$100,895,000 MEDSTAR HEALTH, INC.

Transcription

1 NEW ISSUE BOOK-ENTRY ONLY Ratings Fitch: A Moody s: A2 Standard & Poor s: A- $100,895,000 MEDSTAR HEALTH, INC. Taxable Bonds, Series 2015 Dated: Date of Issue Due August 15, as set forth on inside cover Interest Payable: February 15 and August 15 The MedStar Health, Inc. Taxable Bonds, Series 2015 (the Bonds ) are general obligations of MedStar Health, Inc. (the Corporation ), issued pursuant to an Indenture, as described herein, and will be payable from payments made by the Corporation under the Indenture and from certain funds held under the Indenture. The obligations of the Corporation under the Indenture are evidenced and secured by a promissory note of the Obligated Group to the Trustee issued under the Master Indenture and secured equally and ratably with certain other outstanding Obligations of the Corporation under the Master Indenture. In addition, except as described herein, the Material System Affiliates and certain other System Affiliates (the Guarantors ) have entered into a Guaranty Agreement in favor of the Master Trustee jointly and severally guaranteeing the payment and performance of the obligations of the Corporation under the Master Indenture. The obligations of the Guarantors are secured by certain Deeds of Trust on certain property of the Guarantors. See Security and Sources of Payment for the Bonds. The Bonds are issuable only as fully registered bonds in denominations of $1,000 or integral multiples thereof. All of the Bonds initially will be maintained under a book-entry system under which The Depository Trust Company, New York, New York ( DTC ), will act as securities depository. Purchases of the Bonds will be in book-entry form only (without physical certificates) and, under limited circumstances, will be exchangeable for physical certificates, as more fully described herein. Interest on the Bonds from the date of their initial delivery is payable on August 15, 2015, and semiannually thereafter on each February 15 and August 15. As long as the Bonds are maintained under a book-entry system, payments of the principal of and Make-Whole Redemption Price, if any, and interest on the Bonds will be made when due by U.S. Bank National Association, (the Trustee ), to DTC in accordance with the Indenture, and the Trustee will have no obligation to make any payments to any beneficial owner of any Bonds. See Appendix E Book-Entry System herein. The Bonds are subject to optional redemption prior to their respective maturities, as described herein. Interest on, and gain, if any, on the sale of the Bonds are not excludable from gross income for federal, state or local income tax purposes. See Certain United States Federal Income Tax Considerations herein. This cover page contains information for general reference only. It is not intended as a summary of these transactions. Investors are advised to read the entire Offering Memorandum to obtain information essential to making an informed investment decision. The Bonds are offered, subject to prior sale, when, as and if received by the Underwriters, and to the approval of certain legal matters for the Corporation by the Executive Vice President and General Counsel of the Corporation and Ballard Spahr LLP, special counsel to the Corporation, and by Orrick, Herrington & Sutcliffe LLP, counsel to the Underwriters, and to certain other conditions. It is expected that the Bonds will be available for delivery through DTC on or about February 11, J.P. Morgan Citigroup Loop Capital Markets January 29, 2015 See the caption RATINGS herein. BofA Merrill Lynch RBC Capital Markets US Bancorp Wells Fargo Securities

2 $100,895,000 MEDSTAR HEALTH, INC. Taxable Bonds, Series 2015 MATURITY SCHEDULE Maturity Date (August 15) Principal Amount Interest Rate Yield Price CUSIP ± 2016 $5,155, % 0.800% 100% 58506YAA ,130, YAB ,965, YAC ,730, YAD ,740, YAE ,730, YAF ,770, YAG ,225, YAH ,140, YAJ ,100, YAK ,155, YAL ,240, YAM ,330, YAN ,400, YAP ,490, YAQ ,595, YAR3 ± Copyright 2015, American Bankers Association. CUSIP data herein are provided by the CUSIP Service Bureau, managed on behalf of the American Bankers Association by Standard & Poor s, a division of The McGraw-Hill Companies, Inc. The CUSIP numbers listed above are being provided solely for the convenience of bondholders only and neither the Underwriters nor the Corporation makes any representation with respect to such numbers or undertakes any responsibility for their accuracy.

3 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. No dealer, broker, sales representative or other person has been authorized by MedStar Health, Inc. (the Corporation ) or the Underwriters to give any information or to make any representation other than as contained in this Offering Memorandum and, if given or made, such other information or representation must not be relied upon as having been authorized by any of the foregoing. This Offering Memorandum does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from the Corporation, The Depository Trust Company ( DTC ) and other sources that are believed to be reliable but is not guaranteed as to accuracy or completeness by the Underwriters, and is not to be construed as a representation either by the Underwriters or, as to information from sources other than DTC, by DTC. The Underwriters have provided the following sentence for inclusion in this Offering Memorandum: The Underwriters have reviewed the information in this Offering Memorandum in accordance with and as part of their responsibility 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. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Bonds, or determined that this Offering Memorandum is accurate or complete. Any representation to the contrary is a criminal offense. This Offering Memorandum contains certain forward-looking statements concerning the operations and financial condition of the Corporation. These statements are based upon a number of assumptions and estimates which are subject to significant uncertainties, many of which are beyond the control of the Corporation. The words may, would, could, will, expect, anticipate, believe, intend, plan, estimate and similar expressions are meant to identify these forward-looking statements. Actual results may differ materially from those expressed or implied by these forward-looking statements. The Corporation does not plan to issue any updates or revisions to these forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur. All quotations from and summaries and explanations of provisions of laws and documents herein do not purport to be complete and reference is made to such laws and documents for full and complete statements of their provisions. Any statements made in this Offering Memorandum involving estimates or matters of opinion, whether or not expressly so stated, are intended merely as estimates or opinions and not as representations of fact. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Offering Memorandum nor any sale of the Bonds shall under any circumstances create any implication that there has been no change in the affairs of the Corporation or DTC since the date hereof. The Bonds have not been and will not be registered under the Securities Act of 1933, as amended (the Securities Act ), and are being issued in reliance on an exemption under Section 3(a)(4) of the Securities Act. The Bonds are not exempt in every jurisdiction in the United States; some jurisdictions securities laws (the blue sky laws ) may require a filing and a fee to secure the Bonds exemption from registration.

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5 TABLE OF CONTENTS Page INTRODUCTORY STATEMENT... 1 ESTIMATED USES AND SOURCES OF FUNDS... 2 PLAN OF FINANCING... 2 THE BONDS... 3 General... 3 Redemption... 4 Acceleration... 6 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS... 7 General... 7 Master Indenture... 7 Guaranty Agreement... 7 Deeds of Trust... 8 Security Interest in Pledged Revenues... 8 Rate Covenant... 9 No Debt Service Reserve Fund for the Bonds... 9 Amendments of Master Indenture ANNUAL DEBT SERVICE REQUIREMENTS OF SYSTEM LONG-TERM INDEBTEDNESS OTHER INDEBTEDNESS Parity Debt Other Debt Future Capital Improvements REGULATORY ENVIRONMENT Certificate of Need Maryland Health Services Cost Review Commission Rates at Maryland Hospitals District of Columbia Hospital Rates Maryland Hospital Bond Program Nonprofit Health Care Environment CERTAIN BONDHOLDERS RISKS General Obligated Group Guarantors Discretion of Board and Management General Economic Conditions, Bad Debt and Investment Performance Health Care Reform Federal and State Reimbursement Regulation Medicare and Medicaid Programs Medicaid Funding in Maryland Patient Transfers Waiver Co-Payments and Deductibles Health Insurance Portability and Accountability Act Health Information Technology for Economic and Clinical Health Act Security Breaches and Unauthorized Releases of Personal Information Cybersecurity Risks Federal, State and Local Legislation Corporate Compliance i-

6 TABLE OF CONTENTS (continued) Page Managed Care and Commercial Payors Maryland Health Insurance Plan State Children s Health Insurance Programs Uninsured Patients Pension and Benefit Funds Cost and Availability of Medical Malpractice Insurance Environmental Laws and Regulations Tax Exemptions Alliances and Affiliations with Physicians, Hospitals and Other Healthcare Providers Affiliation, Merger, Acquisition and Disposition Other Acquisitions and Affiliations Antitrust Other Regulatory and Contractual Matters Risks in Health Care Delivery Licensing, Surveys, Investigations and Audits Limitations on Enforceability of Rights and Remedies Limitations Relating to Remedies under the Deeds of Trust Bankruptcy Additional Limitations on Enforceability General Litigation and Insurance Amendment of Legal Documents Ratings Secondary Market Prepayment Risks Financial Information Risks Related to Variable Rate Obligations Hedging Transactions Other Factors NO ADVERSE LITIGATION RELATING TO BONDS UNDERWRITING RATINGS CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS U.S. Holders Non-U.S. Holders FATCA Other Matters Effect of Defeasance Other CERTAIN ERISA CONSIDERATIONS LEGAL MATTERS FINANCIAL ADVISORS INDEPENDENT AUDITORS CERTAIN RELATIONSHIPS CONTINUING DISCLOSURE MISCELLANEOUS APPENDIX A MEDSTAR HEALTH, INC. AND THE SYSTEM... A-1 -ii-

7 TABLE OF CONTENTS (continued) Page APPENDIX B CONSOLIDATED FINANCIAL STATEMENTS OF MEDSTAR HEALTH, INC. AND ITS SUBSIDIARIES... B-1 APPENDIX B-1 SELECTED INTERIM UNAUDITED FINANCIAL INFORMATION OF MEDSTAR HEALTH, INC. AND ITS SUBSIDIARIES... B-1-1 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS... C-1 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT... D-1 APPENDIX E BOOK-ENTRY SYSTEM... E-1 -iii-

8 SUMMARY OF THE OFFERING Issuer Securities Offered Interest Accrual Dates MedStar Health, Inc. (the Corporation ) MedStar Health, Inc. Taxable Bonds, Series See inside cover page of this Offering Memorandum. Interest will accrue from the Date of Issue. Interest Payment Dates February 15 and August 15 of each year, commencing August 15, 2015 Redemption The Bonds are subject to optional redemption prior to their respective stated maturities, upon written direction of the Corporation, in whole or in part on any Business Day in such order of maturity as directed by the Corporation, at the Make- Whole Redemption Price, together with accrued interest to the redemption date, as further described herein. See The Bonds Redemption herein. Date of Issue February 11, 2015 Authorized Denominations Form and Depository Use of Proceeds Ratings $1,000 and any integral multiples thereof The Bonds will be delivered solely in book-entry form through the facilities of DTC. The Corporation will use proceeds of the Bonds to finance and refinance the acquisition and renovation of ambulatory care facilities or other capital projects of the System and for other general corporate purposes of the System consistent with the Corporation s charitable purposes and to pay costs of issuance relating to the Bonds. See Plan of Financing herein. Fitch: A Moody s: A2 S&P: A- For an explanation of the ratings, see Ratings herein.

9 $100,895,000 MEDSTAR HEALTH, INC. TAXABLE BONDS, SERIES 2015 INTRODUCTORY STATEMENT This Offering Memorandum sets forth certain information for use in connection with the sale by MedStar Health, Inc. (the Corporation ) of its $100,895,000 Taxable Bonds, Series 2015 (the Bonds ). The Bonds are issued pursuant to and secured by an Indenture of Trust, dated as of February 1, 2015 (the Indenture ) between the Corporation and U.S. Bank National Association, as trustee (the Trustee ). For the definitions of certain words and terms used in this Offering Memorandum, see Definitions of Certain Terms Used in the Indenture and Summary of Certain Provisions of the Master Indenture -- Definitions in Appendix C. The Corporation is the controlling entity of an integrated health services organization (the System ) offering a broad continuum of health care services to residents of the Baltimore-Washington, D.C. region. The System consists of the Corporation, 10 hospitals (collectively, the System Hospitals ) and other health services affiliates (together with the System Hospitals, the System Affiliates ) which provide acute care (secondary, tertiary and quaternary), primary care, emergency/urgent care, ambulatory care, rehabilitation (hospital-based and outpatient), post-acute care, home care, adult day care, health promotion and wellness services as well as medical research and education. For detailed information concerning the Corporation and the System Affiliates, see Appendix A. Appendix B sets forth consolidated financial statements of the Corporation and its subsidiaries for the Fiscal Years ended June 30, 2013 and June 30, 2014 audited by KPMG LLP. Appendix B-1 sets forth selected interim unaudited financial information with respect to the Corporation and its subsidiaries for the three-month periods ended September 30, 2013 and Such financial statements and information include affiliates of the Corporation that are not Members of the Obligated Group or Guarantors. The Bonds are being issued to finance and refinance the acquisition and renovation of ambulatory care facilities or other capital projects of the System and for other general corporate purposes of the System consistent with the Corporation s charitable purposes and to pay costs of issuance relating to the Bonds. See Estimated Uses and Sources of Funds and Plan of Financing below. All non-governmental Maryland hospitals charge for hospital services at rates approved by the Maryland Health Services Cost Review Commission (the HSCRC or the Rate Commission ). See Regulatory Environment -- Maryland Health Services Cost Review Commission. HSCRC-approved rates only apply to the rates charged by the seven System Hospitals located in the State of Maryland. The District of Columbia does not regulate the rates charged by hospitals. Certain risk factors that should be considered by prospective investors in the Bonds are set forth under Certain Bondholders Risks.

10 ESTIMATED USES AND SOURCES OF FUNDS The following table sets forth the estimated uses and sources of funds related to the Bonds. Sources: Bonds Par Amount of Bonds $100,895,000 Total Sources $100,895,000 Uses: Capital Projects (including Ambulatory Care) and Other General Corporate Purposes $100,000,000 Costs of Issuance (1) $895,000 Total Uses $100,895,000 (1) Includes underwriters discount, certain fees and expenses of the financial advisor, legal counsel, certain accounting fees, rating agency fees, printing costs, fees and expenses of the Trustee and Master Trustee and other miscellaneous expenses. PLAN OF FINANCING The Bonds are being issued to finance and refinance the acquisition and renovation of ambulatory care facilities or other capital projects of the System and for other general corporate purposes of the System consistent with the Corporation s charitable purposes and to pay costs of issuance relating to the Bonds. The obligations of the Corporation under the Indenture will be evidenced and secured by a promissory note of the Obligated Group to the Trustee in principal amount equal to the aggregate principal amount of the Bonds (the 2015B Obligation ), issued in accordance with the Master Trust Indenture, dated as of December 1, 1998, as amended and supplemented (the Master Indenture ), between the Corporation and U.S. Bank National Association, as successor trustee (the Master Trustee ). The Corporation is currently the sole Member of the Obligated Group. Currently, the System Affiliates are not Members of the Obligated Group. Except as described below, however, all Material System Affiliates, as well as certain other System Affiliates (collectively, the Guarantors ) have entered into a Guaranty Agreement, as amended (the Guaranty Agreement ), jointly and severally guaranteeing the payment and performance of the obligations of the Corporation under the Master Indenture. Pursuant to the Master Indenture, except as otherwise provided therein, the Corporation has agreed to cause each Material System Affiliate to be a party to the Guaranty Agreement provided that a new Material System Affiliate can comply with the requirements set forth in the Master Indenture for the admission of Members to the Obligated Group. Notwithstanding the requirement under the Master Indenture that the Corporation shall cause each Material System Affiliate to be a party to the Guaranty Agreement, any Guarantor may be released from the provisions of the Guaranty Agreement by complying with the provisions of the Master Indenture relating to the withdrawal of Members from the Obligated Group. See Summary of Certain Provisions of the Master Indenture -- Parties to Guaranty Agreement in Appendix C. The Guarantors currently include each of the 10 System Hospitals: MedStar Washington Hospital Center, MedStar Georgetown University Hospital and MedStar National Rehabilitation Network, each of which is located in the District of Columbia, and MedStar Union Memorial Hospital, MedStar Franklin Square Medical Center, MedStar Southern Maryland Hospital Center, MedStar Good Samaritan Hospital, MedStar Montgomery Medical Center, MedStar Harbor Hospital and MedStar St. Mary s Hospital, which are located in Maryland (collectively, the Maryland Hospitals ). See Corporate Organization and System Affiliates 2

11 and Acute Care Facilities -- The Hospitals in Appendix A and Security and Sources of Payment for the Bonds -- Guaranty Agreement below. MedStar Family Choice, Inc., a Medicaid and Medicare managed care organization licensed by the State of Maryland and the District of Columbia ( MFC ), is a Material System Affiliate as defined under the Master Indenture. In connection with the issuance of the Bonds, however, the Master Indenture will be amended to provide that MFC will not be required to become a party to the Guaranty Agreement. See Security and Sources of Payment for the Bonds -- Amendments of Master Indenture. In addition to the 2015B Obligation issued by the Corporation to secure the Bonds, concurrently with the issuance of the Bonds, the Corporation expects to issue an additional Obligation (the 2015A Obligation ) to secure certain fixed rate tax-exempt revenue bonds (the 2015 Tax-Exempt Bonds ), to be issued by the Maryland Health and Higher Educational Facilities Authority (the Maryland Authority ) for the benefit of the Corporation in the aggregate principal amount of $357,205,000 the proceeds of which will be used to refinance (i) a portion of the District of Columbia Multimodal Revenue Bonds Medlantic/Helix Issue, Series 1998B (the 1998B District of Columbia Bonds ), (ii) a portion of the District of Columbia Multimodal Revenue Bonds Medlantic/Helix Issue, Series 1998C (the 1998C District of Columbia Bonds and together with the 1998B District of Columbia Bonds, the 1998 District of Columbia Bonds ), (iii) a portion of the Maryland Authority s Refunding Revenue Bonds, MedStar Health Issue, Series 2004 (the 2004 Maryland Authority Bonds ) and (iv) all of the Maryland Authority s Revenue Bonds, MedStar Health Issue, Series 2007 (the 2007 Maryland Authority Bonds ). The 1998 District of Columbia Bonds, the 2004 Maryland Authority Bonds and the 2007 Maryland Authority Bonds that will be refunded are collectively referred to herein as the Refunded Bonds. See Other Indebtedness -- Parity Debt. The 2015 Tax-Exempt Bonds are not being offered by this Offering Memorandum. Upon the issuance of the Bonds, approximately $663,855,000 aggregate principal amount of Obligations issued under the Master Indenture that secures revenue bonds will remain outstanding, exclusive of the 2015B Obligation, Obligations related to the Refunded Bonds, the 2015A Obligation and certain other obligations secured equally and ratably on parity with the 2015B Obligation. See Other Indebtedness below. THE BONDS The following is a summary of certain provisions of the Bonds and the Indenture. See also Summary of Certain Provisions of the Indenture in Appendix C for a summary of certain additional provisions relating to the Bonds and the Indenture. Reference is made to the Bonds for the complete text thereof and to the Indenture for all of the provisions relating to the Bonds. The discussion herein is qualified by such reference. General The Bonds are being issued pursuant to the Indenture in the aggregate principal amount and with the maturity dates set forth on the inside cover of this Offering Memorandum. The Bonds will be delivered in fully registered form without coupons. The Bonds will be dated the Date of Issue and will be payable as to principal, subject to the redemption provisions set forth herein, on the dates and in the amounts set forth on the inside cover page hereof. The Bonds will be transferable and exchangeable as set forth in the Indenture and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only, in denominations of $1,000 or integral multiples thereof. See Appendix E Book-Entry System. The Bonds will bear interest at the rates set forth on the inside cover page hereof payable on February 15 and August 15 of each year, commencing August 15, 2015 (each an Interest Payment Date ). Interest will be calculated based on a 360-day year with twelve 30-day months. The payment of interest, on, Make-Whole Redemption Price, if any, and of principal at redemption of or on the maturity date of, the Bonds will be made to the person in whose name each Bond is registered at the close of business on the applicable Record Date (which will be the 1st day of the month of such Interest Payment Date, or, if such day shall not be a Business Day, the next succeeding Business Day), so long as ownership of such Bond is maintained in book-entry form by DTC, by wire transfer to such person, and otherwise by check mailed by the Paying Agent to such person; provided, however, at 3

12 any time, at the option of any Owner of Bonds having a principal amount of at least $1,000,000, any payment on the Bonds owned by such Owner may be transmitted by wire transfer to such Owner, at such Owner s written request, to the bank account number on file with the Registrar on the third day before the Record Date or, if any such day is not a Business Day, the Business Day next preceding such day; and; provided, however, that if the Corporation shall default in the payment of interest due on any Interest Payment Date, such interest shall cease to be payable to the person in whose name each Bond was registered on such Record Date and shall be payable, when and if paid by the Corporation, to the person in whose name each Bond is registered at the close of business on the record date fixed therefor by the Trustee (each a Special Record Date ), which shall not be more than 15 days and not less than 10 days prior to the date of the proposed payment. So long as Cede & Co. is the registered owner of the Bonds, principal of and Make-Whole Redemption Price, if any, and interest on the Bonds are payable by wire transfer by the Trustee to Cede & Co., as nominee for DTC, which, in turn, will remit such amounts to DTC Participants (as defined herein) for subsequent disbursement to the Beneficial Owners. See Appendix E Book-Entry System. The Corporation cannot and does not give any assurances that DTC will distribute to DTC Participants or that DTC Participants or others will distribute to the Beneficial Owners payments of principal of, Make-Whole Redemption Price, if any, and interest on the Bonds or any redemption or other notices or that they will do so on a timely basis or will serve and act in the manner described in this Offering Memorandum. The Corporation is neither responsible nor liable for the failure of DTC or any DTC Participant or DTC Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Bonds or any error or delay relating thereto. Redemption Optional Redemption. The Bonds are subject to optional redemption prior to their respective stated maturities, upon written direction of the Corporation, in whole or in part on any Business Day in such order of maturity as directed by the Corporation, at the Make-Whole Redemption Price, together with accrued interest thereon to the redemption date. As used herein, the Make-Whole Redemption Price shall mean the greater of (i) 100% of the principal amount of any Bonds being redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on any Bonds being redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus (i) for the Bonds maturing on August 15, 2016, 10 basis points, (ii) for the Bonds maturing on August 15, , 15 basis points, (iii) for the Bonds maturing on August 15, , 20 basis points, and (iv) for the Bonds maturing on August 15, , 30 basis points. The Make-Whole Redemption Price shall be determined by an independent accounting firm or financial advisor retained by the Corporation and such accounting firm or financial advisor shall perform all actions and make all calculations required to determine the Make-Whole Redemption Price. The Trustee and the Corporation may conclusively rely on such accounting firm s or financial advisor s calculations in connection with, and determination of, the Make- Whole Redemption Price, and shall bear no liability for such reliance. For purposes of this paragraph, the following definitions shall apply: Comparable Treasury Issue shall mean, with respect to the Bonds of a particular maturity, the United States Treasury security selected by a Designated Investment Banker as having an actual maturity comparable to the remaining term of the Bonds to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of a comparable maturity to the remaining term of such Bonds. Comparable Treasury Price shall mean, with respect to any redemption date, for the Bonds of a particular maturity, (A) the average of the Reference Treasury Dealer Quotations for such redemption date after excluding the highest and lowest of such Reference Treasury Dealer Quotations or, (B) if the Designated Investment Banker obtains fewer than four Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations. Designated Investment Banker shall mean one of the Reference Treasury Dealers appointed by the Corporation. Reference Treasury Dealer shall mean each of J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated and two additional firms designated by the Corporation, or their respective affiliates, 4

13 which are primary U.S. government securities dealers, and their respective successors; provided that if any of them shall cease to be a primary U.S. government securities dealer (a Primary Treasury Dealer ), the Corporation shall substitute therefor another Primary Treasury Dealer. Reference Treasury Dealer Quotations shall mean, with respect to each Reference Treasury Dealer and any redemption date for the Bonds of a particular maturity, the average, as determined by the Designated Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Designated Investment Banker by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third Business Day preceding such redemption date. Treasury Rate shall mean, with respect to any redemption date, for the Bonds of a particular maturity, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue with respect thereto, computed as of the second Business Day immediately preceding such redemption date, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price with respect thereto for such redemption date. Notice of Redemption of the Bonds; Effect of Redemption. Optional redemptions of Bonds shall be effected by the Registrar and the Paying Agent (after receipt of notice of such optional redemption by the Trustee, the Registrar and the Paying Agent to be given by the Corporation by first class mail, not less than 35 days prior to the redemption date) on the date specified by the Corporation, which date shall be the earliest date, following receipt by the Trustee, the Registrar and the Paying Agent of the direction to redeem, on which the Bonds to be redeemed are subject to redemption and with respect to which notice of redemption can be timely given in accordance with the Indenture. In the event any of the Bonds are to be called for redemption, the Registrar shall give notice, in the name of the Corporation, of the redemption of such Bonds. Each notice shall (i) specify the Bonds to be redeemed by CUSIP number, registration number, date of issue, interest rate, maturity date, the redemption date, the Make-Whole Redemption Price (or, if not known, the method of calculation) and the place or places where amounts due upon such redemption will be payable (which shall be the Principal Office of the Paying Agent) and, if less than all of the Bonds are to be redeemed, the registration numbers or portions of such Bonds to be redeemed and, in the case of Bonds in a denomination other than the minimum authorized denomination, portions of the Bonds which are to be redeemed in part, (ii) state that on the redemption date the Bonds or portions thereof to be redeemed shall cease to bear interest and (iii) any conditions to the redemption. Such notice may set forth any additional information relating to the redemption. Such notice shall be given by the Registrar not less than 30 days prior to the date fixed for redemption to DTC in any manner permitted by its rules and procedures, or if the Bonds are Certificated Bonds, by certified mail, return receipt requested, to the Owners of the Bonds or portions of such Bonds to be redeemed at the addresses shown on the registration books of the Registrar as of the third day next preceding the date on which notice by mail is given, or, if any such day is not a Business Day, the Business Day next preceding such day (a Redemption Record Date ). The Registrar shall also give notice of such redemption by certified mail, return receipt requested, to such information services as shall be designated by the Corporation. The Registrar shall send notices, if applicable, to DTC in such manner that the notice will be received by DTC at least two days before the date of general publication or release to the public. The failure to give notice by mail to any Owner of any Bond to be redeemed, or any defect therein, shall not affect the validity of the proceedings for redemption of any other Bonds for which notice to the Owners was properly given. The failure to give notice by mail to the information services designated by the Corporation, or any defect therein, shall not affect the validity of the proceedings for redemption of any Bonds. If a notice of redemption shall be unconditional, or if the conditions of a conditional notice of redemption pursuant to the Indenture shall have been satisfied, then, the Bonds called for redemption shall be redeemed upon presentation and surrender of such Bonds at the place or places of payment. If the Bonds are Certificated Bonds, the Registrar shall use its best efforts to mail, by the same means as the first notice, a second notice to Owners of Bonds who have not presented their Bonds for redemption within 60 days after the date fixed for redemption. Subject to the provisions of the Indenture described in the next paragraph, on the redemption date, the principal amount of each Bond or portion thereof to be redeemed, together with the accrued interest (if any) on such Bonds or portion thereof to the redemption date, shall become due and payable. If notice of redemption has been given to the Owners of the Bonds to be redeemed and if moneys to pay the Make-Whole Redemption Price are on deposit with the Trustee or the Paying Agent in accordance with the provisions of the Indenture, and if all 5

14 conditions, if any, to the redemption are satisfied, then (i) no further interest shall accrue on any of the Bonds to be redeemed, whether or not such Bonds have been surrendered for payment, and (ii) the Bonds to be redeemed shall no longer be Outstanding under this Indenture and the Corporation shall be under no further liability with respect to such Bonds. With respect to any notice of optional redemption of the Bonds in accordance with the Indenture, the notice may state that the redemption shall be conditional upon receipt by the Trustee, by 11:00 a.m., New York City time, on the date fixed for the redemption, of moneys sufficient to pay the principal of, Make-Whole Redemption Price, if any, and interest on the Bonds to be redeemed or that the redemption is subject to such other conditions as the Corporation may specify, and that if such moneys shall not have been so received or such other conditions have not been satisfied, the notice shall be of no force and effect and the Corporation shall not be required to redeem the Bonds. In the event that the notice of redemption contains such a condition and such moneys are not received or such other conditions have not been satisfied, the redemption shall not be made and the Registrar shall, within a reasonable time after the proposed redemption date, give notice, in the manner in which the notice of redemption was given, that the redemption shall not occur. No Partial Redemption of Bonds After Default. If there shall have occurred and be continuing an Event of Default under the Indenture and if there shall have been an acceleration of the principal of and interest on the Bonds by the Trustee, then there shall be no redemption of less than all of the Bonds at the time Outstanding. Selection of Bonds for Redemption. Whenever provision is made in the Indenture for the redemption of less than all of the Bonds of any maturity or any given portion thereof, the Trustee will allocate the Bonds to be redeemed from all Bonds of such maturity subject to redemption or such given portion thereof not previously called for redemption, on a pro rata pass-through distribution of principal basis. If the Bonds are registered in book-entry only form and so long as DTC or a successor securities depository is the sole registered owner of the Bonds, if less than all of the Bonds of a maturity are called for prior redemption, the particular Bonds or portions thereof to be redeemed shall be selected on a pro rata pass-through distribution of principal basis in accordance with DTC procedures, provided that, so long as the Bonds are held in book-entry form, the selection for redemption of such Bonds shall be made in accordance with the operational arrangements of DTC then in effect. It is the Corporation s intent that redemption allocations made by DTC be made on a pro rata pass-through distribution of principal basis as described above. However, the Corporation can provide no assurance that DTC, DTC s Direct and Indirect Participants or any other intermediary will allocate the redemption of Bonds on such basis. If the DTC operational arrangements do not allow for the redemption of the Bonds on a pro rata pass-through distribution of principal basis as discussed above, the Bonds will be selected for redemption, in accordance with DTC procedures, by lot. For purposes of calculation of the pro rata pass-through distribution of principal, pro rata means, for any amount of principal to be paid, the application of a fraction to each denomination of the respective Bonds where (a) the numerator of which is equal to the amount due to the respective Bondholders on a payment date, and (b) the denominator of which is equal to the total original par amount of the respective Bonds. If the Bonds are no longer registered in book-entry-only form, each Beneficial Owner will receive an amount of Bonds equal to the original face amount then beneficially held by that Beneficial Owner, registered in such Beneficial Owner s name. Thereafter, any redemption of less than all of the Bonds of any maturity will continue to be paid to the registered Owners of such Bonds on a pro-rata basis, based on the portion of the original face amount of any such Bonds to be redeemed. Acceleration Upon the occurrence of certain events, the due date for the payment of the principal of the Bonds may be accelerated. See Appendix C -- Summary of Certain Provisions of the Indenture, including Events of Default and Acceleration of Maturity. 6

