Board Leadership Joseph A. Macerelli, Esq Partner, Grogan, Graffam, Pittsburgh Chairman, Canonsburg General Hospital Board of Directors Robert W. Kampmeinert 2000 Chairman, Janney Montgomery Scott, LLC, Pittsburgh George J. Magovern, Jr., M.D Professor and Chairman, Cardiovascular and Thoracic Surgery, Allegheny General Hospital, Pittsburgh Gerald E. McGinnis 2001 Chairman, Respironics, Inc., Murrysville L. Theodore Neighbors, CPA 2000 Partner, Labriola Neighbors LLP, Bridgeville Melinda N. Meighen 2002 Senior Executive (Retired); Westinghouse Credit, Pittsburgh David C. Neuschwander, M.D Orthopedic Associates of Pittsburgh, Monroeville W. Keith Smith 2004 Senior Vice Chairman (Retired), Mellon Financial Corporation, Pittsburgh Chairman, Allegheny General Hospital Board of Directors Joseph Platt 2007 Private Investor, Pittsburgh Powers of the Parent s Board. The Parent s Board, by virtue of the articles and bylaws of the other Members of the Obligated Group, controls significant aspects of each Member s business that is a direct controlled affiliate of the Parent. Specific powers retained by the Parent with respect to each Member include the following: approval of strategic plans; direction of managed care activities and programs; adoption and approval of capital and operating budgets and financial plans; adoption and approval of mission statements; adoption and approval of amendments or restatements of articles of incorporation and bylaws; appointment and removal of directors (with or without cause); appointment and removal of officers; approval of merger or other fundamental transactions; approval of certain asset dispositions and creation of liens as determined by the Parent s Board; adoption and approval of debt incurrence; adoption of criteria for management performance; control of litigation settlements; control of managed care contracts; control of reorganization plans; and control of certain other non-ordinary course transaction. With respect to indirectly controlled affiliates, such reserved powers generally reside with the direct parent. On July 20, 1999, in connection with the planned formation of the Health System, the Parent and the Attorney General of the Commonwealth of Pennsylvania agreed to a set of operating conditions regarding debt repayments, cash transfers, and intercompany loans, which were accepted by the Health System. These conditions prohibit the transfer of funds between hospitals without the consent of the Attorney General except for the following: the Health System to allocate joint and several indebtedness as deemed appropriate; loans between Hospitals and among the Parent and Hospitals at commercially reasonable terms; spending of the proceeds of certain taxable indebtedness; transfers of funds from Hospitals to their non-hospital affiliates consistent with historical practice; and investments in budgeted charitable and mission activities of the Hospitals. A-8

57 Audit and Compliance Committee of the Parent. The Board of Directors of the Parent has established a Health System Audit and Compliance Committee, comprised of directors of Health System entities with accounting and financial backgrounds. This committee is responsible for the oversight of the accounting and financial reporting process, the systems of internal accounting and financial controls, the internal audit function, and the annual independent audit of the Health System's financial statements. The Audit and Compliance Committee meets quarterly. A Health System Compliance Executive Committee, comprised of the Health System s senior administrators, meets monthly to provide oversight to the compliance program as well. Other Committees of the Parent. The Board of Directors of the Parent has also established the following standing committees: Executive Committee, Finance and Operating Committee, Strategic Planning Committee, Investment Committee, and Compensation Committee. Obligated Group Member Boards. The Health System members are governed by Boards of Directors (each a Member Board ) appointed by the Parent or a directly controlled affiliate of the Parent. The Parent has the authority to remove, with or without cause, the members of the Member Boards directly controlled by the Parent. The Parent appoints members of the Member Boards based upon the needs of the particular Health System member and the skills and experience of the Member Board. Recognizing the importance of physicians to the performance of the Hospitals, physicians play an active role on their boards. Conflict-of-Interest Policy. It is the policy of the Health System that members of the Parent Board and Member Boards, Health System management with a title of manager or higher, and physicians with department, division or committee leadership roles annually will disclose personal and professional relationships with entities that do or seek to do business with a Health System entity or that compete with a Health System entity. The conflict of interest disclosure process is intended to protect the interests of the Health System when entering into a transaction or arrangement that may potentially benefit or inure to the private interest of an officer, director or other person affiliated with or in a position to exercise substantial influence or control over the affairs of a Health System entity. The process was designed and implemented at the direction of the Board of Directors in order to comply with applicable federal and state laws and regulations, including the laws, rules and regulations that govern the tax-exempt status of the Health System or any affiliated member, participation in the Medicare and Medicaid programs, and accreditation by The Joint Commission (formerly named "The Joint Commission for Accreditation of Healthcare Organizations") ("The Joint Commission"). In addition, this process is intended to supplement, but not replace, any applicable federal and state laws governing conflicts of interest applicable to nonprofit and charitable organizations. The Health System Compliance Office coordinates the annual distribution and collection of the conflict of interest disclosure forms. All of the potential conflicts declared on those forms were reviewed by the Compliance Officer, the Health System Compliance Executive Committee and each respective hospital chief executive officer. In addition, all the potential conflicts are also sent to the Health System Board Chairman and each respective Hospital Board Chairman. The chief executive officer and/or the respective Board Chairman address and resolve actual conflicts that are identified in accordance with the common Conflicts of Interest Policy at each Health System entity. A-9

