The date of this Official Statement is December 1, 2015

Transcription

1 NEW ISSUE-BOOK ENTRY ONLY RATING: Moody s: MIG-2 See RATINGS herein) In the opinion of Bond Counsel, under existing law and assuming continuous compliance with the applicable provisions of the Internal Revenue Code of 1986, as amended (the Code ), interest on the Notes (including any original issue discount properly allocable to an owner thereto) is excluded from gross income of the owners thereof for federal income tax purposes, and is not treated as an item of tax preference for purposes of determining the federal alternative minimum tax for individuals and corporations, but is included in determining adjusted current earnings for purposes of computing the federal alternative minimum tax imposed on corporations. Interest on the Notes is NOT excluded from income for State of Iowa income tax purposes. See TAX EXEMPTION herein. $25,350,000 IOWA FINANCE AUTHORITY HOSPITAL REVENUE AND BOND ANTICIPATION NOTES, SERIES 2015 (SHENANDOAH MEDICAL CENTER PROJECT) CUSIP #46246NHT6 ** Interest Rate 1.75% Price % Dated: Date of Delivery Due: June 1, 2018 The Iowa Finance Authority s Hospital Revenue and Bond Anticipation Notes, Series 2015 (Shenandoah Medical Center Project) (the Notes ) are issuable only as fully registered notes without coupons, and when issued will be registered in the name of Cede & Co., as Noteholder and nominee for The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Notes. Purchases of the Notes will be made in book-entry form, in the denominations of $100,000 and integral multiples of $5,000 in excess thereof. Purchasers of the Notes will not receive certificates representing their interest in the Notes purchased. THE NOTES Book-Entry Only System herein. Principal of, premium, if any, and interest on the Notes will be paid by First National Bank of Omaha, Omaha, Nebraska (the Trustee ) as Trustee and Paying Agent. So long as DTC or its nominee, Cede & Co., is the Noteholder, such payments will be made directly to such Noteholder, and disbursement of such payments to the Beneficial Owners is the responsibility of the DTC Participants as more fully described herein. Neither the Iowa Finance Authority (the Issuer ), Shenandoah Medical Center (the Hospital ) nor the Trustee will have any responsibility or obligation to such DTC Participants, indirect participants or the persons for whom they act as nominee with respect to the Notes. Interest on the Notes will be payable commencing on June 1, 2016 and semiannually thereafter on each June 1 and December 1, in each case until the respective maturity or earlier redemption thereof at the rate set forth above and shall mature on June 1, 2018, subject to earlier redemption, upon surrender at the principal corporate trust office of the Trustee. THE NOTES INVOLVE RISK INCLUDING, AMONG OTHERS, THOSE DESCRIBED UNDER THE HEADING NOTEHOLDERS RISKS WITHIN. NO PROSPECTIVE PURCHASER OF THE NOTES SHOULD MAKE A DECISION TO PURCHASE ANY NOTES WITHOUT FIRST READING AND CONSIDERING IN FULL THIS ENTIRE OFFICIAL STATEMENT, INCLUDING, WITHOUT LIMITATION, THE SECTION ENTITLED NOTEHOLDERS RISKS HEREIN. The Notes are subject to redemption prior to maturity as described herein. See THE NOTES- Redemption herein. THE NOTES ARE SPECIAL, LIMITED OBLIGATIONS OF THE ISSUER PAYABLE SOLELY FROM THE PROCEEDS OF THE NOTES, THE REVENUES PLEDGED TO THE PAYMENT THEREOF PURSUANT TO THE LOAN AGREEMENT, AND THE FUNDS AND ACCOUNTS HELD IN THE INDENTURE. NEITHER THE ISSUER, THE STATE OF IOWA, NOR ANY POLITICAL SUBDIVISION THEREOF SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF, PURCHASE PRICE FOR OR INTEREST ON THE NOTES EXCEPT FROM SAID REVENUES, AND NEITHER THE FAITH AND CREDIT NOR ANY TAXING POWERS OF THE ISSUER, THE STATE OF IOWA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PURCHASE PRICE FOR OR INTEREST ON THE NOTES. THE ISSUER HAS NO TAXING POWER. The Notes are offered when, as and if issued by the Issuer and received by the Underwriters, subject to prior sale, to withdrawal or modification of the offer without any notice and to the approval of legality of the Notes by Dorsey & Whitney LLP, Des Moines, Iowa, Bond Counsel. Certain legal matters will be passed on for the Hospital by its counsel, Davis, Brown, Koehn, Shors & Roberts, P.C. and by Dorsey & Whitney LLP, Disclosure Counsel. For details of the Underwriters compensation, see UNDERWRITING herein. It is expected that the Notes in definitive form will be available for delivery in New York, New York, on or about December 8, The date of this Official Statement is December 1, 2015 ** CUSIP numbers shown above have been assigned by a separate organization not affiliated with the Issuer, the Hospital or the Underwriters. None of the Issuer, the Hospital or the Underwriters has selected or is responsible for selecting the CUSIP numbers assigned to the Notes nor do they make any representation as to the correctness of such CUSIP numbers on the Notes or as indicated above.

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3 REGARDING USE OF THIS OFFICIAL STATEMENT No dealer, broker, salesman or other person has been authorized by the Issuer, the Hospital or the Underwriters to give information or to make any representations with respect to the Notes, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale hereunder implies that there has been no change in the matters described herein since the date hereof. Certain information contained herein has been obtained from the Hospital and other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness and is not to be construed to be the representation of the Issuer or the Underwriters. Neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Issuer or the Hospital 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 on the Notes by any person, in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. The information set forth herein has been obtained from the Issuer, the Hospital, USDA, or other sources that are deemed to be reliable, but is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation of, the Underwriters. The information herein is subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create an implication that there has been no change in the affairs of the Hospital since the date hereof. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their 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. All information contained in this Official Statement other than the information contained under the headings INTRODUCTION - The Issuer and LITIGATION The Issuer has been furnished by the Hospital and others. The Issuer has not participated in the preparation of this Official Statement and has not verified the accuracy of the information contained herein, other than the information respecting the Issuer under the headings INTRODUCTION - The Issuer and LITIGATION The Issuer. The Issuer s approval of this Official Statement does not constitute approval of the information contained herein, other than such aforesaid information contained herein. THE NOTES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION BY REASON OF THE PROVISIONS OF SECTION 3(a)(2) OF THE SECURITIES ACT OF 1933, AS AMENDED. THE REGISTRATION OR QUALIFICATION OF THESE SECURITIES IN ACCORDANCE WITH APPLICABLE PROVISIONS OF THE SECURITIES LAWS OF THE JURISDICTIONS IN WHICH THEY HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER JURISDICTIONS SHALL NOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE JURISDICTIONS NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE SECURITIES OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE HOSPITAL AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FORWARD-LOOKING STATEMENTS This Official Statement, including Appendices A and B, contains statements which should be considered forward-looking statements, meaning they refer to possible future events or conditions. Such statements are generally identifiable by the words such as plan,, expect, estimate, budget, or similar words. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE HOSPITAL DOES NOT EXPECT OR INTEND TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR OR FAIL TO OCCUR. i

4 TABLE OF CONTENTS INTRODUCTION... 1 THE NOTES... 5 SECURITY FOR THE NOTES... 7 PLAN OF FINANCE ESTIMATED SOURCES AND USES OF FUNDS NOTEHOLDERS RISKS LITIGATION LEGAL MATTERS TAX EXEMPTION FINANCIAL STATEMENTS RATING UNDERWRITING CONTINUING DISCLOSURE RELATIONSHIPS AMONG THE PARTIES MISCELLANEOUS Appendix A INFORMATION CONCERNING SHENANDOAH MEDICAL CENTER Appendix B FINANCIAL STATEMENTS OF SHENANDOAH MEDICAL CENTER Appendix C USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER Appendix D DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS Appendix E FORM OF BOND COUNSEL OPINION Appendix F CONTINUING DISCLOSURE AGREEMENT. Page ii

5 OFFICIAL STATEMENT relating to $25,350,000 Iowa Finance Authority Hospital Revenue and Bond Anticipation Notes (Shenandoah Medical Center Project), Series 2015 INTRODUCTION This Official Statement, including the cover page and Appendices, is furnished in connection with the offering of $25,350,000 in principal amount of Hospital Revenue and Bond Anticipation Notes, Series 2015 (Shenandoah Medical Center Project) (the Notes ) of the Iowa Finance Authority (the Issuer ). The Notes will be issued under an Indenture of Trust dated as of November 1, 2015 (the Indenture ) from the Issuer to First National Bank of Omaha, as Trustee (the Trustee ). The Notes are being issued pursuant to Chapter 16 of the Code of Iowa (the Act ). The proceeds of the sale of the Notes will be loaned by the Issuer to Shenandoah Medical Center, an Iowa nonprofit corporation (the Hospital ) pursuant to a Loan Agreement dated as of November 1, 2015 (the Loan Agreement ) between the Issuer and the Hospital. The proceeds of the Notes, along with other funds of the Hospital, will be used to (i) finance the construction, renovation, remodeling, equipping and/or furnishing of the Borrower s existing hospital and clinic facilities (the Facilities ) located on the Borrower s campus at 300 Pershing Avenue, Shenandoah, Iowa (the Borrower s Campus ), including without limitation, (a) an approximately 43,000 square foot, two story medical office building addition to be attached to the existing hospital building that will house approximately 21 clinic providers, 4 visiting specialty clinics, a walk-in clinic, 5 mental health offices, 78 exam rooms and a new central registration department for the Borrower s Facilities; (b) a new surgery department to include without limitation two operating rooms, an endoscopy suite, a minor procedure room, central sterilizing, and pre-op/recovery rooms/bays; (c) a new waiting space centrally located within the Borrower s Facilities; (d) an expanded emergency department to include larger and improved check-in areas, exam rooms and support space; (e) relocating and expanding the lab department to include microbiology services in conjunction with the emergency and surgery departments improvement and (f) other improvements to the Facilities, including related site improvements and ancillary building improvements (together, the Project ); (ii) pay capitalized interest on the Notes, and (iii) pay the costs of issuance and certain other costs associated with the issuance of the Notes. See ESTIMATED SOURCES AND USES OF FUNDS herein. The Notes are being issued to provide interim financing for the acquisition and construction of the Project. Under the Loan Agreement, the Hospital has agreed to make the payments in amounts and at times scheduled to be sufficient to pay when due the principal of, premium, if any, and interest on the Notes. The Hospital will execute a Subordinate Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated as of November 1, 2015 (the Mortgage ) in favor of the Trustee to further secure the Notes. The Mortgage will create a lien on certain property of the Hospital. See DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Mortgage and the description of Mortgaged Property in Appendix D. The Hospital has also granted a lien on the same property to secure the USDA First Closing Loan (as defined herein) pursuant to the USDA Loan Mortgage (as defined herein). The Mortgage is subordinate to the USDA Loan Mortgage. The USDA First Closing Loan is a loan to the Hospital in an amount of $20,350,000, of which only $3,000 has been advanced. No further advances under the USDA First Closing Loan are permitted unless USDA determines to purchase all of the Completion Bonds (defined herein) and fully fund the USDA Loan, to repay the Notes. See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER in Appendix C. -1-

6 This Official Statement contains descriptions of, among other matters, the Notes, the Indenture, the Loan Agreement, the Mortgage and the Hospital. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to the Indenture, the Loan Agreement and the Mortgage are qualified in their entirety by reference to such documents, and references herein to the Notes are qualified in their entirety by reference to the forms thereof included in the Indenture. Until the issuance and delivery of the Notes, copies of the Indenture, the Loan Agreement, the Mortgage and the other documents described herein may be obtained from the Underwriters of the Notes. After delivery of the Notes, copies of such documents will be available for inspection at the principal corporate trust office of the Trustee. For summaries of the Loan Agreement, the Indenture and the Mortgage, including certain covenants relating to the Hospital, see DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS in Appendix D hereto. Certain capitalized terms used in this Official Statement that are not required to be capitalized by proper rules of grammar have the meanings set forth in Appendix D hereto. All information contained in this Official Statement other than information contained under the headings INTRODUCTION The Issuer and LITIGATION The Issuer has been furnished by the Hospital. The Issuer has not participated in the preparation of this Official Statement and has not verified the accuracy of the information contained herein, other than the information respecting the Issuer contained herein under the captions INTRODUCTION The Issuer and LITIGATION The Issuer. The Issuer s approval of this Official Statement does not constitute approval of the information contained herein, other than such aforesaid information contained herein. The documents summarized in this Official Statement will be entered into on or prior to the date of initial delivery of the Notes referred to on the cover of this Official Statement, and the legal opinions referred to in this Official Statement will be delivered on the Closing Date for the Notes. In connection with the issuance of the Notes, the Hospital is undertaking to provide certain continuing disclosures, all as further set forth in the Continuing Disclosure Agreement dated as of November 1, 2015 (the Continuing Disclosure Agreement ) to be entered into between the Hospital and the Trustee. See CONTINUING DISCLOSURE herein and CONTINUING DISCLOSURE AGREEMENT in Appendix F hereto. For information with respect to the Hospital, see Appendix A attached hereto. Financial reports of the Hospital and its affiliates are included in Appendix B attached hereto. The Issuer The Issuer is a public instrumentality and agency of the State of Iowa. The Issuer is authorized by Chapter 16 of the Code of Iowa, as amended, to issue the Notes and lend the proceeds thereof to the Hospital, and to secure the Notes by a pledge of amounts payable by the Hospital under the Loan Agreement and the Indenture. The Notes are issued under and pursuant to Chapter 16 of the Code of Iowa, as amended (the Act ), and pursuant to a resolution adopted by the Issuer. The Notes constitute special, limited obligations of the Issuer, payable solely from proceeds of the Notes, the revenues pledged to the payment thereof pursuant to the Loan Agreement, and the funds and accounts held under and pursuant to the Indenture and pledged therefor. The Notes, the interest thereon and any other payments or costs incident thereto do not constitute an indebtedness or a loan of the credit of the Issuer, the State of Iowa or any political subdivision thereof within the meaning of any constitutional or statutory provisions. The Issuer does not pledge its faith or credit nor the faith or credit of the State nor any political subdivision of the State to the payment of the principal of, the interest on or any other payments or costs incident to the Notes. The issuance of the Notes and the execution of any documents in relation thereto do not directly, indirectly or contingently obligate the State or any political subdivision of the State to apply money from -2-

7 or levy or pledge any form of taxation whatever to the payment of the principal of or interest on the Notes or any other payments or costs incident thereto. The Issuer has no taxing power. The Hospital The Hand Hospital, originally constructed in 1918, served as the hospital for Shenandoah, Iowa until 1978, when Shenandoah Memorial Hospital was organized as a nonprofit corporation. The Hospital adopted the name Shenandoah Medical Center in The Hospital operates a 25-bed primary care hospital facility and a 50-bed skilled care facility located in Shenandoah, Iowa. The Hospital serves a market consisting primarily of Page and Fremont Counties in Iowa. The Hospital has received a determination letter from the Internal Revenue Service stating that it is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code ), and is therefore exempt from federal income tax under Section 501(a) of the Code. The Hospital was designated a critical access hospital as of January 1, The Financing The proceeds from the sale of the Notes will be used to provide funds to finance the cost of the Project, pay capitalized interest, and pay costs related to the issuance of the Notes. The Hospital will use funds on hand to pay any additional costs of the Project or costs related to the issuance of the Notes in excess of those anticipated to be paid from proceeds of the Notes. For a more detailed description of the uses of the proceeds of the Notes, and such other moneys, see ESTIMATED SOURCES AND USES OF FUNDS herein. Security for the Notes The Notes provide interim financing for the construction of the Project. The primary security for the Notes is the proceeds of the Completion Bonds (defined herein) to be purchased by USDA (defined herein) or another purchaser if USDA does not purchase the Completion Bonds) to provide permanent financing for the Project. As more fully described below, the Notes are payable solely from (i) the proceeds of the Completion Bonds, which pursuant to the Indenture, are pledged to the payment of the Notes, (ii) payments or prepayments made under the Loan Agreement (excluding the Reserved Rights of the Issuer) and (iii) funds and accounts held by the Trustee under the Indenture (other than the Rebate Fund). See SECURITY FOR THE NOTES herein for additional discussion of the security for the Notes. The Notes are limited obligations of the Issuer, payable solely from payments made by the Hospital pursuant to the Loan Agreement and funds held under the Indenture and pledged therefor. The amounts payable by the Hospital under the Loan Agreement will be in the amount sufficient to pay (i) the principal of, premium, if any, and interest on the Notes and (ii) certain fees and expenses of the Trustee or the Issuer incurred in the future. The Hospital will be prohibited from encumbering or pledging the assets of its Facilities, subject to certain exceptions. See DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Mortgage Title to the Mortgaged Property; Maintenance of Lien; After-Acquired Property in Appendix D. The Hospital will grant the Mortgage to further secure repayment of the Notes. The Mortgage is subordinate to the USDA Loan Mortgage. However, no advances other than the initial $3,000 advance under the USDA First Closing Loan are permitted unless USDA determines to purchase all of the Completion Bonds and fully fund the USDA Loan, to repay the Notes. See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER in Appendix C. The Mortgage creates a subordinate lien on the Hospital s Facilities and other assets (collectively, the Mortgaged Property ), as further described in the Mortgage. See SECURITY FOR THE NOTES The Mortgage herein and DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Mortgage in Appendix D. -3-

8 The Issuer will secure the Notes by entering into the Indenture, under which the Issuer will pledge to the Trustee the Issuer s interest (other than the Issuer s Reserved Rights) under the Loan Agreement and the Issuer s interest in certain funds created under the Indenture. Completion Bonds. The Notes mature on June 1, 2018 (the Maturity Date ). The Hospital will covenant in the Loan Agreement to issue bonds, notes or other obligations (including the Hospital s promissory notes issued to USDA pursuant to the USDA First Closing Loan as discussed below) (the Completion Bonds ) to refund the Notes on or prior to the Maturity Date. The Department of Agriculture, acting through the United States Department of Agriculture Rural Development ( USDA ) has obligated funds to loan to the Borrower an aggregate principal amount of $25,350,000 (the USDA Loan ) pursuant to a commitment letter (the Commitment Letter ), upon compliance by the Hospital with the provisions contained in the Letter of Conditions dated September 26, 2014 from USDA to the Hospital as amended by an Amendment to Letter of Conditions dated June 19, 2015 (collectively the Letter of Conditions ), including but not limited to substantial completion of the Project in accordance with USDA requirements. See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER in Appendix C hereto for a copy of the Letter of Conditions and the Commitment Letter. USDA has determined that the conditions contained in the Letter of Conditions can be met by the Hospital. The Hospital has issued a letter of intent to meet these conditions (the letter of intent together with the Letter of Conditions and the Commitment Letter, the USDA Commitment ). USDA will be reviewing all draws on the proceeds of the Notes to be used for construction of the Project. However, USDA is not unconditionally bound to purchase all of the Completion Bonds and to fully fund the USDA Loan. The breach by the Hospital of its covenants under the Letter of Conditions could result in a decision by USDA not to purchase all of the Completion Bonds and not to fully fund the USDA Loan. If USDA does not purchase all of the Completion Bonds and fully fund the USDA Loan, the Hospital would have to seek financing from other sources in order to refund the Notes on or before the Maturity Date. There is no assurance the Hospital could secure financing from other sources, and such failure to sell the Completion Bonds to another purchaser or secure financing from other sources would result in the nonpayment of the Notes on the Maturity Date. In order to lock the interest rate on $20,350,000 of the $25,350,000 aggregate principal amount of the USDA Loan, the Borrower and USDA closed a portion of the USDA Loan (the USDA First Closing Loan ) in an amount of $20,350,000, of which only $3,000 has been advanced. The USDA First Closing Loan is secured by the Real Estate Mortgage for Iowa dated as of June 26, 2015 from the Hospital to USDA (the USDA Loan Mortgage ) which creates a lien and security interest in the Mortgaged Property senior to the lien of the Mortgage. The remainder of the USDA First Closing Loan is expected to be fully advanced to repay the Notes as part of the purchase by USDA of all of the Completion Bonds and the funding of the entire USDA Loan as discussed in the preceding paragraph. No further advances under the USDA First Closing Loan are permitted unless USDA determines to purchase all of the Completion Bonds and fully fund the USDA Loan, to repay the Notes. See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER in Appendix C. In the event the Hospital determines that there are economic benefits to defer the issuance of the Completion Bonds on or before the Maturity Date even though all requirements for issuance of the Completion Bonds have been met, the Hospital may request a deferral from USDA and obtain other interim financing to pay the Notes on or before the Maturity Date, through the issuance of other financing, as permitted by the Indenture. The Notes will not be secured by a debt service reserve fund or other reserve fund. Existing Indebtedness; Parity Obligations; Additional Bonds Pursuant to the Indenture and the Loan Agreement, under certain circumstances the Issuer may issue Additional Bonds or the Hospital may incur other debt (the Parity Obligations ) on a parity with -4-