15 General SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Bonds will be general obligations of the Corporation, payable from payments made by the Corporation under the Indenture and from certain funds held under the Indenture. The Bonds are secured by the Trust Estate, which generally consists of the amounts and securities, including investment income thereon, deposited or required to be deposited with, or held or required to be held by the Trustee under the funds and accounts pursuant to the Indenture. The Bonds are also secured by the 2015B Obligation issued under the Master Indenture as further described herein. Master Indenture Under the Master Indenture, the Obligated Group is authorized to issue Obligations to evidence or secure Indebtedness or Financial Products Agreements not constituting Indebtedness. The obligations of the Corporation under the Indenture will be evidenced and secured by the 2015B Obligation issued by the Obligated Group under the Master Indenture. Under the Master Indenture, the Obligated Group unconditionally and irrevocably covenants that it will pay the principal of and interest and redemption premium, if any, on the Obligations and all other amounts payable under the Master Indenture. See Summary of Certain Provisions of the Master Indenture -- Definitions in Appendix C. The 2015B Obligation will be secured by the Master Indenture, equally and ratably with the existing Obligations, the 2015A Obligation and any other Obligations outstanding from time to time under the Master Indenture. See Other Indebtedness below. The Master Indenture provides that any person may be admitted to the Obligated Group and that any Member of the Obligated Group may withdraw from the Obligated Group upon the satisfaction of certain conditions. Currently the Corporation is the sole Member of the Obligated Group, and the Corporation has no present intention of admitting any other party to the Obligated Group. See Entrance into the Obligated Group and Cessation of Status as a Member of the Obligated Group under Summary of Certain Provisions of the Master Indenture in Appendix C. The Master Indenture may be amended in certain circumstances without the necessity of obtaining the consent of or giving notice to the Holders of Obligations, including amendments necessary to permit any Member of the Obligated Group to affiliate or merge with, on acceptable terms, one or more corporations that provide health care services and which, in the opinion of Counsel, do not materially adversely affect the Holders of Obligations. See Summary of Certain Provisions of the Master Indenture -- Supplemental Master Indentures Not Requiring Consent of Obligation Holders in Appendix C. The Master Indenture may also be amended in certain other circumstances with the consent of the Holders of not less than a majority in aggregate principal amount of Obligations. See Summary of Certain Provisions of the Master Indenture Supplemental Master Indentures Requiring Consent of Obligation Holders in Appendix C. In connection with the issuance of the Bonds, the Master Indenture will be amended as described below under Amendments to Master Indenture. Under certain circumstances, the Obligated Group and the Master Trustee may, without the consent of the Holders of any Obligations or Related Bonds, enter into one or more supplements, amendments, restatements, replacements or substitutions of the Master Indenture to modify, amend, restate, supplement, replace, substitute, change or remove any covenant, term or provision of the Master Indenture, in whole or in part. See Summary of Certain Provisions of the Master Indenture -- Obligation and Document Substitution in Appendix C. Notwithstanding the foregoing, the Corporation has agreed in the Indenture that the Master Indenture may not be replaced or substituted in its entirety unless the consent of a majority in aggregate principal amount of Outstanding Bonds has been secured. Supplements, amendments, restatements, replacements or substitutions of less than the entirety of the Master Indenture are not limited by this provision of the Indenture. See Summary of Certain Provisions of the Indenture Covenants of the Corporation -- Master Trust Indenture in Appendix C. Guaranty Agreement Under the Guaranty Agreement, the Guarantors unconditionally guarantee jointly and severally (i) the full and prompt payment of the principal of and any prepayment premium on the outstanding Obligations when and as 7

16 the same shall become due, whether at the stated maturity thereof, by acceleration, call for prepayment or otherwise, (ii) the full and prompt payment of the interest on the outstanding Obligations when and as the same shall become due, (iii) any other payment required to be made by the Members of the Obligated Group under the Master Indenture and (iv) the full and complete performance by the Members of the Obligated Group of any other covenants, warranties, duties and obligations of the Members of the Obligated Group under the provisions of the outstanding Obligations and the Master Indenture. See Summary of Certain Provisions of the Guaranty Agreement in Appendix C. Currently, the Guarantors consist of the 10 System Hospitals, as well as HH MedStar Health, Inc., Parkway Ventures, Inc., VNA, Inc. and MedStar Enterprises, Inc. In the Guaranty Agreement, each Guarantor agrees to comply with the covenants contained in the Master Indenture as if such Guarantor were a Member of the Obligated Group. Notwithstanding the requirement under the Master Indenture that the Corporation shall cause each Material System Affiliate (except as described in the Master Indenture) to be a party to the Guaranty Agreement, any Guarantor may be released from the provisions of the Guaranty Agreement by complying with the provisions of the Master Indenture relating to the withdrawal of Members from the Obligated Group, and new Guarantors may only be added to the Guaranty Agreement by complying with the provisions of the Master Indenture relating to entry of Members into the Obligated Group. See Summary of Certain Provisions of the Master Indenture -- Entrance into the Obligated Group and -- Cessation of Status as a Member of the Obligated Group in Appendix C. Deeds of Trust The obligations of the Guarantors under the Guaranty Agreement are secured by a separate Deed of Trust, Security Agreement and Financing Statement with respect to the principal hospital facilities and the Pledged Revenues of the System Hospitals (collectively, the Deeds of Trust ). The real property subject to the Deeds of Trust (the Mortgaged Property ) consists generally of the acute care and rehabilitation hospitals and related parking facilities of the System Hospitals. See Summary of Certain Provisions of the Deeds of Trust in Appendix C. The liens on the Mortgaged Property under the Deeds of Trust, except with respect to the facilities of MedStar Southern Maryland Hospital Center, secure all amounts due and payable under the Guaranty Agreement without any limitation regarding the amount recoverable under such Deeds of Trust. The lien under the Deed of Trust with respect to the facilities of MedStar Southern Maryland Hospital Center, however, secures all amounts due and payable under the Guaranty Agreement to a maximum amount equal to $33,600,000, which amount equals the appraised value of such facilities as of June 19, The Deeds of Trust are subject to Permitted Encumbrances. See Summary of Certain Provisions of the Deeds of Trust in Appendix C. The obligations of the Guarantors under the Guaranty Agreement are not secured by a security interest in any personal property of the System Hospitals. While the Deeds of Trust cover substantially all of the acute care hospital facilities, rehabilitation hospital facilities and related parking facilities, they do not cover all property of the System Hospitals. In addition, the Deeds of Trust allow for the release of certain property from the liens created by the Deeds of Trust without the necessity of satisfying any financial tests. Additionally, the Deeds of Trust provide that the Master Trustee shall release property from the Deeds of Trust upon request of the Corporation if the conditions to disposition of property contained in the Master Indenture are satisfied. See Summary of Certain Provisions of the Master Indenture -- Sale, Lease or Other Disposition of Property and Summary of Certain Provisions of the Deeds of Trust -- Covenants and Agreements Relating to the Release of Property and Subordination of Liens in Appendix C. Security Interest in Pledged Revenues Under the Master Indenture and the Deeds of Trust, as security for the payments due thereunder, the Corporation and the System Hospitals, respectively, grant to the Master Trustee a security interest in the Pledged Revenues, subject to certain Permitted Encumbrances. The Pledged Revenues include (a) all receipts, revenues, income and other moneys acquired by or on behalf of the Corporation and the System Hospitals from the operation of any of their facilities whether now existing or hereafter acquired, and all rights to receive the same (including accounts, instruments, chattel paper and general intangibles representing a right to payment constituting revenues of the Corporation or the System Hospitals), whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by the Corporation or the System Hospitals and all proceeds of the foregoing 8

17 and (b) the non-operating revenues of the Corporation and the System Hospitals, including, without limitation, contributions, donations and pledges, whether in the form of cash, securities or other personal property, that are legally available to meet the obligations of the Corporation or the System Hospitals under the Master Indenture and the Guaranty Agreement, respectively. Gifts, grants, bequests, donations and contributions made to the Corporation or the System Hospitals designated at the time of making thereof by the donor or maker as being for certain specific purposes, and the income derived therefrom and all receipts, revenues, income and other moneys subject to Permitted Encumbrances as defined in the Master Indenture and permitted therein, at present or in the future do not constitute Pledged Revenues. The Master Trustee s security interest in the Pledged Revenues may be limited as described herein under Certain Bondholders Risks -- Limitations on Enforceability of Rights and Remedies. Rate Covenant The Members of the Obligated Group agree under the Master Indenture to cause the System Affiliates to charge such fees and rates and to exercise such skill and diligence as to provide income from their Property, together with other available funds, sufficient to pay promptly all payments of principal and interest on all Indebtedness, all expenses of operation, maintenance and repair of their Property and all other payments required to be made under the Master Indenture to the extent permitted by law. If at the end of any Fiscal Year, the Debt Service Coverage Ratio of the System is less than 1.10 to 1, the Obligated Group Agent is required under the Master Indenture to retain a Consultant to make recommendations with respect to the rates, fees and charges of the System Affiliates and the System s methods of operation and other factors affecting their financial condition in order to increase the Debt Service Coverage Ratio to 1.10 to 1 in the succeeding Fiscal Year. The Master Indenture requires each Member, and the Guaranty Agreement requires each Guarantor, to cause each of the System Affiliates, if any, that it controls to follow each recommendation of the Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of such Member) and permitted by law. Notwithstanding the provisions of the Master Indenture described above, if in any Fiscal Year the Debt Service Coverage Ratio of the System is less than 1.10 to 1, the Obligated Group Agent is not required to retain a Consultant if: (i) there is filed with the Master Trustee the written report of a Consultant to the effect that applicable laws or regulations have prevented the System from generating income available for debt service during such Fiscal Year in an amount sufficient to produce a Debt Service Coverage Ratio of the System of 1.10 to 1 or higher; (ii) the report of such Consultant indicates that the fees and rates charged by the System Affiliates are such that the System Affiliates have generated the maximum amount of System Revenues reasonably practicable given such laws or regulations; and (iii) the Debt Service Coverage Ratio was at least 1.00 to 1 for such Fiscal Year. The Obligated Group Agent will not be required to cause a Consultant s report to be prepared more frequently than once every two Fiscal Years if at the end of each Fiscal Year the Obligated Group Agent provides to the Master Trustee an Officer s Certificate or an opinion of counsel to the effect that the applicable laws and regulations underlying the Consultant s report delivered in respect of the previous Fiscal Year have not changed in any material way. Any failure of the Members of the Obligated Group and the Guarantors to generate a Debt Service Coverage Ratio of at least 1.00 to 1 as of the end of two consecutive Fiscal Years will constitute an Event of Default under the Master Indenture and the Guaranty Agreement if, as of the end of the second of such Fiscal Years, the System has less than 55 Days Cash on Hand. No Debt Service Reserve Fund for the Bonds The Bonds will not be secured by a debt service reserve fund. 9

18 Amendments of Master Indenture Although MFC, a Medicaid and Medicare managed care organization operating in Maryland and the District of Columbia, constitutes a Material System Affiliate since it generated in excess of 5.0% of the System s revenues during the past fiscal year, the Master Indenture will be amended at the time of the issuance of the Bonds to exclude MFC from becoming a Guarantor given the regulatory restrictions placed on its assets by Maryland and the District of Columbia, making MFC presently unable to satisfy the obligations of a Guarantor under the Guaranty Agreement. A second amendment to the Master Indenture will be made to eliminate any Material System Affiliate that constitutes a regulated insurance entity (including MFC) from ever becoming a Guarantor. See Summary of Certain Provisions of the Master Indenture Parties to Guaranty Agreement in Appendix C. This amendment will require the consent of the majority of the holders of outstanding bonds secured by Obligations as well as a majority of the holders of outstanding Obligations under the Master Indenture and will become effective once such consent has been obtained. The holders of the Bonds and the 2015 Tax-Exempt Bonds (and the Obligations securing the Bonds and the 2015 Tax-Exempt Bonds) and the holder of each Obligation and bond secured by an Obligation issued after the date of issuance of the Bonds will be deemed to have consented to this amendment by their purchase of the Bonds, the 2015 Tax-Exempt Bonds or such Obligations or such bonds secured by an Obligation, respectively. See Appendix A Non-Acute Subsidiaries and/or Affiliates -- Health Plans herein for a description of the operations of MFC. 10

19 ANNUAL DEBT SERVICE REQUIREMENTS OF SYSTEM LONG-TERM INDEBTEDNESS The following table sets forth for each Fiscal Year ending June 30: (i) the principal due on the Bonds for such period; (ii) the interest due on the Bonds for such period; (iii) the total debt service requirements of the Bonds; (iv) the total debt service requirements of the 2015 Tax-Exempt Bonds; (v) the total debt service requirements of the other System Long-Term Indebtedness for such period; and (vi) the total debt service requirements of the Bonds, the 2015 Tax-Exempt Bonds and the other System Long-Term Indebtedness. Bonds Year Principal Interest Total Total Debt Service on 2015 Tax-Exempt Bonds Total Debt Service on Other System Long-Term Indebtedness (1)(2) Total (1) $ 65,758,622 $ 65,758, $2,831,128 $ 2,831,128 $17,266,492 55,172,308 75,269, $5,155,000 2,779,397 7,934,397 21,031,800 52,369,103 81,335, ,130,000 2,727,586 7,857,586 21,038,225 52,438,551 81,334, ,965,000 2,653,325 7,618,325 21,035,725 52,682,005 81,336, ,730,000 2,542,112 9,272,112 24,396,225 47,666,692 81,335, ,740,000 2,395,618 9,135,618 24,306,975 47,887,643 81,330, ,730,000 2,231,054 8,961,054 24,294,350 48,079,480 81,334, ,770,000 2,051,349 8,821,349 24,280,475 48,232,600 81,334, ,225,000 1,824,139 11,049,139 24,249,725 46,034,208 81,333, ,140,000 1,612,064 6,752,064 24,118,975 50,465,527 81,336, ,100,000 1,439,185 7,539,185 24,057,975 49,733,597 81,330, ,155,000 1,244,677 7,399,677 24,096,350 49,835,844 81,331, ,240,000 1,038,641 7,278,641 24,023,100 50,035,259 81,337, ,330, ,849 7,151,849 23,935,100 50,247,717 81,334, ,400, ,937 6,995,937 23,846,475 50,492,233 81,334, ,490, ,359 6,852,359 23,853,475 50,630,174 81,336, ,595, ,975 6,716,975 23,745,100 50,877,127 81,339, ,720,600 51,038,058 74,758, ,676,725 51,224,356 74,901, ,457,475 63,710,272 78,167, ,403,350 63,903,644 78,306, ,340,350 64,104,117 78,444, ,351,100 64,224,139 78,575, ,250,725 48,866,487 63,117, ,369,850 32,513,025 55,882, ,377,850 32,635,650 56,013, ,360,350 32,778,350 56,138, ,472,350 7,862,725 31,335, ,474,700 7,860,825 31,335, ,472, ,472, ,470, ,470,200 (1) Total debt service on the System Long-Term Indebtedness does not include debt service requirements of the Refunded Bonds. See Other Indebtedness -- Parity Debt. (2) Assumes unhedged variable rate demand obligations bear interest at an annual rate of 3.50% and hedged variable rate demand obligations bear interest at an annual rate of 3.69% and are not required to be purchased or redeemed (other than from sinking fund installments) prior to maturity. Assumes the bank line of credit with an outstanding balance of $129,838,825 and certain indebtedness in an aggregate principal amount of $14,734,957 (see Other Indebtedness -- Other Debt below) bear interest at an annual rate of 3.50% and amortize over 30 years for level debt service. 11

20 OTHER INDEBTEDNESS Parity Debt Outstanding Obligations The 2015B Obligation constitutes an Obligation under the Master Indenture. Upon the issuance of the Bonds, in addition to the 2015B Obligation and the 2015A Obligation, there will remain outstanding approximately $663,855,000 of Obligations constituting long-term debt securing the following revenue bonds (exclusive of the Obligations securing the Refunded Bonds): $139,015,000 aggregate principal amount of the Maryland Authority s Revenue Bonds, Medlantic/Helix Issue, Series 1998A and Series 1998B, $4,590,000 aggregate principal amount of the 2004 Maryland Authority Bonds, $78,435,000 aggregate principal amount of the Maryland Authority s Revenue Bonds, MedStar Health Issue, Series 2011, $38,620,000 aggregate principal amount of the Maryland Authority s Revenue Bond, MedStar Health Issue (2012) (the 2012 Maryland Authority Bond ), $117,785,000 aggregate principal amount of the Maryland Authority s Revenue Bonds, MedStar Health Issue, Series 2013A, $149,760,000 aggregate principal amount of the Maryland Authority s Revenue Bonds, MedStar Health Issue, Series 2013B, $122,850,000 aggregate principal amount of the District of Columbia s Multimodal Revenue Bonds, Medlantic/Helix Issue, Series 1998A (the 1998A District of Columbia Bonds ), $6,400,000 aggregate principal amount of the 1998B District of Columbia Bonds and $6,400,000 aggregate principal amount of the 1998C District of Columbia Bonds (collectively, the Existing Bonds ). All of the Existing Bonds, other than the 1998A District of Columbia Bonds, are fixed rate bonds. The 1998A District of Columbia Bonds are multimodal bonds that are currently variable rate demand obligations backed by bank letters of credit. The Corporation may be required to purchase or redeem the 1998A District of Columbia Bonds prior to maturity upon the occurrence of certain events, including any failure by one or more of the credit facility providers securing such 1998A District of Columbia Bonds to extend its credit facility and the inability of the Corporation to obtain a substitute credit or liquidity facility or convert the interest rate on such 1998A District of Columbia Bonds to an interest mode not requiring a credit or liquidity facility. The interest rate on the 2012 Maryland Authority Bond may be increased in the event of certain changes in the Corporation s ratings. The Corporation maintains a bank line of credit with an outstanding balance of $129,838,825, which is also evidenced and secured by an Obligation. In addition, the Obligated Group issued an Obligation in connection with an interest rate swap agreement with a notional amount of $97,450,000 at September 30, 2014 entered into by the Corporation relating to the 1998A District of Columbia Bonds. See Management s Discussion and Analysis of Operations and Financial Condition -- Interest Rate Swap Agreement in Appendix A. Additional Obligations In addition to the 2015B Obligation, the 2015A Obligation and the existing Obligations, the Corporation may issue additional Obligations under the Master Indenture upon compliance with the requirements thereof. The aggregate principal amount of Obligations that may be issued under the Master Indenture upon compliance with the requirements thereof is not limited. Under the Master Indenture, Obligations may be in the form of promissory notes or other forms of Indebtedness not constituting promissory notes (not including Non-Recourse Indebtedness). Financial Product Agreements and other Obligations that do not constitute Indebtedness also may be authenticated as Obligations under the Master Indenture. Obligations Equally and Ratably Secured The 2015B Obligation will be secured equally and ratably on parity with the outstanding existing Obligations, the 2015A Obligation and any additional Obligations from time to time outstanding under the Master Indenture as to the security of the Pledged Revenues, the Guaranty Agreement and the Deeds of Trust to the extent provided in the Master Indenture. 12

21 Other Debt As of September 30, 2014, in addition to the existing Obligations, approximately $14,734,957 aggregate principal amount of Indebtedness of the Corporation and the System Affiliates was outstanding. See Management s Discussion and Analysis of Operations and Financial Condition -- Liquidity and Capital Resources - - Financing Transactions in Appendix A and Appendix B. The Members of the Obligated Group or any other System Affiliates may issue or incur other Indebtedness on the conditions described in the Master Indenture. See Summary of Certain Provisions of the Master Indenture -- Indebtedness in Appendix C. Future Capital Improvements In addition to the indebtedness related to the Bonds and the 2015 Tax-Exempt Bonds, the Corporation s financial forecast through fiscal year 2018 includes the incurrence of additional debt to fund growth in the Corporation s ambulatory strategy and capital improvements primarily to its District of Columbia facilities in the approximate amount of $175,000,000 in fiscal year 2016 and $300,000,000 in fiscal year With the exception of the Bonds, the incurrence of additional debt, however, has not been approved by the Corporation s Board of Directors and specific projects have not been identified at this time. In the event such indebtedness is incurred which, as indicated above, is not certain at this time, the Corporation expects that it would be issued as or secured by Obligations under the Master Indenture on parity with the outstanding Obligations. Certificate of Need REGULATORY ENVIRONMENT Under current law, certificate of need approval (or, in certain circumstances, a determination of exemption) is required for the development, operation or participation in certain health care projects in the District of Columbia and Maryland. See Market Forces and Environment -- Market Regulation in Appendix A. Maryland Health Services Cost Review Commission General Hospital rate regulation was established by an act of the Maryland legislature in 1971, which created the Maryland Health Services Cost Review Commission or the Rate Commission. The Rate Commission was given broad authority to establish hospital rates and regulate cost containment, quality and financial stability. Under current law, the rates charged for most hospital services by non-governmental Maryland hospitals are subject to review and approval by the Rate Commission pursuant to Sections through of the Health-General Article of the Annotated Code of Maryland, as amended (the Rate Commission Act ). By the terms of the Rate Commission Act, no hospital subject to the Rate Commission Act is permitted to charge for covered hospital services (inpatient services, emergency services and outpatient services provided at the hospital) at rates other than those established by the Rate Commission in accordance with the procedures established under the Rate Commission Act ( All Payor Model ). The Rate Commission is empowered by statute to initiate hospital rate reviews and to review hospital rate applications on an individual basis to assure that (i) the total costs of all hospital services offered by or through a hospital are reasonable, (ii) the hospital s aggregate rates are reasonably related to the hospital s aggregate costs and (iii) rates are charged equitably among all purchasers or classes of purchasers without undue discrimination or preference. The Rate Commission Act provides in part that the Rate Commission, in discharging its duties, shall permit any nonprofit institution subject to its jurisdiction to charge reasonable rates which will permit the institution to provide, on a solvent basis, effective and efficient service in the public interest. The Rate Commission Act states that, in considering a request for change in or initiating a review of rate schedules or other charges, the Rate Commission shall permit any institution subject to the Rate Commission Act to charge rates which will in the aggregate produce sufficient total revenue to enable the institution reasonably to meet all of the obligations and requirements specified in the Rate Commission Act. The Rate Commission Act also provides that, in the 13

22 determination of reasonable rates, the Rate Commission shall take into account all of the costs of complying with the determinations made by the Maryland Health Care Commission (the Health Care Commission ). The Rate Commission Act requires all payors to pay Rate Commission-approved rates for appropriately billed, covered hospital services. Differentials up to 6% are allowed if the payor meets certain conditions. These differentials apply to Medicare and Medicaid as discussed below. Effective January 1, 2014, the State of Maryland and the Centers for Medicare and Medicaid Services ( CMS ) entered into a new agreement for Medicare reimbursements under Maryland s all payor rate-setting system. As a result, the Health Care Commission is transitioning its rate-setting system to conform to the new Medicare requirements and adopting new policies that will apply to all payers. The modernization of the unique Maryland all-payor rate setting system will result in a new All-Payor Model that is intended not only to reduce per capita hospital expenditures but also to improve patient health outcomes. The reforms will take place over the course of the next few years and can be monitored through the publicly available Health Services Commission Biannual Reports prepared for the Maryland legislature. The Rate Commission is transitioning its current methodologies and policies towards a more populationhealth and value-based reimbursement model. These concepts are incorporated into the new Maryland All-Payor Model Agreement described below and are also being implemented nationally in commercial and non-governmental health plans and insurance products based on demonstration models funded by the federal Affordable Care Act (defined hereinafter in the section on Health Care Reform ). The Corporation cannot predict the future impact of changes to the new rate-setting methodology to the financial condition or results of operation of the System. Updated Maryland Medicare Waiver Agreement In 1976, Medicare signed a contract with the Rate Commission agreeing to pay Maryland acute care general hospitals, as an experimental program and subject to certain limitations, on the basis of Rate Commissionapproved rates, less a 6% differential. This contract, commonly referred to as the Medicare Waiver, was in effect from 1977 through 2013, with several renewals. Under the Medicare Waiver, Maryland hospitals were exempted from reimbursement under the Medicare Inpatient Prospective Payment System and Outpatient Prospective Payment System pursuant to Section 1814(b)(3) of the Social Security Act. Continuation of the Medicare Waiver was contingent on Maryland s performance on certain factors, including Maryland s aggregate rate of increase in Medicare cost per hospital admission as compared to the national rate of increase (the Waiver Test ). Since the Waiver Test is primarily focused on inpatient services and factors such as cost-per-discharge and length of stay, the system did not provide regulated hospitals with incentives with respect to population health management and coordinated care and Maryland s performance on the Waiver Test deteriorated over time. Following the enactment of the Affordable Care Act, on February 11, 2014, CMS and the Governor of Maryland, Department of Health and Mental Hygiene and the Rate Commission (collectively, the State ) signed the Maryland All-Payor Model Agreement (the Agreement ) pursuant to Section 1115A(b) of the Social Security Act. Pursuant to the Agreement, at the election of the State, reimbursement under Section 1814(b)(3) of the Social Security Act was terminated and the State elected instead for regulated hospitals to be reimbursed under the terms of the All-Payor Model (the Model or the Waiver Model ) described below. The Agreement replaces the Waiver Test and provides that CMS will waive certain requirements of the Social Security Act as applied to regulated hospitals subject to the conditions of the Agreement. The Agreement covers a performance period of five calendar years (each, a Performance Year ) which commenced January 1, 2014 and ends December 31, 2018 (collectively, the Performance Period ). Performance under the Agreement will be measured using the following five metrics: total inpatient and outpatient hospital cost growth per capita; total hospital cost growth per Medicare beneficiary; transition to population based reimbursement; hospital acquired conditions program; and readmission reduction program. Physician reimbursement is not included in the first five years of the program. 14

23 Prior to the beginning of the fourth Performance Year, the State will submit a proposal for a new model, which must limit, at a minimum, the Medicare per beneficiary total cost of care growth rate, to take effect by no later than December 31, Approval of the new model will be subject to the sole discretion of CMS and would require a separate agreement between the State and CMS. In the event CMS does not approve the new model, or if the Agreement is terminated during the Performance Period, Maryland hospitals will have two years to complete the transition to the national Medicare program, at which time the Agreement will terminate. Under the Agreement, Maryland must continue its all-payor rate-setting system described above under General. All Total Inpatient and Outpatient Hospital Cost Growth Per Capita During the first, second and third Performance Years, the State must limit the cumulative annual all-payor per capita total hospital revenue growth for Maryland residents to an amount less than or equal to the per capita growth ceiling. For the first, second and third Performance Years, the growth ceiling is fixed at 3.58% per capita per year, which represents the State s per capita gross state product ( GSP ) compound annual growth rate from 2002 through In the third quarter of the third Performance Year, the State may, subject to prior approval by CMS, update the annual all-payor per capita total hospital revenue growth limit for the fourth and fifth Performance Years to the State of Maryland s most recent 10-year per capita GSP growth rate. For each Performance Year, by no later than May 1 of the subsequent Performance Year, the State will calculate the applicable Performance Year s all-payor per capita total hospital revenue amount for Maryland residents by dividing: (i) gross revenue for State of Maryland residents served in regulated hospitals (adjusted for changes in the differential to achieve the required Medicare savings of the Model) by (ii) the most recently available population estimates at the time of such calculation. At the same time, the State is required to calculate, for the entire Performance Period, the compounded annual all-payor revenue limit along with the total hospital revenue amount for Maryland residents. Increases in per capita costs may occur due to factors wholly unrelated to the Model, such as the construction of a new hospital facility or the expansion of health care coverage under the Affordable Care Act. Upon any such occurrence, the State may submit to CMS information and data regarding the impact of such factors on the Model and proposed adjustments to the Model to take into account the impact of any such factors. Any adjustments will be made in the sole discretion of CMS. Medicare per Beneficiary Total Hospital Cost Growth Over the Performance Period, the State must produce aggregate savings in Medicare per beneficiary total hospital expenditures for Maryland resident fee-for-service Medicare beneficiaries, regardless of the state in which the services were provided, in an amount equal to at least $330 million. Period: Under the Agreement, the State is to achieve the following savings amounts during the Performance Performance Year 1: Performance Year 2: Performance Year 3: Performance Year 4: Performance Year 5: no savings $49,500,000 ($49.5 million in cumulative savings) $82,500,000 ($132 million in cumulative savings) $115,500,000 ($247.5 million in cumulative savings) $82,500,000 ($330 million in cumulative savings) For each Performance Year, CMS will calculate the Medicare aggregate savings for State of Maryland Medicare per beneficiary total hospital expenditures (collectively, the Expenditures ) by adding the (i) Medicare per beneficiary inpatient hospital expenditures and (ii) Medicare per beneficiary outpatient hospital expenditures. The Expenditures for 2013 will be used to establish a baseline with respect to the actual Medicare per beneficiary total hospital expenditures for State of Maryland Medicare fee-for-service beneficiaries (the Medicare Baseline ). The Medicare Baseline will be trended forward by the actual growth rate in national Medicare per beneficiary 15