58 Senior Management Team of the Parent The senior management team of the Parent is composed primarily of individuals who have several years of service with the Health System and its predecessors. The management team includes the following individuals: Jerry J. Fedele, President and Chief Executive Officer, age 53. Mr. Fedele has served as President and Chief Executive Officer of the Parent since He has held senior management positions with the Health System and one of its predecessors, The Western Pennsylvania Health System ("WPHS"), since 1986 when he became the General Counsel of WPHS. In 1990, he was appointed Senior Vice President of WPHS. Mr. Fedele has executive management responsibility as President and Chief Executive Officer of the Parent. He is an ex officio member of the Board of Directors of the Parent, AGH, ASRI, ASPN, AKMC, Canonsburg, West Penn, WPHF, FHF, SHF, and Canonsburg Ambulance Service, and is a member of the Board of AMPN, WPCMS, WPSMSO, WPPPN and WPAON. Mr. Fedele graduated from the University of Pittsburgh in 1975 with a bachelor of science degree in mathematics; from Duquesne University School of Law in 1980 with a juris doctor degree, where he was valedictorian of his class; and from the University of Pittsburgh in 1986 with a master s degree in business administration. James L. Rosenberg, Executive Vice President Hospital Operations, age 57. Mr. Rosenberg joined WPHS as Senior Vice President and Chief Operating Officer in He became Executive Vice President Hospital Operations of the Parent in He has held executive positions in the health care industry since Mr. Rosenberg graduated from Trinity College, Hartford, Connecticut with a bachelor s degree with honors in economics and from the University of Chicago with a master s degree in business administration/hospital administration. David A. Samuel, Senior Vice President and Chief Financial Officer, age 50. Mr. Samuel joined WPHS in 1987 as the Director of Corporate Accounting and Treasury of West Penn and Assistant Treasurer of WPHS. He has served as Senior Vice President and Chief Financial Officer of West Penn since 1995 and also holds corporate responsibilities for the affiliated entities of West Penn. Mr. Samuel graduated from the University of North Dakota in 1979 with a bachelor s degree in accounting and from Pennsylvania State University in 1981 with a master s degree in business administration. C. Daniel Sacco, Vice President of Managed Care and Planning, age 53. Mr. Sacco joined WPHS in 1985 as Director of Financial Planning. Mr. Sacco has served the organization as Director of Planning, Executive Director of the West Penn Physician Hospital Organization, Director of Managed Care and Planning, and was appointed Vice President of Managed Care and Planning for the Parent in Mr. Sacco graduated from the University of Pittsburgh in 1978 with a bachelor of science degree in business administration summa cum laude, and from Carnegie Mellon University in 1988 with a master s degree in public management cum laude. Thomas S. Albanesi, Jr., Vice President, Corporate Finance, age 45. Mr. Albanesi joined West Penn Corporate Medical Services as Director of Finance in 1997 and assumed the same role in 2000 for Allegheny Medical Practice Network. He assumed his current position in Mr. A-10

59 Albanesi graduated from Duquesne University in 1983 with a bachelor s degree in accounting. He is a Certified Public Accountant, licensed in Pennsylvania. Judy Hlafcsak, Vice President and General Counsel, age 47. Ms. Hlafcsak joined the Parent in 2004 as its Vice President and General Counsel. Prior to joining the Parent, Ms. Hlafcsak was a partner in the law firm of Kirkpatrick & Lockhart, LLP (now Kirkpatrick & Lockhart Preston Gates Ellis, LLP), where her practice focused on health care and health care transactional work. Ms. Hlafcsak graduated from the University of Pittsburgh in 1981 with a bachelor's degree in English and the University of Pittsburgh School of Law in 1987 with a Juris Doctor summa cum laude. Nicholas Valadja, Vice President of Information Systems, age 60. Mr. Valadja joined WPHS in He has served as Vice President of Information Services for the Parent since Mr. Valadja graduated from Wilkes University, Wilkes-Barre, Pennsylvania, in 1968 with a bachelor s degree in mathematics and physics. David Zimba, Vice President of Corporate Contracting, age 44. Mr. Zimba joined the Parent in Prior to joining the Parent, Mr. Zimba served in public accounting and in senior executive roles in health care systems in Massachusetts and Florida. Mr. Zimba received a master s degree in hospital administration from the University of Minnesota in 1986 and a Bachelor of Arts degree from Syracuse University in Robert R. Michalski, Vice President and Chief Compliance Officer, age 39. Mr. Michalski joined the organization in 1996 as a Director of Patient Financial Services. He was promoted to Vice President and Chief Compliance Officer for the Parent in Prior to 1996, Mr. Michalski was a senior healthcare consultant with Deloitte & Touche Consulting Group. Mr. Michalski received a Bachelor of Science degree in microbiology and a Master of Health Administration degree from The Ohio State University. Hospital Senior Management The Senior Management of the Hospitals is as follows: Connie M. Cibrone, President and Chief Executive Officer, Allegheny General Hospital, age 50. Ms. Cibrone became the President and Chief Executive Officer of Allegheny General in June 1998, after serving in other senior management positions beginning in Ms. Cibrone also served as Executive Vice President and Chief Operating Officer of Allegheny Integrated Health Group, a primary care network affiliated with Allegheny General Hospital. Ms. Cibrone graduated in 1978 from the University of Pittsburgh with a Bachelor of Science degree cum laude in mathematics and economics and a minor in psychology. She received her master of business administration degree from the University of Pittsburgh Graduate School of Business in Mark Palmer, President and Chief Executive Officer, The Western Pennsylvania Hospital, age 45. Mr. Palmer was named President and Chief Executive Officer of West Penn in November He served as Chief Operating Officer and Administrator and then Chief Executive Officer at Alvarado Hospital Medical Center/San Diego Rehabilitation Institute in San Diego, California from 1999 until Prior to holding positions at Alvarado, Mr. Palmer served as Chief A-11