9 the Notes. The issuance of the Completion Bonds is specifically authorized under the Indenture and the Loan Agreement. The Borrower and USDA closed the USDA First Closing Loan of which only $3,000 was advanced. The USDA First Closing Loan is secured by the USDA Loan Mortgage and is senior to the Mortgage. The USDA First Closing Loan is specifically authorized under the Indenture and the Loan Agreement. See DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS - The Indenture - Additional Bonds and DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS - The Loan Agreement Additional Bonds; Parity Obligations, and The Loan Agreement Permitted Indebtedness in Appendix D hereto. Risks An investment in the Notes involves certain risks. See NOTEHOLDERS RISKS herein. THE NOTES The Notes are issuable only as fully registered notes without coupons in denominations of $100,000 and integral multiples of $5,000 in excess thereof. The Notes will be dated the date of delivery thereof, and will bear interest from that date at the rate set forth on the cover page of this Official Statement and will mature on June 1, Interest on the Notes will be payable semi-annually on June 1 and December 1, commencing June 1, Interest on the Notes is calculated on the basis of a 360-day year consisting of twelve 30-day months. Book-Entry Only System The Depository Trust Company ( DTC ), New York, NY, will act as securities depository for the Notes. The Notes will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Note certificate will be issued for each maturity of the Notes, each in the aggregate principal amount of maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC s records. The ownership interest of each actual purchaser of each Note ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners -5-

10 are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes 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 Notes, except in the event that use of the book-entry system for the Notes is discontinued. To facilitate subsequent transfers, all Notes 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 Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC s records reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices shall be sent to DTC. If less than all of the Notes within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Notes unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Notes 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 Issuer or Paying Agent, on any payment date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with Notes 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 Paying Agent, Issuer or the Hospital, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of 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 Issuer or the Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Notes at any time by giving reasonable notice to the Issuer or the Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Note certificates are required to be printed and delivered. The Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor Notes depository). In that event, Note certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the Issuer and the Hospital believe to be reliable, but neither the Issuer, the Hospital, nor the Paying Agent takes any responsibility for the accuracy thereof. -6-

11 Redemption Optional Redemption. The Notes are subject to redemption prior to maturity on any Business Day, in whole or in part (and if in part, by maturities as may be directed by the Hospital and within a maturity by lot in such manner as the Trustee may determine to be fair and equitable) on or after January 1, 2018, upon receipt by the Trustee of a written certificate from the Hospital stating that it intends to prepay all or a part of the amounts payable under the Loan Agreement and thereby effect redemption of all or a part of the Notes at the redemption price of 100% of the principal amount thereof to be redeemed plus accrued interest to and including the redemption date, solely from the proceeds of the Completion Bonds. In the event the Notes are redeemed with moneys other than the USDA Loan, such moneys shall constitute Available Moneys. Selection of Notes for Redemption. Whenever fewer than all of Notes are to be redeemed, the Paying Agent/Registrar will select the Notes by maturities as may be designated by the Hospital, and within maturities by lot in $5,000 denominations, so long as any Notes not redeemed remain in denominations of at least $100,000, in any manner which the Paying Agent/Registrar in its sole discretion deems appropriate and fair. Notice of Redemption. The Trustee shall send notice of redemption by electronic means or registered or certified mail not less than 30 days before the redemption date to each registered owner of a Note at such owner s address appearing on the bond register, but no defect in or failure to give such mailed notice of redemption for any Note shall affect the validity of proceedings for redemption of any Notes to be redeemed. All Notes so called for redemption will cease to bear interest on the specified redemption date, provided funds for their redemption have been duly deposited with the Trustee and, except for the purpose of payment, shall no longer be protected by the Indenture and shall not be deemed outstanding under the Indenture. Any such notice of optional redemption shall state that it is conditioned upon the deposit of moneys, in an amount equal to the amount necessary to effect the redemption, with the Trustee no later than the redemption date and that such notice shall be rescinded on or prior to the redemption date if the amounts deposited with the Trustee are subject to the automatic stay provisions of the Bankruptcy Code. In addition, any such notice of optional redemption may be rescinded by written notice given by the Hospital to the Trustee no later than five (5) Business Days prior to the date specified for redemption. As soon as practicable thereafter, the Trustee shall give notice of such rescission to the same parties and in the same manner such notice of redemption was given. Limited Obligations of the Issuer SECURITY FOR THE NOTES The Notes constitute special, limited obligations of the Issuer, payable solely from proceeds of the Notes, the revenues pledged to the payment thereof pursuant to the Loan Agreement, and the funds and accounts held under and pursuant to the Indenture and pledged therefor. The Notes, the interest thereon and any other payments or costs incident thereto do not constitute an indebtedness or a loan of the credit of the Issuer, the State of Iowa or any political subdivision thereof within the meaning of any constitutional or statutory provisions. The Issuer does not pledge its faith or credit nor the faith or credit of the State nor any political subdivision of the State to the payment of the principal of, the interest on or any other payments or costs incident to the Notes. The issuance of the Notes and the execution of any documents in relation thereto do not directly, indirectly or contingently obligate the State or any political subdivision of the State to apply money from or levy or pledge any form of taxation whatever to the payment of the principal of or interest on the Notes or any other payments or costs incident thereto. The Issuer has no taxing power. Completion Bonds Pursuant to the Indenture, the Issuer will irrevocably assign to the Trustee for the benefit of the owners of the Notes, all right, title and interest in and to the amounts anticipated to be received from the -7-

12 Completion Bonds. The Hospital will covenant in the Loan Agreement to apply the proceeds of the Completion Bonds to redeem the Notes on or prior to the Maturity Date. The primary source of repayment of the Notes is the Completion Bonds expected to be purchased by USDA pursuant to the USDA Loan. The Hospital expects that USDA will purchase all of the Completion Bonds and fund all of the USDA Loan prior to or on the Maturity Date. As mentioned above under INTRODUCTION Security for the Notes, a small portion of the USDA Loan in the amount of $3,000 has been advanced to the Borrower as part of the USDA First Closing Loan, but USDA is under no obligation to advance additional amounts unless and until the Hospital complies with all USDA requirements, as discussed below. The purchase of all of the Completion Bonds and the full funding of the USDA Loan is conditioned upon compliance by the Hospital with the provisions contained in the Commitment Letter, including but not limited to substantial completion of the Project in accordance with USDA requirements and the Letter of Conditions. See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER, in Appendix C hereto for a copy of the Letter of Conditions and the Commitment Letter. USDA will be reviewing all draws on the proceeds of the Notes to be used for construction of the Project. However, USDA is not unconditionally bound to purchase all of the Completion Bonds and fully fund the USDA Loan. The breach by the Hospital of its covenants under the Letter of Conditions and the Commitment Letter could result in a decision by USDA not to purchase all of the Completion Bonds and fully fund the USDA Loan. If the Hospital does not complete construction of the Project on or prior to the Maturity Date but meets all other conditions and requirements contained in the Letter of Conditions, USDA, in its sole discretion, may purchase all of the Completion Bonds and fund the loan of the proceeds thereof as a Multiple Advance Loan (defined herein). Multiple advances of the proceeds of the Completion Bonds (collectively, a Multiple Advance Loan ) may be made by USDA if interim commercial financing is not legally permissible or not available for the Project pursuant to USDA policies and procedures (see RD Instruction 1942-A, (p)(2)). If USDA does not purchase all of the Completion Bonds and does not fully fund the USDA Loan, the Hospital would have to sell the Completion Bonds to other purchasers or obtain financing from other sources in order to redeem the Notes on or before the Maturity Date. There is no assurance the Hospital could secure financing from other sources, and such failure to sell the Completion Bonds or secure financing from other sources would result in the nonpayment of the Notes on the Maturity Date. The failure by USDA to purchase all of the Completion Bonds and fully fund the USDA Loan would result in a default on the Notes if the Hospital does not secure alternate financing, and/or does not generate sufficient Net Revenues Available for Debt Service to pay the principal of, and interest and premium, if any, on the Notes on or before the Maturity Date. See NOTEHOLDERS RISKS Failure to Redeem the Notes herein. Even with the issuance of the Commitment Letter, USDA is not unconditionally bound to purchase all of the Completion Bonds and fully fund the USDA Loan. There is no assurance that USDA will purchase all of the Completion Bonds and fully fund the USDA Loan. See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER in Appendix C attached hereto for a copy of the Letter of Conditions and the Commitment Letter. See CERTAIN DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT Hospital s Covenant to Comply With USDA Loan Requirements and Secure Alternate Financing and in Appendix D hereto. The Loan Agreement Pursuant to the Loan Agreement, the Hospital agrees to make payments to the Issuer in such amounts and at such times as are sufficient to pay in full, when due, the principal of, premium, if any, and interest on the Notes. Pursuant to the Indenture, the Loan Agreement (with certain reservations) has been assigned by the Issuer to the Trustee and, consequently, the Hospital will make its payments directly to -8-

13 the Trustee. For a discussion of limits on the Hospital s ability to mortgage or encumber its assets, see DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Mortgage Title to the Mortgaged Property; Maintenance of Lien; After-Acquired Property in Appendix D. The Mortgage The Hospital s payment obligations with respect to the Notes are further secured by the Mortgage, which creates a lien upon the Mortgaged Property, subject to certain Permitted Encumbrances. For a discussion of the security granted by the Hospital to the Trustee, see DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Mortgage in Appendix D. The Borrower has also granted a lien on the Mortgaged Property to secure the USDA First Closing Loan pursuant to the USDA Loan Mortgage. The Mortgage is subordinate to the USDA Loan Mortgage. The only amount advanced and secured by the USDA Loan Mortgage is $3,000. No further advances under the USDA First Closing Loan are permitted unless USDA determines to purchase all of the Completion Bonds and fully fund the USDA Loan, to repay the Notes. See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER in Appendix C. The Indenture Assignment by Issuer to the Trustee. Pursuant to the Indenture, the Issuer will assign to the Trustee, as security for the payment of the Notes, the following: 1. All Revenues and all of the Issuer s rights, title and interest in and to the Loan Agreement including, among other things, the assignment of the Issuer s rights, title and interest in and to the Revenues, the proceeds of the Completion Bonds and all extensions and renewals thereof, if any, and including but without limiting the generality of the foregoing, the present and continuing right to make claim for, collect and receive any of the money, income, revenues, issues, profits and other amounts payable or receivable thereunder, to bring actions and proceedings thereunder or for the enforcement thereof, and to do any and all things which the Issuer or any other person is or may become entitled to do under the Loan Agreement (except the Issuer s rights to receive notices, to grant waivers and consents, to inspect the Facilities, to receive indemnity, and to receive payment of its fees and expenses); 2. All rights, title and interest of the Issuer, if any, in all choses in action and all choses in possession now or hereafter existing to the benefit of or arising from the benefit of the Issuer with respect to the Notes (except for the Issuer s rights to compensation and indemnification pursuant to the Loan Agreement), and all proceeds of the foregoing; 3. All funds and accounts (except the Rebate Fund) established under the Indenture and the investments thereof, if any, and money, securities and obligations therein (subject to disbursement as provided in the Indenture); and 4. All money and securities held by the Trustee under the Indenture and all property transferred to the Trustee as additional security for the Notes. No Debt Service Reserve Fund The Notes are not secured by a debt service reserve fund or any other reserve fund. -9-

14 PLAN OF FINANCE The proceeds of the Notes and funds of the Hospital will be used to (i) finance the costs of the Project, (ii) pay capitalized interest, and (iii) pay the costs of issuance and certain other costs associated with the issuance of the Notes. The Notes are being issued to provide interim financing for the acquisition and construction of the Project. See SECURITY FOR THE NOTES Completion Bonds herein for a discussion of the anticipated permanent financing for the acquisition and construction of the Project. See INFORMATION CONCERNING SHENANDOAH MEDICAL CENTER The Hospital and the Project in Appendix A attached hereto for a further description of the Project. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds relating to the Notes, exclusive of accrued interest, are as follows: Sources of Funds: Notes $25,350, Total Sources of Funds $25,350, Uses of Funds: Prospective Project Costs $22,552, Reimbursement to Hospital for Project Costs 1 $ 1,407, Deposit to Capitalized Interest Fund $ 1,096, Costs of Issuance $ 294, Total Uses of Funds $25,350, General NOTEHOLDERS RISKS No person should purchase any Note without carefully reviewing this entire Official Statement, including, without limitation, the following information which summarizes some, but not all, of the risks associated with such purchase. The Notes are secured by (a) the Completion Bonds, (b) a pledge by the Issuer to the Trustee of amounts payable by the Hospital under the Loan Agreement (other than payments for the Issuer s indemnification rights and payment of its fees and expenses), (c) amounts held in accounts and funds held by the Trustee (other than the Rebate Fund), and (d) the Mortgage, which is subordinate to the USDA Loan Mortgage. In the event USDA does not purchase the Completion Bonds and the Hospital cannot obtain other financing to refund the Notes, Noteholders must look to the other sources of security for payment of principal of and interest on the Notes. Certain risks are inherent in the successful operation of a hospital and related facilities. Such risks should be considered in evaluating the Hospital s ability to generate sufficient revenues to pay the principal of, premium, if any, and interest on the Notes when due. This section discusses some of these risks, but it is not intended to be a comprehensive listing of all risks associated with the operation of the Hospital or the payment of the Notes. 1 The Hospital has previously incurred or paid for costs of the Project in the amount of $1,407,143.98, which is anticipated to be reimbursed from Note proceeds at closing. -10-

15 Failure to Redeem the Notes The Notes are intended to provide interim financing for a portion of the Project and mature on June 1, USDA has obligated funds to the Hospital in the amount of $25,350,000 and has committed to purchase the Completion Bonds upon satisfaction by the Hospital of the terms and conditions contained in the Letter of Conditions, including substantial completion of the Project in accordance with USDA requirements. The Project is anticipated to be substantially complete by December 31, See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER in Appendix C hereto for a copy of the Letter of Conditions and the Commitment Letter. As part of the construction process USDA will be reviewing and approving construction draw requests for construction of the Project in accordance with USDA standards. However, even with the issuance of the Commitment Letter and the issuance of the Notes, USDA is not unconditionally bound to purchase all of the Completion Bonds. The breach by the Hospital of its covenants under the Letter of Conditions could result in a decision by USDA not to purchase all of the Completion Bonds and to fully fund the USDA Loan. The Notes are secured by amounts payable therefor by the Hospital under the Loan Agreement, proceeds of the Completion Bonds, funds and accounts established in the Indenture (other than the Rebate Fund), and the Mortgage which is subordinate to the USDA Loan Mortgage. See SECURITY FOR THE NOTES herein for a further discussion of the security for the Notes. If (1) USDA determines that it will not purchase all of the Completion Bonds because all of the conditions for the USDA Loan have not been met on or before the Maturity Date, including but not limited to substantial completion of the Project, (2) USDA will not issue the loan as a Multiple Advance Loan, or (3) the Hospital does not secure other interim or permanent financing for the Project, the Hospital will not have sufficient Net Revenues Available for Debt Service to pay the principal of and interest on the Notes at maturity. See SECURITY FOR THE NOTES herein. There is no certainty that the Hospital would be able to obtain other financing or generate sufficient revenues to pay the principal of, premium, if any, and interest on the Notes on or before the Maturity Date, if ever. The revenues of the Hospital would be insufficient to pay in full the outstanding principal of, premium, if any and interest on the Notes when due. See NOTEHOLDERS RISKS Adequacy of Revenues herein. Failure by the Hospital to pay the principal of and interest on the Notes when due would result in an event of default under the Indenture and the Loan Agreement. Changes in Federal and State Law From time to time, there are legislative proposals that, if enacted, could adversely affect the federal and state tax matters referred to herein, adversely affect the marketability or market value of the Notes, or otherwise prevent holders of the Notes from realizing the full benefit of the tax exemption of interest on the Notes. For example, both President Obama and the Chairman of the Committee on Ways and Means of the U.S. House of Representatives have proposed legislation that effectively would impose a partial tax on otherwise tax exempt interest for certain higher income taxpayers. In addition, regulatory and administrative actions may from time to time be announced that could adversely affect the market value, marketability or tax status of the Notes. No prediction is made concerning future events. The opinions expressed by Bond Counsel in connection with the issuance of the Notes are based upon existing law. Purchasers of the Notes should consult their own tax advisors regarding any pending or proposed legislation, regulatory actions, or litigation. Regulatory actions are from time to time announced or proposed and litigation is threatened or commenced which, if implemented or concluded in a particular manner, could adversely affect the market value, marketability or tax status of the Notes. It cannot be predicted whether any such regulatory action will be implemented, how any particular litigation or judicial action will be resolved, or whether the Notes would be impacted thereby. -11-

16 Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Notes to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state 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 legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Notes. Prospective purchasers of the Notes should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion. Federal Budget Issues The Budget Control Act of 2011 (the BCA ) mandates significant reductions and spending caps on the federal budget for the federal fiscal years The BCA also created a Joint Select Committee on Deficit Reduction (the Super Committee ) to develop a plan by November 23, 2011 to further reduce the federal deficit in the amount of $1.5 trillion. As the Super Committee failed to act, the BCA mandated that a 2% reduction in Medicare spending, among other reductions, could be triggered to take effect on January 2, The Medicaid program would be exempt from such automatic reductions. The American Taxpayer Relief Act of 2012 (the ATRA ) postponed this scheduled reduction until March 1, The Centers for Medicare and Medicaid Services confirmed that the 2.0% reduction to Medicare providers and insurers are for services provided after April 1, The federal budget for the federal fiscal year ending September 30, 2014, extends this reduction. It is possible that Congress will take action to eliminate some or all of the reductions in the future and any Congressional action could be made retroactive in order to eliminate some or all of the cuts even to the extent they were imposed. However, there is no certainty that Congress will take any action. Absent further Congressional action, these automatic spending cuts will become permanent. Because Congress may make changes to the budget in the future, it is impossible to predict the impact any spending cuts may have upon the Hospital. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. If and to the extent Medicare and/or Medicaid spending is reduced under either scenario, this may have a material adverse effect upon the financial condition of the Hospital. Ultimately, these reductions or alternatives could have a disproportionate impact on providers and could have an adverse effect on the financial condition of the Hospital, which could be material. In the past, the United States government has shut down and curtailed most routine operations after Congress failed to enact legislation appropriating funds for a fiscal year, or a continuing resolution for interim authorization of appropriations for the remainder of a fiscal year. During such shutdowns, many federal employees are furloughed and other federal employees were required to report to work without known compensation dates. If a government shutdown occurs in the future, there can be no assurance that federal payments, including Medicare payments or Medicaid payments to the states or the purchase of the Completion Bonds by USDA, will occur on a timely basis or at all during such a shutdown. While prior governmental shutdowns and continuing resolutions have not had a material adverse effect on the Hospital s revenues, there can be no assurance that future governmental shutdowns will not adversely affect such revenues. Adequacy of Revenues The adequacy of the Hospital s revenues will be dependent on the amount of future income received by the Hospital. If the occupancy of or services provided by the Hospital s facilities decreases or reimbursement from government programs decreases, the future income of the Hospital pledged to the payment of the Notes may not be sufficient to pay the principal and interest on the Notes. -12-