24 hospital expenditures to establish a benchmark (the Medicare Benchmark ). For each Performance Year, the aggregate savings will be determined by comparing the actual Expenditures to the Medicare Benchmark. CMS will calculate the required Medicare savings for each Performance Year by comparing the growth rate from the initial Medicare Baseline, regardless of the state in which the services were provided, to the national growth rate in Medicare per beneficiary total hospital expenditures for fee-for-services beneficiaries. CMS will make adjustments to the Medicare savings calculations, as necessary, to avoid accounting for, and payment of, duplicate amounts made to or received by hospitals in the State of Maryland that are participating in any other existing or future Medicare program or model. To assure a fair comparison, CMS will adjust national Medicare fee-for-service expenditures in a manner similar to any adjustments made for State Medicare fee-for-service expenditures. Under the Agreement, the State will require hospitals participating in Medicare programs or models involving shared savings to provide information to the State at least annually respecting the amount of any shared savings payments distributed to the hospital (the Shared Savings ), regardless of the entity receiving the payment from CMS, and CMS will adjust the State s annual Medicare savings amount taking into account the Shared Savings. As in the case of measuring the growth in hospital costs per capita, in the event of increases in Medicare per beneficiary costs that are unrelated to the Model, such as the construction of a new hospital facility or the expansion of health care coverage under the Affordable Care Act, the State may submit to CMS information and data regarding the impact of such factors on the Model and suggestions on how to adjust it based on such factors. Any adjustment will at the sole discretion of CMS. Population Based Revenue Over the course of the Performance Period, the State must facilitate the transfer of all Regulated Revenue (as defined below) for State residents to Population Based Payment Reimbursement (as defined hereafter). Population Based Payment Reimbursement is a hospital payment that is directly related to specific population or establishes a fixed global budget for hospitals based upon services unrelated to a specific population, but rather, related to historical trends, the hospital service area or residents served through innovative care models. Regulated Revenue is defined under the Agreement as the revenue earned by regulated hospitals for which the State has agreed to reimburse on the basis of the rates established under the Model. Beginning with the second Performance Year, the State will report the percentage of all Regulated Revenue for Maryland residents under Population-Based Payment Reimbursement for the previous Performance Year. This percentage will be calculated by placing all Regulated Revenue for Maryland residents, approved by CMS as Population Based Payment reimbursement, as the numerator with the denominator being the figure that includes all Regulated Revenues for State residents. Based on this formula, the following minimum percentages must be met: Performance Year 2: 50% Performance Year 3: 60% Performance Year 4: 70% Performance Year 5: 80% The State will subject any Regulated Revenue that is not covered under a Population-Based Payment approach to a volume adjustment system with use of variable cost factors, update factors, and a volume governor, so that such hospitals operate within the all-payor and Medicare revenue limitations prescribed by the Model. The Rate Commission may adjust such factors on a more specific regional or hospital basis to assure accountability and compliance with the terms of the Agreement. Rate Setting Adjustments Under New Model In fiscal year 2014, a majority of regulated Maryland hospitals entered into a rate-setting agreement with the Rate Commission which, among other things, shifted the per-case rate system to a structure under which a global revenue maximum was established for the hospital (a Global Budget Revenue or GBR ). The GBR program is a revenue constraint and quality improvement system to provide hospitals with financial incentives to manage their 16

25 resources efficiently in order to decrease the rate of increase in health care costs and improve health care delivery processes and outcomes. Under the GBR program, total revenue for the hospital is capped at a pre-determined amount calculated using permanent base revenue. Each hospital is required to adjust its rates from time to time in order to reflect changes in admissions so as not to exceed the revenue maximum limit. The Rate Commission expects to update each hospital s Global Budget Revenue annually with positive or negative adjustments for inflation, assessments, performance, infrastructure improvements and population changes. The Rate Commission is currently considering the appropriate methodology for taking into account changes in market share. Waiver of Certain Medicare Program Conditions Under the Agreement, CMS waives compliance with certain elements of the national Medicare program, subject to the State s compliance with certain terms of the Agreement. Waiver of compliance with the Medicare Hospital Readmissions Reduction Program is based upon the State s agreement to comply with the Maryland Readmissions Reduction Program (described below). Waiver of compliance with the Medicare Hospital Acquired Conditions Program is based upon the State s agreement to comply with the Maryland Hospital Acquired Conditions Program (described below). The waiver of compliance with Medicare Hospital Value Based Purchasing Program is contingent on the State s submission of an annual report that provides satisfactory evidence that the State operates a similar program that achieves or surpasses the results in terms of patient health outcomes and cost savings as required by the Medicare Value Based Purchasing Program. If the State fails to meet any of the conditions to these waivers, it must submit a Corrective Action Plan ("CAP") to CMS. If the State cannot correct the failure, CMS may terminate the waiver of compliance with the particular program and the State must comply with the applicable national Medicare requirements. Maryland's Readmissions Reduction Program began in July 2011 as a voluntary revenue constraint program developed by the Rate Commission which provided hospitals with a financial incentive to more effectively coordinate care and reduce unnecessary readmissions to their facilities. An inpatient case is considered a readmission to the hospital if the patient is admitted to the same facility (intra-hospital readmission), or another hospital in the same hospital system (intra-system readmission in the case where linked system hospitals are treated as a single entity for purposes of this methodology) within 30 days of the discharge of the initial admission of the same patient. In April 2014, the Rate Commission approved a new Readmission Reduction Incentive program, which provides a potential 0.5% revenue increase in rate year 2016 for hospitals that had at least a 6.76% reduction in riskadjusted readmissions during calendar year 2014 compared to Maryland Hospital Readmissions Reduction Program Under the Agreement, the State is required to reduce the aggregate Medicare 30-day unadjusted all-cause, all-site readmission rate for Medicare fee-for-service beneficiaries, such that by the end of the fifth year of the Performance Period, the readmission rate for Medicare fee-for-service beneficiaries of Maryland hospitals must be equal to or less than the national rate (the Maryland Readmissions Reduction Program ). If, in a given Performance Year, Maryland hospitals fail to outperform the national readmission rate change by an amount equal to or greater than the cumulative difference between Maryland hospitals and national readmission rates in the base period divided by five, CMS may require a corrective action plan or terminate the Agreement. Maryland Hospital Acquired Conditions Program Under the Agreement, the State is required to achieve an aggregate 30% reduction of potentially preventable conditions, which are defined as either harmful events (e.g., accidental laceration during a procedure) or negative outcomes (e.g., hospital acquired pneumonia) that may result from the process of care and treatment rather from a natural progression of the underlying disease (the Maryland Hospital Acquired Conditions Program ). 17

26 Continuation of Indirect Medical Education and Graduate Medical Education The Rate Commission will continue to include in rates indirect medical education payment and graduate medical education and apply those rules to regulated hospitals as it would to hospitals not paid under the Model. Termination of Model Under the Agreement, notice will be provided to the State upon the determination by CMS of the occurrence of one of the following events (a Triggering Event ): (i) a material breach of any provision of the Agreement; (ii) determination by CMS that the State has not produced aggregate savings in the Medicare per beneficiary total hospital expenditure for State of Maryland resident fee-for-service beneficiaries, regardless of the state in which the service was provided, for two consecutive Performance Years; (iii) determination by CMS that the State failed to meet the cumulative target set forth for a Performance Year by a total of $100,000,000 or more; (iv) determination by CMS that the annual growth rate in Medicare per beneficiary total cost of care for State of Maryland residents, regardless of the state in which such residents receive service, is greater than one percentage point above the annual national Medicare per beneficiary total cost of care growth rate during a single Performance Year; (v) effective in the second Performance Year, a determination by CMS that the annual growth rate in Medicare per beneficiary total cost of care for State residents, regardless of the state in which such residents receive service, is greater than the annual national Medicare per beneficiary total cost of care growth rate for any two consecutive Performance Years; (vi) determination by CMS that the percentage of Medicare hospital revenue attributable to non-resident Medicare beneficiaries is one and one-half percentage points above the percentage level of the calendar year 2013; (vii) determination by CMS that the quality of care provided to beneficiaries has deteriorated; and (viii) determination by CMS that the State or Regulated Maryland Hospitals have taken actions that compromise the integrity of the Model or the Medicare trust funds. The notice will be provided no later than six months following the end of a Performance Year if the Triggering Event is one of the specified items enumerated in (ii) through (vii) above. Notice may be provided at any time for any other material breach of any provision of the Agreement. Upon receipt of any such notice, the State must provide a written response to CMS which may either accept the response as sufficient or require the State to submit a CAP. CMS will consider the factors surrounding the Triggering Event and determine, in its sole discretion, whether the State s response is sufficient and no further action is warranted or if a CAP is required. A CAP must be successfully implemented within one year from the date of the notice. If CMS determines that the State has not successfully implemented the CAP, then CMS may determine to modify, amend or rescind any aspect of the Model or may immediately terminate the Performance Period of the Agreement. The State may terminate the Agreement at any time, for any reason, upon 180 days notice to CMS. If the Agreement is terminated, the State has two years to transition to payment under the national Medicare program. Rates at Maryland Hospitals The rate structure for Maryland Hospitals within the System for all hospital-based services is subject to review and approval by the Rate Commission. Under the Rate Commission's rate-setting system, such Maryland Hospitals inpatient and outpatient charges are the same for all patients regardless of payor, including Medicare and Medicaid. As noted above, to implement the Agreement with CMS, the Rate Commission has introduced new revenue arrangements, including the GBR model. The Corporation entered into a GBR arrangement covering five of the seven Maryland Hospitals during the year ended June 30, In August 2014, the Corporation entered into GBR arrangements for its remaining two Maryland Hospitals. The Corporation recognized hospital inpatient and outpatient revenue under the new arrangement for the year ended June 30, 2014 and for the quarter ended September 30, District of Columbia Hospital Rates In contrast to the State of Maryland, the District of Columbia does not regulate the rates charged by hospitals. The District of Columbia does not impose a single payor rate structure; instead, hospitals are free to set 18

27 their own rates for services. However, the ability to recover those rates is subject to, among other things, contracts with third-party payors, such as Medicare, Medicaid, private health plans and managed care plans. As noted above and explained further under Certain Bondholders Risks below, one of the goals of the Affordable Care Act was to promote a transition from a fee-for-service, procedure-based reimbursement model towards a pay for performance, quality outcomes-based reimbursement model. Public and private third-party payors are incorporating pay for performance programs into their contracts with hospitals. In the District of Columbia, these programs may provide for incentive payments for quality performance and some portion of rate-based revenues may be put at risk and subject to performance metrics established by the health care plans. Maryland Hospital Bond Program In 1985, the Maryland General Assembly (the General Assembly ) enacted comprehensive health care legislation for the purpose of encouraging the reduction of excess capacity in the Maryland health care system. Pursuant to this legislation, the Maryland Hospital Bond Program (the Bond Indemnification Program or the Program ) was created to preserve the access of Maryland health care facilities to adequate financing by establishing a program to facilitate the refinancing and payment of certain public obligations of a closed or delicensed hospital. The terms of the Program are set forth in Part IV of the Maryland Health and Higher Educational Facilities Authority Act, consisting of Sections through , inclusive (collectively, Part IV ). As defined in Part IV, public obligations include all bonds, notes, evidences of indebtedness or other obligations for the payment of borrowed money issued by the Maryland Authority, the State of Maryland, any political subdivision thereof or any of their instrumentalities, except any obligation or portion of an obligation (a) insured by an effective municipal bond insurance policy, if a hospital voluntarily closes, or (b) issued to finance a facility that is used primarily (i) to provide outpatient services at a location other than the hospital, or (ii) by physicians who are not employees of the hospital to provide services to nonhospital patients. Part IV provides that the Bond Indemnification Program shall provide for the payment and refinancing of public obligations of a hospital if: (1) the hospital is (a) closed in accordance with Section (l) of the Health-General Article of the Annotated Code of Maryland, as amended, or (b) delicensed in accordance with Section of the Health-General Article of the Annotated Code of Maryland, as amended, upon the petition of the Health Care Commission and the Rate Commission after efforts to encourage the hospital to reduce its excess capacity have failed; (2) a public obligation issued on behalf of the hospital is outstanding; (3) the hospital plan for closure or delicensure and the related financing plan is acceptable to the Secretary of DHMH and the Maryland Authority; and (4) in the case of the 2015 Tax-Exempt Bonds and any other public obligations issued after October 1, 2008 (a) the Rate Commission determines that implementation of the Program is in the public interest, taking into account the amount of system-wide savings to the health care system in the State of Maryland that might be expected as a result of the closure, and (b) the hospital provides to the Health Care Commission a closure plan including the hospital s plan for the provision of care to its patients and the population in its service area. Under the Program, the Rate Commission must assess a fee on all Maryland hospitals whose rates have been approved by the Rate Commission in an amount sufficient to pay the public obligations or any bonds that the Maryland Authority issues under Section of Part IV to refinance public obligations of the closed or delicensed hospital. The fee assessed each hospital is proportionate to that hospital s gross patient revenues compared with the total gross patient revenues of all Maryland hospitals. In the event that the Rate Commission is terminated by law, the Secretary of DHMH shall impose the fee. 19

28 The Bond Indemnification Program has been implemented three times to provide for the payment of approximately $25,480,000 aggregate principal amount of public obligations of Maryland hospitals closed in accordance with the Program. In connection with a 1991 closure of a hospital, at the request of the health system of which the closed hospital was a member, and in accordance with the Maryland Health and Higher Educational Facilities Authority Act, the Maryland Authority developed a plan to provide for the payment of the obligations which included the assessment by the Rate Commission of fees on Maryland hospitals sufficient to redeem the obligations on various optional redemption dates occurring prior to their maturity. All of the outstanding obligations were paid with these fees and liquidation proceeds from the sale of the assets of the closed hospital. In 1992 and 1999, the Maryland Authority developed plans to provide for the payment of two issues of public obligations issued on behalf of member hospitals of two health systems in accordance with the Bond Indemnification Program. In each case, the Maryland Authority issued its revenue bonds to retire the public obligations on their earliest optional redemption dates, and these bonds were in turn paid from fees assessed Maryland hospitals under the Bond Indemnification Program and, in the case of the 1992 bonds, proceeds of the liquidation of the hospital s assets. The 1992 bonds and the 1999 bonds have been paid in full. The Bond Indemnification Program may also be used to provide for the payment of certain closure costs of a closed or delicensed hospital if the Rate Commission determines, after consideration of the system-wide savings to the State of Maryland health care system expected to result from the closure or delicensure of the hospital, that the payment of such costs is necessary or appropriate to encourage and assist the hospital to close or to implement the Program. The Bond Indemnification Program does not provide for the payment of any hospital obligations unless the hospital closes or is delicensed as described above. Accordingly, default in the payment of bonds or other default, including the initiation of bankruptcy proceedings by or against a hospital, would not, in and of itself, require or permit the implementation of the Program. Further, there can be no assurance that the Program will not be modified or eliminated by future legislation amending or repealing Part IV. The initiation of bankruptcy or similar proceedings by or against a closed or delicensed hospital could preclude or substantially delay the implementation of the Program with regard to the public obligations of such hospital. Nonprofit Health Care Environment As nonprofit tax-exempt organizations, the Corporation and the System Affiliates are subject to federal, state and local laws, regulations, rulings and court decisions relating to their organization and operation, including their operation for charitable purposes. At the same time, the Corporation and the System Affiliates conduct significant business transactions. As a result, the Corporation and the System Affiliates must ensure consistency between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of complex health care organizations. The operations and practices of nonprofit, tax-exempt hospitals are routinely challenged or criticized for inconsistent or inadequate compliance with the regulatory requirements for, and societal expectations of, nonprofit charitable tax-exempt organizations. An overarching concern is that nonprofit hospitals may not be providing community benefits that equal or exceed the benefit received from their tax-exempt status. In addition to required compliance with federal and state statutes and regulations, such as those related to the Medicare and Medicaid programs, the core business practices of health care organizations are routinely examined. Areas which have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation and private use of facilities financed with taxexempt obligations. Questions regarding the business practices of nonprofit hospitals have come from a variety of sources, including state attorneys general, the Internal Revenue Service (the Internal Revenue Service or IRS ), labor unions, the United States Congress, state legislatures, the press and patients, and in a variety of forums, including hearings, audits and litigation. In 2004, the IRS began a compliance program to measure compliance by tax-exempt organizations with prohibitions on excessive compensation of and benefits to officers and other insiders. In 2009, the IRS issued its Hospital Compliance Project Final Report (the IRS Final Report ), which indicated that the IRS will continue to heavily scrutinize executive compensation arrangements, practices and procedures of tax-exempt hospitals and other 20

29 tax-exempt organizations and, in certain circumstances, may conduct further investigations or impose fines on such organizations. The IRS revised the Form 990 required to be filed by tax-exempt organizations beginning in 2010 to include a new schedule, Schedule H, which hospitals must use to report their community benefit activities, including the cost of providing charitable care and other information pertinent to their tax-exempt status. The IRS initiative to ensure that an organization s tax exempt status is used for charitable purposes and not for any private benefit includes a schedule to the Form 990 return (Schedule K) to be filed annually by tax-exempt organizations. Schedule K 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. The Affordable Care Act expanded these initiatives and imposes additional requirements for tax-exemption and reporting obligations, including obligations to adopt and publicize a financial assistance and emergency medical care policies; limit charges to patients who qualify for financial assistance to the lowest amount charged to insured patients; and control billing and collection processes. See Certain Bondholders Risks -- Health Care Reform. Additionally, tax-exempt hospitals must conduct community health needs assessments and adopt an implementation strategy to meet the health needs identified in the assessment at least once every three years, effective for tax years beginning after March 23, Failure to satisfy these conditions may result in the imposition of excise taxes and the loss of tax-exempt status. The foregoing are some examples of certain challenges facing nonprofit health care organizations. These challenges, and any examinations, legislation, regulations, judgments or penalties, could have a material adverse effect on the Corporation or any System Affiliate and, in turn, its ability to make payments under the Indenture, Guaranty Agreement and the 2015B Obligation. CERTAIN BONDHOLDERS RISKS Payment of the Bonds is dependent primarily upon the ability of the Corporation and the System Affiliates to generate revenues sufficient to provide for the payment of the Bonds while meeting their operating expenses and other cash requirements. Future revenues and expenses of the Corporation and the System Affiliates are subject to future events and conditions that cannot be determined at this time. The paragraphs below discuss certain Bondholders risks, but are not intended to be a complete enumeration of all risks associated with the purchase or holding of the Bonds. The order in which such risks are presented does not necessarily reflect the relative importance of such risks or the likelihood that any of the events or circumstances described below will occur or exist. General No representation can be made or assurance given that revenues will be realized by the Corporation or any future Members of the Obligated Group, the Guarantors and other System Affiliates in amounts sufficient to make payments required by the Indenture and the 2015B Obligation and thus to pay maturing principal, Make-Whole Redemption Price, if any, and interest on the Bonds. Future revenues and expenses of the System are subject to, among other things, the capabilities of the management of the Corporation and the System Affiliates and future economic conditions and other conditions which are unpredictable, and which may affect the revenues of the System Affiliates and, therefore, payments of principal of and interest on the Bonds, as well as other obligations of the Corporation and the System Affiliates. Future economic and other conditions, including (without limitation) the demand for health care services, economic trends and events, technological developments and demographic changes, the confidence of physicians and the public in the Corporation and the System Affiliates, malpractice claims and other litigation, competition, 21

30 changes in the methods and rates of payment for health care services as well as increased costs and changes in government regulations, including Internal Revenue Service policy regarding tax exemption, may adversely affect the future financial condition of the Corporation and the System Affiliates and, consequently, their ability to make payments of the principal of and Make-Whole Redemption Price, if any, and interest on the Bonds. There can be no assurance given that the financial condition of the Corporation and the System Affiliates and utilization of the facilities of the System Affiliates will not be adversely affected by other future events. Obligated Group The Master Indenture provides that other entities may be admitted to the Obligated Group from time to time and that Obligated Group Members may withdraw from the Obligated Group upon the satisfaction of certain conditions. See Summary of Certain Provisions of the Master Indenture -- Entrance into the Obligated Group and -- Cessation of Status as a Member of the Obligated Group in Appendix C. Thus, there is no assurance that any person other than the Corporation that may become an Obligated Group Member will remain a part of the Obligated Group. Guarantors The Guaranty Agreement provides that any Guarantor may be released from the provisions of the Guaranty Agreement by complying with the provisions of the Master Indenture relating to the withdrawal of Members from the Obligated Group, and new Guarantors may be added to the Guaranty Agreement by complying with the provisions of the Master Indenture relating to entry of Members into the Obligated Group. See Summary of Certain Provisions of the Guaranty Agreement in Appendix C. Discretion of Board and Management The Corporation, any future Members and the System Affiliates, including the Guarantors, may enter into transactions that could materially affect the business, organizational structure and control of the Corporation, such future Members, such Guarantors and the System Affiliates, subject to certain limitations contained in the Master Indenture and the Guaranty Agreement. Such transactions could include, for example, divestitures of Guarantors or other System Affiliates, substantial new joint ventures, and mergers, consolidations or other forms of affiliations in which control of the Corporation, any future Member, any Guarantor and any other System Affiliate could be materially changed. Given the pace of change in the health care industry, it is likely that the Corporation will be presented with opportunities to enter into transactions of such magnitude or significance. The ability of the Guarantors to perform under the Guaranty Agreement and the ability of the Corporation, any future Members and the System Affiliates to generate revenues sufficient to pay debt service on the 2015B Obligation is dependent in large measure on the decisions of the Corporation s Board and management with respect to such opportunities. General Economic Conditions, Bad Debt and Investment Performance The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd Frank Act ), enacted in response to the disruptions in the credit and financial markets, has had a broad impact on the U.S. financial and credit markets, including significant regulatory and compliance changes. In addition, many of the requirements called for in the Dodd-Frank Act have yet to be implemented and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the remaining provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on the System is unclear. The health care sector has been materially adversely affected by these developments. The consequences of these developments have included, among others, realized and unrealized investment portfolio losses, reduced investment income, limitations on access to the credit markets, difficulties in extending existing or obtaining new liquidity facilities, difficulties in remarketing revenue bonds subject to tender, expenditure of internal liquidity to fund tenders of revenue bonds, expenditure of funds to restructure debt capital and increased borrowing costs. 22

31 The health care sector continues to experience decreased philanthropic support. Patient service revenues and inpatient volumes have not increased as historic trends would otherwise indicate. Increased cost-sharing in employer-provided health care coverage and changes in the employment market generally have resulted in increases in self-pay admissions, increased levels of bad debt and uncompensated care and reduced availability and affordability of health insurance. The recession also increased stresses on the budgets of states, including the State of Maryland and the District of Columbia where the Corporation and the System Affiliates are located, potentially resulting in reductions in Medicaid payment rates or Medicaid eligibility standards, and delays of payment of amounts due under Medicaid and other state or local payment programs. Some of the challenges that were caused by the market turmoil are further highlighted below. The reader is advised to refer to Appendix A of this Offering Memorandum for specific information about the effects of these factors upon the recent financial performance and financial condition of the Corporation and the System Affiliates, and upon their investment and debt portfolios. In particular, reference is made to information in Appendix A under the caption heading Management s Discussion and Analysis of Operations and Financial Condition. Impact of Investment Performance. The System has significant holdings in a broad range of investments. Investment income (including both realized and unrealized gains on investments) may contribute significantly to the Corporation s financial results. Market fluctuations have affected and will likely continue to affect materially the value of those investments and those fluctuations may be and historically have been material. The state of the economy and market disruptions may exacerbate the market fluctuations. Reduction in investment income and the market value of its investments may have a negative impact on the financial condition of the Corporation and the System Affiliates, including their ability to fund capital expenses from cash and investments. See Appendix A for a more detailed description of the System s investment policy and the System s investment performance for the fiscal years ended June 30, 2014 and In addition, the historically low interest rate environment has caused many organizations to reduce the discount rate used to measure liabilities under defined benefit pension plans, resulting in increased liabilities and the need to increase funding levels under these plans. See Appendix B, note 7 for a more detailed description of the System s retirement plans. Access to Credit Markets. Adverse conditions in the credit markets may limit the ability of the Corporation to borrow to fund capital expenditures and increase borrowing costs and may result in the postponement or revision of planned and approved capital projects, which may be integral to the financial condition and operations of the Corporation and the System Affiliates. Inability of Liquidity Providers to Purchase Variable Rate Bonds. Broad economic factors, including the effects of the recent years recession, have negatively impacted the operations of financial institutions and likely will continue to do so, including those that provide liquidity support for the Corporation s variable rate bonds. In addition, the effect of certain federal regulatory changes that have been enacted, including the creation of new federal agencies to identify and respond to risks to the financial stability of the United States, have adversely affected financial institutions and may continue to do so. As a result, no assurance can be given that liquidity facility providers will provide funds to purchase tendered variable rate bonds or honor draws on the liquidity facilities to fund such purchases. Difficulty Obtaining New Liquidity Facilities or Extensions to Existing Liquidity Facilities. Credit market disruption has caused a number of financial institutions to restrict lending, including the extension of liquidity and credit facilities supporting tax-exempt bonds. No assurance can be given that the Corporation s existing liquidity facility providers will renew existing liquidity facilities or renew them on terms that the Corporation considers cost-effective, or that the Corporation will be able to obtain alternate liquidity facilities for its variable rate bonds or convert such bonds to a mode for which liquidity facilities are not required. Federal Budget Cuts. The Budget Control Act of 2011 (the Budget Control Act ) mandated significant reductions and spending caps on the federal budget for fiscal years 2012 through The Budget Control Act also created a Joint Select Committee on Deficit Reduction (the Super Committee ) to develop a plan to further reduce the federal deficit by $1.5 trillion on or before November 23, As the Super Committee failed to act before the mandated deadline, a 2% reduction in Medicare spending, among other reductions, was to take effect beginning January 1, 2013 in a process known as sequestration. 23

32 On January 2, 2013, President Obama signed into law the American Taxpayers Relief Act, which delayed sequestration until April 1, 2013 for Medicare providers and March 1, 2013 for all other reductions. In December 2013, the Bipartisan Budget Act of 2013 was enacted, which extended through 2023 the 2% reduction in Medicare spending. The Bipartisan Budget Act of 2013 also included restructuring of Medicaid disproportionate share payments ( DSH payments ) reductions by delaying the fiscal year 2014 DSH payment cuts until fiscal year 2016, but increasing the overall level of reductions and extending cuts through fiscal year On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014 which further extended numerous Medicare reimbursement provisions, including extending the delay in Medicaid DSH payments reductions by one year and making additional reductions through 2024, preventing the Medicare reimbursement cuts scheduled for physicians treating Medicare patients that were to be effective as of April 1, 2014, replacing the proposed cuts with a 0.5% increase through December 31, 2014 and a 0% increase from January 1 until April 1, 2015 and extending the ICD- 10 transition for one year. See International Classification of Diseases, 10th Revision Coding System below. 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. 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 Corporation and the System Affiliates. 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. Reductions in Medicare or Medicaid spending and any alternatives may have a material adverse effect upon the financial condition of the Corporation and the System Affiliates. Health Care Reform In March 2010, the United States Congress enacted the Patient Protection and Affordable Care Act (the PPACA ) and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act and, together with the PPACA, the Affordable Care Act ), modifying various provisions of the PPACA. The comprehensive health care reform mandated by the Affordable Care Act aims to expand the availability of health insurance coverage, control the costs of health care and improve the manner in which health care is delivered. The Affordable Care Act requires all individuals to purchase health insurance or pay a tax, with hardship exceptions; substantially expands Medicaid coverage; provides premium subsidies to certain individuals; imposes certain taxes on individuals and employers; creates insurance pooling mechanisms or state run health insurance exchanges; imposes new requirements on the insurance industry regarding access and coverage; provides for certain cost containment mechanisms and new models of care delivery; and includes provisions designed to reduce Medicare spending and improve the quality of outcomes and health system performance. Funding cutbacks in Medicare are to be achieved by, among other means, reducing Medicare and Medicaid Disproportionate Share Hospital (DSH) payments and annual market basket updates (updates which are used to adjust Medicare payments for inflation) for inpatient hospitals and other Medicare providers. DSH payments cover the increased costs of hospitals that provide a disproportionate amount of care to uninsured patients and low income patients covered by Medicaid. Although these provisions will not directly impact Maryland hospitals as long as the Waiver Model remains in effect, reductions in Medicare payments nationally are likely to create pressures to enact payment restrictions in Maryland. A number of System Affiliates are located in the District of Columbia and therefore are not covered by the Maryland rate-setting system. See Regulatory Environment -- Maryland Health Services Cost Review Commission. The Affordable Care Act also establishes a Medicare shared savings program that promotes accountability for the care of Medicare beneficiaries and encourages coordination of care and other efficiencies through entities called Accountable Care Organizations ( ACOs ). See Alliances and Affiliations with Physicians, Hospitals and Other Healthcare Providers below. The Affordable Care Act extends existing pay for performance initiatives for hospitals and creates a valuebased purchasing program (VBP) for hospitals that are paid under Medicare s inpatient prospective payment system ( PPS ). Under the VBP program, incentive payments are available to hospitals that achieve certain quality performance measures during performance periods. Hospitals that fail to report certain quality measures or satisfy 24