60 Operations Officer for two hospitals owned by HCA in Florida and Kentucky. Mr. Palmer served as Vice President of Operations at West Penn from 1995 to Mr. Palmer holds a Master s of Business Administration degree from the University of Pittsburgh s Joseph M. Katz Graduate School of Business and a Bachelor of Science degree in Accounting from the University of Southern California. Kim Malinky, President and Chief Executive Officer, Canonsburg General Hospital, age 46. Ms. Malinky has been the President and Chief Executive Officer of Canonsburg General Hospital since 2003 and has been employed at Canonsburg since 1983 in a variety of other positions, including staff nurse, weekend supervisor, and Emergency Department Director. Ms. Malinky received her diploma in nursing from Washington Hospital School of Nursing in In 1989, she completed a Bachelor of Science degree in Nursing at West Liberty State College. Ms. Malinky has a Master in Business Administration from West Virginia University and a Master of Science in Nursing Administration from Wheeling Jesuit University. Cindy K. Schamp, President and Chief Executive Officer, Alle-Kiski Medical Center, age 43. Ms. Schamp has served as the President and Chief Executive Officer of Alle-Kiski since Previously Ms. Schamp served, among other positions, as chief operating officer and senior vice president of operations of Saint Alphonsus Regional Medical Center in Boise, Idaho and as hospital vice president and chief executive officer for Intercommunity Health Network, a regional joint venture health organization sponsored by three area hospitals. Ms. Schamp earned her undergraduate degree in gerontology and business administration from the University of Oregon and her master s degree in hospital and health administration from the University of Iowa. STRATEGIC INITIATIVES The Health System is currently working on a number of strategic initiatives, many of which are common to the Hospitals. A summary of the major initiatives is provided below. Clinical Program Initiatives. The Health System has completed or plans to complete initiatives in the following key service areas: Neurosciences: The Health System intends to build upon the recent The Joint Commission stroke center designation achieved by AGH to develop a Health Systemwide stroke program and, as a result of recent physician recruitment successes, the Health System will continue to expand neurosurgery coverage to its community hospital network and plans to enhance its spine care programs; Oncology: The Health System will continue to recruit and expand its Community Medical Oncology physician network, integrate its radiation oncology programs, and enhance its lung and breast cancer programs through integration of practice protocols and standards and enhancement of diagnostic and treatment technology; Cardiovascular and Thoracic: AGH has completed the development of a Multidisciplinary Institute, which brings together various sub-specialists for the treatment of heart, vascular and thoracic diseases, and AGH and West Penn intend to expand their A-12

61 electrophysiology programs through enhancement of technology and network development; and Obstetrics-Gynecology-Neonatology: The Health System is building upon the existing tertiary capabilities in high-risk obstetric, neonatal and gynecological oncology programs through physician recruitment and market outreach. Recruitment Initiatives. The Health System continually recruits physicians in an effort to support and expand clinical programs, build admissions and gain market share. The Hospitals added over 175 physicians to their medical staffs in 2006, including key recruitments of specialists in orthopedic surgery, cardiology, transplant surgery (liver and bone marrow), neurosurgery, vascular surgery, oncology and obstetrics. Recruitment of additional medical and surgical subspecialists, including a new Chair of Medicine for West Penn, neurosurgeons, anesthesiologists, oncologists, perinatologist, gastroenterologists and primary care physicians, continues across the Health System. In addition, a consultant has been engaged to assist with the creation of a medical staff development plan, including a plan for the primary care and specialty medical staff development for West Penn and Forbes Regional. Capital Projects Initiatives. The Hospitals have completed several major capital projects and have several additional projects underway to support clinical priorities. Renovations and expansions of the emergency departments at Forbes Regional and Canonsburg are complete, and an expansion project at AKMC is in the initial planning phase. Plans to house an existing internal medicine practice within AGH-Suburban and upgrade two operating rooms at that facility are also in progress. In addition to the $6 million expansion and renovation of its emergency department, Forbes Regional recently acquired a new CT scanner, upgraded the GI Lab and expanded cancer services. Forbes Regional has also launched a $24 million "Growth and Expansion Project" to create a Heart and Advanced Surgical Center and a Women s and Infant s Care Center. The Heart and Advanced Surgical Center will expand Forbes Regional s clinical portfolio to include open-heart surgery, post-operative cardiovascular services, expanded diagnostic capabilities (including coronary angiography and angioplasty) and comprehensive vascular services (including screening, diagnosis and treatment of peripheral vascular disease). The Women s and Infant s Care Center will feature 11 private labor, delivery, recovery and postpartum care rooms, an operating room devoted to the performance of Caesarean sections, a 9 bed Level 1 Nursery and 4 bed Level 2 Nursery. The projects described above are currently anticipated to be completed in December Information Systems Initiatives. A number of information systems initiatives were recently completed at the Hospitals. These initiatives included activation of the core laboratory, systemwide general ledger and scheduling/documentation systems. In addition, a physician information technology system is undergoing continued deployment. Furthermore, the Health System is working to implement an Advanced Clinical Information System, which is a combination of highly integrated software modules that work together to support and enhance patient care. Activation of the Advanced Clinical Information System at AGH and AGH-Suburban is projected for the fourth quarter of fiscal A-13