17 Government Regulation and Reimbursement of Critical Access Hospitals On January 11, 2005 the Hospital was certified as a critical access hospital (a CAH ) under federal law. CAHs are subject to special requirements regarding the provision of emergency services, number of beds and length of stay of inpatients, facility standards, and governance. The Balanced Budget Act created the Rural Hospital Flexibility Program. The CAH program is a large part of the Rural Hospital Flexibility Program, and is administered by CMS. To obtain designation as a CAH, a hospital must be located in a rural area; provide 24-hour emergency care services; maintain an average length of stay of 96 hours or less; be located more than 35 miles from another hospital or CAH or be designated by the State as a necessary provider; and maintain not more than 25 beds. The significance of a hospital becoming a CAH is primarily related to reimbursement mechanisms. Iowa CAHs are reimbursed on a cost basis by Medicare and Medicaid. A discussion of the relevant legislative and regulatory schemes affecting CAHs is set forth in greater detail below. It is not intended to be complete or all-inclusive, but is intended to highlight significant issues affecting the Hospital under Medicare and Medicaid. In recent years, the Medicare Payment Advisory Commission ( MedPAC ) has recommended that Congress study specific issues related to whether CAHs have enough incentives under the current system to control costs; whether continuing to pay cost-based reimbursement for services identical to those reimbursed for other nearby providers under a prospective payment system is appropriate; and whether there should be larger distance requirements between hospitals. The implementation of any changes which decrease Medicare reimbursement to CAHs could adversely affect the Hospital s ability to pay the principal of and interest on the Notes on a timely basis, or in full. If the Hospital were to lose its status as a critical access hospital or if governmental regulations or laws with respect to reimbursement methods of critical access hospitals are revised the Hospital s ability to pay debt service on the Notes may be significantly reduced. Any such changes could have a substantial financial impact on the Hospital. Government Regulation of the Health Care Industry The health care industry in general is subject to regulation by a number of governmental and private agencies, including those which administer the Medicare and Medicaid programs discussed under the headings BONDHOLDERS RISKS Medicare and BONDHOLDERS RISKS Medicaid herein. The health care industry is also affected by federal, state and local policies developed to regulate the manner in which health care is provided, administered and paid for nationally and locally. As a result, the health care industry is sensitive to frequent and substantial legislative and regulatory changes. Congress and the states have consistently attempted to curb the growth of federal spending on health care programs. In addition, Congress and other governmental agencies have focused on the provision of care to indigent and uninsured patients, prevention of dumping such patients on public hospitals in order to avoid the provision of non-reimbursed care, the unlawful payment of remuneration in exchange for referral of patients, the unauthorized use or disclosure of patients protected health information, billing for services not in accordance with governmental requirements and other issues. It is unlikely that the Hospital could attract sufficient numbers of private pay patients to become self-sufficient without reimbursement from governmental programs. Cost shifting to private sources of payment is not an option to offset declining federal and state reimbursement because private insurance companies have adopted cost containment measures similar to those used by government agencies. These cost containment mechanisms include managed care and capitated payment. Despite these efforts, due to, among other things, the growing percentage of older persons in the population, improved technology and administrative costs in a highly regulated industry, health care expenditures as a percentage of the gross national product continue to rise. Consequently, it can be -13-

18 expected that aggressive cost containment measures and anti-fraud and abuse investigation and enforcement could have a material adverse effect on the Hospital. Continue efforts in the form of statutory and regulatory activity to reduce the rate of increase in reimbursement for health care costs, particularly costs paid under the Medicare and Medicaid programs, can be expected. The Medicare and Medicaid programs have been and continue to be affected by numerous legislative initiatives. In general, the purpose of much of the statutory and regulatory activity has been to reduce the rate of increase in health care costs, particularly costs paid under the Medicare and Medicaid programs. Diverse and complex mechanisms to limit the amount of money paid to health care providers under both the Medicare and Medicaid programs have been enacted, and have caused reductions in reimbursement from the Medicare program. CAHs are reimbursed by the Centers for Medicare and Medicaid Services ( CMS, formerly known as the Health Care Financing Administration or HCFA ) on the basis of reasonable costs, with several caveats discussed in more detail below. The Hospital is a CAH and is currently reimbursed on that basis for costs related to Medicare. Because the Hospital is a CAH, it is not subject to the inpatient prospective payment system; however, the provision is significant in that it links reimbursement to the quality of care a hospital provides. Current emphasis is placed on patient safety and reduction of medical errors and quality improvement in health care are expected to expand beyond PPS hospitals and could become a requirement for CAHs. This quality information is now available to the public online as well and it should be noted that while not obligated to do so, the Hospital already complies with certain reporting requirements related to the inpatient prospective payment system. The State of Iowa has also faced budget shortfalls in recent years, but health care providers have been insulated from those shortfalls to date. The Iowa Legislature has addressed shortfalls by appropriating supplemental funds from several trust funds, such as the Senior Living Trust Fund, the Healthy Iowans Tobacco Fund, and the Hospital Trust Fund. However, there can be no assurance that such appropriations will continue. The Iowa Legislature has also passed legislation that redesigns the Iowa Medicaid program in a number of significant ways. See BONDHOLDERS RISKS Medicaid herein. Numerous other proposals have been advanced by various parties to require or promote alternate methods of health care delivery, to establish health care cost containment measures, to provide alternatives for payment of health care costs under Medicare, Medicaid and private reimbursement programs, and to institute other changes in health care payment and reimbursement. The Hospital is subject to governmental regulation under the federal Medicare program and the joint federal and state Medicaid program. Health care providers, including the Hospital, have been and will continue to be affected by changes that have occurred during the last several years in the administration of the Medicare and Medicaid programs. The Health Reform Law On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act (the Affordable Care Act ) which includes sweeping changes to how health care is paid for and provided in the United States. On March 30, 2010, the President signed the Health Care and Education Reconciliation Bill (the Reconciliation Act ), which modifies the Affordable Care Act in many respects. Together, the Affordable Care Act and the Reconciliation Act will be referred to as the Health Reform Law. The Health Reform Law is estimated to expand health insurance coverage to 30 million individuals through Private Insurance and Exchanges. Among other significant changes, the Health Reform Law has both immediate and ongoing effects on the private insurance market. For example, the Health Reform Law required that starting in 2010, among other things, all individual and group health plans must provide dependent coverage for children through age 26, certain insurers are prohibited from imposing lifetime -14-

19 limits on the dollar value of coverage, new prohibitions exist on rescinding coverage except in cases of fraud, and insurers are prohibited from imposing pre-existing condition exclusions. For individuals and, at first, small employers, the Health Reform Law creates state-based health insurance marketplaces, known as exchanges. The exchanges became effective in 2014 and are administered by either a governmental agency or a non-profit organization. Starting in 2014, individuals and small employers with less than 50 employees can purchase insurance through an exchange. The exchanges are open to employers with between 50 and 100 employees beginning in In addition, states may elect to create regional exchanges or to permit more than one exchange to operate in a given state if each exchange serves a distinct geographic area. Furthermore, as of 2014, all qualified health benefits plans offered through the exchanges and in the individual and small group markets, with certain exceptions, must offer an essential benefits package, consisting of a minimum package of health benefits offering comprehensive services and covering at least 60% of covered out-of-pocket expenses with reasonable out-of-pocket maximums. Subsidies are available to assist low-income individuals and certain small businesses to cover the costs of purchasing health insurance through the exchanges. To ensure competition between plans offered through the exchanges, the Health Reform Law directs the federal Office of Personnel Management to enter into contracts with private insurers to offer at a minimum two multi-state plans in each exchange in each state. At least one such plan must be offered by a non-profit insurer. It is not possible to predict what effect changes in the health insurance market will have on demand for services from the Hospital or the amount of reimbursement available for those services. During the most recent annual open enrollment period, the U.S. Department of Health & Human Services estimated that about 11.4 million people signed-up for or renewed a health plan via the health insurance marketplaces created as a result of the Health Reform Law. Employers. The Health Reform Law does not expressly require employers to offer health care coverage. However, in 2015 large employers (i.e., those with one hundred or more employees) and in 2016 small employers (i.e., those with between fifty and ninety-nine employees) will become subject to a penalty if they do not offer health care coverage and if any of their workers obtain subsidized coverage through the planned health care exchanges. Employers with fewer than fifty employees are not required to provide health insurance to their employees. Also employers that offer coverage must provide a voucher equal to what the employer would have paid under the employer s plan to employees with incomes up to 400% of the federal poverty level who choose to enroll in the planned health care exchanges. Certain subsidies to purchase health insurance will be made available to qualifying employers. For example, employers with fewer than 25 employees and with certain average worker annual wages that purchase health insurance for their employees will qualify for a tax credit. It is not possible to predict what effect changes that the Health Reform Law imposes on employers will have on demand for services from the Hospital or the amount of reimbursement available for those services. Individuals. Beginning in 2014, with some exceptions, all United States citizens and legal residents must have a minimum level of health insurance coverage or pay a penalty. Individuals without qualifying coverage must pay a tax penalty with certain maximums. The penalty will be phased in based on a preset schedule. Certain categories of individuals will qualify for an exception from the penalty; the main categories are: American Indians, individuals with religious objections, individuals who can show financial hardship, individuals without coverage for less than three months each year and households with incomes below a certain level. In addition, the Health Reform Law will provide tax credits (also referred to as subsidies) to purchase health insurance through the exchange on a sliding scale to individuals and families with incomes up to 400% of the federal poverty level. -15-

20 It is not possible to predict what effect changes that the Health Reform Law imposes on individuals will have on demand for services from the Hospital or the amount of reimbursement available for those services. Medicare The Hospital receives a significant portion of its gross patient service revenue from reimbursement under Medicare (approximately 44.8% in the fiscal year ended December 31, 2014 (see SELECTED FINANCIAL DATA Sources of Revenue in Appendix A)). In 1966, the federal Social Security Act established the Medicare program to provide health care services to the elderly and the disabled. Medicare Part A provides health insurance benefits for covered hospital and related health care services to persons aged 65 years and older who are entitled to monthly Social Security retirement benefits, as well as to certain disabled persons. Medicare Part B provides supplemental medical benefits covering primarily outpatient and physician care costs for covered persons; beneficiary participation in Medicare Part B is on a voluntary basis. Legislative action and the promulgation of related regulations since the program s adoption have resulted in significant changes in the Medicare program. Formerly, Medicare provided reimbursement to hospitals for the reasonable direct and indirect costs of inpatient hospital services furnished to beneficiaries. Pursuant to the Social Security Amendments of 1983 and subsequent Budget Reconciliation Act modifications, Congress adopted a prospective payment system ( PPS ) to cover the routine and ancillary operating costs of most Medicare inpatient hospital services. Because the Hospital is designated as a CAH, it is not subject to either inpatient or outpatient PPS under Medicare. Instead, the Hospital is reimbursed on the basis of its reasonable costs, subject to certain limitations. In an effort to restrict unbundling of services for which payment might be made separately, OBRA-90 directed that outpatient services, including diagnostic tests and other admission-related nondiagnostic services provided by a hospital on the day of hospital admission and up to three business days immediately preceding the admission date, would no longer be reimbursable under Medicare Part B if Medicare Part A is the primary payer. CMS has stated that because CAHs are reimbursed on a cost basis, the three-day payment window rule does not apply to CAHs. However, this could change in the future and has the potential to have an adverse effect on the Hospital. While hospitals that have been prosecuted for unbundling have confronted a substantial amount of potential financial liability, the Department of Justice has typically offered reasonable settlements. Because the rules applicable to such unbundling provisions are complicated and were not well understood at the time of their implementation, investigations in other states have found some violations in virtually all hospitals. The Health Reform Law in its net effect is estimated to reduce the projected growth of Medicare by $424 billion for the ten-year period from federal fiscal year 2010 through 2019, which is a six percent reduction from the Medicare spending that had been projected for that period, including $116 billion from private Medicare Advantage plans. In addition, payments to providers under Medicare will be more closely tied to quality outcomes. For example, the Health Reform Law introduced new quality reporting requirements, value-based purchasing programs, and hospital re-admission rate and hospital-acquired condition penalties. Some of these quality initiatives are discussed in more detail below. The Health Reform Law establishes the Independent Advisory Board ( IPAB ), which is directed to recommend savings for Medicare if the per capita growth in Medicare spending exceeds defined target growth rates. The recommendations move to Congress for fast-track consideration, and if Congress does not act in the required timeframe, the Secretary of HHS is required to implement them. IPAB is prohibited from including any recommendation that would: 1) ration health care; 2) raise revenues or increase Medicare beneficiary premiums or cost sharing; or 3) otherwise restrict benefits or modify eligibility criteria. In addition, for implementation years through 2019, mandatory proposals cannot include recommendations that would reduce payment rates for certain providers and suppliers of services. -16-

21 As a result, payments for inpatient and outpatient hospital services, inpatient rehabilitation and psychiatric facilities, long-term care hospitals, and hospices are exempt from IPAB-proposed reductions in payment rates until 2020; clinical laboratories are exempt until President Obama has proposed to allow IPAB to start its work earlier, though the 2014 federal omnibus spending bill reduced its $15 million dollar budget by $10 million dollars, essentially gutting it. At this point there is no way to predict whether any deadlines will be moved up or how IPAB s recommendations would impact hospital reimbursement, if at all. Certain payment demonstration programs for payment and care have also been developed. An example of such a program is an accountable care organization (an ACO ), which functions by integrating hospitals, physicians and other health care providers in order to provide care for a defined patient population. An ACO is partially paid based on, and generally held accountable for, the cost and quality of care furnished by the ACO provider members to the defined patient population. In turn, the ACO provider members are accountable for the total cost of care provided to such patient population. The ACO and its provider members are paid based on a pre-set formula for the care provided and they may be eligible to receive incentive payments for achieving certain cost and quality goals. The Health Reform Law makes changes to Medicare Part D, the prescription drug program, including taking steps to close the donut hole or coverage gap for prescription drug coverage. Beginning in 2010, individuals who faced the coverage gap received a $ rebate and beginning in 2011, drug makers began providing a 50% discount on brand-name drugs to low- and middle-income Medicare Part D beneficiaries who must pay for the drugs themselves once the coverage gap begins. The drug makers rebate will increase to a 75% discount on brand name and generic drugs by 2020, effectively closing the coverage gap. Hospital Inpatient and Outpatient Services. For inpatient services, the Medicare Prescription Drug Improvement and Modernization Act ( MPDIMA ) sets reimbursement at 101% of the reasonable costs of the CAH in providing those services. For outpatient services, a CAH may elect an All-Inclusive Rate for Outpatient Payments, which allows a CAH to be paid an all-inclusive rate that incorporates the cost-based facility payment and a professional fee based on 115% of the Medicare physician fee schedule on a single claim (referred to as Method II billing ). In the alternative, a CAH could be paid on the basis of its reasonable costs. For cost reporting periods beginning on or after October 1, 2011, CMS has reduced CAH s reimbursement under Method II billing from 101% of reasonable costs plus the professional fee, to 100% of reasonable costs plus the professional fee. However, the Health Reform Law provides that CAHs are now paid 101% of costs for all outpatient services they provide, regardless of the billing method selected. Additionally, the Health Reform Law expands the outpatient 340B program to CAHs and to certain Sole Community Hospitals and Rural Referral Centers, but does not expand the program to cover inpatient drugs for existing 340B hospitals. The 340B Drug Pricing Program limits the cost of covered outpatient drugs to certain federal grantees, federally-qualified health center look-alikes and qualified disproportionate share hospitals. Significant savings on pharmaceuticals may be seen by those entities that participate in this program. Laboratory Services. Prior to July 1, 2011, Medicare payment for clinical diagnostic laboratory tests provided to outpatients of a CAH was made on a reasonable costs basis only if the patient was an outpatient of the CAH and was physically present at the CAH when the specimen was collected. Otherwise, payment was made on the basis of the Medicare Clinical Laboratory Fee Schedule ( CLFS ). The Medicare Improvements for Patients and Providers Act of 2008 ( MIPPA ) provided that effective July 1, 2011, patients no longer are required to be physically present at the CAH when the specimen is collected, and CMS has implemented regulations which provide for cost-based reimbursement if the patient received outpatient services from the CAH on the same day the specimen is collected or the specimen is collected by an employee of the CAH. Cost-based reimbursement will also be allowed if the specimen is collected while the patient is physically present in the CAH when the specimen is collected, or it is collected in a facility that is provider-based to the CAH. In other cases, services would be reimbursed under the CLFS. -17-

22 Emergency Room Personnel. Medicare payments to CAHs include costs of compensation and other related costs of on-call emergency room physicians, physician assistants, nurse practitioners and clinical nurse specialists even if those physicians are not present at the facility, if the practitioner is not otherwise providing services and is not on-call at any other facility. Physician Services. Payments for physician services, other than those performed in a rural health clinic, under Part B of the Medicare program are based on a national fee schedule. The fee schedule is based on a resource-based relative value scale ( RBRVS ), whereby physician work for a service is assigned a value reflecting the relative resources such as time, intensity, and risk required to perform the service. Values are also assigned to each service for practice expenses for example, billing, rent, office personnel, and supplies, and for malpractice expenses. Payments are calculated by multiplying the combined costs of a service by a conversion factor. The conversion factor is a monetary amount that was previously adjusted annually by CMS s Sustainable Growth Rate ( SGR ) system. On April 16, 2015, the Medicare Access and CHIP Reauthorization Act of 2015 ( MACRA ) was signed into law permanently repealed the SGR system. MACRA replaced the SGR system with a combination of automatic increases for physician payments, including an annual update of 0.5 percent between 2015 and 2019, and incentives for physicians to participate in a variety of pay-for-performance programs and alternative payment models. There is no guarantee that reimbursement for physician services will cover the cost of those services to beneficiaries. Rural Health Clinics. The Hospital owns two provider-based rural health clinics ( RHCs ), one in Shenandoah, Iowa, and one in Sidney, Iowa. RHCs are independent or provider-based clinics which are certified under the Medicare program to receive special, generally increased, Medicare and Medicaid reimbursement in order to improve access to primary care in rural medically underserved areas. Providerbased RHCs such as the Hospital s rural health clinics receive enhanced Medicare payments. The Hospital s RHC Medicare visits are reimbursed based on allowable costs. Medicaid visits are currently reimbursed under either the cost-based method or an alternative PPS system. Following the state s transition to a Medicaid Managed Care model effective January 1, 2016, Medicaid rates for services provided in the Hospital s RHCs will be negotiated between the Managed Care Organizations and the Hospital. Medicare Audits and Withholds. Hospitals that participate in Medicare and Medicaid are subject to audits and retroactive adjustments with respect to reimbursement claimed under those programs. Medicare and Medicaid regulations permit withholding of payments in certain circumstances. Any such withholding could have a material adverse effect on the financial condition of the Hospital. See MANAGEMENT S DISCUSSION OF HOSPITAL OPERATIONS in Appendix A hereto for a discussion of potential repayment to the Medicare program based upon a disallowance of home office costs for which the Hospital was previously reimbursed. Other than such potential repayment, management of the Hospital is not aware of any situation in which a Medicare or other payment is being, or may in the future be, withheld that would materially and adversely affect the financial condition of the Hospital. The CMS has also launched another major initiative to directly challenge providers, the Medicare Zone Program Integrity Contractors ( ZPIC ). ZPICs are organizations hired indirectly (or in connection with other CMS affiliated contractors) by CMS to perform a wide range of medical review, data analysis, Medicare evidence-based policy auditing activities and potential Medicare fraud audits. Any or all of these audit programs could adversely affect the Hospital s reimbursement and financial performance. The Medicare Modernization Act of 2003 established a Medicare Recovery Audit Contractor ( RAC ) program as a demonstration program to identify improper Medicare payments. Each RAC is paid on a contingency fee basis, receiving a percentage of the improper overpayments collected from providers. During the fiscal year 2006, the RACs collected $69 million in overpayments and found $3 million in underpayments. The Tax Relief and Health Care Act of 2006 made the RAC program permanent and authorized CMS to expand the program to all 50 states by Iowa hospitals became subject to RAC review in HealthDataInsights, Inc. ( HDI ) is the RAC contractor for Region D, -18-