33 the performance standards are subject to a decrease in their Medicare payments. Funding for the VBP program comes from withholding a percentage of annual reimbursement payments to hospitals. In the first year of the program (Fiscal Year 2013), the withhold was 1 percent of certain Medicare inpatient payments; in the second year of the program, Fiscal Year 2014, the withhold increased to 1.25 percent. CMS published a final rule addressing standards through Fiscal Year 2019 in August, 2013 and continues to implement the VBP with annual updates to the performance standards and measures. As noted above, under the new Waiver Agreement, Maryland has a waiver from the VBP contingent on the State s submission of a report that provides evidence of a similar state program each year and therefore the exemption is not guaranteed to continue. It is unclear what effect the VBP program will have on the revenues of System Affiliates in Washington, D.C. The impact of the Affordable Care Act on Maryland s rate-setting system in general and on the Corporation and its System Affiliates in particular cannot be predicted at this time, and the uncertainty of that impact is likely to continue until implementing regulations are finalized and the provisions of the Affordable Care Act are fully implemented. Possible impacts on the System include, without limitation, significant regulatory changes that increase the cost of operations; increased activity by government agencies regarding fraud, waste and abuse; decreased reimbursements for hospital services from third party payors, including Medicare and Medicaid; significant changes to current payment methodologies for hospital services; and changes to costs and expenses of providing health insurance coverage to hospital employees. Although many of the changes are not expected to directly affect Maryland hospitals, the long-term impact of such changes on the continuation of the Medicare Waiver in Maryland is uncertain, and it is likely that revenue increases approved by the Rate Commission for Maryland hospitals will be constrained as regulators attempt to gauge the impact on Medicare spending nationally. Expansion of Medicaid coverage may result in a significant shift in the payor mix of the System. Increased insurance coverage and a reduction in the number of uninsured patients could result in increased demand for the services of the System, straining the existing operating capacity of the facilities of the System, and is likely to create a need to recruit or employ additional physicians and other health services providers to meet increased demand. The Affordable Care Act also establishes requirements for any organization that operates at least one hospital facility to qualify as an exempt organization under Section 501(c)(3) of Internal Revenue Code of 1986, as amended (the Internal Revenue Code or the Code ). Section 501(r) of the Code and final regulations that became effective December 29, 2014 impose substantial financial and administrative requirements on hospitals, among others: (i) hospitals are required to conduct a community needs assessment at least every three taxable years and adopt an implementation strategy to meet the community needs identified through such assessment; (ii) hospitals must adopt, implement and widely publicize a written financial assistance policy and an emergency medical care policy; (iii) hospitals must limit charges to individuals who qualify for financial assistance under the hospital s financial assistance policy to no more than amounts generally billed to individuals who have insurance covering such care and refrain from using gross charges when billing such individuals; and (iv) hospitals may not undertake extraordinary collection actions (even if otherwise permitted by law) against individuals without first making reasonable efforts to determine whether the individuals are eligible for assistance under the hospitals financial assistance policies. Failure to complete a community health needs assessment in any applicable three-year period can result in a financial penalty or revocation of the hospital s status as a Section 501(c)(3) organization. The Affordable Care Act requires the Secretary of the Treasury, in consultation with the Secretary of the Department of Health and Human Services ( HHS ), to submit annually a report to Congress with information regarding the levels of charity care, bad debt expenses and unreimbursed costs of government programs, as well as costs incurred by tax-exempt hospitals for community benefit activities. The Secretary of the Treasury, in consultation with the Secretary of HHS, must conduct a study of the trends in these amounts, and submit a report on the study to Congress not later than March 23, These statutorily mandated requirements for periodic review are expected to increase IRS surveillance over such organizations and may increase the likelihood of IRS examinations challenging the Section 501(c)(3) status of hospitals. In addition, submission of a report to Congress relating to community benefit provided by Section 501(c)(3) hospital organizations may increase the likelihood that Congress will consider additional requirements for Section 501(c)(3) hospitals in the future. Some of the provisions of the Affordable Care Act took effect immediately, while others will take effect or will be phased in over a time period extending as many as 10 years following the date of its enactment. Due to the complexity of the Affordable Care Act, there have been numerous delays in the implementation and enforcement of various market reforms required by the Affordable Care Act. The Affordable Care Act has and will continue to 25

34 generate substantial regulations with significant effects on the healthcare industry and third-party payors. In response, third-party payors and suppliers and vendors of goods and services to healthcare providers are expected to impose new and additional contractual terms and conditions. Thus, the healthcare industry will continue to be subjected to significant new statutory and regulatory requirements and commercial contract terms and conditions, and consequently to structural and operational changes and challenges, for a substantial period of time. The constitutionality of the Affordable Care Act has been challenged on numerous fronts and survived most challenges to date. On June 28, 2012, the Supreme Court of the United States (the Supreme Court ) issued its opinion regarding several challenges to the Affordable Care Act and specifically addressed: (i) the constitutionality of the mandate on individuals to obtain health insurance; (ii) the constitutionality of the Medicaid expansion; and (iii) whether the Anti-Injunction Act, which requires a tax to be assessed and collected before it can legally be challenged, bars the Supreme Court from hearing the case until a penalty for violation of the individual health insurance mandate is imposed. The Supreme Court held that the Anti-Injunction Act did not preclude the Supreme Court from hearing challenges to Affordable Care Act. The Supreme Court further held that the individual mandate for individuals to buy health insurance is a constitutional exercise of Congress s power to levy taxes. However, the Supreme Court found that the provision of the Affordable Care Act that required states to expand Medicaid to all people with income below 133% of the poverty level or lose the states existing Medicaid funds, is an improper exercise of Congress spending powers under the Constitution and amounts to coercion. The Supreme Court held that this requirement was severable from the rest of the law; therefore, the additional Medicaid funds may still be made available to states which agree to the expansion of their Medicaid programs, but Congress cannot withhold all Medicaid funds from those states that opt out of the expansion. The Affordable Care Act requires states to either establish and operate a health insurance exchange or participate in a multi-state or federal exchange. Maryland established its own health insurance exchange, however, its implementation encountered numerous technological issues and, as a result, the number of enrollees in commercial insurance programs was lower than expected. Maryland initiated a phased roll out of a new exchange system in 2014 and indications are that the new exchange system was much more successful than the initial roll-out in Maryland has also elected to pursue Medicaid expansion up to 138% of the federal poverty levels and enrollment of Medicaid beneficiaries exceeded expectations during the enrollment period. While the federal government is responsible for the increased costs incurred for the expanded coverage, the state must bear most of the costs incurred for increased enrollment by individuals eligible for coverage under the state's pre-affordable Care Act eligibility levels. The increased Medicaid enrollment could affect State of Maryland budget allocations for Medicaid services and payment rates to health care providers. The District of Columbia also established a state-based exchange, known as DC HealthLinks and, pursuant to a Section 1115 Waiver, expanded Medicaid eligibility for single adults up to 200% of federal poverty levels. In November, 2014, the Supreme Court agreed to hear the case of King v. Burwell, a Fourth Circuit case that upheld the Obama Administration's determination that individuals enrolled in federally-facilitated exchange plans are entitled to premium and cost-sharing subsidies. While both D.C. and Maryland have implemented state exchanges and thus will not be directly impacted by the outcome of the case, if the Supreme Court finds that subsidies are not legally available in the 36 states with federally-facilitated exchanges, national health care reform will be significantly disrupted. Arguments will be heard by the Supreme Court on March 4, 2015 and a decision is expected by late June, Judicial decisions, changes in the control of Congress and the next presidential election may substantially impact health care reform in its current form. Management of the Corporation will continue to analyze the Affordable Care Act and the manner in which it is implemented in order to assess the effects of the law on current and projected operations, financial performance and the financial condition of the System. Because of the uncertainties associated with various provisions of the Affordable Care Act, management cannot predict the longterm effects of the Affordable Care Act on the System with any degree of certainty. Federal and State Reimbursement Regulation The System Affiliates are subject to regulatory actions by a number of governmental and private agencies, including those that administer the Medicare and Medicaid programs, the Rate Commission, other private agencies 26

35 and federal, state and local agencies. These bodies may promulgate new regulatory provisions from time to time, and it is not possible to predict the effect of any such future promulgations on the System Affiliates. The amount of reimbursement available to the System Affiliates could be adversely affected by various federal cost containment programs designed to reduce federal payments to health care facilities by limiting the amount of reimbursement for health care costs. In particular, for inpatient services, Medicare pays hospitals fixed amounts for specific services based upon patient diagnosis. With certain exceptions, such payments will not be adjusted for actual costs, varying services or length of stay. Maryland currently has an exemption from this federal PPS and, therefore, the System Hospitals located in Maryland are presently reimbursed in accordance with the Rate Commission s rate setting system. See Regulatory Environment -- Maryland Health Services Cost Review Commission. However, there can be no assurance that Maryland s exemption from the federal prospective payment system will be maintained. There can be no assurance that the current rate-setting system will continue in effect or that the Rate Commission will continue to utilize the current methodology by which it determines rate adjustments or approves rates in the future sufficient to ensure payment by the System s Maryland Hospitals of any amount payable under the Guaranty Agreement. Future action by the Rate Commission, changes in the Rate Commission regulations, rate approval guidelines, structure or operations, or the loss of the Medicare Waiver may adversely affect the operations of the System s Maryland Hospitals. Future actions by the federal government with respect to Medicare and by the federal and state governments with respect to Medicaid, reducing the total amount of funds available for either or both of these programs or changing the reimbursement regulations or their interpretation, could adversely affect the amount of reimbursement available to the System Affiliates. Revision and expansion of effective regulations or the proposal of additional regulations may affect hospitals and other health care facilities and providers which seek payment under the Medicare and Medicaid programs. See Medicare and Medicaid Programs below. Furthermore, loss of accreditation by The Joint Commission could result in loss of Medicare and Medicaid reimbursement. See Acute Care Facilities -- Licenses and Accreditations in Appendix A as to the current status of accreditations of the System Hospitals. Future federal or state legislation or regulations and their impact upon the Members and the System Affiliates cannot be determined at this time. No assurance can be given that any future health care legislation that is enacted will not materially adversely affect the Members or the System Affiliates. Medicare and Medicaid Programs As described above, the District of Columbia hospitals are subject to the Medicare and Medicaid payment systems. Medicare and Medicaid are the commonly used names for reimbursement or payment programs governed by certain provisions of the federal Social Security Act. Medicare is an exclusively federal program, and Medicaid is a combined federal and state program. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or older, blind, disabled or qualify for the End Stage Renal Disease Program. Medicare Part A covers inpatient hospital services, some skilled nursing care and some home health care, and Medicare Part B covers physician services and some supplies. Medicaid is designed to pay providers for care given to the medically indigent and others who receive federal aid. Medicaid is funded by federal and state appropriations and administered by the various states. Medicare Medicare is a federal governmental health insurance system under which physicians, hospitals and other health care providers are reimbursed or paid directly for services provided to eligible elderly and disabled persons and persons with end-stage renal disease. Medicare is administered by CMS within the federal Department of Health and Human Services. In order to achieve and maintain Medicare certification, a health care provider must meet CMS s Conditions of Participation on an ongoing basis, as determined by the state in which the provider is located and The Joint Commission or the Healthcare Facilities Accreditation Program. The federal government frequently revises the laws, regulations and policies governing Medicare eligibility, coverage, payment and participation under the Medicare program. The Affordable Care Act institutes multiple mechanisms for reducing the 27

36 costs of the Medicare program. The demonstration and pilot projects authorized and funded by the Affordable Care Act are also likely to precipitate other significant modifications in the future to the Medicare payment system. Management cannot project the extent of these modifications, or what impact such modifications may have on the financial operations of the System. See Health Care Reform above. Also, at this time, it is not known whether future changes to such laws, regulations or policies will have a material adverse financial effect on the System. The District of Columbia System Hospitals depend significantly on Medicare as a source of revenue. Because of this dependence, changes in the Medicare program may have a material effect on the System. Future reductions in Medicare reimbursement, or the failure of increases in Medicare reimbursement to keep pace with increases in the costs of providing care, may have a material adverse financial effect on the System. A portion of the Medicare revenues of the System is derived from payments made for services rendered to Medicare beneficiaries under PPS, where the amount paid to the provider for an episode of care is established by federal regulation and is not related to the provider s charges or costs of providing that care. Presently, inpatient and outpatient services, skilled nursing care, and home health care are paid on the basis of a prospective payment system. Under inpatient PPS, fixed payment amounts per inpatient discharge are established based on the patient s assigned diagnosis related group ( DRG ). DRGs classify treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. All services paid under the PPS for hospital outpatient services are classified into groups called ambulatory payment classifications ( APCs ). Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. The capital component of care is paid on a fully prospective basis. PPS-exempt hospitals and units (inpatient psychiatric, rehabilitation and long-term hospital services) are currently reimbursed for their reasonable costs, subject to a cost per discharge target. These limits are updated annually by an index generally based upon inflationary increases in costs of providing health care services. From time to time, the factors used in calculating the prospective payments for units of service are modified by CMS, which may reduce revenues for particular services. As part of the federal budgetary process, Congress has regularly amended the Medicare law to reduce increases in payments that are otherwise scheduled to occur, or to provide for reductions in payments for particular services. These actions could adversely affect the revenues of the System. In addition, the costs of providing a unit of care may exceed the revenues realized from Medicare for providing that service. In the Prospective Payment Final Rule for 2008 and in the Prospective Payment Final Rule for 2009 (together, the IPPS Rules ), CMS included provisions preventing hospitals from assigning patient cases to DRGs with higher payments where a secondary diagnosis warranting higher payment is one of several specified health conditions and was acquired in the hospital. Specifically, the IPPS Rules identify certain conditions, including certain infections and serious preventable errors ( never events ), for which CMS will not reimburse hospitals unless the conditions were present at the time of admission. CMS has also announced its intent to identify additional conditions for which higher payment will be unavailable. Various HMOs and other private insurers have followed Medicare s lead in refusing to pay for certain hospital-acquired conditions, so called never events. There can be no assurance that these future payment limitations will not adversely affect the revenues of the System. Never events may be more likely to be publicized and may negatively impact a hospital s reputation, thereby reducing future utilization and potentially increasing the possibility of liability claims. Eligible hospitals are paid for a portion of their direct and indirect medical education costs. The formulae used to determine payments for medical education do not necessarily reflect the actual costs of such education, and the federal government will continue to evaluate its policy on graduate medical education and teaching hospital payments. There can be no assurance that payments to the System and its Affiliates under the Medicare program will be adequate to cover their direct and indirect costs of providing medical education to interns, residents, fellows and allied health professionals. Additional payments may be made to hospitals that treat a disproportionately large number of low-income patients (Medicaid and Medicare patients eligible to receive supplemental Social Security income) in the form of DSH payments, but these payments are significantly reduced by the Affordable Care Act. 28

37 Additional payments are made to hospitals that treat patients who are costlier to treat than the average patient; these additional payments are referred to as outlier payments. Following an audit of aggressive pricing strategies at one of the nation s largest hospital chains, and a determination that some hospitals might be manipulating current hospital charge data to maximize reimbursement from Medicare under the outlier payment provisions, the Office of the Inspector General of HHS ( OIG ) began investigating past outlier billing practices, and CMS amended the regulations on how outlier payments were to be calculated in the future. The methodology for calculating outlier payments is designed to prevent hospitals from manipulating the outlier formula to maximize reimbursement and allows for recovery of overpayments in certain cases. The OIG continues to scrutinize outlier payments in an effort to determine whether outlier payments to the hospitals were paid in accordance with Medicare regulations or whether such payments were the result of potentially abusive billing practices. While the Corporation believes that it has calculated its outlier payments appropriately, there can be no assurance that the Corporation or any of its System Affiliates will not become the subject of an investigation or audit with respect to its past outlier payments, or that such an audit would not have a material adverse impact on the Obligated Group. Moreover, there can be no assurance that any future revisions to the formula for calculating outlier payments will not reduce the payments to System and its affiliates. Effective October 1, 2013, CMS adopted a policy known as the Inpatient Hospital Prepayment Review Probe & Educate review process or the Two-Midnight rule. The Two-Midnight policy specifies that hospital stays spanning two or more midnights after the beneficiary is properly and formally admitted as an inpatient will be presumed to be reasonable and necessary for purposes of inpatient reimbursement. With some exceptions, stays not expected to extend past two midnights should not be admitted and instead be billed as outpatient. On January 31, 2014, CMS issued a notice delaying enforcement of the Two-Midnight rule until September 30, Subsequent legislation directed CMS to refrain from conducting post-payment patient status reviews through recovery audit contractors on claims with dates of admission through March 31, 2015, absent evidence of systematic gaming, fraud, abuse, or delays in the provision of care. The implementation of the Two-Midnight rule may have an adverse financial impact on hospitals. The legislation extended the ability of Medicare administrative contractors to select a limited number of claims for review of policy compliance with dates of admission through March 31, Medicare Advantage Hospitals also receive payments from health plans under the Medicare Advantage program. The Affordable Care Act includes significant changes to federal payments to Medicare Advantage plans resulting in a transition to benchmark payments tied to the level of fee-for-service spending in the applicable county. Decreased federal payments to the Medicare Advantage plans could in turn affect the scope of coverage of these plans or cause plan sponsors to negotiate lower payments to providers. Electronic Health Information Systems, Medicare and Medicaid Incentive Payments and Payment Reductions The American Recovery and Reinvestment Act of 2009 ( ARRA ) provides for Medicare and Medicaid incentive payments that began in 2011 to hospital providers meeting designated deadlines for the installation and use of electronic health information systems. For those hospital providers failing to meet a 2016 deadline, Medicare payments will be significantly reduced. 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 those programs. For information regarding System s electronic medical records system, see Strategic Initiatives -- Information Technology Strategy in Appendix A. Physician Reimbursement under Medicare Certain physician services are reimbursed by Medicare on a national fee schedule called the resourcebased-relative-value scale ( RB-RVS ). The RB-RVS fee schedule establishes payment amounts for all physician services, including services of provider-based physicians, and is subject to annual updates. The Sustainable Growth 29

38 Rate ( SGR ), which is a limit on the growth of Medicare payments for physician services, is linked to changes in the U.S. Gross Domestic Product over a ten-year period. SGR targets are compared to actual expenditures in order to determine subsequent physician fee schedule updates. Since 2003, Congress has passed legislation to delay application of the SGR. At the end of March 2014, Congress again postponed the implementation of SGR cuts, which averted an approximate 24.0% reduction to all physicians payments reimbursed under fee schedules, which would have been effective April 1, This last legislative act postponed the implementation of SGR cuts only until March 31, There can be no assurance that Congress will intervene again in the future to prevent the SGR payment reduction or, if delayed again, when the SGR formula will take effect, if ever. Legislation has been introduced in Congress to permanently repeal the SGR formula, but it is unclear whether any proposal will be approved by both houses of Congress and, if so, what other measures may be included to control the growth of physician payments. International Classification of Diseases, 10th Revision Coding System In 2009, HHS published the final rule adopting the International Classification of Diseases, 10th Revision coding system ( ICD-10 ), which health care organizations were required to implement by October 1, Implementation has now been delayed until at least October 1, ICD-10 provides a common approach to the classification of diseases and other health problems, allowing the United States to align with other nations to better share medical information, diagnosis and treatment codes. In order to implement the ICD-10, staff will need to be retrained, processes redesigned and computer applications modified as the current available codes and digit size will dramatically increase. The inability to hire or retain qualified personnel to provide such services could adversely affect the ability of the Corporation and the System Affiliates to implement ICD-10. Additionally, there is a potential for a temporary coding and payment backlog, as well as potential increases in claims errors caused by technical issues from the new processes and computer applications, human error from adjusting to the new coding system or other sources. There is a potential for revenue stream disruption for health care organizations and the magnitude of the transition within the industry may add pressure to health care organizations cash flows. Products and services must be developed by outside software vendors, clearinghouses and third-party billing companies to support and enable timely, complete and successful implementation of ICD-10. Delays in the required implementation may occur if such ICD-10 products and services are not available to health care organizations from these outside sources well in advance of the required implementation date to allow for adequate testing and installation. These changes may be costly to physicians and hospitals and will require significant planning, training and updates to the software and systems of hospitals at substantial cost to the hospitals and other providers. The continued delay of ICD-10 implementation is likely to result in increased training and related implementation costs for the Corporation and the System Affiliates. Further, it remains unclear whether continued delay in ICD-10 implementation will ultimately resolve potential implementation issues. Medicaid Medicaid is a health insurance program for certain low-income and needy individuals that is jointly funded by the federal government and the states. Pursuant to broad federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration, and scope of services; sets the payment rates for services; and administers its own programs. Under the Medicaid program, the federal government supplements funds provided by the various states for medical assistance to the medically indigent. Payment for medical and health services is made to providers in amounts determined in accordance with procedures and standards established by state law under federal guidelines. Fiscal considerations of both federal and state governments in establishing their budgets will directly affect the funds available to the providers for payment of services rendered to Medicaid beneficiaries. Some states also participate in Medicaid waiver programs, which allow states to adjust eligibility criteria beyond what the federal requirements allow. Maryland s Medicaid waiver program, known as Health Choice, covers childless adults with incomes up to 116% of the federal poverty level. The Corporation s Maryland Hospitals have been approved by the Rate Commission to participate in the Health Choice program through 30

39 MedStar Family Choice, a risk bearing entity, through December 31, Beginning January 1, 2014, Maryland s Medicaid eligibility expanded to 138% of the federal poverty level under the Maryland Health Progress Act. The District of Columbia expanded its Medicaid program under the Affordable Care Act. It currently operates a Medicaid waiver program for Childless Adults that extends health coverage to non-pregnant, nondisabled adults ages 21 through 64 years who are residents of the District of Columbia with household incomes that are above 138 percent but do not exceed 200 percent of the federal poverty level. The Affordable Care Act made changes to Medicaid funding and substantially increased the potential number of Medicaid beneficiaries. While the federal government is responsible for funding the incremental cost of certain categories of Medicaid eligibility expansion under the Affordable Care Act, changes in Medicaid benefits and other coverage requirements under the Affordable Care Act increase costs to the states and the District of Columbia. As Medicaid program costs continue to rise, the federal and state governments, including the District of Columbia and Maryland, continue to explore options for a long-term solution to the funding difficulties with Medicaid. Certain additional proposals being examined may ultimately result in reduced federal Medicaid funding to the states, including the District of Columbia, which could adversely impact the amount received by the System. Management of the Corporation cannot predict the effect of these changes to the Medicaid program on the operations, results from operations or the financial condition of the System. Section 340B Drug Pricing Program Hospitals that participate in the prescription drug discount program established under Section 340B of the federal Public Health Service Act (the 340B Program ) are able to purchase certain outpatient drugs for their patients at reduced cost. The Office of Pharmacy Affairs, which is the federal agency that regulates the 340B Program, has announced that it intends to release proposed regulations governing many aspects of the 340B Program later this year. A majority of the System Hospitals participate in the 340B Program and restrictions on the ability of hospitals to utilize 340B Program drugs for their patients may have an adverse effect on these System Hospitals. Medicare and Medicaid Audits Hospitals participating in Medicare and Medicaid are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under those programs, and the representations upon which such reimbursements are claimed. There can be no assurance that any such future adjustments will not be material or that the reserves of the System Affiliates for such purpose will be adequate to cover any such adjustments. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to a System Affiliate could have a material adverse effect on the financial condition and results of operations of the Corporation and the System Affiliates. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withholding provisions that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of the Corporation and the System Affiliates. No assurance can be given that in the future a Medicare payment or other payment will not be withheld that would materially and adversely affect the financial condition or results of operations of the Corporation and the System Affiliates. Under both the Medicare and the Medicaid programs, certain health care providers, including hospitals, are required to report certain financial information on a periodic basis, and with respect to certain types of classifications of information, penalties are imposed for inaccurate reports. These penalties may be material and could include criminal, civil or administrative liability for making false claims and exclusion from participation in the federal healthcare programs. Under certain circumstances, payments based on improper claims or overpayments that are not refunded can implicate the federal Civil False Claims Act (the False Claims Act ) or other federal statutes, subjecting the provider to civil or criminal sanctions. The United States Department of Justice has initiated a number of national investigations involving proceedings under the False Claims Act relating to alleged improper billing practices by hospitals. These actions have resulted in substantial settlement amounts being paid in certain cases. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established the Medicare Recovery Audit Contract ( RAC ) program initially as a demonstration program to identify improper Medicare 31

40 payments. CMS contracts with private contractors to conduct RAC audits (the RAC Contractors ). RAC Contractors are paid on a contingency fee basis, receiving a percentage of the improper overpayments and underpayments they collect from providers. RAC Contractors can retrospectively review claims for up to three years from the date the claim was paid and review provider claims for the following types of services: hospital inpatient and outpatient, skilled nursing facility, physician, ambulance and laboratory, as well as durable medical equipment. RAC Contractors use automated software programs to identify potential payment errors in such areas as duplicate payments, fiscal intermediaries mistakes, medical necessity and coding, and identified significant overpayments for collection. The RAC program is now being implemented nationwide and the Affordable Care Act expanded the RAC program s scope to include managed Medicare plans and Medicaid claims. Authorized by the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ), the Medicare Integrity Program ( MIP ) was established to deter fraud and abuse in the Medicare program. Funded separately from the general administrative contractor program, the MIP allows CMS to enter into contracts with outside entities and insure the integrity of the Medicare program. CMS contracts with Medicare Zone Program Integrity Contractors ( ZPICs ), formerly known as program safeguard contractors, to review claims and medical charts, both on a prepayment and post-payment basis, conduct cost report audits and identify cases of suspected fraud. ZPICs have the authority to deny and recover payments and to refer cases to the Office of the Inspector General (the OIG ). CMS is also planning to enable ZPICs to compile claims data from multiple sources in order to analyze the complete claims histories of beneficiaries for inconsistencies. In light of the complexity of the regulations relating to the Medicare program, and the threat of ongoing investigations as described above, there can be no assurance that the System Affiliates will not continue to be the subject of any such investigation. In addition, CMS has instituted a Medicaid Integrity Program, modeled on the MIP. Medicaid Integrity Program contractors assist state Medicaid agencies by analyzing Medicaid claims data to identify high-risk areas and potential vulnerabilities and conducting post-payment field audits and desk reviews audits of Medicaid provider payments. Medicare and Medicaid audits may result in reduced reimbursement or repayment obligations related to past alleged overpayments, may delay payments to providers pending resolution of the appeals process and may result in OIG investigations that could lead to monetary penalties. The Affordable Care Act explicitly gives the Department of Health and Human Services the authority to suspend Medicare and Medicaid payments to a provider or supplier during a pending investigation of fraud. The Affordable Care Act also amended certain provisions of the False Claims Act to include retention of overpayments as a violation and added provisions respecting the timing of the obligation to identify, report and reimburse overpayments. The effect of these changes on existing programs and systems of the System cannot be predicted. Medicaid Funding in Maryland Medicaid is a joint federal-state reimbursement program that is administered in each state by that state s health or public welfare agency. Medicaid programs vary from state to state. In each state s program, Medicaid generally pays for covered health services provided to certain categorically qualified or indigent individuals. In 2009, the Maryland General Assembly imposed a tax on hospital net patient revenues to fund a deficit in the State of Maryland s Medicaid program. Although the assessment was intended to be temporary, it continues today and will require legislative action to eliminate it. The Governor s budget for fiscal year 2015 assesses Maryland hospitals approximately $422.8 million. A majority of the assessments for individual hospitals is built into the hospitals rate structures. A portion of the annual update factor is designed to address this assessment. It cannot be determined at this time the impact of the Waiver Model on the State of Maryland s Medicaid program as the State implements the Waiver Model and its Medicaid plan to ensure compliance with the Agreement. 32

41 Patient Transfers In response to concerns regarding inappropriate hospital transfers of emergency room patients based on the patient s ability to pay for the services provided, Congress enacted the Emergency Medical Treatment and Active Labor Act ( EMTALA ) in This so-called anti-dumping law imposes certain requirements on hospitals prior to transferring a patient to another facility. Negligent failure of a hospital to meet its responsibilities under EMTALA could result in termination of its provider agreement and civil monetary penalties and repeated or flagrant violation of EMTALA by a physician could result in the physician s exclusion from the Medicare and Medicaid programs, any of which could adversely affect its financial condition. EMTALA and its implementing regulations are complex, and a hospital s compliance is dependent, in part, upon the volition of medical staff members. EMTALA also requires hospital departments that are located anywhere on a hospital s main campus to comply with EMTALA even if such departments are not located within the hospital itself. In addition, EMTALA creates a private cause of action for individuals who suffer personal harm as a result of an EMTALA violation, and for any hospital that suffers financial loss as a result of another hospital s violation of EMTALA. Any sanctions imposed as a result of an EMTALA violation could have a material adverse effect on the future operations or financial condition of a System Affiliate. Waiver Co-Payments and Deductibles The System Affiliates may at times waive certain Medicare coinsurance and deductible amounts. Certain waiver programs may be considered to be in violation of certain rules and policies applicable to the Medicare program and may be subject to enforcement action. If an agency or court were to conclude that a waiver by a System Affiliate violates applicable law, there is a possibility that the System Affiliate involved could be assessed fines, which could be substantial, that certain Medicare payments might be withheld or, in a serious case, that the System Affiliate could be excluded from the Medicare program. While management is not aware of any challenge or investigation with respect to such matters, there can be no assurance that such challenge or investigation will not occur in the future. Health Insurance Portability and Accountability Act Congress enacted HIPAA as part of a broad health care reform effort. Among other things, HIPAA established a program administered jointly by the Secretary of HHS and the United States Attorney General designed to coordinate federal, state and local law enforcement programs to control fraud and abuse in connection with the federal health care programs. In addition, Congress greatly increased funding for health care fraud enforcement activity, enabling the OIG to substantially expand its investigative staff and authorizing the Federal Bureau of Investigation to quadruple the number of agents assigned to health care fraud. The result has been a dramatic increase in the number of civil, criminal and administrative prosecutions for alleged violations of the laws relating to payment under the federal health care programs, including the Anti-Kickback Law and the False Claims Act. HIPAA added two prohibited practices, the commission of which may lead to civil monetary penalties: (1) the practice or pattern of presenting a claim for an item or service on a reimbursement code that the person knows or should know will result in greater payment than appropriate ( upcoding ), and (2) engaging in a practice of submitting claims for payment for medically unnecessary services. Violation of such prohibited practices could result in civil monetary penalties which could be substantial. HIPAA also included administrative simplification provisions intended to facilitate the processing of health care payments by encouraging the electronic exchange of information and the use of standardized formats for health care information. Congress recognized, however, that standardization of information formats and greater use of electronic technology present additional privacy and security risks due to the increased likelihood that databases of personally identifiable health care information will be created and the ease with which vast amounts of such data can be transmitted. Therefore, HIPAA requires the establishment of distinct privacy and security protections for individually identifiable health information. Regulations of the HHS designed to protect patient medical records and other personal health information maintained by health care providers, hospitals, health plans, health insurers and health care clearinghouses provide 33