62 Compliant Documentation Management Program Initiative ( CDMP ). The Health System initiated the CDMP at each of its hospitals during the second quarter of fiscal year The program is designed to improve the accuracy of clinical documentation via collaborative efforts of physicians and hospital-employed clinical documentation specialists. Quality Improvement Initiatives. The Health System s quality improvement initiatives include efforts to aggressively reduce expected mortality and diminish the incidence of ventilator associated pneumonia ("VAPs") and central line-associated blood stream infections ("CLABS"). All of the Hospitals participate in the Institute for Healthcare Improvement ("IHI") 100,000 Lives Campaign, in which AGH is a mentor hospital for the reduction of central line infections. In January 2007, the CLABS elimination work in AGH s MICU and CCU received the AACN Circle of Excellence Award for Excellence in Patient Safety. In addition, West Penn is the first hospital in Western Pennsylvania to achieve Magnet recognition status from the American Nurses Credentialing Center ( ANCC ). The Magnet Program was developed by the ANCC to recognize health care organizations that provide superior nursing and overall patient care. Only 4% of hospitals in the United States have achieved Magnet status. AKMC has been recognized by Health Grades for clinical excellence and patient safety, and Forbes Regional has been recognized by Solucient Nation s Top 100 Performance Improvement Leaders for 2004 and Management of the Health System has also developed a concept called The Excellence Makeover: Hospital Design, pursuant to which teams or units undergo rapid cycle process improvement to redesign the patient experience. Embedded into the Excellence Makeovers are training in concepts from the Toyota production system, theory of constraints and Six Sigma, as well as various other change and process redesign concepts. The Health System has been recognized as a leader in working with these concepts through publications about improvements in the Harvard Business Review, The Joint Commission Journal for Quality and Patient Safety, Wall Street Journal, presentations at national and international conferences and several PBS video specials including, Good News: How Hospitals Heal Themselves and Remaking American Medicine. Ambulatory Care Initiatives. The Health System currently has three ambulatory care sites that include primary care, specialty care and various diagnostic and treatment services. The Health System has plans to build three more centers over the next months located in strategically important communities. Completion of such projects is subject to availability of funding and regulatory review. Anesthesiology Transition. The Health System transitioned anesthesiology services at AGH, West Penn, AGH-Suburban, and Forbes Regional, from an independent contractor model to an employment model effective February 2, Prior to this transition, a single practice group served as the exclusive anesthesia provider to each of AGH, West Penn, AGH-Suburban, and Forbes Regional pursuant to four separate provider agreements, each with a multi-year term. In the fall of 2005, the anesthesia group announced that it intended to cease providing anesthesia services at each of the Hospital campuses in two weeks unless the Hospitals collectively A-14

63 increased their annual stipend payment to WPAA by $10 million above the contractually agreed stipend amounts. The Health System sought a preliminary injunction requiring the anesthesia practice group to fulfill its contractual commitment. The suit was settled through mediation, resulting in a global settlement and the February 2, 2006 termination of the contracted group as the exclusive anesthesia provider to each of AGH, West Penn, AGH-Suburban, and Forbes Regional, with each Hospital employing its anesthesia providers. The initial cost of recruiting and employing all anesthesia providers caused a significant impact to the fiscal 2006 financial statements as net income was reduced by $16 million during the last five months of that fiscal year. By employing its anesthesia providers, each Hospital has more control over delivery of this critical service. More recently, AKMC also transitioned to an employment model. CAPITAL PLANNING AND NEEDS The Health System has a capital approval process to allocate and ration capital which was developed to address its capacity to fund capital expenditures. The process seeks to balance the clinical needs of patients with infrastructure needs as well as the need for a composite return on investment. Capital planning is typically performed twice per fiscal year through collaboration of management of the Health System and the individual Hospitals. The Health System increased its capital investment in fiscal 2006 to exceed depreciation for the first time since its inception, and capital spending for the first six months of fiscal 2007 was more than 1.2x depreciation. In the aggregate, capital investments for the five fiscal years ending June 30, 2006 were 83% of depreciation expense. Moody s median for the "Freestanding Hospitals and Single State Health Systems" category for this capital spending ratio has ranged from 1.2x to 1.4x depreciation over the most recent 5 years. For hospitals rated below "Baa", the median was 0.8x for the most recent year. Subsequent to implementation of the plan of finance, the Health System anticipates continuing to fund capital spending at levels in excess of depreciation, subject to liquidity needs and the maintenance of profitable operations. A portion of this increased capital spending will be funded with new money borrowings of approximately $105 million included in the plan of finance. UNCOMPENSATED CARE To enhance the health status of the communities in which they operate and consistent with their tax-exempt status, the Hospitals provide needed health care services to individuals regardless of their ability to pay for all or part of the services rendered. These services include both inpatient and outpatient services as well as maintaining six emergency rooms that are available 24 hours a day. Components of uncompensated care include charity care, uninsured discounts, and bad debt. Exclusive of bad debt of $38,310,000, the Hospitals provided free care (all measured in charges) of approximately $34,500,000 in fiscal 2006, which included $25,008,000 attributable to uninsured discounts and $9,492,000 attributable to charity care. Services are also provided to beneficiaries of government-sponsored programs, including the Pennsylvania Medical Assistance and indigent care programs. Reimbursement from these programs is often less than the cost of providing these services. For example, in fiscal 2006, the A-15