23 which includes Iowa. The Health Reform Law expands the RAC audits to the Medicaid, Medicare Part D and Medicare Advantage Programs. RACs collected $3.65 billion in Medicare overpayments during fiscal year 2013, in addition to blocking $22 million in improper payments from being made through prepayment reviews. The Medicare program is subject to judicial interpretations, administrative rulings, governmental funding restrictions and requirements for utilization review (such as second opinions for surgery and preadmission criteria), as well as national health care reforms, paid for in part by reductions to the Medicare and Medicaid programs. Such matters, as well as more general governmental budgetary concerns, may reduce payments made to the Hospital, and future Medicare payment rates may not be sufficient to cover increases in the cost of providing services to Medicare patients. At this time, the management of the Hospital cannot predict the full impact that national health reforms will have on the Hospital s revenues, but it is possible that the Medicare program changes will have a material adverse effect on the Hospital. See BONDHOLDERS RISKS - Government Regulation of the Health Care Industry herein. Medicare and the Health Reform Law The Affordable Care Act will reduce the projected growth of Medicare by $500 billion over 10 years, including $116 billion from private Medicare Advantage plans. In addition, payments to providers under Medicare will be more closely tied to quality outcomes and will more increasingly be in part dependent upon meeting certain performance standards and avoiding hospital-acquired patient conditions. For example, beginning in 2013, a portion of a hospital s Medicare payment was linked to the hospital s performance on quality measures related to common and high-cost conditions. Similar programs will be introduced for other health care providers as well. Additionally, beginning in 2015, hospitals in the top 25th percentile of rates of hospital-acquired conditions for certain high-cost procedures are subject to a payment penalty. At this time, CAHs are exempt from the inpatient prospective payment system and hospital-acquired conditions payment provisions. However, there is no way to predict if this will change or what effect it may have on reimbursement. Medicaid Medicaid is the commonly accepted name for the healthcare reimbursement program created by certain provisions of the Federal Social Security Act to benefit indigent persons who are elderly, blind or disabled, or members of families who are eligible for Aid to Families with Dependent Children. Medicaid is a combined federal and state program. The Hospital receives a material portion of gross patient service revenue from reimbursement under Medicaid (approximately 18.8% in the fiscal year ended December 31, See SELECTED FINANCIAL DATA Sources of Revenue in Appendix A). Payments made to health care providers under the Medicaid program are subject to change as a result if federal or state legislative or administrative actions, including changes in the methods for calculating payments, the amount of payments that will be made for covered services, and the types of services that will be covered under the program. In Iowa, the federal government s share, ranges between 60-65% of the program s costs. Reimbursement for hospital services has historically been determined in accordance with procedures and standards established by state law under federal guidelines and have been based on the methods used for reimbursement under the Medicare program using statewide cost data. In several states, including Iowa, the Medicaid program reimburses CAHs on a cost basis or modified PPS basis. In Iowa, CAHs are reimbursed by Medicaid prospectively, with retrospective adjustments based on cost reports submitted by the Hospital at the end of its fiscal year. Section 6034 of the Deficit Reduction Act of 2005 established the Medicaid Integrity Program, which uses Medicaid Integrity Contracts ( MICs ) to prevent, identify, and recover inappropriate Medicaid payments. The scope of a MIC audit can be very large, and because of the complexities created -19-

24 by the varying processes from State to State, healthcare providers will face many new challenges as they work to defend their legitimate revenues from recoupment. Over the last several years, the Iowa Medicaid Enterprise and Iowa Department of Human Services (pursuant to authority from the Iowa legislature) have implemented certain cost-containment initiatives. Some of the cost-containment initiatives that may impact the Hospital include, but are not limited, to changes to reimbursement policies for non-emergent emergency room visits, the institution of payment reductions for multiple procedure therapy claims and the elimination of payment for hospital acquired conditions. Iowa Transition to Medicaid Managed Care In February 2015 the Iowa Department of Human Services ( DHS ) released a Request for Proposals ( RFP ) as part of Iowa Governor Terry Branstad s initiative (the Medicaid Transition ) to transition the majority of individuals in Iowa currently covered under Iowa Medicaid, Healthy and Well Kids in Iowa (hawk-i) and the Iowa Health and Wellness Plan to comprehensive managed care organizations ( MCOs ). The administration announced in August 2015 that it intended to award contracts to four MCOs: Amerigroup Iowa, Inc., AmeriHealth Caritas Iowa, Inc., UnitedHealthcare Plan of the River Valley, Inc. and WellCare of Iowa, Inc. The MCOs will be required to establish provider networks that meet network adequacy standards set by the state in order to show that the MCO s network is sufficient in numbers and types of providers to ensure that all services are accessible to members without unreasonable delay. MCOs are required to accept all physical and behavioral health care providers, including hospitals that accept the MCO s standard terms and conditions, through June 30, Current Medicaid rates are also required to remain in place until June 30, After June 30, 2016, provider networks and reimbursement rates will be negotiated by the MCOs and providers. There is no guarantee that the Hospital will be selected as a provider in all, or any, of the MCO provider networks following the initial six month period after the transition or, if selected, that the revenue generated under the MCO participation agreements would be adequate to pay the costs of treating Medicaid beneficiaries covered by such MCOs. In addition, there remains a great deal of uncertainty related to the process of transitioning to Medicaid Managed Care in Iowa for providers. It is not possible to predict what effect changes the transition to a Medicaid Managed Care model will have on demand for services from the Hospital or the amount of reimbursement available for those services. If the Hospital is not selected as a provider in all of the MCO provider networks, or the reimbursement as a result of the MCO provider networks significantly decreases, the revenues of the Hospital may be materially adversely affected, which could adversely affect the Hospital s ability to pay the principal of and interest on the Notes on a timely basis, or in full. The State of Iowa has not yet received final federal approval of the Medicaid Initiative, and implementation of the Medicaid initiative may be delayed or may not occur if such federal approval is not received on a timely basis or at all. In addition, three insurance companies not selected by the State for contracts following the RFP have challenged the State s selection process. As part of these challenges, on November 25, 2015 an Administrative Law Judge ( ALJ ) recommended that the state reverse the contract awarded to WellCare of Iowa, Inc. The ALJ s order did not recommend delaying the Medicaid Initiative transition or that the State reverse the contracts awarded to the other MCOs. In addition, the ALJ s recommendation is not binding on the State. It is possible that the insurance claimants challenging the selection process of the MCOs may file additional challenges in district court, which could delay or otherwise impact the Medicare Initiative. Annual Cost Reporting The Hospital s annual cost reports, which are required under the Medicare and Medicaid programs, are subject to audit, which ultimately may result in adjustments to previously reimbursed amounts. Medicare and Medicaid providers must meet regulatory Conditions of Participation in order to be eligible for Medicare and Medicaid reimbursement. CMS is responsible for ensuring that hospitals -20-

25 meet these regulatory Conditions of Participation, and the Hospital is surveyed by the Iowa Department of Inspections and Appeals to determine whether it is in compliance with the Conditions of Participation for CAHs. Failure to comply with the CAH Conditions of Participation could, in severe cases, lead to loss of participation in Medicare and/or Medicaid which would materially affect the revenues of the Hospital. Additionally, under the Medicare Electronic Health Record ( EHR ) Incentive Program, CAHs that meaningfully use a certified EHR system can start receiving incentive payments any year from FY 2011 to FY Incentive payments are a product of a calculation involving the CAH s reasonable costs incurred by the purchase of the certified EHR system during the cost reporting period. What EHR systems meet the certification requirements and whether a CAH is deemed a meaningful user are not entirely certain and could be construed against the Hospital. Additionally, beginning in 2014, the federal government began auditing hospitals and providers records related to their attestation of being meaningful users in order to obtain the incentive payments. A hospital or provider that fails the audit will have an opportunity to appeal. Ultimately, hospitals or providers that fail on appeal will have to repay any incentive payments they received through these programs. Emergency Medical Treatment and Active Labor Act (EMTALA) The federal Emergency Medical Treatment and Active Labor Act ( EMTALA ) imposes certain requirements on hospitals and facilities with emergency departments. Generally, EMTALA requires that hospitals provide appropriate medical screening to patients who come to the emergency department, to determine if an emergency medical condition exists. The hospital must stabilize the patient, and the patient cannot be transferred unless stabilization has occurred or an appropriate transfer has been arranged. In addition, a hospital which receives an inappropriate transfer must report that transfer to CMS. Failure to comply with the law can result in exclusion from the Medicare and/or Medicaid programs as well as civil and criminal penalties. The Management of the Hospital has policies and procedures in place to achieve material compliance with EMTALA, but no assurance can be given that a violation of EMTALA will not be found. Any sanctions imposed as a result of an EMTALA violation could have a material adverse effect on the future operations or financial condition of the Hospital. Health Insurance Portability and Accountability Act and Health Information Technology for Economic and Clinical Health Act Congress enacted the Health Insurance Portability and Accountability Act ( HIPAA ). HIPAA has several provisions; however, the most relevant provisions to the Hospital are those directed toward administrative simplification in the health care industry. As part of this effort, Congress enacted significant requirements for health care providers with regard to billing, use and disclosure of patient information, and security measures to be utilized by entities covered by HIPAA. Although Congress did establish some requirements in HIPAA itself, it delegated authority to the Secretary of the United States Department of Health and Human Services (the Secretary ) to develop and implement the regulatory scheme. The Secretary has promulgated regulations for the three large components of HIPAA s administrative simplification, privacy and security provisions, which are discussed in greater detail below. However, the American Recovery and Reinvestment Act of 2010 included the Health Information Technology for Economic and Clinical Health Act ( HITECH Act ). The HITECH Act includes a number of provisions which significantly affect HIPAA covered entities. On January 25, 2013, HHS issued comprehensive modifications to the existing HIPAA regulations to implement the requirements of the HITECH Act, commonly known as the HIPAA Omnibus Rule. The HIPAA Omnibus Rule became effective on March 26, 2013, and covered entities were required to be in compliance by September 23, 2013 (though certain requirements have a longer timeframe). Key aspects of the HIPAA Omnibus Rule include, but are not limited to: (i) a new standard for what constitutes a breach of private health information, (ii) establishing four levels of culpability with -21-

26 respect to civil monetary penalties assessed for HIPAA violations, (iii) direct liability of business associates for certain violations of HIPAA, (iv) modifications to the rules governing research, (v) stricter requirements regarding non-exempt marketing practices, (vi) modification and re-distribution of notices of privacy practices, and (vii) stricter requirements regarding the protection of genetic information. While the effects of the HIPAA Omnibus Rule cannot be predicted at this time, the obligations imposed thereunder could have a material adverse effect on the financial condition of the Hospital. Management of the Hospital believes that the Hospital is in substantial compliance with HIPAA, the HITECH Act, and all accompanying regulations, include the HIPAA Omnibus Rule, however, the changes enacted by the HITECH Act and the HIPAA Omnibus Rule, and future changes may be costly and burdensome for the Hospital to implement, and may subject the Hospital to fines or assessments which could adversely affect the financial condition of the Hospital. Transactions/Code Sets. One major focus of HIPAA is in the area of electronic data interchange. Specifically, the regulations require all health care providers, health care clearinghouses and health plans who submit electronic transactions to do so in a nationally standardized format. The purpose is to allow for uniformity in claims and other electronic data communications between payers and providers. The regulations apply only to providers who submit transactions electronically. As part of the regulations, the Secretary has published implementation standards for providers to use when transmitting electronic transactions. Privacy. The HIPAA privacy regulations are directed toward the protection of individually identifiable health information from certain uses and disclosures. To prevent improper use or disclosure of protected health information, providers must develop and maintain numerous safeguards, which may involve substantial administrative and financial burdens. Specifically, HIPAA provides that protected health information is subject to stringent requirements for use inside the Hospital and when disclosed to third parties. For example, HIPAA requires that covered entities: transmit data in standard code sets; maintain detailed records of uses and disclosures of a patient s data, and make those records available to the patient upon his/her request; give patients the right to access, inspect and request amendments to their health records; develop and adhere to privacy policies and a notice of privacy practices for patients; provide appropriate training to employees; implement various physical, technical and administrative safeguards to prevent intentional and unintentional misuse of health information; and designate a privacy official to oversee the implementation of these requirements. Subject to certain exceptions, when using or disclosing protected health information or when requesting protected health information from another covered entity or business associate, a covered entity or business associate must make reasonable efforts to limit protected health information to the minimum necessary to accomplish the intended purpose of the use, disclosure, or request. Congress has directed the Secretary to publish guidance to covered entities on what constitutes minimum necessary. In addition, covered entities may use protected health information in a limited data set for certain nontreatment purposes (e.g., research and health care operations). The term Limited Data Set is defined under existing HIPAA regulations as information that excludes names, postal address, telephone and fax numbers, address, social security and medical record numbers, and nine other identifiers. Covered entities that use an electronic health record will also be required to account for disclosures of information pursuant to the HITECH Act that are currently not subject to the accounting requirements, including disclosures for treatment, payment and health care operations, depending on when the covered entity acquired the electronic health record technology. The covered entity will have the option of accounting for all disclosures, including disclosures made by its business associates, itself, or providing an accounting of only the covered entity s disclosures, with a list of the names and contact information of its business associates, so that a patient may request the information directly from each business associate. In addition, if a covered entity maintains an electronic health record, individuals have -22-

27 a right to receive a copy of the protected health information maintained in the record in an electronic format. Again, the Secretary is charged with developing guidance to refine these requirements. The HITECH Act also includes several other major provisions. Among these is the requirement that covered entities comply with patient requests to restrict disclosure of information to a health plan for the purposes of carrying out payment or health care operations, if the information pertains solely to an item or service for which the provider was paid out of pocket in full. The Act also includes a prohibition on the direct or indirect payment or receipt of remuneration in exchange for protected health information without specific patient authorization, except in limited circumstances, such as the sale of a business. Finally of note, the Act imposes additional restrictions on the use and disclosures of protected health information for marketing communications and fundraising communications. Security. The HIPAA regulations also address the security of electronic patient information. The regulations require organizations to evaluate existing security and confidentiality policies, as well as technical practices and procedures, including access controls, audit trails, physical security and disaster recovery, protection of remote access points, protection of external electronic communications, software discipline and system assessment. Under current HIPAA security regulations, there is no prescribed form of technology or information system capability a covered entity must use to meet the security requirements. Under the provisions of the HITECH Act, the Secretary is required to issue annual guidance on the most effective and appropriate technical safeguards to be used by organizations in carrying out HIPAA security obligations. While the technical safeguards set forth in the HHS annual guidance will not be considered the only means through which to comply with the requirements, covered entities and business associates who choose not to use the safeguards included in the guidance should be prepared to justify the choice to use different processes and/or systems. Further, to encourage covered entities and business associates to use technology that will render information unusable, unreadable or indecipherable in the event of unauthorized access, organizations that fail to adopt prescribed technology are required to provide written notification of security breaches to the affected individual and to HHS. In some cases, notice of the security breach may be required to be posted on the organization s website, and/or provided to major print or broadcast media. The Secretary has published guidance specifying the technologies and methodologies that render protected health information unusable, unreadable or indecipherable. In August 2010, the Secretary proposed regulations implementing the breach notification provisions of the HITECH Act, and in those regulations, declined to identify alternate forms of qualifying technology for purposes of the breach notification requirements. The term breach means the acquisition, access, use or disclosure of protected health information in a manner that is not permitted under the privacy regulations, which compromises the security or privacy of the protected health information. The HIPAA Omnibus Rule significantly changes the scope of covered entities breach obligations. Previously, a covered entity was permitted to use a risk of harm standard in determining whether a breach occurred such that the covered entity needed to take action. Under the new rule, an impermissible acquisition, access, use or disclosure of unsecured PHI is presumed to be a breach, and breach notification is required, unless the covered entity (or business associate, as applicable) demonstrates through a risk assessment that there is a low probability the PHI has been compromised. The rule provides four factors that covered entities may use in making this determination. The new rule reminds covered entities that they are required to provide breach notification to the affected individuals without unreasonable delay and in no event later than sixty days following discovery of the breach, which is deemed discovered if any person, other than the individual committing the breach, that is an employee, officer, or other agent of such entity or associate knows or should reasonably have known of the breach. In some cases where notice is required, notice of the security breach may also be required to be posted on the organization s website, and/or provided to major print or broadcast media. Each covered entity must also maintain a log of breaches, which must be submitted to the Secretary annually, except in cases in which more than 500 individuals are affected, in which case the Secretary must be notified immediately. Covered entities like the Hospital were required to update their internal policies and their -23-

28 business associate agreements to comply with this new rule. This is especially true since at the same time that the new rule imposes new obligations, it also expands federal enforcement for example, by requiring mandatory investigation of any complaint filed indicating a possible HIPAA violation due to willful neglect. Business Associates. Under existing HIPAA regulations, covered entities must include certain required provisions in their contractual relationships with organizations that perform functions on their behalf which involve use or disclosure of protected health information. These organizations are called business associates, and have been indirectly regulated by HIPAA through those contractual obligations. The HITECH Act provides that all of the HIPAA security administrative, physical and technical safeguards, as well as security policies, procedures and documentation requirements will now apply directly to all business associates. In addition, the HITECH Act makes certain privacy provisions directly applicable to business associates. These changes are significant because business associates will now be directly regulated by HHS for those requirements, and as a result, will be subject to penalties imposed by HHS and/or state attorney general. Enforcement. Violations of HIPAA can result in civil monetary penalties and/or criminal penalties for willful disclosures. While there is no private right of action under HIPAA, individuals who believe their rights have been violated may file a complaint directly with the HHS Office of Civil Rights ( OCR ), the administrative office tasked with enforcing HIPAA. OCR has stated that it has now moved from education to enforcement in its implementation of the law. Recent settlements of HIPAA violations for breaches involving lost data have reached the millions of dollars. Any breach of HIPAA, regardless of intent or scope, may result in penalties or settlement amounts that are material to a covered healthcare provider or health plan. The HITECH Act revised the civil monetary penalties associated with violations of HIPAA. The January, 2013 final rule implements changes to the civil monetary penalty amounts that may be imposed for HIPAA violations. The final rule incorporates the tiered penalty structure from the HITECH Act, which categorizes violations of the HIPAA rules based on culpability of the entity into four categories: did not know, reasonable cause, willful neglect (but corrected within thirty days), and willful neglect (not corrected within thirty days). Penalties are assessed per violation and range from a minimum of $100 up to a maximum of $1.5 million for all such violations of an identical provision in a calendar year. In all cases, the penalties will be assessed after an evaluation of applicable factors including: (a) the nature and extent of the violation, including the number of individuals affected; (b) the nature and extent of resulting harm, including consideration of reputational harm to individuals affected; (c) history of prior compliance, including indications of noncompliance by the covered entity or business associate; (d) the financial condition of the covered entity or business associate; and (e) other such matters as justice shall require. Management of the Hospital believes that it is presently in material compliance with all provisions of HIPAA, however, the changes enacted by the HITECH Act and subsequent HHS rules and guidance may be costly and burdensome for the Hospital to implement, and may subject the Hospital to fines or assessments which could adversely affect the financial condition of the Hospital. Statutes and Regulations Governing Hospitals, Relationships with Physicians and Other Providers The Health Reform Law contains more than thirty-two sections related to healthcare fraud and abuse and program integrity and makes significant amendments to existing criminal, civil, and administrative healthcare-related anti-fraud statutes. Some of these provisions, if violated, may create a basis for overpayment or fraud liability. These provisions include new employee and vendor screening requirements, new financial disclosure requirements, the requirement of face-to-face physician and patient encounters for durable medical equipment and home health services and new price reporting requirements in the 340B program. -24-