42 specific federal penalties if a patient s right to privacy is violated. Non-criminal violations of the privacy standards may result in civil monetary penalties while criminal penalties are available under HIPAA for certain types of violations of the statute that are committed knowingly. Like other major health systems, certain System Affiliates may be the subject of the OIG, U.S. Attorney General or Justice Department investigations and any System Affiliate may be the subject of such investigations in the future. Failure to comply with the complex Medicare and Medicaid billing laws can result in exclusion from the Medicare programs as well as civil and criminal penalties. A substantial failure of a System Affiliate to meet its responsibilities under the law could materially adversely affect the financial condition of such System Affiliate. Health Information Technology for Economic and Clinical Health Act ARRA appropriated funds for the development and implementation of health information technology standards and the adoption of electronic health care records. ARRA also includes the Health Information Technology for Economic and Clinical Health Act ( HITECH Act ), which contains a number of provisions that affect HIPAA s privacy regulations that provide generally that covered entities must keep a person s personal health information private. The HITECH Act limits a covered entity s discretion in determining what health care information about a person may be properly disclosed under the HIPAA privacy regulations. The HITECH Act also significantly expanded the HIPAA privacy and security provisions applicable to covered entities and their business associates. In September, 2013, the final regulations implementing the HITECH provisions became effective. The law includes an individual notice requirement when there is a breach of unsecured electronic personal health information, increases civil monetary and criminal penalties for HIPAA violations, and authorizes the state attorneys general to enforce its provisions. Each covered entity must report any breach involving over 500 individuals in a state to HHS and the local media. All other breaches must be reported annually to HHS. The financial costs to comply with the 2013 regulations and continuing compliance with HIPAA, HITECH and the administrative simplification regulations are substantial. Covered entities that use an electronic health record are required to account for disclosures of information that are currently not subject to the accounting requirements, including disclosures for treatment, payment and health care operations. In addition, if a covered entity maintains an electronic health record, individuals have a right to receive a copy of the protected health information maintained in the record in an electronic format. The Secretary of HHS is charged with developing guidance and implementing regulations for these requirements. The HITECH Act requires covered entities to comply with a patient s request to restrict disclosure of information to a health plan if the disclosure s purpose is to carry out payment or health care operations (not treatment) or if the information pertains solely to an item or service for which the provider was paid out of pocket in full. The HITECH Act also includes a prohibition on the payment or receipt of remuneration in exchange for protected health information without specific patient authorization, except in limited circumstances, and places additional restrictions on the use and disclosures of protected health information for marketing and fundraising communications. The HITECH Act requires covered entities to notify affected individuals, HHS and sometimes the media of any unauthorized disclosure of protected health information, depending on the nature of the breach, the type of unauthorized disclosure and its scope. The HITECH Act increases the civil monetary penalties associated with violations of HIPAA and provides state attorneys general with authority to enforce the HIPAA privacy and security regulations in some cases, through a monetary damages assessment or an injunction against the violator. The Corporation and its System Affiliates are actively engaged in continuing compliance efforts with HIPAA and HITECH regulations. However, no guarantee can be made that the Corporation and its System Affiliates will remain HIPAA compliant in the future. 34

43 Security Breaches and Unauthorized Releases of Personal Information State and local authorities are increasingly focused on the importance of protecting the confidentiality of individuals personal information, including patient health information. Many states have enacted laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. In some states, notification requirements may be triggered even where information has not been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security breaches exposes health organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement. Failure to comply with restrictions on patient privacy or to maintain robust information security safeguards, including taking steps to ensure that contractors who have access to sensitive patient information maintain the confidentiality of such information, could consequently damage a health care provider s reputation and materially adversely affect business operations. Cybersecurity Risks Despite the implementation of network security measures by the Corporation and the System Affiliates, their information technology systems may be vulnerable to breaches, hacker attacks, computer viruses, physical or electronic break-ins and other similar events or issues. Such events or issues could lead to the inadvertent disclosure of protected health information or other confidential information or could have an adverse effect on the ability of the Corporation and the System Affiliates to provide health care services. Federal, State and Local Legislation The System Affiliates are subject to a wide variety of federal, state and local regulatory actions and legislative and policy changes that could have a significant impact on the System Affiliates. Federal, state and local legislative bodies have broad discretion in altering or eliminating programs that contribute significantly to the revenues of the System Affiliates, including the Medicare and Medicaid programs. In addition, such entities may enact legislation which imposes significant new burdens on the operations of the System Affiliates. There can be no assurance that such legislative bodies will not make legislative policy changes (or direct governmental agencies to promulgate regulatory changes) that have adverse effects upon the ability of the System Affiliates to generate revenues or upon the favorable utilization of their facilities. Corporate Compliance Because penalties for noncompliance with various requirements imposed upon the Corporation for violation of Medicare, Medicaid and other healthcare laws and regulations may be substantial, the Corporation has implemented a comprehensive compliance plan consistent with the model compliance plan offered by the OIG ( Compliance Plan ). The purpose of a Compliance Plan is to detect and deter violations of law. One of the major goals is to identify and address issues involving the submission of claims to governmental payors such as Medicare and Medicaid and to assure that those claims comply with statutes, regulations and other guidance provided by the programs. Integral components of the Compliance Plan include education, adoption of written standards, policies and procedures, auditing and monitoring, and encouraging employees to identify potential issues. It is possible that the Compliance Plan may bring to the attention of the Corporation issues with respect to prior practices and payments. Depending upon the nature of the issue and whether an overpayment has occurred, voluntary or involuntary refunds to governmental payors may result. Although one goal of the Compliance Plan is to identify violations at an early stage or prevent inappropriate actions, there can be no assurance that the Compliance Plan will detect all potential violations and improprieties. Managed Care and Commercial Payors A significant portion of the revenues of the System Affiliates are received from health maintenance organizations, preferred provider organizations or other managed care arrangements, including Medicaid managed care health plans. These arrangements differ significantly from traditional indemnity insurers. Managed care plans 35

44 generally accept uniform per-person payments, with fees based on the number of enrollees, and in return agree to provide all, or substantially all, of an enrollee s health care needs without additional charges. Managed care payors rely upon case management to reduce or eliminate unnecessary utilization, including discouraging admissions to a hospital unless absolutely necessary. Case management efforts of managed care payors may in the future adversely affect utilization of the facilities of the System Affiliates. In addition, some Medicaid managed care health plans recently experienced financial difficulties. The insolvency of such plans or their failure to pay amounts owed to the System Affiliates in a timely manner could have an adverse effect on the financial condition of the Corporation and the other System Affiliates. As managed care enrollments increase, managed care payors become significant purchasers of health care services and often select health providers offering the most cost effective services. Hospitals may be adversely affected by the ability of these payors to negotiate low payment rates and to exclude hospitals from participation in their programs. In general, Maryland hospitals currently are not allowed to grant discounts from rates approved by the Rate Commission to specific payors, but the Rate Commission does grant a uniform discount to managed care payors meeting certain criteria. Not all of the System Affiliates are covered by the Maryland rate-setting system and there can be no assurance that the Maryland rate-setting system will be maintained or that current Rate Commission methodology will continue to be used. High deductible insurance plans have also become more common in recent years, and the Affordable Care Act is expected to encourage the increase in high deductible insurance plans as the health care exchanges include a variety of plans, several of which offer lower monthly premiums in return for higher deductibles and copayments. Many plans offered on the exchanges and an increasing number of employer group health plans have high deductibles. High deductible plans may contribute to lower elective inpatient admissions as patients may forgo or choose less expensive medical treatment to avoid having to pay the costs of the admissions as a result of the high deductibles. There is also a potential concern that some patients with high deductible plans will not be able to pay their medical bills as they may not be able to cover costs that are not covered by their insurance plans as a result of the high deductible. Certain health maintenance and preferred provider organization contracts of the System Affiliates can be terminated by the third-party payor at any time without the necessity of showing cause upon short notice. Termination could have an adverse effect on the financial performance of the Corporation and the System Affiliates. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withholding provisions that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of the Corporation and the System Affiliates. No assurance can be given that in the future payment will not be withheld that would materially and adversely affect the financial condition or results of operations of the Corporation and the System Affiliates. Maryland Health Insurance Plan The Maryland Health Insurance Plan (MHIP) is a high-risk pool created in 2003 to cover individuals who were otherwise medically uninsurable residents of Maryland. MHIP was funded through hospital assessments and premiums. With the implementation of the Affordable Care Act, MHIP has transitioned its population into other healthcare insurance options as of December 31, 2014, and expects to dissolve as an agency in State Children s Health Insurance Programs The State Children s Health Insurance Program ( SCHIP ) is a federally funded insurance program for children whose families earn too much money to be eligible for Medicaid, but cannot afford commercial health insurance. CMS administers SCHIP, but each state and Washington D.C. create their own programs based on minimum federal guidelines. While generally considered to be beneficial for both patients and providers because it reduces the number of uninsured children, it is difficult to assess the fiscal impact of SCHIP payments on the System. Moreover, each state must periodically submit its SCHIP plan to CMS for review to determine if it meets the federal requirements. If a state does not meet the federal requirements, it may lose its federal funding for its program. From time to time Congress and the President seek to expand or contract SCHIP. The loss of federal approval for Maryland s or Washington D.C. s program, or a reduction in the amounts available under SCHIP, could have an adverse impact on the financial condition of the System. 36

45 The Affordable Care Act requires states to maintain current income eligibility levels for children in SCHIP until 2019 and extends funding for SCHIP through SCHIP benefits packages and cost sharing rules will continue as under current law. Health Care Reform will most likely result in substantial changes to the SCHIP program once health care coverage becomes available for children through an expanded Medicaid program, the state-operated exchanges or employer-based health care coverage. The net financial impact of these changes is unknown at this time. Uninsured Patients Future increases in unemployment in the areas served by the System Affiliates and changing health care plan designs (such as high deductible plans) that shift costs to the patients could adversely affect revenues, as those who lack health insurance or are underinsured may delay elective procedures. In addition, in times of greater unemployment and economic hardship, the amount of uncompensated care provided by the System Affiliates would be expected to increase. Federal law requires hospitals to provide certain medical treatment to individuals who come to hospitals, regardless of the ability of the individuals to pay. The Rate Commission rate-setting system currently includes a provision for charity care and bad debt, but not all of the System Affiliates are covered by the Maryland rate-setting system and there is no assurance that the current rate setting system will continue in effect or that the Rate Commission will continue to utilize the current methodology by which it approves rates. Although the Affordable Care Act may reduce uncompensated care by providing coverage to a larger portion of the population, improvements to coverage and access will not be immediate. In addition, the Medicaid program is dependent on the continued availability of federal and state funding, which could be curtailed in the future in response to growing budget deficits at all governmental levels. The continued availability, comprehensiveness of coverage and adequacy of reimbursement for care for the indigent and disabled cannot be assured in the future. Pension and Benefit Funds As large employers, hospitals may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers compensation benefits. Funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes which could have a material adverse effect on the System Affiliates. See Appendix A -- Management s Discussion and Analysis of Operations and Financial Condition Retirement Plans and note 7 of the audited financial statements in Appendix B for the funded status of the System s retirement plans. Cost and Availability of Medical Malpractice Insurance In recent years, the number of malpractice suits and the dollar amount of damages awarded have been increasing nationwide. Hospitals and health care providers have experienced substantial increases in malpractice insurance premiums. There have been insolvencies of several medical malpractice insurers and others have withdrawn from underwriting malpractice coverage for physicians or hospitals in various markets. Hospitals and health care providers that have self-funded programs are experiencing similar difficulties with respect to reinsurance of their captive insurance companies. To the extent that insurance coverage maintained by the Corporation and the System Affiliates is inadequate to cover judgments against them, such claims may be required to be discharged by payments from their own funds. To the extent that insurance coverage maintained by others with whom the Corporation and the System Affiliates may have joint and several liability is inadequate, the Corporation and the System Affiliates (or their insurers to the extent of applicable coverage) may incur additional liability for such claims. Although legislation has been enacted in the State of Maryland to mitigate the impact of malpractice claims, there can be no assurance that such legislation will reduce the cost or increase the availability of medical malpractice insurance. Further increases in the cost or limitations on the availability of malpractice insurance or reinsurance could adversely affect the operating results of the Corporation and the System Affiliates. In addition, increases in medical malpractice premiums could result in a shortage of medical professionals and may disrupt the delivery of healthcare. For information relating to the insurance coverage of the System Affiliates see Insurance in Appendix A. 37

46 Environmental Laws and Regulations Health care providers are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations which address, among other things, hospital operations and facilities and properties owned or operated by hospitals. Among the types of regulatory requirements faced by hospitals are (i) air and water quality control requirements, (ii) waste management requirements, (iii) specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances, (iv) requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the hospital, (v) requirements for training employees in the proper handling and management of hazardous materials and wastes and (vi) other requirements. At the present time, management of the Corporation is not aware of any pending or threatened claim, investigation or enforcement action regarding environmental issues which, if determined adversely to the System Affiliates, would have a material adverse effect on the results of operations or financial condition of the System. Tax Exemptions The 2015 Tax-Exempt Bonds to be issued concurrently with the Bonds and the other tax-exempt obligations previously issued for the benefit of the Corporation are subject to a number of requirements that must be satisfied for interest on such state and local obligations, to be excludable from gross income for federal income tax purposes. The IRS has increased the number of audits of tax-exempt bonds in the charitable organization sector in recent years and, as described above under Regulatory Environment -- Nonprofit Health Care Environment, IRS officials have indicated that more resources will be invested in these audits. Effective with the 2009 tax year, taxexempt organizations must also complete new schedules to IRS Form Return of Organizations Exempt From Income Tax, which create additional reporting responsibilities. On Schedule H, hospitals and health systems must report how they provide community benefit and specify certain billing and collection practices. Schedule K requires detailed information related to all outstanding bond issues of tax-exempt borrowers, including information regarding operating, management and research contracts as well as private use compliance. Tax-exempt organizations must also complete Schedule J, which requires reporting of compensation information for the organizations officers, directors, trustees, key employees, and other highly compensated employees. There can be no assurance that responses by the Corporation to Form 990 will not lead to an IRS audit. The tax-exempt obligations issued for the benefit of the Corporation may be, from time to time, subject to examinations or audits by the IRS. Tax-Exempt Status of System The tax-exempt status of the tax-exempt obligations issued for the benefit of the Corporation presently depends upon the maintenance by the Corporation and certain of the System Affiliates of their status as organizations described in section 501(c)(3) of the Code. In addition, the loss of tax-exempt status by a System Affiliate could result in loss of tax exemption of tax-exempt debt issued on behalf of the System Affiliates, and defaults in covenants regarding the tax-exempt debt would likely result. Loss of tax-exempt status could also result in substantial tax liabilities on income of affected System Affiliates. For these reasons, loss of tax-exempt status of a System Affiliate could have a material adverse effect on the financial condition of the System Affiliates, taken as a whole. The maintenance of such tax-exempt status is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and educational purposes and their avoidance of transactions which may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities which do not conduct large-scale technical operations and business activities, they often do not adequately address the myriad of operations and transactions entered into by modern health care organizations. The Affordable Care Act also contains new requirements for tax-exempt hospitals. See Health Care Reform above. One of the tools available to the IRS to discipline a tax-exempt entity for inurement or unlawful private benefit is revocation of the entity s tax-exempt status. Although the IRS has not often revoked the 501(c)(3) taxexempt status of an organization, it could do so in the future. 38

47 Neither the Corporation nor any System Affiliate is presently the subject of an IRS audit. A previous audit of their pension plans was resolved satisfactorily concluding that the pension plans were in compliance with tax law requirements. However, there is no assurance that the Corporation or the System Affiliates will not be the subject of an audit in the future. Management believes that the System Affiliates have properly complied with the tax laws. Nevertheless, because of the complexity of the tax laws and the presence of issues about which reasonable persons can differ, an audit could result in additional taxes, interest and penalties. An audit could ultimately affect the taxexempt status of a System Affiliate as well as the exclusion from gross income for federal income tax purposes of the interest payable on tax-exempt debt issued on behalf of the System Affiliates. State Income Tax Exemption and Local Property Tax Exemption It is likely that the loss by a System Affiliate of federal tax exemption would also result in a challenge to the State of Maryland or District of Columbia tax exemption of such System Affiliate. Depending on the circumstances, such event could be adverse and material. In recent years, state, county and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where such authorities are dissatisfied with the amount of services provided to indigents, the real property tax exemption of the health care providers has been questioned. The real property used for hospital and other tax-exempt purposes of the System Affiliates is currently exempt from real property taxation. Unrelated Business Income In recent years, the IRS and state, county and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt hospitals with respect to their exempt activities and the generation of unrelated business taxable income ( UBTI ). The System Affiliates participate in activities which generate UBTI. Management believes it has properly accounted for and reported UBTI; nevertheless, an investigation or audit could lead to a challenge which could result in taxes, interest and penalties with respect to unreported UBTI and in some cases could ultimately affect the tax-exempt status of a System Affiliate as well as the exclusion from gross income for federal income tax purposes of the interest payable on tax-exempt debt issued on behalf of the System Affiliates. Alliances and Affiliations with Physicians, Hospitals and Other Healthcare Providers Many hospitals and health systems have pursued strategic alliances with physicians and other providers. These integration strategies involve multiple forms, including management service organizations ( MSOs ), physician-hospital organizations ( PHOs ), and ownership of physician practices. More recent integration models include joint ventures for delivery of services and assumption of risk. The Affordable Care Act encourages the development of health care delivery models that are designed to enhance quality, improve outcomes and reduce cost and that will effectively require greater integration between and collaboration among hospitals and physicians by allowing the formation of accountable care organizations ("ACOs") that meet quality thresholds to share in the savings achieved for the Medicare Program. The Affordable Care Act requires the Secretary of HHS to implement a shared savings program through ACOs requiring integration between hospitals and physicians that will deliver health care services to Medicare beneficiaries, and to implement a demonstration project to develop ACOs for pediatric patients under the Medicaid program. Participation in the Medicare ACOs is voluntary. For the initial years of the program, an ACO can participate on an incentive payment basis only. Ultimately, under the Medicare ACO program, an ACO will assume risk in the event of an increase over benchmarked costs. To qualify as an ACO, organizations must agree to be accountable for the overall care of their Medicare beneficiaries, have adequate participation of primary care physicians, define processes to promote evidence-based medicine, report on quality and costs, and coordinate care. In 2011, the Department of Health and Human Services issued a final rule to implement the ACO provisions of the Affordable Care Act. The Federal Trade Commission and Department of Justice issued a joint proposed statement of antitrust enforcement policy as applied to ACOs; CMS and the OIG issued a joint notice on waivers of the Anti-kickback Statute, Stark law and the Civil Money Penalty laws as applied to ACOs; and the IRS issued a request for comment on the impact on tax-exempt organizations participating in ACOs. The outcomes of these final regulations and guidance, and the impact they will 39

48 have upon the health care marketplace, is unknown and cannot be predicted. Commercial health insurance companies are also adopting incentive payment programs modeled after the Medicare ACOs. Often, the sponsoring hospital or health system will be the primary capital source for such alliances. Depending on the size and organizational characteristics of a particular development, these capital requirements may be substantial. While there are many benefits which may be derived from such alliances, most are relatively new developments with uncertain outcomes, and, therefore, invested capital is subject to risk of loss. These types of alliances are generally designed to respond to existing trends in the delivery of medical care, to increase physician availability to the community or to enhance the managed care capability of the affiliated hospital and physicians. However, these goals may not be achieved, and, if the development is not successful, it may produce materially adverse results that are counterproductive to some or all of the above-stated goals. All such integrated delivery developments carry with them the potential for legal or regulatory risks in varying degrees. Such developments may call into question compliance with the anti-referral laws and relevant antitrust laws (discussed below under Referral Laws and Antitrust ). Such developments may also subject the System Affiliates to state insurance department regulation. Questions of federal or state tax exemption may arise in certain types of developments or as a result of formation, operation or future modification of such developments (see Tax Exemptions -- Tax-Exempt Status of System above). MSOs which operate at a deficit over an extended period of time may raise significant risks of investigation or challenge regarding tax exemption or compliance with the anti-referral laws. In addition, depending on the type of development, a wide range of governmental billing and reimbursement issues may arise, including questions of the authorization of the entity to bill or collect revenue for or on behalf of the physicians involved. Other legal and regulatory risks may arise, relating to employment, pension and benefits, and corporate practice of medicine, particularly in the current atmosphere of frequent and often unpredictable changes in federal and state legal requirements regarding health care. There can be no assurance that such issues and risks will not lead to material adverse consequences in the future. Affiliation, Merger, Acquisition and Disposition As with many multi-hospital systems, the Corporation s overall strategic planning and development process may include the evaluation and pursuit of potential merger and affiliation candidates. Discussions with respect to affiliation, merger, acquisition, disposition or change of use, including those which may affect System Affiliates, may be held in the future. These are most often conducted with acute care hospitals or hospital systems or physician practice groups and most often relate to hospitals or physician practice groups joining the System. As a result, it is possible that the organizations and assets which currently make up the System Affiliates will change from time to time and it is possible that new hospitals will be added as System Affiliates in the future. As part of its on-going planning and property management functions, the Corporation reviews the use, compatibility and business viability of many of the Corporation s operations, including those of the System Affiliates, and from time to time the Corporation may pursue changes in the use of, or disposition of, various assets of the System Affiliates, including hospital facilities. Likewise, the Corporation occasionally receives offers from, or conducts discussions with, third parties about the potential sale of some of the operations and properties which are a part of the System. Under the Master Indenture, the Members may dispose of a System Affiliate upon compliance with the provisions of the Master Indenture. Currently, certain System Affiliates also have operating affiliations and joint ventures with other nonprofit and for profit corporations. In certain instances, such affiliates may conduct operations which are of strategic importance to the applicable System Affiliate, or their operations may subject the System Affiliate to potential legal or financial liabilities. In certain cases, System Affiliates fund the affiliates on a start-up or ongoing basis, and this funding may be significant. Other Acquisitions and Affiliations In addition to relationships with hospitals and physicians, the Corporation and the System Affiliates may consider, and may pursue, investments, ventures, affiliations, development and acquisition of other health care- 40

49 related entities. These may include home health care, long-term care entities or operations, infusion providers, pharmaceutical providers, and other health care enterprises which support the overall operations and mission of the Corporation and the System Affiliates. In addition, the Corporation and the System Affiliates may pursue such transactions with health insurers, HMOs, preferred provider organizations, third-party administrators and other health insurance-related businesses. Because of the integration occurring throughout the health care field, the Corporation will consider such arrangements where there is a perceived strategic or operational benefit for the Corporation or one or more System Affiliates. All such initiatives may involve significant capital commitments and capital and operating risk (including, potentially, insurance risk) in a business in which the Corporation or the involved System Affiliate may have less expertise than in hospital operations. There can be no assurance that these projects, if pursued, will not lead to material adverse consequences. Antitrust Enforcement of the antitrust laws against health care providers is becoming more common, and antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, third-party contracting, physician relations, and joint venture, merger, affiliation and acquisition activities. In some respects, the application of federal and state antitrust laws to health care is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, System Affiliates may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants. The ability to consummate mergers, acquisitions or affiliations may also be impaired by the antitrust laws, potentially limiting the ability of health care providers to fulfill their strategic plans. Liability in any of these or other antitrust areas of liability may be substantial, depending on the facts and circumstances of each case. Other Regulatory and Contractual Matters The Corporation and the System Affiliates are subject to extensive federal, state and local regulations governing licensure, operations, construction of new facilities, cost containment and reimbursement for services rendered. Failure by the Corporation or the System Affiliates to meet applicable standards could result in the loss of licensure, the delay in or loss of reimbursement or the loss of an ability to deliver services. There can be no assurance that federal, state or local governments will not impose additional restrictions on the operations of the Corporation and the System Affiliates that might adversely affect their businesses, financial condition and results of operations. See Regulatory Environment for additional risks related to governmental regulation. Anti-Fraud and Abuse Laws The federal anti-kickback law (the Anti-Kickback Law ) makes it a felony to knowingly and willfully offer, pay, solicit or receive remuneration, directly or indirectly, in order to induce business that is reimbursable under any federal health care program. The statute has been interpreted to cover any arrangement where one purpose of the remuneration is to obtain referrals or to induce further referrals. The Affordable Care Act amended the intent requirement to provide that a person need not have actual knowledge of the Anti-Kickback Law or specific intent to commit a kickback violation to violate the statute, and it added penalties for the failure to grant timely access to HHS. Violation of the Anti-Kickback Law may result in imprisonment and fines, which could be substantial. In addition, HHS, through the Office of Inspector General (the OIG ), has the authority to impose civil assessments and fines and to exclude hospitals engaged in prohibited activities from the Medicare, Medicaid, TRICARE (a health care program providing benefits to dependents of members of the uniformed services) and other federal health care programs for not less than five years. The Anti-Kickback Law also authorizes the imposition of penalties against any person who contracts with a provider that the person knows or should know is excluded from the federal health care programs. There are limited regulatory safe harbors to the Anti-Kickback Law. 41

50 Arrangements that implicate the Anti-Kickback Law but do not fit within a regulatory safe harbor are not automatically in violation, but are analyzed by OIG on a case-by-case basis. However, such arrangements face a significant risk of running afoul of the Anti-Kickback Law, which may result in substantial penalties. The OIG has published a proposed rule that would add new safe harbors to the Anti-Kickback Law, although there is no guarantee that the OIG will promulgate a final rule to this effect. HIPAA created a new program operated jointly by HHS and the U.S. Attorney General to coordinate federal, state and local law enforcement with respect to fraud and abuse investigations, including violations of the Anti-Kickback Law. Because of the breadth of the Anti-Kickback Law and the narrowness of the safe harbor regulations, there can be no assurance that the Corporation or a System Affiliate will not be found to have violated the Anti-Kickback Law. Although the Anti-Kickback Law applies only to federal health care programs, a number of states, including Maryland, have passed similar statutes that contain similar types of prohibitions. While the Corporation and System Affiliates continue to monitor their contracts and business arrangements, they cannot be certain that all of their agreements with physicians and other covered activities qualify under current regulations. Stark Law Another federal law (known as the Stark Law ) prohibits a physician who has a financial relationship, or whose immediate family has a financial relationship, with an entity (including a hospital) from referring federal healthcare program patients to such entity for the furnishing of designated health services, with limited statutory and regulatory exceptions. Designated health services under the Stark Law include physical therapy services, occupational therapy services, radiology or other diagnostic services (including MRIs, CT scans and ultrasound procedures), durable medical equipment, radiation therapy services, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services, outpatient prescription drugs, inpatient and outpatient hospital services and clinical laboratory services. The Stark Law also prohibits the entity receiving the referral from filing a claim or billing for the services arising out of the prohibited referral. A finding of intent is not required to establish a violation of the Stark Law. Sanctions for violation of the Stark Law include denial of payment for the services provided in violation of the prohibition, refunds of amounts collected in connection with prohibited referrals, exclusion from the federal healthcare programs and civil penalties, which could be substantial. Violations of the Stark Law may also serve as the basis for liability under the False Claims Act. The types of financial arrangements between a physician and an entity that trigger the self-referral prohibitions of the Stark Law are broad, and include ownership and investment interests and compensation arrangements. Arrangements that violate the Stark Law and do not fall within a statutory or regulatory exception are not subject to a case-by-case review, unlike violations of the Anti-Kickback Law. Rather, such arrangements are immediately subject to sanction because the Stark Law is a strict liability statute. The types of financial arrangements between a physician and an entity that trigger the self-referral prohibitions of the Stark Law are broad, and include ownership and investment interests and compensation arrangements. Complex regulations issued by CMS in phases during the last decade tightly regulate the types of compensation agreements and the business ventures that hospitals can enter into with physicians and their group practices. Before the final regulations became effective in October, 2009, many hospitals and physicians had to restructure existing contracts and relationships. The Stark Law absolutely prohibits specific referral arrangements and the accompanying claims for payment from Medicare or Medicaid by the provider unless there is an applicable exception in the law or regulations. Sanctions for violations of the Stark Law include refunds of the amounts collected for services rendered pursuant to a prohibited referral, civil money penalties of up to $15,000 for each claim arising out of such referral, plus up to three times the reimbursement claimed, and exclusion from the Medicare and Medicaid programs. The Stark Law also provides for a civil penalty of up to $100,000 for entering into an arrangement with the intent of circumventing its provisions. In addition, knowing violation of the Stark Law may also serve as the basis for liability under the False Claims Act. Under authority from the Deficit Reduction Act, CMS created the Disclosure of Financial Relationships Report (the DFFR ). The DFFR is a mandatory disclosure instrument designed to collect information concerning 42

51 the ownership and investment interest and compensation arrangements between hospitals and physicians. Although CMS has postponed implementation of the DFFR, future implementation is likely to increase enforcement. Because of the complexity of the Stark Law, the inflexibility of the statutory and regulatory exceptions and the evolving nature of quality improvement and cost-reduction efforts, there can be no assurance that the Corporation or a System Affiliate will not be found to have violated the Stark Law. Refunds for amounts collected or exclusion of the Corporation or a System Affiliate from the Medicare and Medicaid programs could have a material adverse effect on the future results of operations and financial condition of the Corporation or System Affiliate, as could any significant penalties, demands for refunds or denials of payment. Although the Stark Law applies only to federal health care programs, a number of states (including Maryland) have passed similar statutes pursuant to which similar types of prohibitions are made applicable to all other health plans or third party payors. An arrangement might comply with the federal Stark Law or with Maryland s Stark-type statute but fail to comply with the other. False Claims Laws There are principally three federal statutes which address the issue of false claims. First, the False Claims Act imposes civil liability (including substantial monetary penalties and damages) on any person or corporation which (1) knowingly presents or causes to be presented a false or fraudulent claim for payment to the United States of America government; (2) knowingly makes, uses, or causes to be made or used a false record or statement to obtain payment; or (3) engages in a conspiracy to defraud the federal government by getting a false or fraudulent claim allowed or paid. Specific intent to defraud the federal government is not required to act with knowledge. This statute authorizes private persons to file qui tam actions on behalf of the United States of America. The government may choose to intervene and jointly litigate the qui tam action. These private persons, also known as relators, can collect between 15% and 30% of the proceeds of any fines or damages paid, in the event their cases are successful, depending on whether the government intervenes. In addition to the False Claims Act, the Civil Monetary Penalties Law ( CMP ) authorizes the imposition of substantial civil monetary penalties against an entity which engages in activities such as, but not limited to, (1) knowingly presenting or causing to be presented to a federal or state officer, employee or agent a claim for services not provided as claimed or which is otherwise false or fraudulent in any way; (2) knowingly giving or causing to be given false or misleading information reasonably expected to influence the decision to discharge a hospital patient covered under Medicare; (3) offering or giving remuneration to any beneficiary of a federal health care program likely to influence the receipt of reimbursable items or services; (4) arranging for reimbursable services with an entity which is excluded from participation from a federal health care program; (5) knowingly or willfully soliciting or receiving remuneration for a referral of a federal health care program beneficiary; or (6) using a payment intended for a federal health care program beneficiary for another use. The Secretary of HHS, acting through the OIG, also has both mandatory and permissive authority to exclude individuals and entities from participation in federal health care programs pursuant to this statute. Finally, it is a criminal federal healthcare fraud offense to: (1) knowingly and willfully execute or attempt to execute any scheme to defraud any healthcare benefit program; or (2) obtain, by means of false or fraudulent pretenses, representations or promises any money or property owned or controlled by any healthcare benefit program. Penalties for a violation of this federal law include fines and imprisonment and forfeiture of any property derived from proceeds traceable to the offense. A number of states (including Maryland) have passed similar statutes expanding the prohibition against the submission of false claims to nonfederal third party payors. Although the False Claims Act has been in effect for many years, in recent years there has been a significant increase in the number of allegations (sometimes known as whistle blower allegations) filed under the False Claims Act, a large number of which involve the health care and pharmaceutical industries. This is due in part to the ability of relators, acting on the government s behalf, to collect a sizable percentage of the verdict or settlement. In 2009, the Fraud Enforcement Recovery Act ( FERA ) was enacted, which authorized increased funding for fraud investigation and prosecution and expanded the scope of the False Claims Act. 43