64 cost of providing services to Medical Assistance beneficiaries was $27,926,000 greater than payments received from the Medical Assistance Program ALLEGHENY GENERAL HOSPITAL Description of Organization and Subsidiaries Founded in 1885, AGH operates two separate hospital campuses: the original campus on Pittsburgh s North Side, comprised of 665 licensed beds, and AGH-Suburban in Bellevue, comprised of 89 licensed beds. During 2006, AGH and AGH-Suburban admitted over 29,000 patients, recorded nearly 61,000 emergency visits and performed over 26,000 surgical procedures. The combined medical staff numbers approximately 866 physicians, of whom 590 are on the active staff, and AGH employs approximately 3,900 FTEs. AGH has a long-standing commitment to medical education; it is a teaching affiliate of Drexel University College of Medicine and sponsors 28 residency and fellowship programs accredited by the Accreditation Council of Graduate Medical Education ( ACGME ) with over 270 residents and fellows enrolled in graduate medical education training programs in Since 1997, AGH has been recognized by U.S. News & World Report eight times as one of "America's Best Hospitals," highlighting such clinical specialties as cancer treatment, orthopedic surgery, digestive diseases, neurology, neurosurgery, hormonal disorders, urology, rheumatology and geriatric medicine. AGH was also recognized in 2002 as one of America's top 25 medical centers by the AARP's Modern Maturity magazine. AARP also identified AGH in 2002 as the nation's top hospital for the treatment of renal diseases and the second-leading center for the treatment of heart disease. HCIA-Sachs (now known as Solucient Inc.), one of the health care industry's leading quality research organizations, listed AGH in 2000 as a "Top 100" hospital in the nation for both orthopedic surgery and the treatment of stroke. In six out of the past nine years, AGH has received the National Research Corporation's Consumer Choice Award as the region's most preferred health care provider. In 2006, AGH was named a Neuroscience Center of Excellence by Neuroscience Inc. and was also designated as a primary stroke center by The Joint Commission. In 2007, AGH's critical care nurses were selected to receive the American Association of Critical Care Nurses Circle of Excellence Award for patient safety. AGH was the first hospital in the region to receive designation as a Level I Trauma Center, which is the highest designation available (this designation was reaffirmed in September 2006), and the AGH LifeFlight aeromedical service was the first to fly in the northeastern United States. Overview of Services AGH Offering a wide array of medical and surgical services, AGH is recognized for its expertise in cardiology, cardiothoracic surgery, colorectal surgery, diagnostic and interventional radiology, emergency medicine, endocrinology, gastroenterology, general surgery, internal medicine, minimally invasive surgery, neonatology, nephrology, neurology, neurosurgery, obstetrics/gynecology, oncology, ophthalmology, orthopedic surgery, otorhinolaryngology, pediatrics, physical medicine and rehabilitation, plastic and reconstructive surgery, psychiatry, A-16

65 pulmonary medicine, radiation oncology, rheumatology, transplant surgery and urology. As noted above, AGH is designated as a Regional Resource (Level I) Trauma Center. As one of the largest tertiary facilities in the region, AGH offers advanced care in certain specialty areas including allergy/immunology, anesthesiology/pain medicine, bariatric/weight loss surgery, critical care medicine, infectious disease, pathology and laboratory medicine, reproductive medicine and infertility, vascular surgery, urogynecology, maternal and fetal medicine, oral and maxillofacial surgery, dental medicine and nutrition. In fiscal 2006, AGH reinvigorated its Heart Failure and Transplant Program, completing 12 heart transplants in the nine months ended December In addition, AGH maintains a kidney transplant program, has received United Network for Organ Sharing ("UNOS") approval to initiate a liver transplant service and has applied to CMS to reinitiate its lung transplant program. AGH sponsors a Neuroscience Center of Excellence, and recently was designated by The Joint Commission as a Primary Stroke Center. AGH s sports medicine program serves as the official medical provider for the Pittsburgh Pirates professional baseball team and the Washington Wild Things minor league baseball team. In addition, AGH provides sports medicine services for all varsity sports teams of Duquesne University and numerous area school districts and coaches. AGH has a number of other comprehensive disease-specific centers, including those for lung and thoracic disease, digestive health, diabetes, hearing and balance disorders, vascular diseases, spasticity and movement disorders, multiple sclerosis, neuro-oncology, neuromuscular diseases, epilepsy, cranial nerve disorders, skull base and endoscopic neurosurgery, spinal disorders, child and adolescent psychiatry, wound care and genetic disease. AGH s Cancer Center offers patients access to programs for a broad spectrum of malignant disease, including lung, esophageal, prostate, breast, colon and rectal, liver, brain, pancreatic, gynecologic, head and neck, and blood-borne cancers. AGH is involved in research into breast and colorectal cancer treatment and prevention through studies conducted by the National Surgical Adjuvant Breast and Bowel Project ("NSABP"). The headquarters of the NSABP, supported by the National Cancer Institute, is located on the AGH campus and coordinates the efforts of more than 5,000 medical professionals in the study of breast and bowel cancer. AGH-Suburban The former Suburban General Hospital was merged with Allegheny General in January 2005 and was renamed the Allegheny General Hospital Suburban Campus. The integration of AGH- Suburban into Allegheny General Hospital included the merger of the medical staff and consolidation of administration. Upon completion of the merger, AGH initiated a construction and renovation plan to enhance the existing operating room suites, improve the critical care unit and improve the medical-surgical inpatient units. The AGH-Suburban integration plan included the development of the AGH-Suburban campus into an outpatient orthopedic specialty hospital. In addition, AGH relocated its inpatient pediatric service from the main campus to AGH- Suburban to take advantage of the lower cost structure and available capacity. This strategic relocation has opened up space on the main campus for the development of an inpatient Joint A-17