29 Anti-Kickback Laws. The Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act (the Anti-Kickback Law ) make it a criminal felony offense (subject to certain exceptions) to knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business for which reimbursement is provided under Medicare or Medicaid and other governmental health care programs. In addition to criminal penalties, violations of the Anti-Kickback Law can lead to exclusion from Medicare, Medicaid and other governmental health care programs for not less than five years, or the imposition of civil money penalties. Exclusion from any of these programs or sanctions of civil money penalties would have a material adverse impact on the operations and financial condition of the Hospital. Similarly, the Iowa Board of Medicine prohibits physicians from providing medical services under terms or conditions which tend to interfere with or impair the free and complete exercise of the physician s medical judgment and skill or tend to cause a deterioration of the quality of medical care. The arrangements prohibited under the federal Anti-Kickback Law can involve hospitals, physicians and other health care providers, and are broader than referral fees, kickbacks, rebates or other payments. Prohibited arrangements may include joint ventures between providers, space and equipment rentals, purchases of physician practices, physician recruiting programs and management and personal services contracts. Federal safe harbor regulations describe certain arrangements that will not be deemed to constitute violations of the Anti-Kickback Law. The safe harbors generally are narrow and do not cover a wide range of economic relationships which many hospitals, physicians and other health care providers have historically considered to be legitimate business arrangements not prohibited by the Anti-Kickback Law. Because the safe harbor regulations do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, it is uncertain whether hospitals and other health care providers that have these arrangements or relationships may need to alter them in order to ensure compliance with the Anti-Kickback Law. The Anti-Kickback Law does provide for a mechanism to request determinations of the legality of arrangements, called an Advisory Opinion. These opinions, while only valid and enforceable for the entity requesting the opinion, are available for public review. While not binding on the OIG with regard to parties other than the requesting entity, these opinions are generally regarded as critical guidance in how economic arrangements may and may not be structured under the Anti-Kickback Law. The OIG also issues guidance in the form of Special Fraud Alerts ( Fraud Alerts ) and Special Advisory Bulletins, designed to warn providers about particularly suspect arrangements or billing practices. The OIG also publishes its Work Plan on an annual basis, which outlines what it considers to be the top priorities for enforcement and education. Management of the Hospital believes that the Hospital is presently in material compliance with the Anti-Kickback Law. However, in light of the broad scope of the Anti-Kickback Law, the narrowness of the safe harbor regulations and the limited case law and regulatory activity interpreting the Anti- Kickback Law, there can be no assurance that no violation of the Anti-Kickback Law will be found, and if found, that any sanction imposed would not have a material adverse effect on the operations or the financial condition of the Hospital. The Health Reform Law amended the Anti-Kickback Law to relax the specific intent requirement for violating the law so that a violation of the law can now be established without showing that an individual knew of the statute s proscriptions and intended to violate the statute. Additionally, the Anti- Kickback law is amended to explicitly provide that a violation of the statute constitutes a false or fraudulent claim under the federal False Claims Act. Physician Self-Referral Prohibition. Federal law prohibits physicians from referring Medicare, Medicaid and other federally funded patients for certain designated health services ( DHS ) where the physician has a financial relationship (ownership interest or compensation interest) in the provider of the referral services unless an exception exists. Also, any services furnished pursuant to a prohibited referral are not eligible for payment by Medicare, Medicaid or other federally funded programs, and the provider is prohibited from billing any third party for such services. This law and the regulations that accompany it are commonly referred to as the Stark law. There are several exceptions to the self-referral -25-

30 prohibition. The Stark law has changed significantly over the years. The most recent revisions to the regulations were published August 19, These regulations contained new exceptions, but also significantly changed several of the existing exceptions. Among the most significant changes were the changes to the space and equipment lease exceptions, which will no longer permit rental charges to be calculated on a per click or per use basis for patients who are referred between the parties, as well as changes to the scope of services that can be provided by a physician-owned company under arrangements. The Iowa Board of Medicine has adopted similar (though far less detailed) physician selfreferral prohibitions. As a condition to comply with the in-office ancillary services exception, the Health Reform Law requires a referring physician to inform patients that they may obtain certain imaging services from a person other than the referring physician, including a list of suppliers willing to provide the services in the patient s area. The Secretary of HHS is authorized to expand the list of DHS subject to this requirement. In addition, CMS published, on September 23, 2011, a voluntary self-disclosure protocol for actual and potential Stark Law violations, which gives CMS the authority to reduce the amount owed to the government as a result of a Stark Law violation within six months of enactment, and gives the Secretary authority to reduce the amount due and owing for Stark violations to an amount less than specified in the statute. Management believes that any ownership interest or compensation arrangement between the Hospital and physicians who refer patients to the Hospital for services currently fall within one or more of the statutory or regulatory exceptions. However, in light of the most recent revisions to the Stark regulations, and the limited case law and regulatory activity interpreting and enforcing this complex law, there can be no assurance that no violation of this law will be found and, if found, that any sanction imposed would not have a material adverse effect on the operation or financial condition of the Hospital. Billing and Reimbursement Practices. Health care providers, including hospitals and physician clinics, are also subject to criminal, civil and exclusionary penalties for violating billing and reimbursement standards under state and federal law. In recent years, state and federal enforcement authorities have investigated and prosecuted providers for submitting false claims to Medicare or Medicaid for services not rendered or for misrepresenting the level or necessity of services actually rendered in order to obtain a higher level of reimbursement. Management of the Hospital believes that its billing and claims practices are presently in material compliance with all federal and state billing and reimbursement standards. However, because the Medicare and Medicaid programs impose complex mechanisms for conditions for coverage and payments and for the determination of proper billing codes (including, but not limited to those under the prospective and DRG payment systems), and because future modifications to Medicare and Medicaid may occur such that the Hospital may not be able to comply expeditiously with such modifications, there is no assurance that no violation of federal and state billing and reimbursement standards will be found and, if found, that any sanctions imposed would not have a material adverse effect on the operations or financial condition of the Hospital. The Health Reform Law requires that providers must return identified overpayments within sixty days of identification or the overpayment becomes an obligation under the federal False Claims Act and the failure to return the overpayment after the sixty-day time period creates the potential for False Claims Act liability. Enforcement Activities. Pursuant to the mandates of HIPAA, increased emphasis is being placed on federal investigations and prosecutions of Medicare and Medicaid fraud and abuse cases. HIPAA, among other things, amended existing criminal penalties for Medicare fraud and created new federal health care fraud crimes. HIPAA also expands the scope of the fraud and abuse laws to apply to all federal health care programs, defined to include any plan or program that provides health benefits through insurance that is funded by the federal government. HIPAA directed the Secretary to establish a program -26-

31 to collect information on health care fraud and abuse and to encourage individuals to report information concerning fraud and abuse, and for payment of a portion of amounts collected to such individuals. On May 20, 2009, the Fraud Enforcement and Recovery Act of 2009 was signed into law and significantly changes the civil False Claims Act (the FCA ) to provide the federal government with more power to apply and enforce the FCA. These changes will affect many health care providers. The Health Reform Law revises the federal FCA to make it easier for whistleblowers to bring claims against healthcare providers. Additionally, the Health Reform Law itself includes whistleblower provisions in the event an individual would identify any entity or provider that violates any provision of the Health Reform Law. Further, the Health Reform Law amends the criminal healthcare fraud statute to reduce the intent required to establish a healthcare fraud offense violation as well as increases civil monetary penalties for many healthcare-related offenses, such as knowingly retaining an overpayment. 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 other accrediting bodies. 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, the Hospital s license would materially impair its ability to generate revenues and to pay the principal and interest on the Notes when due. Coding Update The International Classification of Diseases ( ICD ) is the international standard diagnostic classification used for health management purposes, clinical use and billing. HHS mandated a change from the ICD-9 coding standards currently used to ICD-10 standards effective October 1, The coding update changes are costly to physicians and hospitals and continue to require significant planning, training and updates to the software and systems of hospitals at substantial cost to the hospitals and providers. Private Third Party Reimbursement Apart from reimbursement by the federal government under Medicare and the federal and state governments under Medicaid (Medical Assistance), a significant portion of the Hospital s revenue is provided by private third-party payors, such as commercial insurers and various types of managed care programs such as health maintenance organizations ( HMOs ) and preferred provider organizations ( PPOs ). See SELECTED FINANCIAL DATA Sources of Revenue in Appendix A attached hereto. Reimbursement received from managed care programs frequently is lower than rates charged to patients covered by commercial insurance. Future contract negotiations between such third-party payors and the Hospital, and other efforts of these third-party payors and of employers to limit hospitalization and healthcare costs, could adversely affect the level of utilization of the Hospital s services, or reimbursement to the Hospital, or both. In addition, it is possible that competitive pricing of plan premiums could cause an HMO or PPO to operate at a loss and expose the Hospital to delays in payment or nonpayment of claims for services to plan participants. Changes in sources of revenue and case mix intensity may also adversely affect the Hospital s operating revenue. For example, if patients formerly covered by commercial insurance programs that pay full hospital and physician charges shift to HMOs or other third-party payors that pay lower negotiated rates, the discounts reflected in the Hospital s financial statements as contractual allowances will proportionately increase and income will proportionately decrease. In addition, if the average severity of illness or condition of patients of the Hospital covered by a capitated plan (i.e., a plan that pays the Hospital a fixed sum for each participant regardless of the services actually performed by the Hospital for the participant) were to increase after execution of the plan contract, operating expenses of the Hospital would proportionately increase without an offsetting increase in operating revenues. -27-

32 In addition, private insurers or managed care programs might enter into contracts with physicians, hospitals or other health care providers whereby the providers are the sole providers of care for participants in the program. If significant numbers of persons living in the Hospital s market area participated in exclusive provider programs not involving the Hospital, the Hospital s revenues and cash flow could be adversely impacted, thus adversely impacting its ability to pay debt service on the Notes. Environmental Risks Health care facilities are subject to a wide variety of federal, state and local environmental and occupational and safety laws and regulations that address, among other things, health care operations or facilities and properties owned or operated by health care providers. Among the types of regulatory requirements improved upon by health care providers are: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at health care facilities; and requirements for training employees in the proper handling and management of hazardous materials and wastes. In their role as owners and operators of properties or facilities, health care providers may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including any such substances that may have migrated off the property. Typical health care operations include, in various combinations, the handling, use, storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. For this reason, health care operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations or increase their cost, or both; may result in legal liability, damages, injunctions or fines; or may trigger investigations, administrative proceedings, penalties or other government agency actions. There can be no assurance that the Hospital will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of the Hospital. Other Factors Generally Affecting Health Care Facilities In the future, the following factors, among others, may affect the operations and financial performance of health care facilities, including those of the Hospital, to an extent that cannot be determined at this time: 1. Future medical and scientific advances, the development and requirement of the option for health maintenance organizations in labor contracts, state health plans, and other health plans, preventive medicine, improved occupational health and safety, and improved outpatient care could result in decreased usage of inpatient hospital facilities and thereby reduced revenues for the Hospital. 2. The recent focus on the billing and collection practices of tax-exempt hospitals nationwide could result in significant changes to those practices. Any such changes, to the extent they make billing and collection of fees more administratively burdensome or restrictive, could have a substantial impact on the Hospital. 3. A shortage of qualified professional personnel, particularly registered nurses, could significantly increase payroll costs. The Hospital cannot control the prevailing wage rates in its service area, and any increase in such rates will directly affect its costs of operations and may inhibit the ability of the Hospital to provide services of the levels necessary to meet the demands of the Hospital s service area. Similarly, the Hospital s rural setting may affect the ability of the Hospital to recruit qualified professional personnel, especially physicians, which may affect the ability of the Hospital to maintain revenues sufficient to maintain proper operating margins. However, physicians who furnish care in a CAH that is located in a Health Professional Shortage Area (a HPSA ) are eligible for a 10% HPSA incentive payment for outpatient professional services furnished to a Medicare beneficiary. If the service is furnished in an area that is on the CMS list of zip codes eligible for the HPSA incentive payment, -28-

33 payments are automatically paid on a quarterly basis. The Hospital is located in a location currently designated as a HPSA. 4. The possible inability to obtain future governmental approvals to undertake projects which the Hospital deems necessary to remain competitive as to rates and charges and to maintain the quality and scope of care may adversely affect the Hospital. 5. Substantially all of the revenue of the Hospital is derived from the treatment of patients admitted or directed to the Hospital s facilities by members of its medical staff. Each physician on the medical staff has the option of admitting or directing a particular patient, with the patient s consent, to such facilities or to other acute care hospitals with which the physician may be affiliated. If a particular physician or group of physicians were to admit to other area hospitals any patients who normally would have been admitted to the Hospital s facilities, revenue of the Hospital could decrease. 6. Iowa currently does not have a program for the regulation or review of the rates charged for hospital services furnished to private-paying patients. If any such program were established, it may have an adverse effect on the Hospital s revenues. 7. Iowa law requires that a hospital obtain a certificate of need from the State Health Facilities Council before making certain capital expenditures or acquiring certain kinds of equipment or offering certain types of new services. This requirement may prevent the Hospital from adapting in a timely manner, or at all, to changes in the mix of services needed to meet the needs of its service area and/or to remain competitive with other health care providers. The certificate of need law does not require a certificate of need for replacement of previously existing buildings or equipment and for many other types of capital expenditures or new services. 8. The occurrence of a natural or man-made disaster that could damage the Hospital s facilities, interrupt utility service to the facilities, result in an abnormally high demand for healthcare services or otherwise impair the Hospital s operations and the generation of revenues from the facilities. 9. Various proposals have been made for tort reform or changes in medical malpractice liability laws or for a patient s bill of rights. The Department of Health and Human Services Agency for Healthcare Research and Quality recently released a report linking caps on non-economic damages in malpractice cases to an increased number of physicians in those states that have enacted such caps. It is not possible to predict whether such proposals will be enacted or, if enacted, how the Hospital would be affected by tort reform legislation, if at all. Competition from other Health Care Providers Competition from other health care providers now or hereafter located in the service area of the Hospital could adversely affect its operations. The Hospital could also be adversely affected by economic trends and changes in the demographics of its service area. See HOSPITAL SERVICE AREA and COMPETITION in Appendix A. Tax Related Risks The Hospital currently pays property tax on its assisted living facility, which has been closed, and certain residential property owned by the Hospital. Under current Iowa law, the Hospital s facilities other than those listed above are generally exempt from local ad valorem property taxes. There can be no assurances however, that future legislation will not subject such facilities to ad valorem property taxes or other similar payments or fees in lieu of property taxes. Moreover, no assurances can be given that the effect of any such prospective property tax payments by the Hospital would not be either adverse or material. -29-

34 Construction Risks The Hospital has hired Altus Architectural Studios, Inc. (the Architect ) to serve as architects for the Project at a cost of approximately $1,540,000, and Graham Construction (the Construction Manager ) has been hired to provide construction management services for the Project at a cost of approximately $2,132,791. The Hospital has entered into a construction contract with the Construction Manager providing a guaranteed maximum price with respect to the project portion of the Project in the amount of $22,686,474 (including the Construction Manager fee and a contingency of approximately $978,747), which is the maximum amount the Hospital can be charged for such construction unless change orders are requested. The total estimated cost of construction is approximately $25,350,000, including architects fees, capitalized interest of approximately $894,151 and costs relating to the issuance of the Notes of approximately $285,375. The Hospital anticipates spending approximately $1,430,000 for furniture, fixtures and equipment for the Project, which is anticipated to be paid from future cash flows, cash on hand and pledges received pursuant to the Hospital s capital campaign. The Hospital has previously incurred or paid for costs of the Project of approximately $1,550,000, the majority of which is anticipated to be reimbursed from Note proceeds at closing. The Hospital intends to use the portion of the net proceeds of the Notes allocated to construction and funds of the Hospital for construction of the Project. If the costs of construction of the Project exceed the proceeds of the Notes and the cash designated by the Hospital to pay such construction and acquisition costs, the Hospital would be required to contribute additional moneys to complete such construction or reduce the scope of such construction accordingly. In addition, there can be no assurances that such construction will be completed on schedule or that such construction or management by the Hospital will be successful. See PLAN OF FINANCE herein. See GENERAL The Project in Appendix A. Future Health Care Legislation The passage of the ACA is accelerating the pace of future health care legislation and regulatory change. Changes in the law or new interpretations of existing laws may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by government and third-party payors. This process has continued for many years, but has been greatly accelerated since the March 2010 passage of the ACA. The Hospital spends substantial amounts of management time and money monitoring proposed and recently adopted health care laws and regulations and expects to continue to spend increasing amounts of time and money monitoring and responding to future health care legislation, including regulations under and legislative changes in response to the ACA. Any new legislation or government policies, if enacted into law, could adversely affect the revenues and operations of the Hospital. In addition, many states have enacted, or are considering enacting, measures designed to reduce their Medicaid expenditures, change private health care insurance or otherwise respond to various provisions in the ACA. States have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand states Medicaid systems. Possible future changes in the Medicare, Medicaid, and other state programs, may reduce reimbursements to the Hospital and may also increase its operating expenses. Nonprofit Healthcare Environment The tax-exempt status of healthcare organizations is the subject of increasing regulatory and legislative threats. As a nonprofit tax-exempt organization, the Hospital is subject to federal, state and local laws, regulations, rulings and court decisions relating to their organization and operation, including their operation for religious and charitable purposes. 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 healthcare organization such as the Hospital. Health care providers may be forced to forego otherwise -30-

35 favorable opportunities for certain joint ventures, recruitment and other arrangements in order to maintain their tax-exempt status. The operations and practices of nonprofit, tax-exempt healthcare organizations are routinely challenged or criticized for inconsistency or inadequate compliance with the regulatory requirements for, and societal expectations of, nonprofit tax-exempt organizations. These challenges, in some cases, are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead in many cases are examinations of core business practices of the healthcare organizations. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation, exemption of property from real property taxation, private use of facilities financed with tax-exempt bonds and others. These challenges and questions have come from a variety of sources, including state attorneys general, the IRS, labor unions, Congress, state legislatures and patients, and in a variety of forums, including hearings, audits and litigation. The challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could have a material adverse effect on the Hospital. The IRS has provided guidance on a number of topics relating to tax-exempt organizations, including the importance of paying fair market value for goods and services, excess compensation and benefits to officers and other insiders, the implementation of the Intermediate Sanctions regulations, and the issues surrounding joint ventures and partnerships between tax-exempt and for profit entities. These issues, and developments in the area of physician recruiting and inducements for referrals by physicians, pose risk to tax-exempt entities in the current health care environment. The IRS has stressed the importance of ensuring that in relationships with for-profit entities or individuals, the exchange of consideration is consistent with fair market value for the goods or services provided. Areas of particular focus include leasing arrangements, sale of physician practices and the compensation paid to physicians and executives. Generally, payments must be consistent with what would be paid in an arms length transaction, and should be supported by market data or an independent evaluation of reasonableness. Failure to ensure that payments are reasonable could result in the imposition of Intermediate Sanctions and/or the revocation of the organization s exempt status. The Intermediate Sanctions regulations apply to transactions with disqualified persons, who include directors, officers, and other individuals who are in a position to exercise substantial influence over the organization s decisions. Physicians, while not disqualified persons per se, may be included in this category depending upon the extent of their influence over the organization. An excess benefit transaction can occur in the exchange of compensation for services between the organization and the disqualified person or in the exchange of property between an exempt organization and the disqualified person. If such a transaction is found to exist, the IRS may impose an excise tax on both the disqualified person and the organizational manager who knowingly participates in the excess benefit transaction. In determining whether to impose section 4958 excise taxes, the IRS stated it will consider whether the organization involved has been involved in repeated excess benefit transactions; the size and scope of the excess benefit transactions; whether, after discovering it was a party to an excess benefit transaction, the organization took appropriate corrective action and implemented safeguards to prevent future recurrences; and whether the organization has complied with other applicable laws. The imposition of Intermediate Sanctions on the Hospital could adversely impact the ability to pay the amounts due on the Notes. The Hospital may also be subject to an action to revoke its respective exempt status, thereby jeopardizing the tax-exempt status of the Notes. In addition, the IRS has increasingly focused on relationships between exempt organizations and for-profit entities. Generally, the factors considered are whether the joint venture will be operated in furtherance of the exempt organization s purpose, whether ownership interests are proportionate to each party s investment, whether distributions to parties in the venture are consistent with their ownership interests and whether the exempt organization obtains access to capital and expertise that is not otherwise available. -31-