52 The threats of large monetary penalties and exclusion from participation in Medicare, Medicaid and other federal health care programs, and the significant costs of mounting a defense, create serious pressures on providers who are targets of false claims actions or investigations to settle. Therefore, an action under the False Claims Act, FERA or CMP could have an adverse financial impact on the Corporation and the System Affiliates. Physician Recruitment The IRS and HHS have issued various pronouncements that could limit physician recruiting and retention arrangements. In an IRS General Counsel Memorandum concerning hospital-physician joint ventures, the IRS ruled that tax-exempt hospitals that provide recruiting and retention incentives to physicians risk loss of tax-exempt status unless the incentives are necessary to obtain an overriding public benefit; improvement of a charitable hospital s financial condition does not necessarily constitute such a purpose. The IRS has also issued guidelines for its agents to follow in conducting audits that emphasize these restrictions, and has established special audit teams and procedures to ensure compliance. The OIG has taken the position that any arrangement between a federal healthcare program-certified facility and a physician that is intended to encourage the physician to refer patients may violate the federal Anti-Kickback Law unless a statutory or regulatory exception applies. While the OIG has promulgated a practitioner recruitment regulatory safe harbor, the safe harbor is limited to practice recruitment in areas that are health professional shortage areas and to the recruitment of new physicians who are relocating their practices. Therefore, the safe harbor does not cover physician recruitment and retention arrangements. The Stark Law also is implicated by physician recruiting and retention arrangements. An exception applies to payments from a hospital to a physician to induce the physician to relocate to the hospital s service area and join the hospital s medical staff, provided several requirements are met. No assurance can be given that future regulations under the Stark Law will not adversely affect the Corporation and a System Affiliate. Joint Ventures The OIG has expressed concern in various advisory bulletins that many types of joint venture arrangements involving hospitals may implicate the Anti-Kickback Law, since the parties to joint ventures are typically in a position to refer patients of federal health care programs. In 2003, the OIG issued a Special Advisory Bulletin on so-called contractual joint ventures, a subset of joint venture arrangements that the OIG believes is proliferating and that raises Anti-Kickback Law concerns. According to the OIG, contractual joint venture arrangements are arrangements where a provider such as a hospital expands into a new line of business by contracting with an entity that already provides the items or services. As with any analysis under the Anti-Kickback Law, the government reviews the totality of the facts and circumstances presented by a proposed joint venture arrangement and concludes how much risk it poses under the Anti-Kickback Law, and whether, based on that risk, it would subject the parties to sanctions under the statute. Deficit Reduction Act: Compliance Policy and Employee Training Requirements The Deficit Reduction Act also established requirements for states participating in the Medicaid program to impose obligations on health care providers and others that receive at least $5 million annually in Medicaid payments to establish written policies and procedures designed to educate their employees (and certain contractors and agents) by providing detailed information about: (1) the federal False Claims Act and remedies under the law, (2) administrative remedies for false claims and statements established by the Federal Program Fraud Civil Remedies Act of 1986, (3) any state law false claims act and its remedies, (4) the whistleblower protections provided under such laws, (5) the role of such laws in preventing and detecting fraud, waste and abuse, and (6) the provider (or other party s) policies and procedures that are in place for the prevention and detection of fraud, waste and abuse. Providers and other covered parties that do not adequately update their compliance policies, handbooks and other training materials or otherwise abide by these requirements run the risk of losing Medicaid reimbursement and risk potential liability under the False Claims Act and other federal and state fraud and abuse laws. 44

53 Risks in Health Care Delivery Utilization A number of factors have contributed to a reduction of hospital utilization in recent years. Physicians practice patterns indicate a trend to fewer inpatient admissions and shorter lengths of stay for those who are admitted. In addition, third-party payors, such as Medicare, Medicaid, Blue Cross and other insurers and health maintenance organizations, have exerted efforts to contain their costs by reviewing and questioning the need for certain procedures, inpatient admissions and hospital stays. In addition, the utilization of the facilities of the System Affiliates (and, accordingly, their revenues) could be adversely affected by a decline in the population of their service areas, a change in the age composition of the population, a decline in the economic conditions of their service areas or other demographic shifts. Adverse economic conditions, particularly increased unemployment, in the service areas of the System Affiliates could reduce the number of potential patients carrying adequate health insurance coverage and decrease the number of patients who are able to pay fully for the cost of their care at the facilities of the System Affiliates. Competition Increased competition from a wide variety of potential sources, including, but not limited to, other hospitals, inpatient and outpatient health care facilities, clinics, physicians, urgent care centers and others, may adversely and increasingly affect the utilization and revenues of the System Affiliates. Existing and potential competitors may not be subject to various regulations and restrictions applicable to the System Affiliates, and may be more flexible in their ability to adapt to competitive opportunities and risks. Certain new competitors, such as home health and infusion providers, and certain niche providers, such as specialized cardiology or oncology companies, specifically target hospital patients as their prime source of revenue growth. Some of these companies have aggressive business and marketing plans, and some are well capitalized. If these competitors are successful, some of the most profitable aspects of inpatient hospital operations may be stripped away, and overall hospital utilization may decline. Competition may, in the future, arise from new sources not currently anticipated or prevalent. Labor Relations Hospitals are large employers with a wide diversity of employees. Increasingly, employees of hospitals are becoming unionized, and many hospitals have collective bargaining agreements with one or more labor organizations. Employees subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Certain of the System Affiliates have employees covered by collective bargaining agreements. See Appendix A -- Employees. Physician Contracting and Relations Certain System Affiliates have entered into a wide variety of relationships with physicians. Many of these relationships may be of material importance to the operations of the System Affiliates, and, in an increasingly complex legal and regulatory environment, these relationships pose a variety of legal and business risks. The primary relationship between a hospital and physicians who practice in it is through the hospital s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges, or who have such membership or privileges curtailed, denied or revoked often file legal actions against hospitals and medical staffs. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties. All hospitals, including the System Affiliates, are subject to such risks. 45

54 Certain contracts entered into with physicians or physician groups create exclusive relationships. With increased competition among health care providers and the increasing frequency of the application of antitrust principles in health care, such exclusive relationships are subject to challenge, generally by other physicians competing with those who have the exclusive relationship. Absent facts which may arise from a specific challenge or controversy, the validity of such agreements cannot in many cases be accurately determined, nor can the materiality of the loss of the exclusive relationship to a hospital or the damages, if any, which might be assessed against the parties to it. Certain System Affiliates presently have exclusive relationships of the type described above. As of the date hereof, management of the Corporation is not aware of specific controversies which management believes might lead to the loss of an exclusive contractual relationship, or to an award of damages, that would be material with respect to the operation or financial condition of the System Affiliates. Technology and Services Scientific and technological advances, new procedures, drugs and appliances, preventive medicine, occupational health and safety and outpatient health care delivery may reduce utilization and revenues of the System Affiliates in the future. Technological advances in recent years have accelerated the trend toward the use by hospitals of sophisticated, and costly, equipment and services for diagnosis and treatment. The acquisition and operation of certain equipment or services may continue to be a significant factor in hospital utilization, but the ability of the System Affiliates to offer such equipment or services may be subject to the availability of equipment or specialists, governmental approval or the ability to finance such acquisitions or operations. The American Recovery and Reinvestment Act of 2009 allocated $20 billion to health care information technology, and the Affordable Care Act mandates that certain health care providers implement electronic medical records by 2014 or be subject to reductions in reimbursement from federal programs. The costs to acquire and implement an electronic medical records system are significant but it is widely believed that such systems will lead to greater efficiencies in the provision of patient care and improved quality of care. The ability to adequately price and bill healthcare services and to accurately report financial results depends on the integrity of the data stored within information systems, as well as the operability of such systems. Information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards. There can be no assurance that the information systems of the System Affiliates will adequately address these challenges. Electronic media are also increasingly being used in clinical operations, including the conversion from paper to electronic medical records, computerization of order entry functions and the implementation of clinical decision-support software. The reliance on information technology for these purposes imposes new expectations on physicians and other workforce members to be adept in using and managing electronic systems. It also introduces risks related to patient safety and to the privacy, accessibility and preservation of health information. See Health Insurance Portability and Accountability Act and Health Information Technology for Economic and Clinical Health Act above. Technology malfunctions and any failure to understand and use information systems properly could result in the dissemination of or reliance on inaccurate information, as well as in disputes with patients, physicians and other health care professionals. Health information systems may also be subject to different or higher standards or greater regulation than other information technology or the paper-based systems previously used by healthcare providers, which may increase the cost, complexity and risks of operations. All of these risks may have adverse consequences for hospitals and healthcare providers. Enforcement Affecting Clinical Research In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. The Department of Health and Human Services elevated and strengthened its Office of Human Research Protection, one of the agencies with responsibility for monitoring federally funded research. In addition, the National Institutes of Health significantly increased the number of facility inspections that these agencies perform. The Food and Drug Administration ( FDA ) also has authority over the conduct of clinical trials performed in hospitals when these trials are conducted on behalf of sponsors seeking FDA approval to market the drug or device that is the subject of the research. Moreover, the OIG, in its recent Work Plans, has included several enforcement 46

55 initiatives related to reimbursement for experimental drugs and devices (including kickback concerns) and has issued compliance program guidance directed at recipients of extramural research awards from the National Institutes of Health and other agencies of the U.S. Public Health Service. These agencies enforcement powers range from substantial fines and penalties to exclusion of researchers and suspension or termination of entire research programs, and errors in billing of the Medicare Program for care provided to patients enrolled in clinical trials that is not eligible for Medicare reimbursement can subject the System Affiliates to sanctions as well as repayment obligations. Class Actions Nonprofit hospitals and health systems have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of liability for nonprofit hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often involve alleged large classes of plaintiffs, they may have material adverse consequences on nonprofit hospitals and health systems in the future. Federal law and many states impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforces, such as hospitals, are susceptible to actual and alleged violations of these standards. In recent years there has been a proliferation of lawsuits over these wage and hour issues, often in the form of large, sometimes multi-state, class actions. For large employers such as hospitals, such class actions can involve multi-million dollar claims, judgments and settlements. A major class action decided or settled adversely to the Corporation or the System Affiliates could have a material adverse impact on the financial condition and results of operations of the Corporation and the System Affiliates. Personnel Shortages From time to time, the health care industry suffers from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. In addition, aging medical staffs and difficulties in recruitment to the medical profession are predicted to result in physician shortages. A significant factor underlying this trend includes a decrease in the number of persons entering such professions. This trend is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. Competition for physicians and employees, coupled with increased recruiting and retention costs, may increase hospital operating costs, possibly significantly. This trend could have a material adverse impact on hospitals. The health care industry is facing a nationwide shortage of nursing and allied health care professionals, including registered nurses. A shortage of nursing staff and allied health care professionals could result in escalating labor costs, delays in providing care, and patient care management issues, among other adverse effects. The shortage of nurses and allied health care professionals may be exacerbated if the increase in access to coverage provided under the Affordable Care Act leads to an increase in demand for medical care or a greater reliance on nursing staff and allied health care professionals. The Affordable Care Act includes numerous workforce programs that should have an impact on existing and projected shortages of nurses and allied health care professionals and increase their availability. There can be no assurance that a shortage of nurses and allied health care professionals will not adversely affect the operations or financial condition of the Corporation and the System Affiliates. Action by Purchasers of Hospital Services and Consumers Major purchasers of hospital services also could take action to restrain hospital charges or charge increases. As a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services. Decreased utilization could result, and hospitals revenues may be negatively impacted. In addition, consumers and groups on behalf of consumers are increasing pressure for hospitals and other health care providers to be transparent and provide 47

56 information about cost and quality of services that may affect future consumer choices about where to receive health care services. Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of healthcare services provided by hospitals and providers. The Affordable Care Act shifts the basis of payments from the volume of services to the value of services, based on various health outcome measures. Published rankings such as score cards, pay for performance and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals, the members of their medical staffs and other providers and influence the behavior of consumers and providers such as the System Affiliates. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction and investment in health information technology. Measures of performance set by others that characterize a hospital or a provider negatively may adversely affect its reputation and financial condition. Licensing, Surveys, Investigations and Audits Each of the System Hospitals and certain of the facilities operated by the System Affiliates are certified as providers for Medicare services, and such System Affiliates intend to continue to participate in the Medicare program. The requirements for Medicare certification are subject to change, and in order to remain qualified for the program, it may be necessary for the System Affiliates to effect changes from time to time in their facilities, equipment, personnel, billing processes, policies and services. Health facilities, including those of the System Affiliates, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements relating to Medicare and Medicaid participation and payment, state licensing agencies, private payors and The Joint Commission. Renewal and continuance of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require or include affirmative action or response by a System Affiliate. These activities generally are conducted in the normal course of business of health facilities. Nevertheless, an adverse action could result in a loss or reduction in a System Affiliate s scope of licensure, certification or accreditation, or could reduce the payment received or require repayment of amounts previously remitted. Management of the Corporation currently anticipates no difficulty renewing or continuing currently held licenses, certifications or accreditations, nor does it anticipate a reduction in third-party payments from such events that would materially adversely affect the operations or financial condition of the System Affiliates. See Appendix A -- Acute Care Facilities -- Licenses and Accreditations as to the current status of the licenses and accreditations of the System Affiliates. Nevertheless, actions in any of these areas could result in the loss of utilization or revenues, or the System Affiliates inability to operate all or a portion of their health facilities, and, consequently, could have a material adverse effect on the System Affiliates ability to make the debt service payments relating to the Bonds. Limitations on Enforceability of Rights and Remedies The Master Trustee s security interest in the Pledged Revenues created by the Master Indenture and the Deeds of Trust is subject to, among other things, Permitted Encumbrances and the following: (i) (ii) statutory liens; rights arising in favor of the United States of America or any agency thereof; 48

57 (iii) prohibitions against assignment contained in state or federal law, including those governing Medicare and Medicaid, and the absence of an express provision permitting assignment of receivables due under the contracts with third party payors; (iv) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction; (v) state and federal insolvency or bankruptcy laws affecting Pledged Revenues earned by any Member or Guarantor within the statutorily prescribed preference period prior to any effectual institution of bankruptcy proceedings by or against such Member or Guarantor and thereafter; (vi) Trustee; and rights of third parties in any Pledged Revenues not in the possession of the Master (vii) the requirement that appropriate financing statements be filed and continued in accordance with the Uniform Commercial Code as in effect from time to time. The legal right and practical ability of the Trustee to enforce its rights and remedies against the Corporation under the Indenture and the 2015B Obligation and of the Master Trustee to enforce its rights and remedies against the Corporation, any future Member of the Obligated Group or any Guarantor under the Master Indenture, the Guaranty Agreement and the Deeds of Trust will depend upon the exercise of various remedies specified by such documents which may in many instances require judicial actions that are often subject to discretion and delay or that otherwise may not be readily available or may be limited. Limitations Relating to Remedies under the Deeds of Trust Recovery Value. The Deeds of Trust encumber substantial portions of the facilities of the System Hospitals. The Mortgaged Property consists of special purpose facilities with limited alternative possible uses based upon design and construction of the buildings, zoning and other factors. No appraisal has been undertaken to determine the fair market value of the Mortgaged Property. There can be no assurance that if any event of default were to occur under the Master Indenture, the Guaranty Agreement or any Deed of Trust (i) any part or all of the Mortgaged Property could be foreclosed upon and sold for an amount sufficient to pay the outstanding principal of and interest on the outstanding Obligations, or (ii) any bid would be received for the Mortgaged Property. Even if received, such bid would be unlikely to fully pay the outstanding principal of and interest on the outstanding Obligations. Priority of the Liens. The liens created under the Deeds of Trust constitute security interests in the Mortgaged Property, subject to Permitted Encumbrances. The liens are subordinate to and independent of liens for general property taxes, special taxes and assessments. Additional special taxes or assessments may be imposed on the Mortgaged Property by the cities or counties in which each is located and any other public agencies having jurisdiction. Such future special taxes or assessments would have priority over the liens created under the Deeds of Trust. Additionally, the System Hospitals may create Permitted Encumbrances which have priority over the liens created under the Deeds of Trust. The MedStar Washington Hospital Center campus is subject to the lien of a Permitted Encumbrance in the amount of $21,504,039 in favor of the United States government. This encumbrance was created in the deed of the hospital property from the United States government to MedStar Washington Hospital Center in February There is no repayment date for this lien stated in the deed. Under enabling legislation, it appears that repayment could be required after a determination that the property is no longer required for hospital services or the property is disposed of, in which event all or a portion of the amount secured by the lien may be payable to the government. This lien is subordinated to the Deed of Trust on the Washington Hospital Center campus. Title Insurance and Property Descriptions. In 2004, the System Hospitals delivered to the Master Trustee simultaneously with issuance of the 2004 Maryland Authority Bonds, ALTA Lenders Title Policies insuring the priority of the liens created by the Deeds of Trust. The policies provide coverage in the aggregate amount of $20,000,000 for the benefit of the Master Trustee. In 2013, the MedStar Southern Maryland Hospital Center 49

58 delivered to the Master Trustee simultaneously with the issuance of the 2013B Maryland Authority Bonds, an ALTA lenders title policy insuring the priority of the lien created by the deed of trust for MedStar Southern Maryland Hospital Center. This policy provides coverage in the aggregate amount of $33,600,000. The lenders title policies provide financial insurance against a recorded monetary lien against the Mortgaged Property that is not revealed by the title insurance policies (an Undisclosed Lien ). The title policies contain a number of exceptions, including an exception for claims based on any inaccuracies in the property description that would have been disclosed in a survey. New surveys were not conducted in connection with the execution and delivery of the Deeds of Trust. There is no assurance that the title policies would provide adequate insurance coverage if there is an Undisclosed Lien on the Mortgaged Property. Hazardous Substances. While governmental taxes, assessments and charges are common claims against the value of property, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized is a claim with regard to hazardous substances. In general, the System Hospitals may be required by law to remedy conditions of the Mortgaged Property relating to release of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well known and widely applicable of these laws. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition on property, whether or not the owner (or operator) had or has anything to do with the creation or handling of the hazardous substance. Consequently, if any part of the Mortgaged Property is affected by a hazardous substance, the marketability and value of the parcel may be reduced by the cost of remedying the condition. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling the hazardous substance. Any of these circumstances could significantly affect the value of the Mortgaged Property that would be realized upon a delinquency and foreclosure. Bankruptcy The Indenture, the Master Indenture, the Obligations, the Guaranty Agreement, the Deeds of Trust and the Bonds are subject to bankruptcy, insolvency, moratorium, reorganization and other state and federal laws affecting the enforcement of creditors rights and to general principles of equity. For additional detail, reference is made to the Bankruptcy Code, 11 U.S.C. 101 et seq. A claim for payment of the principal of or interest on the Bonds could be made subject to any statutes that may be constitutionally enacted by the United States Congress or the Maryland General Assembly affecting the time and manner of payment or imposing other constraints upon enforcement. In the event of bankruptcy of the Corporation, any future Member or any Guarantor, the rights and remedies of the Bondholders are subject to various provisions of the federal Bankruptcy Code. If the Corporation, any future Member or any Guarantor were to file a petition in bankruptcy, payments made by the Corporation or that Member or Guarantor during the 90-day (or perhaps in certain circumstances one-year) period immediately preceding the filing of such petition may be avoidable as preferential transfers to the extent such payments allow the recipients thereof to receive more than they would have received in the event of the liquidation of the Corporation or such Member or Guarantor. Such a bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Corporation, any future Member or Guarantor and its property, and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property as well as various other actions to enforce, maintain or enhance the rights of the Trustee and the Master Trustee. If the bankruptcy court so ordered, the property of the Corporation, such Member or Guarantor, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of the Corporation, such Member or Guarantor. The rights of the Trustee and Master Trustee to enforce the Indenture, the Guaranty Agreement, the Deeds of Trust and the Master Indenture could be delayed during the pendency of the rehabilitation proceeding. The Corporation, such Member or Guarantor could file a plan for the adjustment of its debts in any such proceeding which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are conditions that the plan be feasible and be accepted by each class of impaired claims thereunder. Each class of claims has accepted the plan if at least two-thirds in dollar amount and more than one-half in number of the class cast votes in its favor. Even if the 50

59 plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly. In the event of bankruptcy of the Corporation, any future Member or any Guarantor, there is no assurance that certain covenants, contained in the Indenture, the Guaranty Agreement and certain other documents would survive. Further, the obligation of any Member to make payments of debt service on the 2015B Obligation may not be enforceable under applicable state insolvency, fraudulent conveyance, bankruptcy, trust and other laws. The state of insolvency, fraudulent conveyance and bankruptcy laws relating to the enforceability of obligations issued by one corporation in favor of the creditors of another, including the obligation of any Member or Guarantor to make debt service payments on behalf of another Member or Guarantor or of a System Affiliate to make debt service payments on behalf of the Corporation or any future Member is unsettled, and the ability to enforce such obligations under the Master Indenture and the Guaranty Agreement against any Member or Guarantor, respectively, or any System Affiliate which would be rendered insolvent thereby could be subject to challenge. In particular, such obligations may be voidable under the Bankruptcy Code or applicable state fraudulent conveyance statutes if the obligation is incurred without fair and fairly equivalent consideration to the obligor and if the incurrence of the obligation thereby renders the Member, Guarantor or System Affiliate insolvent. The standards for determining the fairness of consideration and the manner of determining insolvency are not clear and may vary under the United States Bankruptcy Code and state fraudulent conveyance statutes and judicial opinions with respect to them. Additional Limitations on Enforceability In addition to the limitations described above under Bankruptcy, the joint and several obligation described herein of each Member and Guarantor to make payments, or to cause System Affiliates to make payments, of debt service on an Obligation, the proceeds of which Obligation were not loaned or otherwise made available to such Guarantor or System Affiliate, may not be enforceable to the extent that such payments (i) will be made on an Obligation issued for a purpose that is not consistent with the charitable purposes of the entity from which such payment is requested or is subject to the application of charitable trust principles which may vary from jurisdiction to jurisdiction; (ii) will be made from any property that is donor restricted or that is subject to a direct or express trust that does not permit the use of such property for such payments; (iii) would result in the cessation or discontinuation of any material portion of the services previously provided by the entity from which such payment is requested; or (iv) will be made pursuant to any loan violating applicable usury laws. Due to the absence of clear legal precedent in this area, the extent to which any of the limitations described above would be applicable to any Guarantor or System Affiliate cannot be determined and could be substantial. There exists, in addition to the foregoing, common law authority and authority under various state statutes pursuant to which courts may terminate the existence of a not for profit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry out such purposes. Such court action may arise on the court s own motion or pursuant to a petition of a state attorney general or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses. As described above under Bankruptcy, in determining whether various covenants and tests contained in the Master Indenture are met, the System Affiliates will be combined, notwithstanding uncertainties as to the enforceability of certain obligations of the Members contained in the Master Indenture which bear on the availability of the revenues of the System Affiliates for payment of debt service on the Obligations, including the 2015B Obligation. In addition to the limitations on enforceability described above, the realization of rights under the Master Indenture, the Indenture, the Guaranty Agreement and the Deeds of Trust upon a default by an Obligated Group Member depends upon the exercise of various remedies specified in such agreements. These remedies may require judicial action which is often subject to discretion and delay. Under existing law, certain of the remedies specified in the Master Indenture, the Indenture, the Guaranty Agreement and the Deeds of Trust may not be readily available or may be limited. For example, a court may decide not to order the specific performance of the covenants 51

60 contained in the Master Indenture, the Indenture, the Guaranty Agreement or the Deeds of Trust. Accordingly, the ability of the Trustee to exercise remedies under such agreements upon an Event of Default could be impaired by the need for judicial or regulatory approval. In addition, the bankruptcy of a health plan or physician group that is a party to a significant managed care arrangement with the Corporation or one or more of the System Affiliates could have material adverse effects on the Corporation, the Guarantors or the System Affiliates. General Litigation and Insurance Litigation In common with other multi-institutional systems, there are, at any point in time, a number of medical malpractice actions filed or pending involving System Affiliates. Generally, these will be paid or settled from insurance or self-insurance coverage, and some will not be pursued by plaintiffs. However, certain actions may seek punitive or other damages, which may not be covered by insurance. Litigation also arises from the corporate and business activities of the System Affiliates and certain affiliates, from their status as major employers, and as a result of medical staff peer review or the denial of medical staff privileges. A Supreme Court decision now allows physicians who are subject to adverse peer review proceedings to file federal antitrust actions against hospitals and seek treble damages. Many of these risks are covered by insurance or self-insurance, but some are not. In the unlikely event that a substantial number of uncovered claims were to be determined adversely to the System Affiliates who are defendants in such claims, and substantial monetary damages were to be awarded in each, there could be a material adverse effect on the System Affiliates financial condition. See Legal Matters in Appendix A. Insurance For a description of insurance carried by the Corporation, see Insurance in Appendix A. Amendment of Legal Documents Certain amendments of the Master Indenture, the Indenture, the Guaranty Agreement and the Deeds of Trust may be made without notice to or the consent of the Bondholders, or in some cases with the consent of the holders of a majority in aggregate principal amount of the Obligations or the Bonds. See Summary of Certain Provisions of the Master Indenture -- Supplemental Master Indentures Not Requiring Consent of Obligation Holders, -- Supplemental Master Indentures Requiring Consent of Obligation Holders and Summary of Certain Provisions of the Indenture -- Supplemental Indenture without Bondholder Consent and -- Supplemental Indenture with Bondholder Consent in Appendix C. Such amendments may adversely affect the security for the Bonds. Ratings There is no assurance that the ratings assigned to the Bonds at the time of issuance will not be reduced or withdrawn at any time. Any such reduction or withdrawal could adversely affect the market price or the marketability of the Bonds in the secondary market. See Ratings. Secondary Market There can be no assurance that there will be a secondary market for the purchase or sale of the Bonds, and although the Underwriters intend to make a secondary market for the Bonds, from time to time there may be no market for the Bonds depending upon prevailing market conditions, the financial condition or market position of firms who may make the secondary market and the financial condition and results of operations of the System Affiliates. The Bonds should therefore be considered long-term investments in which funds are committed to maturity. 52

61 Prepayment Risks Upon the occurrence of certain events of default, the payment of the principal of and interest on the Bonds may be accelerated. See Summary of Certain Provisions of the Indenture -- Events of Default and -- Acceleration of Maturity in Appendix C. The Bonds are also subject to optional redemption prior to maturity on the dates and at the prices specified under The Bonds -- Redemption. Thus, there can be no assurance that the Bonds will remain outstanding until their stated maturities. Financial Information Certain financial information regarding the Corporation and the System Affiliates is set forth in Appendices A, B and B-1. There can be no assurance that the financial results achieved in the future will be similar to the results indicated. Future results will vary from the results indicated and the variations may be material. Therefore, the operating results indicated cannot be taken as a representation that the Corporation and the System Affiliates will be able to generate sufficient revenues in the future to fulfill the obligations under the Master Indenture. Risks Related to Variable Rate Obligations Certain outstanding securities issued for the benefit of the Corporation are variable interest rate obligations, the interest rates on which could rise. Such interest rates vary on a periodic basis and may be converted to a fixed interest rate. This protection against rising interest rates is limited, however, because the Corporation would be required to continue to pay interest at the variable rate until it is permitted to convert the obligations to a fixed rate pursuant to the terms of the applicable transaction documents. Prior credit market turmoil in the auction rate markets and dislocation among various bond insurers and swap providers triggered suddenly high interest costs to many healthcare organizations. Hedging Transactions The Corporation has entered into an interest rate swap agreement and the Corporation and the System Affiliates from time to time in the future may enter into additional hedging arrangements to hedge the interest payable or manage interest cost on indebtedness, assets or any other derivative arrangements. Changes in the market value of such agreements could have a negative impact upon the operating results and financial condition of the Corporation and the System Affiliates, and such impact could be material. The existing interest rate swap agreement is and any future hedging agreement may be subject to early termination upon the occurrence of certain events. If either the Corporation or a System Affiliate or the counterparty terminates any hedge agreement when such agreement has a negative value to the Corporation or System Affiliate, the Corporation or System Affiliate could be obligated to make a substantial termination payment, which could materially adversely affect the financial condition of the Corporation and System Affiliates. Other Factors Additional factors which may affect future operations, and therefore revenues, of the System Affiliates include the following, among others: (1) Changes in key management personnel. (2) The fact that MedStar Washington Hospital Center and MedStar Georgetown University Hospital are teaching hospitals is of considerable importance in attracting patients and highly qualified and skilled physicians, which ability may be adversely affected in the event of any adverse change in the relationship of these System Hospitals with the School of Medicine of Georgetown University or loss of approved status for their residency programs. (3) Reductions in utilization of health care facilities as a result of preventive medicine, improved occupational health and safety, development and utilization of medical and scientific research and technological advances and other developments. 53