66 Replacement Center. A portion of the AGH-Suburban facility has also been leased to a for-profit Long Term Acute Care Hospital provider ("LTACH"). The lease relationship provides an additional source of income to AGH through lease payments and the purchase of ancillary services by the LTACH provider and supports the strategic opportunity to attract additional patients to AGH. Two additional operating rooms have recently been renovated to accommodate additional utilization growth. THE WESTERN PENNSYLVANIA HOSPITAL Description of Organization Founded in 1848 as Pittsburgh s first chartered public hospital, The Western Pennsylvania Hospital operates two hospitals serving Pittsburgh and the surrounding area: West Penn in Pittsburgh, with 504 licensed beds, and the Forbes Regional campus in Monroeville, with 340 licensed beds. On July 1, 2005, the Health System integrated West Penn and Forbes Regional to strengthen clinical interdependence and program development at Forbes Regional. In 2006, West Penn and Forbes Regional admitted more than 33,700 patients, recorded more than 69,000 emergency visits, and performed more than 22,000 surgical procedures. The two hospitals collectively employ approximately 3,900 full time equivalent employees. West Penn is an active teaching hospital and provides clinical training to third-and-fourth-year medical students as a clinical campus of the Philadelphia-based Temple University School of Medicine. West Penn also sponsors 18 ACGME-accredited residencies and fellowship programs, with 150 residents and 26 fellows enrolled in the graduate medical education programs in The mission of West Penn is to provide clinical and health-related services to meet the general health needs of the residents of Metropolitan Pittsburgh and certain of the specialized health needs of the residents of the surrounding area. To enhance its ability to provide these services, the hospital is committed to operating a variety of educational programs for physicians, nurses, and other allied health professionals and promotes basic and clinical research. In 2004, West Penn became the only major teaching hospital in Pennsylvania to be recognized by the Solucient Institute for three consecutive years among the 100 Top Hospitals for overall performance. West Penn has been recognized by Solucient as among the nation s best hospitals for heart care and for intensive care. In 2004 and 2005, Solucient named Forbes Regional one of the nation s 100 Top Performance Improvement Leader hospitals. A-18

67 Overview of Services West Penn West Penn offers advanced care in the following specialty areas: allergy, anesthesiology, bariatric surgery, bone marrow transplant, burn trauma, cardiology, cardiothoracic surgery, colorectal surgery, critical care medicine, diagnostic and interventional radiology, emergency medicine, endocrinology, family medicine, gastroenterology, general surgery, gynecology, gynecologic oncology, hematology/oncology, infectious diseases, internal medicine, maternal and fetal medicine, medical oncology, minimally invasive surgery, neonatology, nephrology, neurology, neurosurgery, obstetrics, ophthalmology, oral/maxillofacial surgery, orthopedic surgery, otorhinolaryngology, pain medicine, pathology and laboratory medicine, pediatrics, plastic and reconstructive surgery, physical medicine and rehabilitation, primary care medicine, pulmonary medicine, radiation oncology, reproductive medicine and infertility, rheumatology, surgical oncology, urology, urogynecology and vascular surgery. West Penn also has specialized centers for breast diagnostic imaging and surgical treatment of breast disease, bariatric surgery, joint care, diabetes care, foot and ankle surgery, infant apnea, lung and thoracic disease, minimally invasive surgery, pain medicine, pelvic floor diseases, physical rehabilitation, reproductive medicine and infertility and sleep disorders. West Penn s Burn Center is the only burn program in the region to receive verification honors by the Committee on Trauma of the American College of Surgeons and the American Burn Association. West Penn s obstetrics program is the second busiest in the region and its neonatal intensive care unit is one of the region s largest referral resources for sick newborns. West Penn also is home to the patient offices for the Jones Institute at West Penn Allegheny Health System, an affiliate of the Jones Institute for Reproductive Medicine of the Eastern Virginia Medical School. The Western Pennsylvania Cancer Institute provides advanced diagnostic and treatment services for all types of cancer, including lung, esophageal, breast, gynecologic, prostate, colorectal and blood-borne cancers. The Western Pennsylvania Cancer Institute operates one of the largest bone marrow transplant programs in Pennsylvania. The Western Pennsylvania Cancer Institute also provides radiation oncology services, was the second cancer center in the world to offer Intensity Modulated Radiation Therapy and has recently added Tomotherapy image guided radiation to its menu of services. Patients have access to many of the experimental treatment protocols through the Cancer Institute s participation in national research groups such as the Cancer and Leukemia Group B, American College of Surgeons Oncology Group, and Radiation Therapy Oncology Group. West Penn also provides education programs for nurses and other health care professionals, including a School of Nursing (affiliated with Clarion University of Pennsylvania); a School of Respiratory Care (affiliated with Indiana University of Pennsylvania); and the Pennsylvania State University/Western Pennsylvania Hospital Program of Radiologic Technology. A-19

68 Forbes Regional Forbes Regional was formed in 1972 as the Forbes Health System through the consolidation of two hospitals that had been serving the community since the late 1800s: Pittsburgh Hospital in the East End and Columbia Hospital in Wilkinsburg. Forbes Regional opened in 1978 as the flagship acute-care facility of the former Forbes Health System. Forbes Regional now has 340 beds, over 500 on its medical staff and is Monroeville s largest employer. Forbes Regional is a community-based, full-service medical/surgical hospital. It offers care in obstetrics, gynecology, pediatrics, behavioral sciences, oncology, emergency medicine, cardiology, neurosciences, musculoskeletal diseases, orthopedics, ambulatory surgery and diagnostic imaging. Forbes Regional features an affiliate office of Joslin Diabetes Center, a cardiology diagnostic center, outpatient cancer therapy services, including hospice care, and educational, preventative/rehabilitation and healthy lifestyles programs on its 54 acre campus. Two physician office buildings are adjacent to Forbes Regional, providing patients with convenient access to local physicians. Also on the Forbes Regional campus are the Forbes Family Health Center, which houses the ACGME-accredited Forbes Family Practice Residency Program, and the InterCommunity Cancer Center, a free-standing facility that provides outpatient radiation therapy as part of the hospital s cancer care services. Forbes Hospice, located in Oakland, provides end-of-life and palliative care. Forbes Hospice is a division of Forbes Regional. ALLE-KISKI MEDICAL CENTER Description of Organization AKMC operates a 250 licensed bed acute care hospital as well as an outpatient facility, CACC, in Natrona Heights, Pennsylvania. The main hospital facility has served the community since 1909, when it opened as an 18-bed facility inside a house in Tarentum, Pennsylvania. AKMC expanded its mission in late 2000 following the closure of Citizens General Hospital in New Kensington, at which time the main hospital extended outpatient and urgent care services to the former Citizens Hospital building. The two campuses now employ approximately 1,200 full time equivalent employees and have an active medical staff of 269. AKMC serves a primary service area of more than 195,000 residents in portions of Allegheny, Armstrong, Butler and Westmoreland Counties and is the only hospital located in its primary service area. Its extended market includes over 135,000 residents. AKMC annually admits 11,000 patients and records approximately 33,000 emergency visits, 13,000 urgent care center visits and 10,000 surgical procedures. Overview of Services AKMC provides a wide range of sophisticated cardiology services; an outpatient chemotherapy unit and a radiation oncology program that is part of the West Penn Allegheny Health System A-20