36 Tax-exempt organizations are required to file Form 990 annually with the IRS. The form requires detailed public disclosure of compensation practices, corporate governance, loans to management and others, joint ventures and other types of transactions, political campaign activities, and other areas the IRS deems to be compliance risk areas. The Redesigned Form 990 also requires the reporting of detailed community benefit information, and would establish uniform standards for reporting charity care. The Redesigned Form 990 also contains a separate schedule requiring detailed reporting of information relating to tax-exempt bonds, including compliance with the arbitrage rules and rules limiting private use of bond-financed facilities, including compliance with the safe harbor guidance in connection with management contracts and research contracts. The Redesigned Form 990 will result in enhanced transparency as to the operations of exempt organizations. It is also likely to result in enhanced enforcement, as the Redesigned Form 990 will make available a wealth of detailed information on compliance risk areas to the IRS and other stakeholders, including state attorneys general, unions, plaintiff s class action attorneys, public watchdog groups, and others. The Health Reform Law imposes new requirements on tax-exempt hospitals. Specifically, taxexempt hospitals will need to meet four community benefit standards in order to continue to be exempt. The community benefit standards include conducting a health needs assessment, developing and maintaining a written financial assistance policy, limiting the amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy, and a prohibition on engaging in extraordinary collection actions before determining eligibility under the financial assistance policy. The IRS has developed Schedule H to the Form 990, requiring hospitals to report how they provide community benefit. Failure to meet the requirements for any tax year will result in a tax of $50,000 to the tax-exempt hospital. If the IRS were to find that the Hospital has participated in activities in violation of certain regulations or rulings in any of its Facilities, the tax-exempt status of the Hospital could be jeopardized. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit healthcare organizations, it could do so in the future. Loss of tax-exempt status by the Hospital could result in loss of tax exemption of the Notes, defaults in covenants regarding the Notes 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 the income of the Hospital, adversely affecting its ability to pay debt service on the Notes. In some cases, the IRS has imposed substantial monetary penalties on tax-exempt organizations in lieu of revoking their tax-exempt status. In those cases, the IRS and tax-exempt organizations have entered into settlement agreements requiring the organization to make substantial payments to the IRS. In lieu of revocation of exempt status, the IRS may impose a penalty in the form of 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 Hospital or the tax status of the Notes if an excess benefit transaction were subject to IRS enforcement, pursuant to these intermediate sanctions rules. If the above requirements are not satisfied and interest on the Notes becomes taxable, an event of default may occur under the Loan Agreement or the Indenture. See NOTEHOLDERS RISKS Redemption Prior to Maturity herein for a description of the effects of an event of default under the Loan Agreement or the Indenture. See NOTEHOLDERS RISKS Changes in Federal and State Law herein. -32-

37 Bond Examinations. IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds in the charitable organization sector with specific review of private use. A schedule to the revised Form 990 return (Schedule K), effective for the 2009 tax year and thereafter, is intended to address what the IRS believes is significant noncompliance with recordkeeping and record retention requirements. Schedule K also requires tax-exempt organizations to report on the investment and use of bond proceeds to address IRS concerns regarding compliance with arbitrage rebate requirements and the private use of bond-financed facilities. State Oversight. Nonprofit corporations, such as the Hospital, are subject to oversight and examination by state attorneys general to ensure their charitable purposes are being carried out, that their fundraising and investment activities comply with state law and that the terms of charitable gifts are followed. Challenges to Real Property Tax Exemptions. The real property tax exemptions afforded to certain nonprofit healthcare providers by state and local taxing authorities have been challenged on the grounds that the healthcare providers were not engaged in sufficient charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins and operations that closely resemble for-profit businesses. The foregoing are some examples of the challenges and examinations facing nonprofit healthcare organizations. They are indicative of a greater scrutiny of the billing, collection and other business practices of these organizations and may indicate an increasingly difficult operating environment for healthcare organizations. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on hospitals and healthcare providers, including the Hospital, and may have an adverse effect on the ability of the Hospital to pay debt service on the Notes. Risks Related to Tax-Exempt Status The Code imposes a number of requirements that must be satisfied for interest with respect to state and local obligations, such as the Notes, 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 of bond proceeds prior to expenditure, a requirement that certain arbitrage earned on investment of bond proceeds be paid periodically to the United States, and a requirement that the Issuer file an information report with the Internal Revenue Service (the IRS ). The Hospital has covenanted in certain documents referred to herein that it will comply with such requirements with respect to the Notes. Failure to comply with any of these covenants by the Hospital may result in the treatment of the interest received with respect to certain of the Notes as included in federal gross income, retroactive to the date of their delivery. The federal tax-exempt status of the Notes depends upon the Hospital maintaining its status as an organization 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 and guidance regarding the organization and operation of tax-exempt entities, including their operation for charitable and educational purposes and their avoidance of transactions which may cause their assets to inure to the benefit of private individuals. See NOTEHOLDERS RISKS Nonprofit Healthcare Environment herein for a further discussion of certain risks related to the Hospital s status as an organization described in Section 501(c)(3) of the Code and the Hospital s maintenance of such status. If the above requirements are not satisfied and a Determination of Taxability occurs, the Notes are not subject to mandatory redemption or any increase in the interest rate borne by the Notes. -33-

38 Matters Relating to Enforceability of Agreements Noteholders shall have and possess all the rights of action and remedies afforded by the common law, the Constitution and statutes of the State of Iowa, and of the United States of America, for the enforcement of payment of their obligation, and the pledge of the revenues made pursuant to the Indenture, and of all covenants of the Issuer and the Hospital pursuant to the Loan Agreement and the Indenture, including, but not limited to, the right to a proceeding at law or in equity by suit, action or mandamus to enforce and compel performance of the duties, required by Iowa law and the Indenture, or to obtain the appointment of a receiver to take possession of or operate the Hospital and to perform the duties required by Iowa law and the Loan Agreement. Enforceability of Remedies and Bankruptcy Proceedings The practical realization of any rights of the Trustee following a default on the Notes will depend upon the exercise of various remedies specified in the Indenture and otherwise available under applicable law. The remedies available to the holders of the Notes, in certain respects, may require judicial action, which is often subject to discretion and delay. Under existing law, including specifically the federal bankruptcy code, certain of the remedies specified in the Indenture may not be readily available or may be limited. A court may decide not to order the specific performance of the covenants contained in the Indenture. If the security for the Notes is inadequate for payment in full of the Notes, bankruptcy proceedings and usual equity principles may also limit any attempt by the Trustee to seek payment from other property of the Hospital, if any. Bankruptcy proceedings and equity principles may delay or otherwise adversely affect the ability of the Trustee to obtain amounts under the Indenture, the Mortgage or the Notes. Remedies under the Loan Agreement, Indenture and the Mortgage under existing law may not be readily available or may be limited. In addition, because the Mortgage is subordinate to the USDA Loan Mortgage, certain assets of the Hospital may be used first to repay the principal of and interest on the USDA First Closing Loan. See SECURITY FOR THE NOTES The Mortgage herein. Also, federal bankruptcy law permits adoption of a reorganization plan even though it has not been accepted by the holders of a majority in aggregate principal amount of the Notes, if the Noteholders are provided with the benefit of their original lien or the indubitable equivalent. In addition, if the bankruptcy court concludes that the Noteholders have adequate protection, it may (a) substitute other security subject to the lien of the Noteholders and (b) subordinate the lien of the Noteholders to (i) claims by persons supplying goods and services to the debtor after bankruptcy, and (ii) to the administrative expenses of the bankruptcy proceeding. The bankruptcy court may also have the power to invalidate certain provisions of the Indenture, including provisions that make bankruptcy and related proceedings by the Hospital an event of default thereunder. All legal opinions with respect to the enforceability of the Indenture and other financing documents will be expressly subject to a qualification that enforceability thereof may be limited by bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting the rights of creditors generally, and by general principles of equity and public policy. The obligations of the Hospital to make payments on the Notes may also not be enforceable to the extent such payments are requested to be made from any assets which are donor-restricted or which are subject to a direct, express or charitable trust which does not permit the use of such assets for such payment. Due to the absence of clear legal precedent in this area, the extent to which the assets of the Hospital constitute assets which are so restricted or subject to such trusts cannot now be determined. The amount of such assets could be substantial. -34-

39 The Mortgage The Hospital will deliver the Mortgage which creates a lien on the Mortgaged Property to secure its obligations under the Loan Agreement. The Hospital has delivered the USDA Loan Mortgage which creates a lien on the same Mortgaged Property, creating a lien senior to the lien of the Mortgage. In the event that there is a default under the Loan Agreement or the Indenture, the Trustee has the right to foreclose on the Mortgage under certain circumstances, subject to the prior lien of the USDA Mortgage. The outstanding amount of the advance under the USDA First Closing Loan is $3,000 and no further advances are permitted unless USDA determines to purchase all of the Completion Bonds and fully fund the USDA Loan to repay the Notes. See SECURITY FOR THE NOTES Completion Bonds herein. See USDA LETTER OF CONDITIONS, AMENDMENT TO USDA LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER in Appendix C. All amounts collected upon foreclosure of the Mortgaged Property pursuant to the Mortgage and the USDA Loan Mortgage will be used to pay certain costs and expenses incurred by, or otherwise related to, the foreclosure, the performance of the Trustee and the USDA under the Mortgage, and the USDA Loan Mortgage, and then to pay amounts owing under the Indenture and the Loan Agreement on a pro rata basis with the USDA First Closing Loan. See CERTAIN DEFINITIONS AND SUMMARY OF THE PRINCIPAL DOCUMENTS The Mortgage in Appendix D. In the event the Mortgage is actually foreclosed, then, in addition to the customary costs and expenses of operating and maintaining the Facilities, the party or parties succeeding to the interest of the Hospital in the Mortgaged Property (including the Trustee, if the Trustee were to acquire the interest of the Hospital in the Mortgaged Property) could be required to bear certain associated costs and expenses, which could include the cost of complying with federal, state or other laws, ordinances and regulations related to the removal or remediation of certain hazardous or toxic substances; the cost of complying with laws, ordinances and regulations related to health and safety; and the continued use and occupancy of the Facilities, such as the Americans with Disabilities Act; and costs associated with the potential reconstruction or repair of the mortgaged property in the event of any casualty or condemnation. The Facilities are not comprised of general purpose buildings and generally would not be suitable for industrial or commercial use. Consequently, it will likely be difficult to find a buyer or lessee for the Facilities, and, upon any default, the Trustee may not realize the amount of the outstanding Notes from the sale or lease of the Facilities in the event of foreclosure. Any valuation of the Facilities is based on future projections of income, expenses and capitalization rates. Additionally, the value of the Facilities will at all times be dependent upon many factors beyond the control of the Hospital, such as changes in general and local economic conditions, changes in the supply of or demand for competing properties in the same locality, and changes in real estate and zoning laws or other regulatory restrictions. A material change in any of these factors could materially change the value of the Facilities. Any reduction in the market value of the Facilities could adversely affect the security available to the owners of the Notes. There is no assurance that the amount available upon foreclosure of the Facilities after the payment of foreclosure costs will be sufficient to pay the amounts owing by the Hospital under and pursuant to the Loan Agreement and the USDA First Closing Loan. In the event of a foreclosure, a prospective purchaser of the Mortgaged Property may assign less value to the Mortgaged Property than the value of the Mortgaged Property while owned by the Hospital since such purchaser may not enjoy the favorable financing rates associated with the Notes and other benefits. To the extent that buyers whose income is not tax-exempt may be willing to pay less for the mortgaged property than nonprofit buyers, then the resale of the mortgaged property after foreclosure may require more time to solicit nonprofit buyers interested in assuming the financing now applicable to the mortgaged property. In addition, there can be no assurance that the Mortgaged Property could be sold at 100% of its fair market value in the event of foreclosure. Although the Trustee will have available the remedy of foreclosure of the Mortgage in the event of a default (after giving effect to any applicable grace -35-

40 periods, and subject to any legal rights that may operate to delay or stay such foreclosure, such as may be applicable in the event of the Hospital s bankruptcy), there are substantial risks that the exercise of such a remedy will not result in recovery of sufficient funds to satisfy all the Hospital s obligations, including the Notes and the USDA First Closing Loan. Damage or Destruction Although the Hospital will be required to obtain certain kinds of insurance as set forth in the Loan Agreement, there can be no assurance that the Hospital will not suffer uninsured losses in the event of damage to or destruction of the Facilities due to fire or other calamity or in the event of other unforeseen calamities. For a further description of the insurance provisions required by the Loan Agreement, see DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Loan Agreement Insurance Required To Be Carried in Appendix D. Management The Hospital has a Board of Directors who provides the overall management of the Hospital. The continued operation of the Hospital is heavily dependent upon the efforts of its management. For further information, see Management in Appendix A. Rating The Notes have been given a short-term rating of MIG-2 by Moody s Investors Service, Inc. See RATINGS herein. Any downgrade or withdrawal of the rating on the Notes could adversely affect the marketability of the Notes. Lack of Market for the Notes The Notes will not be listed on a securities exchange or inter-dealer quotation system. There can be no assurance that there will be a secondary market for the Notes, and the absence of such a market for the Notes could result in investors not being able to resell their Notes should they need or wish to do so. Additional Debt; Existing Indebtedness; Parity Obligations The Loan Agreement and Indenture permit the Hospital to incur additional indebtedness under certain circumstances, including Additional Bonds that could be issued under the Loan Agreement and Indenture on a parity with the Notes. The issuance of the Completion Bonds (including the USDA First Closing Loan, which is senior in right of payment to the Notes) is specifically authorized under the Loan Agreement. Under certain circumstances, such additional debt may be secured by a mortgage on or security interest in certain assets of the Hospital. See DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Loan Agreement Additional Bonds; Parity Obligations, DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Loan Agreement Permitted Indebtedness, DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Mortgage Title to the Mortgaged Property; Maintenance of Lien; After-Acquired Property and DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS The Indenture - Additional Bonds in Appendix D. Such additional debt could increase the Hospital s debt service and repayment requirements in a manner which would adversely affect debt service coverage on the Notes and/or could be secured by assets of the Hospital on a parity with the security granted by the Mortgage. Amendments to Documents Certain amendments to the Indenture, the Loan Agreement and the Mortgage may be made without the consent of the holders of the Notes, and other amendments may be made with the consent of the Trustee and the holders of a majority in aggregate principal amount of all outstanding Notes. Such -36-

41 amendments could affect the security for the Notes. Certain amendments, however, are not permitted without the consent of the holder of each outstanding Note affected thereby, including (i) a change in the times, amounts or currency of payment of the principal of, or premium, if any, or interest on, any Note, a change in the terms of the purchase of Notes pursuant to the Indenture, or a reduction in the principal amount or redemption price of any Note or a change in the method of determining the rate of interest thereon, (ii) the creation of a claim or lien upon, or a pledge of, the Revenues ranking prior to or on a parity with the claim, lien or pledge of the Revenues ranking prior to or on a parity with the claim, lien or pledge created by the Indenture, other than Additional Notes and Parity Obligations, (iii) a preference or priority of any Bond or Bonds or any other Bond or Bonds, or (iv) a reduction in the aggregate principal amount of any Bonds. See the subcaptions Supplemental Indentures Without Consent of Owners, Supplemental Indentures With Consent of Owners, Amendment of Loan Agreement and Mortgage Without Consent of Owners and Amendment of Loan Agreement and Mortgage With Consent of Owners under THE INDENTURE in Appendix D. Malpractice and General Liability Claims In recent years, the number of general liability suits and the dollar amounts of damage awards have increased nationwide, resulting in substantial increases in insurance premiums, which may have an adverse financial impact on the Hospital. Litigation may also arise against the Hospital from their corporate and business activities, such as its status as an employer. While the Hospital maintains general liability insurance coverage (see Insurance in Appendix A attached hereto), the Hospital is unable to predict the availability or cost of such insurance in the future. In addition, it is possible that certain types of liability awards may not be covered by insurance as in effect at the relevant times. See LITIGATION The Hospital herein. Redemption Prior to Maturity In considering whether to make an investment in the Notes, potential investors should consider the information included in this Official Statement under the headings THE NOTES Redemption. The Notes are subject to redemption at the option of the Hospital on any Business Day on or after January 1, 2018 as provided in the Indenture. Moreover, the Notes may be accelerated prior to maturity should certain Events of Default otherwise occur under the Loan Agreement or the Indenture should occur. The effect on Noteholders of such an acceleration or purchase would be similar to that of early redemption at par. See THE NOTES Redemption herein. Other Risks The occurrence of any of the following events, or other anticipated events, could adversely affect the operations of the Hospital: (1) Inability to control increases in operating costs, including salaries, wages and fringe benefits, supplies and other expenses, without being able to obtain corresponding increases in revenues. (2) Employee strikes and other adverse labor actions which could result in a substantial increase in expenditures without a corresponding increase in revenues. (3) Adoption of federal, state or local legislation or regulations having an adverse effect on the future operating or financial performance of the Hospital. -37-

42 LITIGATION The Issuer There is not now pending or, to the knowledge of the Issuer, threatened, any litigation against the Issuer seeking to restrain or enjoin the issuance or delivery of the Notes or questioning or affecting the validity of the Notes or the proceedings of the Issuer under which they are to be issued. There is not now pending or, to the knowledge of the Issuer, threatened which in any manner questions the right of the Issuer to authorize the Resolution or enter into the Loan Agreement or the Indenture or to secure the Notes in the manner provided in the Indenture. The Hospital There is no action, suit, proceeding, inquiry or investigation at law or in equity to which the Hospital is a party before or by any court, public board or body, presently pending or, to the knowledge of the Hospital, overtly threatened against or affecting the Hospital which would have a material adverse effect on the Hospital. Due to the nature of its business, from time to time the Hospital may be a party in various types of litigation. See NOTEHOLDERS RISKS - Malpractice and General Liability Claims. The Hospital presently maintains both malpractice and general liability insurance. See Insurance in Appendix A. LEGAL MATTERS Certain legal matters incident to the authorization and issuance of the Notes by the Issuer are subject to the approval of Dorsey & Whitney LLP, Bond Counsel, Des Moines, Iowa. Certain matters will be passed upon for the Hospital by its counsel, Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, Iowa, by Disclosure Counsel, Dorsey & Whitney LLP, Des Moines, Iowa and for the Issuer by its counsel, Dorsey & Whitney LLP, Des Moines, Iowa. The opinions of Bond Counsel and counsel to the Hospital and the Issuer will contain qualifications regarding: (i) limitations on enforceability imposed by bankruptcy and similar laws relating to or affecting creditors rights generally; (ii) the enforceability of equitable rights and remedies; and (iii) limitations on the enforceability of provisions for indemnification of other parties. TAX EXEMPTION In the opinion of Bond Counsel, under the Internal Revenue Code of 1986, as amended (the Code ), and assuming continuing compliance by the Issuer and the Hospital with their respective covenants (set forth in the Indenture and the Loan Agreement) pertaining to certain requirements of the Code, the Notes, as of the date of their issuance, bear interest which is excluded from the gross income of the owners thereof for federal income tax purposes and is not treated as an item of tax preference for purposes of determining the federal alternative minimum tax for individuals and corporations, but is included in determining adjusted current earnings for the purpose of computing the federal alternative minimum tax imposed on corporations (as defined for federal income tax purposes). The Code contains a number of requirements and restrictions which apply to the Notes, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the proper use of note proceeds and the facilities financed therewith and certain other matters. The opinions set forth in the preceding paragraph are subject to the condition that the Hospital comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Notes in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Issuer and the Hospital have covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Notes in gross income for federal income tax purposes retroactive to the date of issuance of the Notes. -38-