62 (4) Future legislation and regulations affecting hospitals, governmental and commercial medical insurance and the health care industry in general, including reductions in federal or state funding of Medicare, Medicaid or other government-financed health care reimbursement programs. (5) Changes in reimbursement procedures or in contracts under the Blue Cross program or other public or private insurance programs. (6) Increased costs of attracting and retaining or decreased availability of a sufficient number of physicians, registered nurses and other allied health professionals. (7) Increased costs resulting from further unionization of the employees of the Corporation or System Affiliates or the utilization by a non-union employee of the Corporation or any System Affiliate of proceedings available under the National Labor Relations Act. See Employees in Appendix A. (8) The health care facilities owned by the Corporation and System Affiliates are comprised of special-purpose facilities that are not suitable for industrial or commercial use; consequently, it could be difficult to find a buyer or lessee for such health care facilities if the Corporation or System Affiliates seek to sell any of their facilities. (9) Depletion of the Medicare Trust Fund or state funds available for the payment of Medicaid reimbursement or any failure of third-party payors to pay amounts owed to any System Affiliate in a timely manner could have a materially adverse impact upon such System Affiliate. (10) The development of advantageous business relationships may be adversely affected by federal and state anti-trust laws and regulations. (11) Increases in costs, including costs associated with, among other things, salaries, wages and fringe benefits, supplies, innovative technology and sophisticated equipment, insurance, energy and other utilities, the attraction and retention of physicians and nurses, compliance with or violation of laws and regulations concerning environmental quality, work safety, accommodating persons with disabilities and other matters, and other costs that could result in a sizable increase in expenditures without a corresponding increase in revenues. (12) Inability of the Corporation or any System Affiliate to obtain future governmental approvals to undertake additional projects necessary to remain competitive as to rates, charges and the quality and scope of care or any limitation on the availability of tax-exempt or other financing for future projects. (13) The operations of the Corporation or the System Affiliates and the generation of revenues from their facilities could be impaired by the occurrence of natural disasters, including floods, hurricanes, tornadoes and earthquakes, or the occurrence of criminal or terrorist acts or other calamities could damage the facilities of the Corporation or any System Affiliate and interrupt utility service to their facilities, or the occurrence of a pandemic or an epidemic that could result in an abnormally high demand for health care services. (14) Imposition of wage and price controls for the health care industry, such as those that were imposed and adversely affected health care facilities in the early 1970s. The paragraphs above discuss certain Bondholders risks, but are not intended to be a complete enumeration of all risks associated with the purchase or holding of the Bonds. 54

63 NO ADVERSE LITIGATION RELATING TO BONDS There is no controversy or litigation of any nature now pending against the Corporation or, to the knowledge of the officers of the Corporation, threatened, restraining or enjoining the issuance, execution or delivery of the Bonds, or in any way contesting or affecting (i) the validity of the Bonds, or (ii) any proceedings of the Corporation taken concerning the Indenture, the Bond Purchase Contract, the 2015B Obligation, the issuance or sale of the Bonds or the collection of amounts due under the Indenture. UNDERWRITING J.P. Morgan Securities LLC, as representative on behalf of itself and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Loop Capital Markets LLC ( LCM ), RBC Capital Markets, LLC, U.S. Bancorp Investments, Inc. ( USBII ) and Wells Fargo Securities, LLC (collectively, the Underwriters ), have agreed to purchase the Bonds at a purchase price of $100,446, (consisting of the par amount of the Bonds less underwriting discount of $448,429.71). The obligation of the Underwriters to purchase the Bonds is subject to certain conditions set forth in the Bond Purchase Contract. The Bond Purchase Contract provides that the Underwriters will purchase all the Bonds if any are purchased, and contains the agreements of the Corporation to indemnify the Underwriters against certain liabilities. The Underwriters may offer and sell Bonds to certain dealers (including dealers depositing Bonds into investment trusts, certain of which may be sponsored or managed by an Underwriter) and others at prices lower than the offering price of the Bonds. J.P. Morgan Securities LLC ( JPMS ), one of the Underwriters of the Bonds, has entered into negotiated dealer agreements (each, a Dealer Agreement ) with each of Charles Schwab & Co., Inc. ( CS&Co. ) and LPL Financial LLC ( LPL ) for the retail distribution of certain securities offerings, including the Bonds, at the original issue prices. Pursuant to each Dealer Agreement (if applicable to this transaction), each of CS&Co. and LPL will purchase Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any Bonds that such firm sells. Citigroup Global Markets Inc., one of the Underwriters of the Bonds, has entered into a retail distribution agreement with each of TMC Bonds L.L.C. ( TMC ) and UBS Financial Services Inc. ( UBSFS ). Under these distribution agreements, Citigroup Global Markets Inc. may distribute securities to retail investors through the financial advisor network of UBSFS and the electronic primary offering platform of TMC. As part of this arrangement, Citigroup Global Markets Inc. may compensate TMC (and TMC may compensate its electronic platform member firms) and UBSFS for their selling efforts with respect to the Bonds. LCM, one of the Underwriters of the Bonds, has entered into an agreement (each, a Distribution Agreement ) with each of Deutsche Bank Securities Inc. ( DBS ) and Credit Suisse Securities USA LLC ( CS ) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to each Distribution Agreement, each of DBS and CS will purchase Bonds from LCM at the original issue prices less a negotiated portion of the selling concession applicable to any Bonds that such firm sells. US Bancorp is the marketing name of U.S. Bancorp and its subsidiaries, including USBII, one of the Underwriters of the Bonds, and U.S. Bank National Association which is serving as Trustee and Master Trustee. Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Securities, LLC, member NYSE, FINRA, NFA, and SIPC. Wells Fargo Securities, LLC ( WFS ), one of the Underwriters of the Bonds, utilizes the distribution capabilities of Wells Fargo Institutional Securities, LLC ( WFIS ), for the distribution of securities offerings, including the Bonds. WFS and WFIS are each wholly-owned subsidiaries of Wells Fargo & Company. 55

64 RATINGS Fitch Ratings ( Fitch ), Moody s Investors Service, Inc. ( Moody s ) and Standard & Poor s Ratings Services ( S&P ) have assigned the Bonds ratings of A, A2 and A-, respectively. The Corporation furnished to the rating agencies certain materials and information respecting the Bonds and itself and the System Affiliates. Generally, the rating agencies base their ratings on such materials and information and on investigations, studies and assumptions by the rating agencies. These ratings reflect only the views of Fitch, Moody s and S&P, respectively. A securities rating is not a recommendation to buy, hold or sell securities. No assurance can be given that such ratings will remain in effect for any given period of time or that they may not be reduced or withdrawn by the rating agencies, or any of them, if in the judgment of such rating agencies circumstances so warrant. Any downward change in or withdrawal of such ratings, or any of them, could adversely affect the market price of the Bonds. The rating of A assigned by Fitch to the Bonds is described as follows: High credit quality. A ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings. The rating of A2 assigned by Moody s to the Bonds is described as follows: Obligations rated A are considered upper-medium grade and are subject to low credit risk. Moody s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 2 indicates a mid-range ranking. The rating of A- assigned by S&P to the Bonds is described as follows: An obligation rated A demonstrates a strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes certain U.S. federal tax considerations generally applicable to holders of the Bonds that acquire their Bonds in the initial offering. The discussion below is based upon laws, regulations, rulings, and decisions in effect and available on the date hereof, all of which are subject to change, possibly with retroactive effect. Prospective investors should note that no rulings have been or are expected to be sought from the IRS with respect to any of the U.S. federal tax consequences discussed below, and no assurance can be given that the IRS will not take contrary positions. Further, the following discussion does not deal with U.S. tax consequences applicable to any given investor, nor does it address the U.S. tax considerations applicable to all categories of investors, some of which may be subject to special taxing rules (regardless of whether or not such investors constitute U.S. Holders), such as certain U.S. expatriates, banks, REITs, RICs, insurance companies, taxexempt organizations, dealers or traders in securities or currencies, partnerships, S corporations, estates and trusts, investors that hold their Bonds as part of a hedge, straddle or an integrated or conversion transaction, or investors whose functional currency is not the U.S. dollar. Furthermore, it does not address (i) alternative minimum tax consequences, (ii) the net investment income tax imposed under Section 1411 of the Code, or (iii) the indirect effects on persons who hold equity interests in a holder. This summary also does not consider the taxation of the Bonds under state, local or non-u.s. tax laws. In addition, this summary generally is limited to U.S. tax considerations applicable to investors that acquire their Bonds pursuant to this offering for the issue price that is applicable to such Bonds (i.e., the price at which a substantial amount of the Bonds are sold to the public) and who will hold their Bonds as capital assets within the meaning of Section 1221 of the Code. As used herein, U.S. Holder means a beneficial owner of a Bond that for U.S. federal income tax purposes is an individual citizen or resident of the United States, a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any state thereof (including the District 56

65 of Columbia), an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust where a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons (as defined in the Code) have the authority to control all substantial decisions of the trust (or a trust that has made a valid election under U.S. Treasury Regulations to be treated as a domestic trust). As used herein, Non-U.S. Holder generally means a beneficial owner of a Bond (other than a partnership) that is not a U.S. Holder. If a partnership holds Bonds, the tax treatment of such partnership or a partner in such partnership generally will depend upon the status of the partner and upon the activities of the partnership. Partnerships holding Bonds, and partners in such partnerships, should consult their own tax advisors regarding the tax consequences of an investment in the Bonds (including their status as U.S. Holders or Non-U.S. Holders). Prospective investors should consult their own tax advisors in determining the U.S. federal, state, local or non-u.s. tax consequences to them from the purchase, ownership and disposition of the Bonds in light of their particular circumstances. U.S. Holders Interest. Interest on the Bonds generally will be taxable to a U.S. Holder as ordinary interest income at the time such amounts are accrued or received, in accordance with the U.S. Holder s method of accounting for U.S. federal income tax purposes. To the extent that the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference may constitute original issue discount ( OID ). U.S. Holders of Bonds will be required to include OID in income for U.S. federal income tax purposes as it accrues, in accordance with a constant yield method based on a compounding of interest (which may be before the receipt of cash payments attributable to such income). Under this method, U.S. Holders generally will be required to include in income increasingly greater amounts of OID in successive accrual periods. Bonds purchased for an amount in excess of the principal amount payable at maturity (or, in some cases, at their earlier call date) will be treated as issued at a premium. A U.S. Holder of a Bond issued at a premium may make an election, applicable to all debt securities purchased at a premium by such U.S. Holder, to amortize such premium, using a constant yield method over the term of such Bond. Sale or Other Taxable Disposition of the Bonds. Unless a nonrecognition provision of the Code applies, the sale, exchange, redemption, retirement or other disposition of a Bond will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of a Bond will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of property received (except to the extent attributable to accrued but unpaid interest on the Bond, which will be taxed in the manner described above) and (ii) the U.S. Holder s adjusted U.S. federal income tax basis in the Bond (generally, the purchase price paid by the U.S. Holder for the Bond, decreased by any amortized premium, and increased by the amount of any OID previously included in income by such U.S. Holder with respect to such Bond ). Any such gain or loss generally will be capital gain or loss. In the case of a non-corporate U.S. Holder of the Bonds, the maximum marginal U.S. federal income tax rate applicable to any such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income if such U.S. holder s holding period for the Bonds exceeds one year. The deductibility of capital losses is subject to limitations. Information Reporting and Backup Withholding. Payments on the Bonds generally will be subject to U.S. information reporting and possibly to backup withholding. Under Section 3406 of the Code and applicable U.S. Treasury Regulations issued thereunder, a non-corporate U.S. Holder of the Bonds may be subject to backup withholding at the current rate of 28% with respect to reportable payments, which include interest paid on the Bonds and the gross proceeds of a sale, exchange, redemption, retirement or other disposition of the Bonds. The payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a U.S. taxpayer identification number ( TIN ) to the payor in the manner required, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a notified payee underreporting described in Section 3406(c) of the Code or (iv) the payee fails to certify under penalty of perjury that the payee is not subject to 57

66 withholding under Section 3406(a)(1)(C) of the Code. Amounts withheld under the backup withholding rules may be refunded or credited against the U.S. Holder s federal income tax liability, if any, provided that the required information is timely furnished to the IRS. Certain U.S. holders (including among others, corporations and certain tax-exempt organizations) are not subject to backup withholding. A holder s failure to comply with the backup withholding rules may result in the imposition of penalties by the IRS. Medicare Tax. A U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. Holder's net investment income for the relevant taxable year and (2) the excess of the U.S. Holder's adjusted gross income (increased by certain amounts of excluded foreign income) for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the individual's circumstances). A U.S. Holder's net investment income will generally include its interest income and net gain from the disposition of the Bonds, unless such interest income and net gain is derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). Net investment income may, however, be reduced by properly allocable deductions to such income. U.S. Holders that are individuals, estates or trusts are urged to consult their tax advisors regarding the applicability of the Medicare Tax to their income and gains from the Bonds. Non-U.S. Holders Interest. Subject to the discussions below under the headings Information Reporting and Backup Withholding and FATCA, payments of principal of, and interest on, any Bond to a Non-U.S. Holder, other than (1) a controlled foreign corporation, a such term is defined in the Code, which is related to the Corporation through stock ownership and (2) a bank which acquires such Bond in consideration of an extension of credit made pursuant to a loan agreement entered into in the ordinary course of business, will not be subject to any U.S. federal withholding tax provided that the beneficial owner of the Bond provides a certification completed in compliance with applicable statutory and regulatory requirements, which requirements are discussed below under the heading Information Reporting and Backup Withholding, or an exemption is otherwise established. Disposition of the Bonds. Subject to the discussions below under the headings Information Reporting and Backup Withholding and FATCA, any gain realized by a Non-U.S. Holder upon the sale, exchange, redemption, retirement (including pursuant to an offer by the Corporation) or other disposition of a Bond generally will not be subject to U.S. federal income tax, unless (i) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business within the United States; or (ii) in the case of any gain realized by an individual Non- U.S. Holder, such holder is present in the United States for 183 days or more in the taxable year of such sale, exchange, redemption, retirement (including pursuant to an offer by the Corporation) or other disposition and certain other conditions are met. U.S. Federal Estate Tax. A Bond that is held by an individual who at the time of death is not a citizen or resident of the United States will not be subject to U.S. federal estate tax as a result of such individual s death, provided that, at the time of such individual s death, payments of interest with respect to such Bond would not have been effectively connected with the conduct by such individual of a trade or business within the United States. Information Reporting and Backup Withholding. Subject to the discussion below under the heading FATCA, under current U.S. Treasury Regulations, payments of principal and interest on any Bonds to a holder that is not a United States person will not be subject to any backup withholding tax requirements if the beneficial owner of the Bond or a financial institution holding the Bond on behalf of the beneficial owner in the ordinary course of its trade or business provides an appropriate certification to the payor and the payor does not have actual knowledge that the certification is false. If a beneficial owner provides the certification, the certification must give the name and address of such owner, state that such owner is not a United States person, or, in the case of an individual, that such owner is neither a citizen nor a resident of the United States, and the owner must sign the certificate under penalties of perjury. The current backup withholding tax rate is 28%. 58

67 FATCA On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act, which included the Foreign Account Tax Compliance Act ( FATCA ). Under the FATCA provisions, foreign financial institutions (which generally include hedge funds, private equity funds, mutual funds, securitization vehicles and other investment vehicles regardless of their size) that are not otherwise exempt from FATCA must comply with new information reporting rules with respect to their U.S. account holders and investors or confront a new withholding tax on U.S. source payments made to them. Specifically, FATCA requires that foreign financial institutions enter into an agreement with the United States government to collect and provide the IRS substantial information regarding U.S. account holders of such foreign financial institution, comply with the terms of an applicable intergovernmental agreement between the United States and such foreign financial institution s jurisdiction of formation, or establish an exemption from FATCA. Additionally, FATCA requires certain foreign entities that are not financial institutions to provide the withholding agent with a certification identifying the substantial U.S. owners of such foreign entity. A foreign financial institution or other foreign entity that does not comply with the FATCA reporting requirements is subject to a 30% withholding tax with respect to any withholdable payments. For this purpose, withholdable payments include U.S. source payments of taxable interest and the entire gross proceeds from the sale of any debt instruments of U.S. issuers. FATCA withholding on gross proceeds generally will apply to payments of gross proceeds made after December 31, The FATCA withholding tax applies regardless of whether the payment would otherwise be exempt from U.S. nonresident withholding tax (e.g., under an income tax treaty, the portfolio interest exemption or as capital gain). FATCA withholding does not apply to withholdable payments made directly to foreign governments, international organizations, foreign central banks of issue and individuals, and the Treasury is authorized to provide additional exceptions. The IRS announced in Notice , I.R.B released on May 2, 2014, that calendar years 2014 and 2015 would be regarded as a transition period for purposes of IRS enforcement and the administration of FATCA s due diligence, reporting, and withholding provisions. The IRS will take into account the extent to which a foreign financial institution or other foreign entity has made good faith efforts to comply with the requirements in determining whether to provide enforcement relief during this transition period. The Bonds are subject to the above FATCA provisions. Accordingly, holders (particularly Non-U.S. Holders) should consult their tax advisors regarding the applicability of the FATCA requirements. Other Matters Special rules not discussed in this summary may apply to certain Non-U.S. Holders that are classified for federal income tax purposes as controlled foreign corporations, passive foreign investment companies, expatriates, surrogate foreign corporations, personal holding companies, or corporations that accumulate earnings to avoid United States federal income tax. Effect of Defeasance Defeasance of any of the Bonds may result in a reissuance thereof, in which event the Holder will recognize taxable gain or loss equal to the difference between the amount realized from the sale, exchange or retirement (less any accrued qualified stated interest which will be taxable as such) and the Holder s adjusted tax basis in the Bonds. Other The foregoing summary is included herein for general information only and does not discuss all aspects of U.S. federal taxation that may be relevant to a particular holder of Bonds in light of the holder s particular circumstances and income tax situation. Prospective investors are urged to consult their own tax advisors as to any tax consequences to them from the purchase, ownership and disposition of Bonds, including the application and effect of state, local, non-u.s., and other tax laws. 59

68 CERTAIN ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended ( ERISA ), imposes certain restrictions on employee pension and welfare benefit plans subject to ERISA ( ERISA Plans ) regarding prohibited transactions, and also imposes certain obligations on those persons who are fiduciaries with respect to ERISA Plans. Section 4975 of the Code imposes similar prohibited transaction restrictions on (i) tax-qualified retirement plans described in Section 401(a) and 403(a) of the Code, which are exempt from tax under section 501(a) of the Code and which are not governmental and church plans as defined herein ( Qualified Retirement Plans ), and (ii) Individual Retirement Accounts described in Section 408 and 408(A) of the Code, and certain other plans described in Section 4975(e) of the Code ( Tax-Favored Plans ). Certain employee benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA), and, if no election has been made under Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA requirements. Additionally, such governmental and non-electing church plans are not subject to the requirements of Section 4975 of the Code. Although assets of such governmental or non-electing church plans, as well as non-u.s. plans, may be invested in the Bonds without regard to the ERISA and Code considerations described below, any such investment may be subject to provisions of applicable federal and state law, or non-u.s. law, that are, to a material extent, similar to the requirements of ERISA and Section 4975 of the Code ( Similar Law ). Accordingly, fiduciaries of such plans should consult with their counsel in considering whether to purchase the Bonds. In addition to the imposition of general fiduciary obligations, including those of investment prudence and diversification and the requirement that a plan s investment be made in accordance with the documents governing the plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions involving assets of ERISA Plans and Tax-Favored Plans and entities whose underlying assets include plan assets by reason of ERISA Plans or Tax-Favored Plans investing in such entities (collectively, Benefit Plans ) and persons who have certain specified relationships to the Benefit Plans (such persons are referred to as Parties in Interest or Disqualified Persons ), unless a statutory or administrative exemption is available. The definitions of Party in Interest and Disqualified Person are expansive. While other entities may be encompassed by these definitions, they include, most notably: (i) a fiduciary with respect to a Benefit Plan; (ii) a person providing services to a Benefit Plan; and (iii) an employer or employee organization any of whose employees or members are covered by the Benefit Plan. Certain Parties in Interest (or Disqualified Persons) that participate in a prohibited transaction may be subject to a penalty (or an excise tax) imposed pursuant to Section 502(i) of ERISA (or Section 4975 of the Code) unless a statutory or administrative exemption is available. Plan asset issues. Certain transactions involving the purchase, holding or transfer of the Bonds might be deemed to constitute prohibited transactions under ERISA and the Code if assets of the Corporation were deemed to be assets of a Benefit Plan. The U.S. Department of Labor has promulgated regulations at 29 C.F.R. Section , as modified by Section 3(42) of ERISA, describing what constitutes the assets of an employee benefit plan with respect to the plan s investment in an entity for purposes of certain provisions of ERISA and Section 4975 of the Code, including the fiduciary responsibility provisions of Title I of ERISA and Section 4975 of the Code (the Plan Asset Regulation ). Under the Plan Assets Regulation, the assets of the Corporation would be treated as plan assets of a Benefit Plan for purposes of ERISA and the Code only if the Benefit Plan acquires an equity interest in the Corporation and none of the exceptions contained in the Plan Assets Regulation is applicable. An equity interest is defined under the Plan Assets Regulation as an interest in an entity other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Although there can be no assurances in this regard, it appears that the Bonds should be treated as debt without substantial equity features for purposes of the Plan Assets Regulation. Accordingly, the assets of the Corporation should not be treated as the assets of plans investing in the Bonds. If the Corporation s assets were deemed to constitute plan assets pursuant to the Plan Asset Regulation, transactions that the Corporation might enter into, or may have entered into in the ordinary course of business, might constitute non-exempt prohibited transactions under ERISA and/or Section 4975 of the Internal Revenue Code. Prohibited Transaction Exemptions. However, without regard to whether the Bonds are treated as an equity interest for such purposes, the acquisition or holding of Bonds by or on behalf of a Benefit Plan could be considered 60

69 to give rise to a prohibited transaction if the Corporation, the Guarantors, the Master Trustee or the Trustee, or any of their respective affiliates, is or becomes a Party in Interest or a Disqualified Person with respect to such Benefit Plan. The fiduciary of a Benefit Plan that proposes to purchase and hold any Bonds should consider, among other things, whether such purchase and holding may involve (i) the direct or indirect extension of credit to a Party in Interest, (ii) the sale or exchange or any property between a Benefit Plan and a Party in Interest, and (iii) the transfer to, or use by or for the benefit of, a Party in Interest, of any Benefit Plan assets. Certain exemptions from the prohibited transaction rules could be applicable depending on the type and circumstances of the plan fiduciary making the decision to acquire a Bond. These are commonly referred to a prohibited transaction class exemption or PTCEs. Included among these exemptions are: PTCE 75-1, which exempts certain transactions between a plan and certain broker dealers, reporting dealers and banks; PTCE 96-23, which exempts certain transactions effected at the sole discretion of an in-house asset manager ; PTCE 90-1, which exempts certain investments by insurance company pooled separate accounts; PTCE 95-60, which exempts certain transactions effected on behalf of an insurance company general account ; PTCE 91-38, which exempts certain investments by bank collective investment funds; and PTCE 84-14, which exempts certain transactions effected at the sole discretion of a qualified professional asset manager. Note that IRAs (and certain other plans described in Section 4975(e)(1) of the Code) are typically not represented by banks, insurance companies or registered investment advisors so that, practically speaking, these status-based PTCEs may be unavailable. In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code generally provide for a statutory exemption, commonly referred to as the Service Provider Exemption, from the prohibitions of Section 406(a) of ERISA and Section 4975 of the Code for certain transactions provided that neither the issuer of the securities nor any of its affiliates (directly or indirectly) have or exercise any discretionary authority or control or render any investment advice with respect to the assets of any Benefit Plan involved in the transaction and further provided that the Benefit Plan pays no more than adequate consideration in connection with the transaction. The availability of each of these PTCEs and/or the Service Provider Exemption is subject to a number of important conditions which the plan s fiduciary must consider in determining whether such exemptions apply. Because of the foregoing, the Bonds (and any interest therein) may not be purchased or held by any person investing plan assets of any Benefit Plan, unless such purchase and holding will not constitute or result in a nonexempt prohibited transaction under ERISA and the Code or similar violation of any applicable Similar Laws. No assurance can be provided that any of the above-listed PTCEs or the Service Provider Exemption will apply with respect to any particular investment in the Bonds by, or on behalf of, a Benefit Plan (or other entity deemed to hold assets of a Benefit Plan under the Plan Asset Regulations) or, even if it were deemed to apply, that any exemption would apply to all transactions that may occur in connection with the investment. Accordingly, by its acceptance of a Bond, each purchaser and any fiduciary acting in connection with the purchase on behalf of a Benefit Plan will be deemed to have represented and warranted that either (i) no plan assets of any Benefit Plan have been used to purchase such Bond, or (ii) that the acquisition, holding and the disposition of any Bond by such holder does not and will not constitute a prohibited transaction under ERISA or Section 4975 of the Code or other Similar Laws for which there is no applicable statutory, regulatory or administrative exemption. 61

70 Any Benefit Plan fiduciary considering whether to purchase Bonds on behalf of an ERISA Plan should, prior to purchasing the Bonds, consult with its counsel regarding the applicability of the fiduciary responsibility and prohibited transaction provisions of ERISA and the Code to such investment and the availability of any of the exemptions referred to above. In addition, persons responsible for considering the purchase of Bonds by a governmental plan, non-electing church plan or non-u.s. plan should consult with its counsel regarding the applicability of any Similar Law to such an investment. LEGAL MATTERS Certain legal matters will be passed upon for the Corporation by the Executive Vice President and General Counsel to the Corporation and Ballard Spahr LLP, special outside counsel to the Corporation. Certain legal matters will be passed upon for the Underwriters by their counsel, Orrick, Herrington & Sutcliffe LLP. FINANCIAL ADVISORS The Corporation has retained Kaufman, Hall & Associates, LLC, Skokie, Illinois, as financial advisor in connection with the issuance of the Bonds. Although Kaufman, Hall & Associates, LLC has assisted in the preparation of this Offering Memorandum, Kaufman, Hall & Associates, LLC was not and is not obligated to undertake, and has not undertaken to make, an independent verification and assumes no responsibility for the accuracy, completeness or fairness of the information contained in this Offering Memorandum. INDEPENDENT AUDITORS The consolidated financial statements of MedStar Health, Inc. and its subsidiaries as of June 30, 2013 and 2014 and for each of the years then ended included in Appendix B to this Offering Memorandum have been audited by KPMG LLP, independent auditors as stated in their report appearing therein. CERTAIN RELATIONSHIPS The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various investment banking services for the Corporation for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of, or issued for the benefit of, the Corporation. JPMorgan Chase Bank, N.A. is an affiliate of J.P. Morgan Securities LLC, which is serving as an Underwriter of the Bonds, and provides a letter of credit that supports Tranche II of the 1998A District of Columbia Bonds. CONTINUING DISCLOSURE The Corporation has undertaken for the benefit of the Holders of the Bonds to provide certain financial information and operating data, audited financial statements and notices of the occurrence of certain events. The specific nature of the information to be provided is set forth in the form of Continuing Disclosure Agreement attached hereto as Appendix D. Since the Bonds are taxable securities issued directly by the Corporation, the Electronic Municipal Market Access ( EMMA ) website of the Municipal Securities Rulemaking Board (the MSRB ) is not directly available 62

71 for the filing of annual or quarterly reports or listed event notices relating to the Bonds. The Corporation will, however, file such reports and notices on EMMA so long as it has tax-exempt bonds outstanding, using the CUSIP numbers for such tax-exempt bonds. If no such tax-exempt bonds are outstanding, the Corporation will make such reports and notices available through any other nationally recognized disclosure site or through the Corporation s website. The Corporation has previously entered into continuing disclosure undertakings in connection with the issuance of bonds issued for the benefit of the Corporation. During the last five years, except as otherwise set forth herein, the Corporation has complied with all its continuing disclosure undertakings. As required by the undertakings, during that period, except as described below, the Corporation provided all required documents to its appointed dissemination agent. During certain years, however, the dissemination agent failed to file some portions of the Corporation s Annual Report with the Nationally Recognized Municipal Securities Information Repositories and/or the Municipal Securities Rulemaking Board s EMMA system, as required by the undertakings. As soon as the Corporation became aware of the incomplete filings, the Corporation caused the complete reports to be filed and implemented procedures to monitor the dissemination agent s future compliance with the undertakings. The Corporation has also discovered that notices were not filed for several rating changes for insured bonds and one instance of a rating change for uninsured bonds. The Corporation has determined that such filings were not material and has covenanted, and intends, to continue to fully comply with its continuing disclosure undertakings in the future. MISCELLANEOUS The foregoing and subsequent summaries and descriptions of provisions of the Bonds, the Indenture, the Master Indenture, the 2015B Obligation, the Guaranty Agreement, the Deeds of Trust and other materials 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 such instruments, documents and other materials. The attached Appendices are integral parts of this Offering Memorandum and should be read in their entirety together with all of the foregoing information. Copies, in reasonable quantity, of the Indenture, the Master Indenture, the 2015B Obligation, the Guaranty Agreement and the Deeds of Trust may be obtained during the offering period upon request directed to the Underwriters. The information contained in this Offering Memorandum has been compiled or prepared from information obtained from the Corporation and official and other sources deemed to be reliable and, while not guaranteed as to completeness or accuracy, is believed to be correct as of this date. Any statements involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. 63

72 This Offering Memorandum has been delivered by the Corporation. This Offering Memorandum is not to be considered as a contract or agreement between the Corporation and the purchasers or Holders of any of the Bonds. MEDSTAR HEALTH, INC. By /s/ Michael J. Curran Michael J. Curran Executive Vice President, Chief Administrative and Financial Officer 64

73 APPENDIX A MEDSTAR HEALTH, INC. AND THE SYSTEM

74 [THIS PAGE INTENTIONALLY LEFT BLANK]

75 Distributed Care Delivery Network MedStar Health System Sites Note: There are 2 Employed Physician Offices in Cumberland, MD and 1 Outpatient Rehab site in Salisbury, MD not shown on the map. A-i

76 TABLE OF CONTENTS Page INTRODUCTION... A-1 CORPORATE ORGANIZATION AND SYSTEM AFFILIATES... A-2 Corporate Organization... A-2 System Overview... A-3 System Affiliates... A-4 Reserved Powers of MedStar... A-4 System-Wide Functions... A-5 Board of Directors... A-6 Certain Relationships... A-7 Executive Management... A-8 ACUTE CARE FACILITIES... A-11 The Hospitals... A-12 Medical Staff... A-14 Licenses and Accreditations... A-14 Academic Affiliations and Research Activities... A-14 NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES... A-15 Physician Networks... A-15 Health Plans... A-15 Home Health Care... A-16 Post Acute Facilities... A-16 Ambulatory Surgery and Urgent Care... A-16 Radiation Oncology... A-16 Rehabilitation Sites... A-16 Air and Ground Transportation... A-17 Retail Pharmacies... A-17 MARKET FORCES AND ENVIRONMENT... A-17 Regional Focus / Service Area... A-17 Market Regulation... A-18 Service Area Competition... A-19 Reimbursement... A-20 A-ii