69 Radiation Oncology Network, and orthopedics, which accounts for the highest volume of specialty surgical services performed at AKMC. AKMC s array of services also includes neurosurgery; psychiatric care with an 18-bed mental health unit exclusively for seniors; sports medicine; gynecology; ambulatory surgery; medical imaging and diagnostic laboratory studies. Beyond the typical services found in community hospitals, AKMC also sponsors the AK-PULSER program (paramedic and medical command of 14 ambulance companies) and offers cardiac rehabilitation, a chest pain unit, a blood bank, a sleep disorders unit, and Destination Wellness, a retail health education/wellness center located at the Pittsburgh Mills Mall. On the former Citizens campus, CACC offers outpatient programs, including ambulatory surgery and endoscopy, laboratory studies, cardiac diagnostics and radiology services - such as routine X-rays, CT scans, mammography, positron emission tomography (PET) scans, ultrasound and MRI services, an outpatient medical oncology center, and a diabetic treatment/education center (through affiliation with Joslin Diabetes Center). The Urgent Care Center provides care for minor medical needs by physicians, nurses and support staff, trained in emergency medicine. AKMC also owns and operates the Citizens School of Nursing, which is affiliated with Penn State University and offers a two-year registered nursing diploma program. Growth initiatives at AKMC include recruiting and maintaining a strong medical staff representing a wide range of specialties and sub-specialties enhancing AKMC s continuum of care. AKMC also offers to the community advanced cancer treatment with the recent introduction of prostate seed brachytherapy, intensity modulated radiation therapy (IMRT) and CT simulation for radiation treatment planning. A new MRI Suite was added to the CACC campus providing convenient access to the latest in MRI technology for physicians and their patients. In February 2007, a 20-bed medical/surgical unit with private and semi-private rooms opened at AKMC to accommodate additional volume. AKMC has attempted to respond to the needs in the community by enhancing its program offerings, expanding appointment times for diagnostic testing, growing its blood donor program, and increasing its presence in neighboring markets with the addition of physician offices and efforts by its A-K PULSER program. New program development includes the Fast Track in the emergency department, a lymphadema program through occupational therapy, and a cardiovascular screening program for high-risk groups that include firefighters and law enforcement personnel. CANONSBURG GENERAL HOSPITAL Description of Organization Canonsburg General Hospital is a 104-bed facility, which includes a 16-bed inpatient acute rehabilitation unit, located in North Strabane Township. The active medical staff of 195 physicians and over 400 full time equivalent employees primarily serve residents living in southern Allegheny and northern Washington counties. A-21

70 The hospital has served the community since 1904, with the current facility built in Since its construction, the hospital has undergone several expansions: in 1996 a new ambulatory care center was opened; in 2003 the rehabilitation department was enlarged; and in 2006, an 11,200 square foot emergency department and a fourth operating room suite were added to accommodate increased patient volume. During fiscal 2006, Canonsburg received over 18,000 emergency visits, over 67,000 outpatient visits and admitted over 4,300 inpatients. Overview of Services Canonsburg provides a wide range of medical and surgical services, with advanced diagnostic and treatment services accessible on both an inpatient and outpatient basis. Inpatient services primarily include the care and treatment of acute and chronic medical conditions, general surgery, and orthopedic surgery. The addition of specialists from AGH to the roster of physicians at Canonsburg has added to the service lines of brachytherapy, neurosurgery, and vascular surgery. Canonsburg has an active and growing ambulatory care center, accommodating same day surgery, GI procedures and staging of cardiac catheterization patients. It also offers specialized services in acute inpatient rehabilitation, and has a strong focus on health education and preventive care that reflects a commitment to wellness and health improvement. Canonsburg s new emergency department features 18 specialty examination rooms each with a sliding glass door and curtain to maximize patient privacy. Among those 18 rooms are two trauma rooms and a decontamination area to treat patients involved in industrial accidents. All of the examination rooms are equipped with cardiac monitors. A medical imaging suite is located within the department. Additionally, a new triage procedure brings patients back to an examination room upon arrival; patients no longer need to check in at registration and sit in the waiting room before being called to the triage area. The medical imaging department at Canonsburg includes radiology, MRI (mobile unit), mammography, nuclear medicine, interventional radiology, CT, ultrasound, bone density (mobile unit) and PET scanning (mobile unit). The laboratory is certified by the College of American Pathologists, a distinction bestowed upon only 20 percent of the nation s labs. Canonsburg also provides a range of programs on and off campus, such as classes, screenings and support groups, which are available free of charge or at little cost to area residents. Additionally, the hospital has a long-standing relationship with several local school districts to provide in-school health programming through its Children s Services Program. PHYSICIAN ORGANIZATIONS Allegheny Medical Practice Network, the Health System s primary care network, employs 155 physicians and mid-level practitioners serving patients in 68 practice sites throughout the Health System s six-county service area. AMPN employs the physicians and staff, and provides management and business development for AMPN s practices. AMPN physicians specialize in internal medicine, family practice, obstetrics/gynecology, and pediatrics. ASPN was created in 1999 to serve as the practice plan for the employed physicians who support AGH. ASPN houses many of the components of the academic enterprise: clinical services, A-22