43 In rendering its opinion, Bond Counsel will rely upon certificates of the Issuer and the Hospital with respect to certain material facts relating to the application of the proceeds of the Notes. Interest on the Notes is not exempt from present Iowa income taxes. No provision has been made for an increase in the interest rate on the Notes in the event that interest on the Notes becomes subject to federal income taxation, and the Notes are not subject to mandatory redemption in such event. FINANCIAL STATEMENTS The financial statements of the Hospital included in Appendix B to this Official Statement, and the summary financial statements of the Hospital set forth under the heading Selected Financial Data in Appendix A to this Official Statement, as of and for the years ended December 31, 2014 and 2013 have been audited by Seim Johnson, LLP, independent auditors, as stated in their report dated May 1, The summary financial statements of the Hospital as and for the nine months ended September 30, 2015 and 2014 set forth under the heading Selected Financial Data in Appendix A to this Official Statement have been prepared by the Hospital. RATING As is noted on the cover page of this Official Statement, Moody s has given the Notes the rating of MIG-2. An explanation of the significance of such ratings may be obtained from Moody s. Moody s was furnished with the information contained in a preliminary form of this Official Statement and other information. Generally, ratings agencies base their ratings on such materials and information, as well as their own investigation, studies and assumptions. The rating reflects only the view of Moody s, and none of the Hospital, the Issuer or the Underwriters makes any representation as to the appropriateness of the rating. It should be noted that there is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by such rating agency, if in the judgment of such rating agency, circumstances warrant such action. Any downward revision or withdrawal of such rating may have an adverse effect on the market price of the Notes. Additionally, due to the ongoing uncertainty regarding the debt of the United States of America, including without limitation, the general economic conditions in the country, and other political and economic developments that may affect the financial condition in the country, and other political and economic developments that may affect the financial condition of the United States government, the United States debt limit, and the bond ratings of the United States and its instrumentalities, obligations issued by state and local governments, such as the Notes, could be subject to a rating downgrade. Furthermore, if a significant default or other financial crisis should occur in the affairs of the United States or any of its agencies or political subdivisions, then such event could also adversely affect the market for and ratings, liquidity, and market value of outstanding debt obligations, such as the Notes. UNDERWRITING Piper Jaffray & Co., as the Representative, on behalf of itself and the other underwriter listed on the cover page hereof (the Underwriters ) has agreed to purchase the Notes at an aggregate purchase price of $25,159, (reflecting an underwriter s discount of 0.75%) pursuant to a Note Purchase Agreement (the Note Purchase Agreement ) entered into by and among the Issuer, the Hospital and the Representative The Note Purchase Agreement provides that the Underwriters shall purchase all of the Notes, if any Notes are purchased, and that the obligation to make such purchase is subject to certain terms and conditions set forth in the Note Purchase Agreement. -39-

44 Piper Jaffray & Co. and Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, entered into an agreement (the Agreement ) which enables Pershing LLC to distribute certain new issue municipal securities underwritten by or allocated to Piper Jaffray & Co., including the Notes. Under the Agreement, Piper Jaffray & Co. will share with Pershing LLC a portion of the fee or commission paid to Piper. Piper Jaffray & Co., one of the Underwriters of the Notes, has entered into a distribution agreement ( Distribution Agreement ) with Charles Schwab & Co., Inc. ( CS&Co ) for the retail distribution of certain securities offerings, including the Notes, at the original issue prices. Pursuant to the Distribution Agreement, CS&Co. will purchase Notes from Piper at the original issue price less a negotiated portion of the selling concession applicable to any Notes that CS&Co. sells. The Underwriters and/or their respective affiliates may receive additional fees for providing services as an investment broker or bidding agent with respect to the investment of Note Proceeds. The Underwriters are purchasing the Notes and intend to offer the Notes to the original purchasers thereof at the offering prices set forth on the cover page of this Official Statement, which offering price may subsequently be changed without any requirement of prior notice. The Underwriters have reserved the right to permit other securities dealers who are members of the National Association of Securities Dealers, Inc. to assist in selling the Notes. The Underwriters may offer and sell the Notes to certain dealers at prices lower than the public offering price or otherwise allow concessions to such dealers who may re-allow concessions to other dealers. Any discounts and/or commissions that may be received by such dealers in connection with the sale of the Notes will be deducted from the Underwriters discount. The Hospital has agreed to indemnify the Underwriters against certain civil liabilities, including certain liabilities under federal securities laws. Under existing statutes, regulations, and court decisions, the enforceability of such an agreement to indemnify is uncertain. CONTINUING DISCLOSURE In order to permit the Underwriters and other participating underwriters in the primary offering of the Notes to comply with paragraph (b)(5) of Rule 15c2-12 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the Rule ), the Hospital will covenant and agree, for the benefit of the registered holders or beneficial owners from time to time of the outstanding Notes, to provide annual reports of specified information and notice of the occurrence of certain events, if material, as hereinafter described (the Disclosure Covenants ). The information to be provided on an annual basis, the events as to which notice is to be given, if material, other provisions of the Disclosure Covenants, including termination, amendment and remedies, are set forth in Appendix F to this Official Statement. Breach of the Disclosure Covenants will not constitute a default or an Event of Default under the Notes or the Loan Agreement. A broker or dealer is to consider a known breach of the Disclosure Covenants, however, before recommending the purchase or sale of the Notes in the secondary market. Thus, a failure on the part of the Hospital to observe the Disclosure Covenants may adversely affect the transferability and liquidity of the Notes and their market price. RELATIONSHIPS AMONG THE PARTIES In connection with the issuance of the Notes, Dorsey & Whitney LLP is acting as Bond Counsel, Issuer Counsel and Disclosure Counsel and the attorneys or law firms identified under the heading LEGAL MATTERS are acting as counsel to the Hospital. In other transactions not related to the Notes, each of these attorneys or law firms may have acted, or be acting, as Bond Counsel and/or may have represented, or be representing, the Issuer, the Hospital, the Underwriters or their affiliates in capacities different from those described under LEGAL MATTERS. There is and will be no limitations imposed -40-

45 as a result of the issuance of the Notes on the ability of any of these firms or attorneys to represent any of these parties, or to act as bond counsel, in any present or future transactions. Furthermore, the Issuer, the Hospital and the Underwriters and their affiliates are not limited in engaging in future business transactions together or in any combination with each other. Potential purchasers of the Notes should not assume that the Issuer, the Hospital and the Underwriters, or their respective counsel, or Bond Counsel, have not previously engaged in, are not presently engaged in, or will not after the issuance of the Notes engage in, other transactions with each other or with any affiliates of any of them, and no assurance can be given that there are or will be no past, present or future relationships or transactions between or among any of these parties or these attorneys or law firms. MISCELLANEOUS The references herein to the Act, the Indenture, the Loan Agreement and the Mortgage are brief outlines of certain provisions thereof. Such outlines do not purport to be complete and for full and complete statements of such provisions reference is made to the Act, the Indenture, the Loan Agreement and the Mortgage. Copies of the documents mentioned under this heading are on file at the offices of the Underwriters and following delivery of the Notes will be on file at the principal corporate trust office of the Trustee. Neither any advertisement of the Notes nor this Official Statement is to be construed as constituting an agreement with the purchasers of the Notes. So far as any statements are made in this Official Statement involving matters of opinion, whether or not expressly so stated, they are intended merely as such and not as representations of fact. The attached Appendices A, B, C, D, E and F are integral parts of this Official Statement and must be read together with all of the foregoing statements. The Issuer has not participated in the preparation of this Official Statement or the Appendices hereto and assumes no responsibility for the sufficiency, completeness or accuracy thereof, except for the information relating to the Issuer contained herein under the captions INTRODUCTION The Issuer and LITIGATION - The Issuer. Shenandoah Medical Center By: /s/ Karen S. Cole, President and Chief Executive Officer -41-

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47 APPENDIX A INFORMATION CONCERNING SHENANDOAH MEDICAL CENTER

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49 GENERAL The Hospital Shenandoah Medical Center ( Shenandoah Medical Center, SMC or the Hospital ) is a 25 bed, notfor-profit primary care critical access hospital located at 300 Pershing Avenue, Shenandoah, Iowa. The Hospital is a community hospital dedicated to serving the people of Page and Fremont counties and the surrounding area. Page and Fremont Counties have a combined population of 17,104 according to the 2010 Census. The Hospital is located in Shenandoah, Iowa (estimated population 5,070; U.S. Census Bureau), which is approximately 60 miles from the metropolitan area of Omaha, Nebraska. The Hospital was originally constructed in 1979 and significant additions since that time have expanded the facility to include treatment centers for cancer and kidney dysfunction in 1993 and an attached outpatient clinic in A radiation oncology center is currently operated by The Nebraska Medical Center while the kidney dysfunction treatment center is operated by Da Vita Healthcare Partners, Inc. A women s health clinic was constructed and opened in Shenandoah Medical Center also owns a 50 bed long-term care and skilled nursing facility (Elm Heights Care Center) and has outreach clinic locations in the Iowa communities of Sidney, Essex, and Red Oak, Iowa. The Shenandoah Healthcare Foundation (the Foundation ) is an independent, not-for-profit organization founded to assist and support not-for-profit healthcare activities within a 25-mile radius of Shenandoah. The Foundation is a Type 1 supporting organization to the Hospital under the Internal Revenue Code. With the exception of monies required for the operation of the Foundation, all funds raised are distributed to Shenandoah Medical Center in accordance with restrictions implied by donors. THE FOUNDATION IS NOT OBLIGATED WITH RESPECT TO THE NOTES. The Hospital very recently started a capital campaign to pay a portion of the costs of furniture, fixtures and equipment for the Project. The Hospital has received $5,000 to date, and anticipates receiving additional pledges and contributions for purchase of furniture, fixtures and equipment after construction of the Project is complete. To the extent the Hospital, capital campaign does not raise sufficient funds to purchase all anticipated furniture, fixtures and equipment, the Hospital plans to use its cash on hand and cash flows to make such purchases. See GENERAL Project Costs and Awards to Date herein. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] A-1

50 Services The Hospital provides the following services: Inpatient Labor & Delivery Swing-Bed Medical-Surgical & Intensive Care Hospice Surgical Services General Surgery Ear/Nose/Throat Urogynecological Orthopedic Endoscopy Outpatient Physical Therapy Occupational Therapy Speech Therapy Radiology Infusion Therapy / Chemotherapy Laboratory Respiratory Therapy Emergency Services Home Health Hospice Diabetic Education Personal Training Lifeline Long-Term Care Physician Clinic Services Family Practice Internal Medicine Mental Health Surgical Women s Health Specialty Clinic Services Allergy & Asthma Cardiology Dermatology Ear/Nose/Throat EMG Studies Gastroenterology Neurology Neurosurgery Nephrology Oncology Ophthalmology Orthopedics Pulmonology Urology Vascular Surgery Project An approximately 43,000 square foot, two story medical office building addition to be attached to the existing hospital building that will house approximately 21 clinic providers, 4 visiting specialty clinics, a walk-in clinic, 5 mental health offices, 78 exam rooms and a new central registration department for the Borrower s Facilities; a new surgery department to include without limitation two operating rooms, an endoscopy suite, a minor procedure room, central sterilizing, and pre-op/recovery rooms/bays; a new waiting space centrally located within the Borrower s Facilities; an expanded emergency department to include larger and improved check-in areas, exam rooms and support space; relocating and expanding the lab department to include microbiology services in conjunction with the emergency and surgery departments improvement; and other improvements to the Facilities, including related site improvements and ancillary building improvements. Project Architect Altus Architectural Studios, Inc. The Hospital has contracted with Altus Architectural Studios, Inc. ( Altus ) headquartered in Omaha, Nebraska specializes in healthcare architecture planning, and interior design. Healthcare comprises approximately 90% of the firm s work. The firm has a combined national experience of over $3 billion worth of healthcare design and construction experience ranging from medical office buildings and specialty clinics to critical access hospitals, campus planning, specialty hospitals and large tertiary medical centers. A-2

51 Construction Manager Graham Construction Company Graham Construction, headquartered in Des Moines, Iowa, is one of the largest Construction Managers and General Contractors in the Midwest. Since its inception in 1981, Graham Construction has concentrated on providing construction services to healthcare customers in the Midwest. Graham Construction has provided construction services to more than 45 hospitals in Iowa. Project Costs and Awards to Date Total project costs are estimated at $25,350,000, including approximately $894,151 in capitalized interest and $288,375 for costs relating to the issuance of the Notes. The Hospital has entered into a guaranteed maximum price contract with the Construction Manager for the project in the amount of $22,686,474, which includes the Construction Manager s fee of $2,132,791 and a contingence of approximately $978,747. Architect fees total approximately $1,540,000. The Hospital anticipates spending approximately $1,430,000 for furniture, fixtures and equipment for the Project, which is anticipated to be paid from future cash flows, cash on hand and pledges received pursuant to the Hospital s capital campaign. HOSPITAL GOVERNANCE AND ADMINISTRATION The Shenandoah Medical Center Board of Directors consists of two classes of directors: Class A directors and a Class B director. There are 9 Class A voting directors appointed by Shenandoah Medical Center that may serve up to 4 3-year terms and 1 Class B voting director, who is appointed to a seven year term by Nebraska Medicine. Additionally, the President and CEO is an ex-officio, non-voting member of the Board of Directors. Current members include: Name Position Appointment Expiration Ed Kloberdanz Chairman Alissa McGinnis Vice Chairman Greg Ritchey Secretary/Treasurer Mary Jo Carrell Director David Lashier Deb Istas Director Director Tim Augustine Floyd Jones D.O. Director Director Roger Jones Linda Laughlin Director Director Karen Cole President/CEO (non-voting) 2011 N/A First adopted in 2006, the Hospital has a Conflict of Interest policy that governs the conduct of directors in regard to any business dealings they might have with the Hospital. The purpose of the policy is to identify and ethically resolve any potential conflict of interest on the part of individuals affiliated with the Hospital. Pursuant to the conflict of interest policy, all Board members, officers, and key employees also have a duty to disclose a conflict of interest or potential conflict of interest in a contract or other transaction between the Hospital and an entity in which his or her immediate family may have a material financial interest, potential ownership or compensation arrangement with the entity contracting, dealing or negotiating with the Hospital. Each year, every Board member, officer, and key employee completes a Conflict of Interest questionnaire to assist in identifying potential conflicts. Each identified conflict is reported to the Board of Directors and mitigating efforts are disclosed. The Hospital s policy is to avoid conflicts of interest whenever possible. A-3

52 Affiliation On October 13, 1998, the Hospital entered into an affiliation agreement with Nebraska Health Systems ( Nebraska Medicine ) to establish a relationship for the provision of healthcare services in Southwest Iowa. In exchange for an initial monetary sum, Nebraska Medicine also received a Class B seat on the Shenandoah Medical Center Board of Directors. The Hospital currently rents space to Nebraska Medicine to provide radiation oncology services at Shenandoah Medical Center. Most recently, Shenandoah Medical Center entered into an employee lease agreement with Nebraska Medicine to provide its patients more frequent and consistent Medical Oncology services. Administration Karen Cole, Chief Executive Officer Karen Cole, M.S., FACHE, joined Shenandoah Medical Center as President and Chief Executive Officer in April of Prior to joining the Hospital, Ms. Cole served as CEO of Wright Memorial Hospital in Trenton, Missouri. Ms. Cole received her undergraduate degree from the University of Wisconsin, Oshkosh, and graduate degree from Arizona State University. Ms. Cole is currently: a fellow in the American College of Healthcare Executives since 1985; Chairman of District D for the Iowa Hospital Association; member of ServiShare Board, a division of Iowa Hospital Association; board member of Nebraska Purchasing Group and Prairie Health Ventures, Lincoln, Nebraska, an organization dedicated to the support of rural healthcare facilities; preceptor for Saint Louis University, St. Louis, Missouri, Healthcare Administration Master s Interns; Corresponding Secretary of the local chapter of P.E.O.; board member for Shenandoah Chamber and Industry; and a member of Rotary International, and past president of the Pittsburg, Kansas club. Ms. Cole was also elected to a 4 year term on the City Commission of Pittsburg, Kansas where she served as Mayor in Matthew Sells, Chief Financial Officer Matthew Sells has served as Chief Financial Officer of Shenandoah Medical Center since July of During his tenure at SMC, Mr. Sells has been responsible for the overall financial reporting process of the organization. Prior to joining SMC, Mr. Sells obtained his Certified Public Accountant (CPA) license while working in the audit department of KPMG LLP before serving as Chief Financial Officer of Brown County Hospital in Ainsworth, Nebraska. Mr. Sells holds bachelor s degrees in Accounting and Political Science from Doane College, where he graduated Magna cum Laude. He also earned his Master s degree in Business Administration with an emphasis in Healthcare Administration from Ashford University. Mr. Sells is an actively licensed CPA, is currently a member of the Iowa Chapter of the Healthcare Financial Management Association (HFMA) and has previously held memberships in the Nebraska Society of Certified Public Accountants (NSCPA), the American Institute of Certified Public Accountants (AICPA), and the Nebraska Chapter of HFMA. Mr. Sells was also named one of the top 150 healthcare CFOs to know nationally by Becker s Hospital Review in Timothy Grollmes, Clinic Practice Administrator Timothy Grollmes is the Practice Administrator for the Shenandoah Medical Center s Physicians Clinic, Shenandoah, Iowa. He received his M.P.A. from the University of Nebraska-Omaha and served on the Cardiac Center of Creighton University Research staff. After his 8-year career as a research coordinator, Mr. Grollmes accepted a position as the clinic director for the Iowa Heart Center in Council Bluffs, Iowa. In addition to his clinic administration, Mr. Grollmes has contributed to articles and research findings on tobacco cessation in such journals as CHEST. He recently collaborated on a manuscript with colleague Dr. Syed Mohiuddin entitled Metabolic Risk for Cardiovascular Disease for the American Heart Association. Having served for 11 years, Mr. Grollmes was honorably discharged from the Army with the rank of Captain in the Ordinance Division. Dennis DeWild, Elm Heights Administrator Dennis DeWild has worked as a Long-Term Care Nursing Home Administrator for over 40 years. Most of his career was spent with a management company supervising the opening of new nursing homes in Iowa. His duties included hiring staff and readying each new facility for occupancy. Mr. DeWild then operated 100-bed and 50-bed facilities in Shenandoah and Clarinda, Iowa. Currently, Mr. DeWild serves as the administrator of the Elm Heights Care Center as the administrative supervisor of maintenance, housekeeping and dietary for all facilities under the umbrella of Shenandoah Medical Center. Keli Royal, Director of Human Resources Keli Royal graduated with a B.S. in Human Resource Management magna cum laude from Bellevue University and has been certified as a Senior Professional in Human Resources (SPHR) since Ms. Royal has over 28 years of human resource experience. Employed with Shenandoah A-4