71 research clinicians and education, including the administrative and supervision aspects of the residency program as well as coordination of clerkships for medical students, and the clinical and administrative leadership of the departments within AGH. ASPN employs approximately 935 full time equivalent employees, including 318 physicians in various clinical specialties, including cardiology, gastroenterology, medicine subspecialties, obstetrics/gynecology, pediatrics, psychiatry, orthopedic surgery, anesthesia, emergency medicine, general surgery, transplant surgery, colo-rectal surgery, trauma surgery, radiation oncology, medical and surgical oncology, neurosurgery, neurology and cardiothoracic surgery. West Penn Physician Practice Network is the employer of all anesthesiologists who provide services on an employed basis at West Penn and Forbes Regional. West Penn Allegheny Oncology Network consists of a group of 21 physicians in the medical oncology specialty that provide hematology and oncology care to patients at 17 sites including the Health System's tertiary hospitals, community hospitals, and suburban locations throughout western Pennsylvania. West Penn Corporate Medical Services and West Penn Specialty MSO, Inc. provide physician support services to several physician groups. SERVICE AREA AND COMPETITION Service Area and Patient Origin The Health System defines its Primary Service Area ( PSA ) as Allegheny County (which includes the metropolitan Pittsburgh area) and the five contiguous counties of Armstrong, Beaver, Butler, Washington and Westmoreland. These counties account for approximately 88% of total inpatient discharges from the Hospitals. The Hospitals attract an additional 6% of total patients from a secondary service area ( SSA ) that is defined as the counties of Cambria, Clarion, Clearfield, Fayette, Greene, Indiana, Jefferson, Lawrence, Mercer, Somerset and Venango and an additional 6% from areas outside of the PSA and SSA. A-23

72 HEALTH SYSTEM SERVICE AREA SSA PSA Area 2006 Discharges % of Total Allegheny County 42, % Other PSA Counties 25, % Subtotal PSA 68, % SSA 4, % Total PSA & SSA 73, % Contiguous Ohio & West Virginia 2, % All Other Areas 1, % TOTAL 78, % Source: Pennsylvania Health Care Cost Containment Council A-24

73 Demographics The following table shows that based on information from Claritas Inc., the population of the combined Health System PSA and SSA is projected to decline 1.2% over the next five years. Out-migration from Allegheny County to the surrounding suburbs is expected to continue during this time period, with Butler and Washington counties benefiting. From 2006 to 2011, the population of Butler County is projected to increase 3.7% and the population of Washington County is projected to increase 1.8%. County 2006 Population Estimate 2011 Change % Age 65+ Population Projection Absolute Percent Chg Allegheny County 1,240,435 1,207,512 (32,923) (2.7)% 17.5% 18.7% 1.2% Other Primary Service Area 1,007,197 1,013,668 6, % 17.6% 19.0% 1.4% Secondary Service Area 938, ,140 (12,433) (1.3)% 17.9% 19.2% 1.3% TOTAL Health System Service Area 3,186,205 3,147,320 (38,885) (1.2)% 17.7% 19.0% 1.3% Pennsylvania 12.46M 12.63M 164, % 15.5% 16.6% 1.1% United States M M 14.36M 4.8% 12.6% SOURCE: 2006 Claritas Inc. The Health System service area population has a higher than average proportion of residents over the age of 65 years 17.7% compared to 15.5% for Pennsylvania and 12.6% nationally. Based on information from Claritas Inc., this proportion is projected to rise between 2006 and The economy of the Health System s PSA has improved over the past few years as evidenced by the decline in the unemployment rate from 5.9% in 2003 to 4.8% in 2006 (based on U.S. Department of Labor, Bureau of Labor Statistics data). The major employers in the Health System s PSA as of 2006 are listed below. A-25

74 Largest PSA employers Number of employees Univ. of Pittsburgh Medical Center 30,957 U.S. Government 19,224 Commonwealth of Pennsylvania 14,023 Giant Eagle, Inc. 12,220 West Penn Allegheny Health System 1 11,462 University of Pittsburgh 10,714 Wal-Mart Stores, Inc. 9,705 Allegheny County 6,607 PNC Financial Services Group, Inc. 6,568 Mellon Financial Corp. 2 6,300 US Airways Group, Inc. 3 5,416 Pittsburgh Board of Education 5,245 Eat n Park Hospitality Group, Inc. 5,167 Highmark, Inc. 4,867 Carnegie Mellon University 4,556 United States Steel Corp. 4,000 Notes: Source: Pennsylvania Department of Labor and Industry, Bureau of Research and Statistics and Pittsburgh Business Times, December The number of employees reported by this source is different that the Health System's internally calculated numbers, which are described below under the heading "EMPLOYEES." 2 Mellon Financial Corporation reported on December 4, 2006 that it is merging with The Bank of New York Company, Inc. Although the impact on Mellon's overall employment in Western Pennsylvania is unknown, the consolidation of certain management functions can be expected. Sources: Mellon Financial Corporation; Pittsburgh Business Times. 3 On September 27, 2005, US Airways Group merged with America West Airways. Since that date, the Pittsburgh International Airport became a secondary hub for the new airline, resulting in a drop in its employment in Western Pennsylvania to approximately 2,700 employees. On February 21, 2007, US Airways announced the selection of Pittsburgh for its new $25 million flight operations control center which is projected to house 600 employees when it commences operations in early Sources: US Airways; Pittsburgh Business Times A-26

75 Competitors In its PSA, the Health System competes with several health systems and independent acute care hospitals. The following map depicts the locations of the Hospitals and competitors in the Health System s PSA. The Hospital's principal competitors are discussed further below. A-27