53 Medical Center for 3 years, Ms. Royal previously served for 19 years as the Director of Human Resources for the University of Nebraska Medical Center Physicians. Ms. Royal received the Human Resource Professional of the Year Award for Nebraska in 2011, was President of the Human Resource Association of the Midland (HRAM) in 2010, and was a member of the Executive Board of Directors for HRAM since Ms. Royal was the recipient of the Employee of the Year Award for UNMC Physicians in 1993 and the recipient of the Distinguished Sales Award in In 1990 Ms. Royal was also nominated as the Outstanding Young Individual for the state of Nebraska. Chuck Dougherty, Chief Information Officer Chuck Dougherty has served as Chief Information Officer of Shenandoah Medical Center since August of 2014, where he is responsible for the overall technology systems and information security of the organization. Prior to joining Shenandoah Medical Center, Mr. Dougherty served as an independent Chief Information Officer (CIO) consultant with several organizations throughout the United States, as well as serving as the CIO for the Chickasaw Nation in Oklahoma. Mr. Dougherty holds a bachelor s degree in Electrical Engineering from Mississippi State University. He is an active member within the ITIL foundation, the CIO Network, and the American Telemedicine Association. Joe Pimentel, Chief Nursing Officer Joe Pimentel, Interim Chief Nursing Officer of Shenandoah Medical Center since March of 2015, is responsible for the supervision of the Hospital nursing services. Prior to joining SMC, Mr. Pimentel operated his own healthcare consulting business since Mr. Pimentel holds a bachelor s degree in Biochemistry from Pacific Union College, and a bachelor s degree in Nursing from Andrews University, where he graduated magna cum laude. He earned his master s degree in Business Administration with an emphasis in Healthcare Administration from University of Phoenix. Mr. Pimentel is an actively licensed RN; is currently a member of the Association of Nurse Executives (AONE), the Emergency Nurses Association (ENA) and the American College of Healthcare Executives (ACHE); and has previously held memberships in the Association of Critical Care Nurses (AACN) and the Sigma Theta Tau nursing honor society. MEDICAL STAFF The Hospital s active medical staff consists of 26 members, composed of 15 physicians and 11 mid-level practitioners. Additionally, there are 40 consulting and 3 courtesy staff members. All medical staff providers are credentialed through a process that verifies licensure, proof of insurance, professional memberships and disciplinary actions. The table below depicts the distribution of the active medical staff (including both physicians and mid-level practitioners) by age category as of June 30, Source: Hospital Records Age of Active Providers Number of Active Providers Under and over 2 [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] A-5

54 The table below sets forth the distribution of all medical staff members by specialty and category of medical staff membership, indicating board certification percentages as applicable. Specialty Active Staff Consulting Staff Courtesy Staff % Board Certified Cardiology Family Practice Surgery ENT Vascular Medicine Orthopedic Pathology Internal Medicine Radiology Urology ER GI Pulmonology Oncology/radiation Nephrology Ophthalmology OB/GYN EMG Neurology Asthma/Allergies Neurosurgeon Psychiatry Infection Disease Podiatry Anesthesia (CRNA) 1 1 N/A ARNP 10 N/A TOTAL: Source: Hospital Records [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] A-6

55 The top admitting medical staff at the Hospital contributed 97.1% of total admissions for the 12-month period ending December 31, The specialties, age, number of admissions and percentage of total admissions for these practitioners is set forth in the following table: Source: Hospital Records Physician Recruitment Specialty Age Admissions % of Total Admissions Family Practice OB/GYN Family Practice Family Practice Family Practice Internal Medicine Family Practice Family Practice General Surgery Family Practice Three additional physicians are contracted to begin practice at Shenandoah Medical Center: Medical Oncologist/Hematologist In collaboration with Nebraska Medicine, contracted to work 2 days per week starting mid-july, Orthopedic Surgeon Anticipated start date: 4th Quarter, Obstetrician/Gynecologist Scheduled to begin practice in July of 2016, following completion of residency program. Additional recruitment efforts include: Pediatrician Non-interventional Cardiologist Internal Medicine As a part of its succession plan, Shenandoah Medical Center will continue to recruit Family Practitioners and Nurse Practitioners in anticipation of current provider retirements. Licensing, Accreditation and Membership OPERATIONS OF THE HOSPITAL The Iowa Department of Inspections and Appeals licenses the Hospital. Licensed as a critical access hospital for 25 beds, the facility offers acute, skilled, outpatient observation services (provided for patients who stay less than 48 hours) and other outpatient levels of care. As a critical access hospital, regulations permit the utilization of the 25 beds in any combination of levels of care. The average length of inpatient stay is limited to less than 96 hours. For fiscal year ending December 31, 2014, the Hospital reported an average length of stay of hours. A-7

56 The Hospital is certified as a provider under both the Medicare and Medicaid programs and is a facility member of the Iowa Hospital Association and the American Hospital Association. The facility s clinic in Shenandoah is also licensed as a Rural Health Clinic, which provides cost reimbursement for Medicare and Medicaid clinic patients. The Iowa Department of Inspections and Appeals also licenses Elm Heights as a 50-bed long-term care and skilled nursing facility. Employees The Hospital has 344 employees (259 full-time, 39 part-time and 46 PRN/flex). No Hospital employees are represented by a labor union, and management believes its relationship with its employees provides great stability. The following tables indicate staffing levels (expressed as Full-Time Equivalents ( FTEs ) as of the dates set forth therein: Hospital FTEs December 31, 2013 December 31, 2014 June 30, 2015 Clerical Office Physicians & Mid-Level Providers Nursing Staff Other Professional Elm Heights HHC/Traveling All Other Support Staff Total Source: Hospital Records Insurance The Hospital maintains coverage for medical professional liability of $1,000,000 per occurrence and $3,000,000 aggregate; facility general liability insurance is maintained at $1,000,000 in the aggregate. MHA Insurance Co. serves as the Hospital s insurance provider. Excess liability coverage is maintained in the amount of $2,000,000 per occurrence and $2,000,000 annual aggregate. Directors and officers liability insurance is maintained through Travelers and property insurance is maintained through Chubb. Litigation From time to time, the Hospital is subject to claims and lawsuits alleging malpractice. In the opinion of management, the ultimate cost, if any, related to the resolution of such pending legal proceedings, if any, will be within the limits of insurance coverage and, accordingly, will not have a significant effect on the financial position or the results of operations of the Hospital. At this time, there is one malpractice claim pending, of which legal counsel has advised the hospital that they are in a strong defensible position. A-8

57 HOSPITAL SERVICE AREA The Hospital s primary service area includes Page and Fremont counties, Iowa. The Hospital s primary service area has a total population of approximately 17,104 persons. In the year ended December 31, 2014, 89% of the Hospital s patients were residents of this primary service area. The City of Shenandoah, Iowa, is located in southwest Iowa. By car, it is 2.25 hours to Des Moines, Iowa, 1 hour from Omaha, Nebraska, 1.25 hours from Lincoln, Nebraska and 1.25 hours from Sioux City, Iowa. The population of Shenandoah was estimated by the U.S. Census Bureau as 5,070 for Shenandoah is located in Page County, Iowa, which has an economy primarily based on agriculture. The Hospital s secondary service area includes Montgomery County, Iowa and Atchison County, Missouri. The cities and surrounding rural areas in the secondary service area have an additional total population of about 16,425 persons. The secondary service area accounted for approximately 8% of the Hospital s total inpatient hospital admissions for the year ending December 31, Source: Patient Origin and Destination Study of the Iowa Hospital Association 1/01/14 to 12/31/14 Edition. The following table provides information concerning major employers in the City of Shenandoah region: Employer Number of Employees Eaton Corporation 450 NSK AKS Corporation 400 Pella Corporation 400 Shenandoah Medical Center 344 Lisle Corporation 300 Clarinda Correctional Facility 287 Clarinda Regional Health Center 260 Shenandoah Community School District 160 Clarinda Community School District 135 Source: Shenandoah Chamber and Industry Association The following table sets forth unemployment statistics by county in the Hospital s service area as of August 2014 and 2015: County Unemployment Rate 2015 Unemployment Rate 2014 Page 3.9% 4.6% Fremont 2.9% 3.9% Montgomery 3.3% 4.1% Atchison 5.2% 5.2% Source: Iowa Workforce Development Website and Missouri Department of Labor and Industrial Relations A-9

58 The following table indicates the percentage of the Hospital s inpatient discharges and outpatient visits from various counties in the Hospital s service area: County Percent of Inpatient Percent of Outpatient Page 71.7% 75.7% Fremont 17.2% 13.6% Montgomery 3.8% 2.5% Atchison, MO 4.5% 3.7% Other 2.8% 4.5% Source: Iowa Hospital Association and Hospital Records COMPETITION Clarinda Regional Health Center is also located in Page County and serves as the primary competition for Shenandoah Medical Center. Additionally, George C. Grape Community Hospital is located in Fremont County. The following table indicates the percentage of discharges originating from Page and Fremont Counties, the Hospital s primary service area that received inpatient services at the listed health care facilities during the year ended December 31, Hospital City Staffed Beds Distance From Hospital Total Discharges County Percent of Discharges County Shenandoah Medical Center Shenandoah 25 n/a % Clarinda Regional Health Center Clarinda miles % George C. Grape Community Hospital Hamburg miles % Methodist Jennie Edmondson Council Bluffs miles % CHI Health Mercy Council Bluffs Mercy Medical Center Des Moines Council Bluffs Des Moines miles 138 miles % 0.2% Iowa Methodist Medical Center Greater Regional Medical Center Des Moines Creston miles 70 miles % 0.1% UnityPoint Health Methodist West West Des Moines miles 2 0.1% Mercy Medical Center North Iowa Mason City miles 1 0.1% Mary Greeley Medical Center Ames miles 1 0.1% 1, % Source: Patient Origin and Destination Study of the Iowa Hospital Association 1/01/14 to 12/31/14 Edition. A-10

59 The following table indicates the percentage of the Hospital s inpatients coming from Page and Fremont counties. County Hospital Patients % of County Total Page % Fremont % Source: Patient Origin and Destination Study of the Iowa Hospital Association 1/01/14 to 12/31/14 Edition UTILIZATION The following table sets forth certain historical operating statistics for the Hospital: Period from January 1 December Staffed Beds Acute Patient Days Acute 1,356 1,203 1,510 Patient Days Swing Bed Admissions Acute Admissions Swing Bed Length of Stay Acute (Days) Length of Stay Swing Bed (Days) % of Occupancy Outpatient Procedures Inpatient Surgeries Outpatient Surgeries Observation Patients Observation Days Hospice Admissions Hospice Days Total Outpatient Visits Patient Days Elm Heights (EH) Swing Bed Patient Days EH Long-Term Care Admissions EH Swing Bed Admissions EH Long-Term Care Source: Hospital Records 1, , , , , , , A-11

60 SELECTED FINANCIAL DATA The selected condensed balance sheets and condensed statement of operations data shown below for the fiscal years ended December 31, 2013 and 2014 is derived from the Hospital s financial statements, which have been audited by Seim Johnson, independent auditors. The selected statement of operations data for the 9-month periods ended September 30, 2014 and 2015 is derived from Hospital records. Historical results are not necessarily indicative of future results. The selected information for the fiscal years ended December 31, 2013 and 2014 should be read in conjunction with the Hospital s audited financial statements, including the notes thereto. Balance Sheets 2013 (Audited) 2014 (Audited) Nine Months Ended September 30, (Unaudited) (Unaudited) Cash and Cash Equivalents $ 1,288,822 $ 2,276,304 $ 2,738,122 $ 1,371,375 Other Current Assets 7,074,705 9,258,314 7,957,952 14,237,429 Total Current Assets $ 8,363,527 $11,147,201 $10,696,074 $15,608,804 Interests in Perpetual Trusts $ 4,729,513 $ 4,812,569 $ 4,729,513 $ 4,812,569 Investment Whose Use is Limited 9,273,345 9,342,606 8,321,159 8,140,632 Net Property & Equipment 8,904,260 11,173,093 9,939,713 13,636,518 Investment in Subsidiaries 329, , , ,388 Total Assets $31,599,910 $36,601,106 $34,015,724 $42,541,910 Total Liabilities $ 3,177,450 $ 6,608,413 $ 5,077,057 $10,512,635 Total Net Assets 28,422,460 29,992,693 28,938,667 32,029,275 Total Liabilities & Net Assets $31,599,910 $36,601,106 $34,015,724 $42,541,910 [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] A-12

61 Statements of Revenue and Expenses 2013 (Audited) 2014 (Audited) Nine Months Ended September 30, (Unaudited) (Unaudited) Unrestricted Revenues Net patient service revenues $29,261,967 $33,569,190 $23,854,595 $26,830,432 Provision for bad debts (2,821,725) (3,350,700) (2,534,175) (1,765,768) Gains and other support 1,631,519 2,626,709 2,135,274 4,268,728 Total Operating Revenue $28,071,761 $32,845,199 $23,455,695 $29,333,392 Expenses Salaries and wages $14,815,400 $16,338,140 $12,471,659 $14,073,411 Employee benefits 2,699,911 3,004,529 2,280,880 2,600,901 Purchased services 3,976,539 3,983,314 2,352,445 3,149,635 Supplies, occupancy and other expenses 5,925,056 6,599,539 4,699,143 5,893,531 Depreciation and amortization 1,889,800 1,917,009 1,448,440 1,558,311 Interest 0 25,936 14,826 90,985 Total Operating Expenses $29,306,706 $31,868,467 $23,267,394 $27,366,774 Operating Income (loss) $(1,234,945) $ 976,732 $ 188,301 $ 1,966,618 Other Income (losses) 287, , , ,855 Revenues in excess of expenses $ (947,044) $ 1,630,107 $ 587,411 $2,275,473 Change in net unrealized gains and losses $ 296,288 $ (229,529) $ (96,481) $ (394,672) Net assets released from restrictions 94,442 76, Increase in unrestricted net assets $ (556,374) $ 1,442,915 $ 490,960 $1,880,801 The following table shows key operating ratios for the Hospital s fiscal year ending December 31, 2014: Days Cash on Hand: 129 Operating Margin: 3.0% Operating Cashflow Margin: 8.9% [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] A-13

62 Historical Capitalization and Investment Position The following table sets forth the capitalization and investment position of the Hospital as of December 31, The table also shows the historic ratio of long-term debt (net of current position) to total capitalization and days cash on hand. Fiscal Year Ended 2014 Available Cash* $10,585,950 Cash Operating Expenses: Total Operating Expense $31,868,467 Less: Depreciation and Amortization $ 1,917,009 Total Cash Expenses $29,951,458 Daily Cash Expenses $82,059 Days Cash on Hand 129 *Available Cash includes cash, cash equivalents and board-designated investments not restricted as to use. Sources of Revenue Payments to the Hospital are made on behalf of certain patients by the federal and state governments under the Medicare and Medicaid programs and by managed care and commercial insurance carriers. A significant portion of the revenue of the Hospital is derived from such third-party payors. Payments from third-party sources for services rendered could be adversely affected to the extent that reimbursement for services rendered is less than actual expenses incurred. The percentages of gross revenue for the Hospital by payors are as follows: For Fiscal Years Ended 2014, 2013 and Medicare 44.8% 46.4% 46.6% Medicaid 18.8% 16.5% 15.4% Commercial Insurance Blue Cross 11.1% 20.7% 10.2% 19.7% 11.3% 19.9% Private Pay 2.7% 5.7% 5.4% Managed Care Contracts The Hospital is a party to numerous commercial insurance contracts with various commercial insurance carriers, the most prevalent of which is Wellmark (Blue Cross Blue Shield). Shenandoah Medical Center has a contract with Wellmark that provides reimbursement for inpatient care on a diagnosis related group basis and outpatients on an enhanced ambulatory patient grouping fee schedule basis. All other commercial contracts are on a discounted percentage of charge basis. Management Discussion and Analysis Healthcare has continued to evolve greatly in recent years and Shenandoah Medical Center is responding to those changes through modifications to its care delivery models, significant investments in electronic medical record systems, and a renewed focus of its efforts to update its physical facilities and infrastructure. The current building is comprised of the original 1979 hospital along with additions completed in 1993, 1998, 2004, and With the trend from inpatient to outpatient care delivery, and an emphasis on primary care, preventive services and population health, current facilities no longer meet patient needs and expectations, nor are they efficient from a staffing perspective. Renovation and expansion of current facilities to address these issues are essential to continue to provide state of the art care in a rural community. A-14

63 The financial performance of the Hospital has historically been consistently strong; this was especially the case in In mid-2012, the Shenandoah Medical Center Board of Directors developed a new vision and initiatives in response to national healthcare reform demands for improved quality and reduced costs. These initiatives included an increase in employed providers, changes in healthcare delivery models, improved electronic health record systems, and an update to the physical infrastructure of the facility. In order to accomplish these goals, many changes occurred, including the replacement of the organization s leadership team with specific skills to position the facility for transition. Modifications to the facility s healthcare delivery models included: consolidating two existing primary clinics into one, thereby reducing overhead and improving work processes; physician recruitment, both replacement and additional; and transitioning all providers from a paper environment to an electronic medical record. These drastic changes were met with financial difficulty in the period of change, but paid off substantially in 2014 with one of the strongest financial years in the organization s history net income (excess of revenues over expenses) was $1,756,860 after posting a net loss of $947,044 in Prior to the changes that occurred in 2013, SMC posted net incomes of: $868,263 in 2012; $1,204,906 in 2011; and $988,065 in Shenandoah Medical Center has experienced consistent net patient service revenue growth, with significant increases in the past two years. From 2010 to 2014, net patient revenue growth increased by 51.7%; an average increase of 10% per year. During the same period expense growth has averaged only 8% per year, or 41.3%. This consistent increase in net revenues and a continued effort to minimize expense growth resulted in nearly a 3% operating margin for Shenandoah Medical Center in The proposed project includes the addition of a two story 40,000 square foot medical office building attached to the south side of the existing building. This office building would accommodate 21 clinic providers, 4 visiting specialty clinics, 1 walk in clinic and 4 mental health offices. The new addition also provides for a new front entry for the entire facility, as well as centralized registration and waiting to improve services to all patients and visitors. The vacated existing clinic space will be remodeled as a new surgery center with two state-of-the-art operating rooms, a dedicated endoscopy room, and a minor procedure room. Patients will benefit from pre-operative and recovery room bays within the surgery center that increase patient privacy by eliminating the need for patients to travel through public corridors. This surgery center will also free up existing patient rooms often needed during peak use times. Significant staff efficiencies will be gained by relocating central sterilization adjacent to the new surgery center from its current location on another floor. The emergency department expansion will add needed check-in and triage areas, exam rooms and support space. The respiratory therapy area and laboratory will also expand and be relocated to accommodate the expanded emergency and surgery departments. The Hospital believes that the facility expansion and renovation will not only better serve its patients and community, but will also enhance its ability to recruit physicians and other staff. These improvements are necessary for Shenandoah Medical Center to thrive in the new environment of health care reform \6\881116\00770 A-15

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65 APPENDIX B FINANCIAL STATEMENTS OF SHENANDOAH MEDICAL CENTER

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67 Shenandoah Medical Center and Affiliate Shenandoah, Iowa Consolidated Financial Statements and Supplementary Information December 31, 2014 and 2013 Together with Independent Auditor's Report B-1

68 Shenandoah Medical Center and Affiliate Table of Contents Page Independent Auditor's Report Consolidated Financial Statements: Consolidated Balance Sheets December 31, 2014 and Consolidated Statements of Operations For the Years Ended December 31, 2014 and Consolidated Statements of Changes in Net Assets For the Years Ended December 31, 2014 and Consolidated Statements of Cash Flows For the Years Ended December 31, 2014 and Notes to Consolidated Financial Statements December 31, 2014 and Supplementary Information: Exhibit 1 - Exhibit 2 - Exhibit 3 - Exhibit 4 - Exhibit 5 - Consolidating Balance Sheets December 31, Consolidating Statement of Operations For the Year Ended December 31, Consolidating Statement of Changes in Net Assets For the Year Ended December 31, Divisional Balance Sheets Shenandoah Medical Center December 31, 2014 and Divisional Statements of Operations Shenandoah Medical Center For the Years Ended December 31, 2014 and B-2

69 Independent Auditor's Report To the Board of Directors Shenandoah Medical Center and Affiliate Shenandoah, Iowa: Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Shenandoah Medical Center and Affiliate (Medical Center) which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Medical Center s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Medical Center s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Medical Center as of December 31, 2014 and 2013, and the respective changes in its financial position and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. B-3 1