77 TABLE OF CONTENTS Page HISTORICAL UTILIZATION... A-22 SUMMARY FINANCIAL INFORMATION... A-22 Summary of Operations... A-22 Capitalization... A-23 Debt Service Coverage... A-24 MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION... A-25 Overview... A-25 Three-Month Period Ended September 30, 2014 Compared to Three-Month Period Ended September 30, A-25 Fiscal Year Ended June 30, 2014 Compared to Fiscal Year Ended June 30, A-26 Retirement Plans... A-27 Liquidity and Capital Resources... A-28 Investment Policy.... A-28 Investment Performance.... A-29 Financing Transactions.... A-29 Debt and Interest Rate Swap Management Policy... A-29 Interest Rate Swap Agreement... A-30 Agreements with Georgetown University... A-30 STRATEGIC INITIATIVES... A-30 MedStar A-30 Acute Care Strategy... A-31 Ambulatory Care and Physician Alignment... A-31 Post Acute Care Strategy... A-32 Population Health... A-32 Quality and Safety Improvements... A-32 Supply Chain Initiatives... A-34 Facilities Management... A-34 MedStar Leader of the Future... A-34 MedStar 2020 Performance Transformation... A-34 Innovation and Research... A-34 Enterprise Risk Management... A-35 Information Technology Strategy... A-35 A-iii

78 TABLE OF CONTENTS Page RESTRICTED FUNDS... A-36 EMPLOYEES... A-36 VOLUNTEERS... A-37 COMMUNITY BENEFITS... A-37 Let s Move Challenge... A-37 Women s Health Improvement Program (WHIP)... A-38 Kids Mobile Medical Clinic (KMMC)... A-38 Rx For Success... A-38 Hair, Heart & Health... A-38 Shepherd s Clinic... A-38 INSURANCE... A-38 Professional and General Liability... A-38 Comprehensive Property Insurance... A-39 Workers Compensation... A-39 Other Insurance... A-39 LEGAL MATTERS... A-39 A-iv

79 MEDSTAR HEALTH, INC. AND THE SYSTEM INTRODUCTION MedStar Health, Inc. (MedStar or the Company), a Maryland non-stock membership corporation, is the controlling entity of an integrated regional healthcare system (the System) offering a wide variety of healthcare services to people living and working in Maryland and the Washington, D.C., region. MedStar s approximately 30,000 employees and 6,000 affiliated physicians support the System s patient-first philosophy that combines care, compassion and clinical excellence with an emphasis on customer service. MedStar combines the best aspects of academic medicine, research and innovation with a complete spectrum of clinical services to advance patient care. As the largest healthcare provider in Maryland and the Washington, D.C., region, MedStar s 10 hospitals, the MedStar Health Research Institute and the System s comprehensive offering of health-related services are recognized regionally and nationally for excellence in medical care. Hospitals Baltimore Region MedStar Franklin Square Medical Center MedStar Good Samaritan Hospital MedStar Harbor Hospital MedStar Union Memorial Hospital Washington D.C. Region The System: Principal Operating Entities MedStar Georgetown University Hospital MedStar Montgomery Medical Center RadAmerica MedStar National Rehabilitation Network MedStar Southern Maryland Hospital Center MedStar St. Mary s Hospital MedStar Washington Hospital Center Other Principal Operating Entities MedStar Ambulatory Services MedStar Enterprises MedStar Family Choice MedStar Health Research Institute MedStar Medical Group MedStar Physician Partners MedStar Visiting Nurse Association Parkway Ventures Through its hospitals, outpatient facilities, physician organizations, and other healthcare related businesses, the System offers a broad continuum of healthcare services including acute care (secondary, tertiary and quaternary), primary care, emergency/urgent care, ambulatory surgery, rehabilitation (hospitalbased and outpatient), post acute care, home care, adult day care, health promotion and wellness, and medical research and education. The System operates one of the largest home health businesses in the region with more than 263,000 annual visits and a Medicaid managed care plan with more than 109,000 covered lives. The System offers specialized services that include cardiac surgery, neurosciences, orthopaedics, organ transplantation, neonatal intensive care, cancer care, shock/trauma, burn care and hand surgery. MedStar Washington Hospital Center, MedStar Union Memorial Hospital, and the MedStar National Rehabilitation Hospital are all nationally recognized. MedStar Washington Hospital Center has been recognized in by U.S. News & World Report as one of the best hospitals for cardiology and heart surgery, ranking 36 th in the nation, and is the only hospital nationally listed for this specialty in the Washington, D.C. metropolitan area. The MedStar Heart & Vascular Institute at MedStar Washington Hospital Center and MedStar Union Memorial Hospital were rated as one of the top five cardiac surgery programs by volume in the United States by the Society of Thoracic Surgeons. For 20 consecutive years, MedStar National Rehabilitation Hospital has been named as one of America s Best Hospitals by U.S. A-1

80 News & World Report and it was listed as the 12 th best hospital in the nation for rehabilitation based on rankings. MedStar Washington Hospital Center s Trauma Program is a Level 1 trauma center according to the American College of Surgeons, the highest national recognition a trauma center can receive. The Burn Center at MedStar Washington Hospital Center is the Washington region s only adult burn treatment facility with more than 400 patients treated annually. The Curtis National Hand Center at MedStar Union Memorial Hospital has grown to be one of the largest hand centers in the world offering 14 surgeons, a prominent fellowship program, a complete research department, and the most certified hand therapists in the nation. In 2013, the chief of the Hand Center was the co-leader on a multi-institutional team that performed one of the very few double arm transplants ever attempted. The System sponsors a wide array of significant educational programs including physician residency programs that provide clinical training opportunities for medical students in the Washington, D.C., and Baltimore metropolitan areas. MedStar has one of the largest teaching programs in the country with more than 1,100 residents and fellows participating in 80 accredited residency and fellowship programs. MedStar is the educational and clinical partner of Georgetown University. Corporate Organization CORPORATE ORGANIZATION AND SYSTEM AFFILIATES MedStar is the sole member or stockholder of, and retains reserved corporate powers over, the System s hospitals and affiliates. The following organizational chart outlines the current structure of the major components of the System. A-2

81 MedStar Health, Inc. MedStar Franklin Square Medical Center * HH MedStar Health, Inc. MedStar Good Samaritan Hospital * MedStar Ambulatory Services, Inc.. MedStar Medical Group, LLC MedStar Harbor Hospital * Parkway Ventures, Inc. MedStar Union Memorial Hospital * MedStar Family Choice Inc. * MedStar Georgetown University Hospital * MedStar Pharmacies, Inc. Georgetown Physicians Group MedStar Montgomery Medical Center Greenspring Financial Insurance Limited MedStar Physician Partners RadAmerica II, LLC MedStar National Rehabilitation Network MedStar Health Research Institute, Inc. MedStar Southern Maryland Hospital Center, Inc.* VNA, Inc. MedStar St. Mary s Hospital MedStar Washington Hospital Center * MedStar Enterprises, Inc. *Represents Material System Affiliates (i.e., generates 5% or more of the System s total revenues) as defined in the Master Indenture. See CORPORATE ORGANIZATION AND SYSTEM AFFILIATES - System Affiliates for more information. System Overview MedStar offers the largest network of healthcare services in the Baltimore Washington, D.C. region, including an acute care network with nine acute care hospitals; ambulatory facilities, including three ambulatory surgery centers, three multi-specialty centers, three family medical centers, and 10 urgent care centers; post-acute care facilities, including a rehabilitation hospital, 44 outpatient rehabilitation sites and 10 hospital-based rehabilitation sites; home health with approximately 263,000 annual visits; a broad physician network with 1,700 employed physicians and 155 employed physician office sites; Medicaid and Medicare managed care organizations with over 109,000 covered lives; and other ancillary healthcare businesses. See the map included in this Offering Memorandum which illustrates the System s distributed care delivery network. A-3

82 System Affiliates MedStar Franklin Square Medical Center, MedStar Georgetown University Hospital, MedStar Good Samaritan Hospital, MedStar Harbor Hospital, MedStar Southern Maryland Hospital Center, MedStar Union Memorial Hospital, MedStar Washington Hospital Center, and MedStar Family Choice are Material System Affiliates, as defined under the Master Indenture. All entities referenced above, except for MedStar Family Choice, are Guarantors under the Guaranty Agreement dated as of February 1, 2004, as amended. 1 See APPENDIX C SUMMARIES OF PRINCIPAL LEGAL DOCUMENTS Summary of Certain Provisions of the Master Indenture Definitions. Although MedStar Montgomery Medical Center, MedStar National Rehabilitation Network, MedStar St. Mary s Hospital, HH MedStar Health, Parkway Ventures, MedStar Visiting Nurse Association, and MedStar Enterprises are not Material System Affiliates, they are Guarantors under the Guaranty Agreement. MedStar also has numerous other nonprofit and taxable subsidiaries providing primary care, urgent care, post acute care services, pharmacy, infusion services, radiation therapy, rehabilitation and other services to outpatients. These entities are not parties to the Guaranty Agreement. Each hospital has a board of directors which is elected by or subject to the approval of the Board of Directors of MedStar (MedStar Board). The hospital boards exercise authority for credentialing of physicians and other healthcare providers and provide oversight for the quality and utilization review of the healthcare services provided by the hospitals. The hospital boards are also involved in fundraising and community affairs in their local service areas. Some members of the hospital boards are appointed as members of individual Committees of the MedStar Board (excluding the Executive, Executive Compensation, Audit and Compliance, and Governance Committees, each of which is composed solely of MedStar Board members). These appointments provide another channel for communication between the hospitals and MedStar on finance, investment, philanthropy, strategic planning, and other functions of the MedStar Board. Reserved Powers of MedStar MedStar is the sole member of each hospital corporation in the System and has the right, either directly or indirectly, to elect or approve board members for each of these organizations and their affiliates. MedStar has reserved powers, directly or indirectly, for the financial management, resource allocation and strategic planning for all affiliates of the System. Subject to delegations which it may make to the board of a hospital or other subsidiary or affiliate, MedStar has authority in the following general categories: 1 Although MedStar Family Choice (MFC), a Medicaid and Medicare managed care organization operating in Maryland and the District of Columbia, constitutes a Material System Affiliate since it generated in excess of 5.0% of the System's revenues during the past fiscal year, the Master Trust Indenture will be amended at the time of the issuance of the Bonds to exclude MFC from becoming a Guarantor given the regulatory restrictions placed on its assets by Maryland and the District of Columbia, making MFC presently unable to satisfy the obligations of a Guarantor under the Guaranty Agreement. A second amendment to the Master Trust Indenture will be made to eliminate any Material System Affiliate that constitutes a regulated insurance entity (including MFC) from ever becoming a Guarantor. This amendment will require the consent of the majority of the holders of outstanding Obligations under the Master Trust Indenture as well as a majority of the holders of the bonds secured by the Obligations. The foregoing required consents will be obtained in the manner discussed under SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Amendments of Master Indenture in the forepart of this Offering Memorandum. See NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES Health Plans herein for a description of the operations of MFC. A-4

83 Corporate actions, including: election of individuals to fill vacancies on the board of directors of each affiliate from individuals nominated by the board of the affiliate; approval of nominees for board officers of each affiliate; approval of the dissolution, liquidation, merger or consolidation of any affiliate; removal of any director from any affiliate; and approval of any amendment to the articles of incorporation or bylaws of any affiliate. Planning and Operations, including: approval and implementation of a strategic and financial plan for the System, and approval of the strategic annual operating and financial objectives and plans of each affiliate; development of operational plans and strategies, including the development and implementation of extensive quality and safety initiatives; negotiation of supply chain contracts and implementation of cost management initiatives. Financial management and resource allocation, including: adoption of annual operating and capital budgets; approval of the sale, transfer, or encumbrance of real property; approval of proposed contracts or commitments, including capital, above a threshold level; approval of lending of funds, investment management, banking relationships, and the issuance of debt or guarantees; approval of investment in other business entities; selection of the independent auditor; approval of transfers of assets; approval of financial policies and actions for the centralized investment of all funds within the System; and approval of accounting and monitoring of the expenditure of endowment funds. Contracts and debt instruments binding affiliates, including: contracts and agreements obligating affiliates consistent with appropriate System policies; rate agreements for the Maryland hospitals; managed care and third party payor agreements; transfer of ownership of property among affiliates, subject to applicable financing documents, loan instruments, master trust indentures, wills or trusts and other applicable debt or gift instruments; authorization and approval of the issuance of tax-exempt bonds and other debt and the execution and delivery of mortgages and other security instruments securing such bonds or other debt in the name of any affiliate individually, or as a member of an obligated group; authorization and approval of all necessary actions in connection with other debt instruments on behalf of the affiliates; and management, investment and disbursement of proceeds of bond issues or other debt on behalf of the affiliate in compliance with the applicable debt documents. System-Wide Functions MedStar has established a variety of corporate functions, including: quality and safety, certain financial services described below, information systems, legal services, risk management, compliance, privacy, business and system development, planning, marketing, external affairs, philanthropy services, managed care, internal audit, and academic affairs. MedStar s corporate quality and safety team coordinates the development and implementation of safety initiatives across the organization. This team works with clinicians across the System to identify opportunities to develop processes, implement changes, and enhance communications in order to improve patient outcomes (see STRATEGIC INITIATIVES MedStar Quality and Safety Improvements ). Legal and regulatory compliance programs have also been established by MedStar. The System s compliance program is managed at the corporate level, providing compliance oversight to MedStar s subsidiaries and affiliates, spanning such key areas as third party reimbursement, fraud and abuse, antitrust, tax, regulatory, privacy and human resources. Substantially all of the work force of MedStar has received compliance training. The Audit and Compliance Committee of the MedStar Board has been given ultimate responsibility for oversight of System-wide audit and compliance efforts. A-5

84 MedStar utilizes a centralized operating and capital budget process. A forecast and strategic plan is prepared which aligns the System s clinical initiatives, community marketplace demands, and MedStar s strategic objectives with available financial resources. Capital investments are made within a framework established by management and approved by the MedStar Board. Priority approval of capital spending is given to projects required for safety or routine purposes and to expenditures that generate income measured by return on investment, protect existing assets, or enhance technology, subject to maintaining key financial ratios including days cash on hand, debt to capitalization and debt service coverage. Along with corporate accounting and reporting and selected business analysis and financial planning, MedStar provides treasury services including investment, debt and tax management on a centralized basis. MedStar maintains its Professional Support Services staff in White Marsh, Maryland which provides back office functions of hospital billing for the four Baltimore hospitals, MedStar Georgetown University Hospital and MedStar Washington Hospital Center. Services provided also include payroll, accounts payable, purchasing, fixed assets, general ledger, and inventory for the four Baltimore hospitals, MedStar Georgetown University Hospital, MedStar Washington Hospital Center and many of MedStar s other principal operating entities. In addition, MedStar maintains a physician billing center in Arlington, Virginia which provides billing and collection services for employed and contracted physicians at MedStar Georgetown University Hospital, MedStar Washington Hospital Center, the four Baltimore hospitals and the ambulatory providers employed by the MedStar Medical Group. Board of Directors While MedStar s hospitals have boards of directors, MedStar is governed by the MedStar Board of Directors. Major oversight functions and powers are reserved to the MedStar Board through MedStar s bylaws. These reserved powers are outlined above in the section entitled Reserved Powers of MedStar. The MedStar Board carries out its functions and exercises its powers through Board meetings and through the meetings of ten committees: Strategic Planning; Finance; Executive Compensation; Governance; Audit and Compliance; Quality, Safety and Professional Affairs; Investment; Pension and Benefits; Philanthropy; and Executive. The MedStar Board of Directors is currently composed of 18 members. The President and Chief Executive Officer of MedStar and the President of Georgetown University serve as ex-officio voting members. The remaining 16 members of the Board are elected through a self- perpetuating nomination and election process, as specified in the MedStar bylaws, whereby members may serve up to three terms, with each term lasting three years. Candidates for nomination for vacancies on the Board are selected based on their business experience and community service, with some preference given to individuals with prior hospital board service within the System. MedStar s bylaws require physician representation at the Board level. Five of the current Board members are physicians. The current directors are shown in the chart below. MEDSTAR HEALTH, INC. BOARD OF DIRECTORS Name Occupation Maximum Term Expiration Rosie Allen-Herring President & CEO of the United Way of the National 2023 Capitol Area Chandralekha Banerjee, M.D. Chief of Infection Control, MedStar Good Samaritan Hospital 2015 Andrew J. Berry President, Drew Berry & Associates 2015 Anthony J. Buzzelli Vice Chairman, Deloitte, Retired 2020 William Couper Retired President of MidAtlantic-Bank of America 2022 A-6

85 Name Occupation Maximum Term Expiration John J. DeGioia, Ph.D. President, Georgetown University Ex officio Marc N. Duber Executive Vice President and Chief Operating Officer, The Bernstein Companies 2019 Mark T. Jensen, Esquire Co-Founder, Bowie & Jensen, LLC 2019 Christopher G. Kalhorn, M.D., FACS, FAANS Associate Professor of Neurosurgery and Director of Epilepsy Surgery, Functional Neurosurgery and Pediatric Neurosurgery, MedStar Georgetown University Hospital 2023 Roberta M. Loker Loan Officer, Primary Residential Mortgage, Inc Vincent J. Martorana, DPM Catherine A. Meloy William J. Oetgen, Jr., M.D., MBA William R. Roberts Section Chief, Podiatric Surgery, MedStar Franklin Square Medical Center President and Chief Executive Officer, Goodwill of Greater Washington Vice-Chair, MedStar Health, Inc. / Executive Vice President, Science & Quality, American College of Cardiology Chair, MedStar Health Inc. / President and CEO, WR Roberts Company Kenneth A. Samet, FACHE President and Chief Executive Officer, MedStar Health, Inc. Ex officio Allen J. Taylor, M.D. Sara E. Watkins Hon. Togo D. West Jr. Certain Relationships Chief of Cardiology at MedStar Heart Institute, MedStar Georgetown University Hospital and MedStar Washington Hospital Center Senior Vice President, Capacity Partners Chairman, TLI Leadership Group The MedStar Board has adopted a Conflict of Interests and Interactions with Industry policy and a Business Ethics and Confidentiality policy. These policies require disclosure of any actual or potential conflict by any Board member or officer who has a financial interest (1) in any transaction or arrangement with MedStar or its affiliates, or (2) in competition with MedStar. The Governance Committee of the MedStar Board oversees the implementation of these policies. The following relationships are noteworthy under this policy: Dr. Banerjee is a physician contractor of a System hospital. A-7

86 Dr. DeGioia is president of Georgetown University, which is a party to several agreements with MedStar. See MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION - Agreements with Georgetown University below. Mr. Duber has a partial ownership interest in a property in which commercial space is leased to a MedStar affiliate. Secretary West serves on the Board of Bristol-Meyers Squibb, a pharmaceutical company that provides pharmaceutical supplies to MedStar. Executive Management The following are the executive officers of the System: Kenneth A. Samet, FACHE, President and Chief Executive Officer (56) - MedStar s Leadership Team is led by Kenneth A. Samet, who was named President and Chief Executive Officer (CEO) for MedStar on January 1, Mr. Samet served as the President and Chief Operating Officer (COO) of MedStar from 2003 to 2008, and was responsible for all operational aspects of the companies that comprise the System. From 2000 to 2003, Mr. Samet served as Executive Vice President and COO of MedStar. He has dedicated his career to health care since receiving his master s degree in health services administration from the University of Michigan in Mr. Samet served as president of Washington Hospital Center from 1990 to From the mid-1980s to 1990, he held a variety of executive leadership positions with the Medlantic Healthcare Group, which merged with Helix Health in 1998 to create MedStar Health. Mr. Samet is presently a member of the Board of Directors at Georgetown University, the Greater Baltimore Committee, the Economic Club of Washington, United Way of the National Capital Area and Goodwill of Greater Washington; and serves on the Executive Committee for the Boards of the Greater Washington Board of Trade, and the Federal City Council. He has held leadership positions on the Boards of the American Hospital Association, District of Columbia Hospital Association and Maryland Hospital Association and served on the Board of Visitors for the University of Maryland School of Nursing. Mr. Samet is also a past Board member and Chair of the Academic Affairs Committee of the Old Dominion University Board of Visitors, where he received his bachelor s degree in business administration in 1980 and an honorary doctorate of humane letters in 2012 following his commencement address to the school's graduating class. In 1996, the American College of Healthcare Executives named him the national Young Healthcare Administrator of the Year. Michael J. Curran, Executive Vice President, Chief Administrative and Financial Officer (57) - Michael J. Curran is Executive Vice President, Chief Administrative and Financial Officer for MedStar and is responsible for the administrative and financial aspects of the companies that comprise the System. He has oversight of operations for finance, information systems, facilities, property, supply chain management, and internal audit, as well as performance improvement efforts. He also manages MedStar s financial models in support of its strategic plan and decision support tools used to help direct operations. Joining MedStar in 2002 as the Executive Vice President and Chief Financial Officer, Mr. Curran brought more than 20 years of senior level experience in the healthcare industry. Prior to his position at MedStar, he served as the Chief Financial Officer and Treasurer of the Jefferson Health System, the largest healthcare delivery network in the Philadelphia region. Mr. Curran began his career with the international accounting firm Deloitte & Touche. As a certified public accountant, Mr. Curran also holds a master s degree in organization dynamics from the University of Pennsylvania and a bachelor of science degree in accounting from St. Joseph s University in Philadelphia. He is a member of the American Institute of Certified Public Accountants and the Healthcare Financial Management Association. He also serves on the Council on Financial Policy of the Maryland Hospital Association. Presently, Mr. Curran is a member of the Board of Directors of VHA Central Atlantic and a member of the Board of Directors of the Glenelg Country School in Howard County, Maryland. He is also a member of the Board of Directors of the MNS Supply Chain Network and recently served as the chairman of its Board. He previously served on the American Red Cross Regional Board of Directors, the Juvenile Diabetes Research Foundation Board of Directors and as vice chairman for the Board of the Elwyn Institute. A-8

87 M. Joy Drass, M.D., Executive Vice President, Operations-Washington Region (67) - Dr. Drass serves as Executive Vice President, Operations-Washington Region for MedStar. In this role, she provides strategic oversight and management for MedStar Georgetown University Hospital, MedStar Montgomery Medical Center, MedStar National Rehabilitation Network, MedStar Southern Maryland Hospital Center, MedStar St. Mary's Hospital and MedStar Washington Hospital Center. In addition, the MedStar Chief Nursing Officer and Vice President of Corporate Human Resources report to her. Prior to her current role, Dr. Drass served as president of MedStar Georgetown University Hospital for nine years, after serving as vice president for professional services and associate medical director at MedStar Washington Hospital Center. Dr. Drass received her medical degree from Georgetown University Medical School. She worked for 13 years as an intensivist in the surgical intensive care unit and the MedStar (Medical Shock Trauma Acute Resuscitation) trauma unit at MedStar Washington Hospital Center. In addition to her medical credentials, Dr. Drass received a master's degree in business administration from the University of Pennsylvania Wharton School of Business. She has served as chair of the District of Columbia Hospital Association Board of Directors and numerous other Washington, D.C. based task forces and committees. Stephen R. T. Evans, MD, Executive Vice President, Medical Affairs & Chief Medical Officer (60) - Stephen R. T. Evans, MD, serves as Executive Vice President, Medical Affairs & Chief Medical Officer for MedStar. In this position, Dr. Evans oversees the medical education, research, clinical quality, and risk management initiatives for the System, as well as the academic partnership with Georgetown University School of Medicine and MedStar s other academic affiliations. From 2009 to 2012, Dr. Evans served as Vice President of Medical Affairs at MedStar Georgetown University Hospital. He was responsible for strengthening relationships between the medical staff and the hospital, leading the identification and development of new programs, and acting as a liaison between administration, hospital staff and medical staff. In addition, Dr. Evans oversaw and supported the medical staff structure, assuring high-quality patient care and compliance with regulatory and accreditation requirements. Dr. Evans joined MedStar Georgetown University Hospital in 1990 as an Assistant Professor of Surgery, and later served as chair of the Department of Surgery for over seven years until 2009 when he was promoted to Vice President of Medical Affairs. Dr. Evans received his medical degree from the University of South Florida College of Medicine. He completed residencies in both General Surgery and Obstetrics and Gynecology at Brigham and Women's Hospital, MedStar Georgetown University Hospital, Harvard Medical School, and a fellowship at Georgetown Lombardi Comprehensive Cancer Center. As a specialist in General Surgery, Dr. Evans is certified by the American Board of Surgery, and previously held board certifications in American Board of Surgical Critical Care, American Board of Obstetrics and Gynecology, and American Board of Obstetrics and Gynecology Critical Care. Currently, Dr. Evans serves as a Vice Chair of the American Board of Surgery and will serve as Chair of the American Board of Surgery in He is an elected member of several distinguished national surgical societies including the American Surgical Association. Oliver M. Johnson, II, Executive Vice President and General Counsel (52) - Mr. Johnson is Executive Vice President and General Counsel for MedStar and oversees all legal, privacy and compliance matters for the System. Mr. Johnson joined MedStar with 23 years of legal, regulatory and business experience, including 18 years of U.S. and international experience in pharmaceutical, vaccine, biotechnology and healthcare industries. Prior to assuming his current role, he worked at Merck & Co., Inc. of Whitehouse Station, New Jersey as counsel for its global marketing services division. From 2004 to 2008, he served as counsel for the company's vaccine division following his service as Merck's first chief privacy officer. Mr. Johnson also served as board chair-elect for Abington Health, Inc., a multi-hospital integrated healthcare system in Abington, Pennsylvania. He has been a trustee of the Community Partnership School in Philadelphia, and of St. Benedict's Preparatory School and St. Vincent Academy in Newark, New Jersey. He also served under gubernatorial appointments to the Pennsylvania State Real Estate Commission and the Pennsylvania State Board of Medicine, of which he was vice-chair. Mr. Johnson received his Bachelor of Arts degree from Williams College and a juris doctorate degree from the Georgetown University Law Center. Maureen P. McCausland, DNSc, RN, FAAN, Senior Vice President and Chief Nursing Officer (65) - Dr. McCausland is Senior Vice President and Chief Nursing Officer for MedStar. She serves as senior nursing executive and is responsible for System-wide oversight and leadership of professional A-9

88 nursing practice, nursing resource utilization, standards of nursing care, nursing outcomes, nursing education, and nursing research. In addition, MedStar Chief Nursing Officers have a dual report to her. Dr. McCausland joined MedStar with 30 years of experience as a hospital and nursing executive. Prior to her current role, Dr. McCausland served as Senior Vice President of Nursing and Patient Care Services at the University of Wisconsin Hospital and Clinics and Chief Nurse Executive of the University of Pennsylvania Health System and Associate Dean for Nursing Practice at the University of Pennsylvania School of Nursing. Additionally, Dr. McCausland is a fellow in the American Academy of Nursing, was a Johnson & Johnson Wharton fellow and a senior fellow at the Leonard Davis Institute for Health Economics at the University of Pennsylvania. She holds a Doctor of Nursing Science degree from Boston University and received her master's and undergraduate degrees in nursing from Boston College. She currently is a member of the American Organization of Nurse Executives, American Nurses Association, American Academy of Nursing and the Sigma Theta Tau International Honor Society of Nursing. Carl J. Schindelar, Executive Vice President, Operations-Baltimore Region (62) - Carl J. Schindelar is Executive Vice President, Operations-Baltimore Region for MedStar. Currently, he is responsible for the coordination and leadership of four MedStar hospitals including MedStar Franklin Square Medical Center, MedStar Good Samaritan Hospital, MedStar Harbor Hospital and MedStar Union Memorial Hospital. In this role, he is charged with enhancing regional focus on program development and operational synergy among the Baltimore market-based entities for the System, as well as oversight of System-wide imaging, lab and pharmacy services. Prior to assuming this position in 2009, Mr. Schindelar served, since 1999, as President of MedStar Franklin Square Medical Center. Prior to joining Franklin Square, Mr. Schindelar was the Executive Vice President and Chief Operating Officer at Anne Arundel Medical Center in Annapolis, Maryland. Among his more than 30 years of experience working for hospitals throughout Maryland, more than half of that time has been spent at MedStar Franklin Square Medical Center. He held several senior management positions at the hospital during the mid-1980s and early 1990s, including Executive Vice President and Chief Operating Officer. He launched his healthcare career at MedStar Franklin Square Medical Center as an administrative resident. Mr. Schindelar is a fellow with the American College of Health Care Executives and is a member and past president of the Maryland Association of Health Care Executives. He was a member of the boards of both the Essex/Middle River/White Marsh Chamber of Commerce and the Baltimore County Chamber of Commerce. He is a past member of the Executive Committee of the Maryland Hospital Association and served as the Second Vice Chairman. He has also been a member of the Operations Committee and currently serves as Chairman of the Compensation Committee of the Maryland Hospital Association and he has served as Chairman of PRIME, the Maryland Hospital Association's group purchasing organization. He also served as a member on the Greater Baltimore Committee Healthcare Committee. Additionally, he has served on several advisory boards for Anne Arundel Community College and Essex Community College. Mr. Schindelar is an alumnus and board member of Leadership Baltimore County and an alumnus of the Leadership Anne Arundel organization. He received a bachelor of science degree from the University of Maryland, College Park and a master's degree in Healthcare Administration from The George Washington University. Christine M. Swearingen, Executive Vice President, Planning, Marketing & Community Relations (69) - Ms. Swearingen is the Executive Vice President, Planning, Marketing & Community Relations for MedStar. She has directed strategic and operational planning for MedStar since the merger of Medlantic Healthcare Group and Helix Health in In 2009, she assumed responsibility for Marketing and Public Affairs and for Community Relations. She joined Medlantic Healthcare Group in 1986 as Director of Strategic Planning. Prior to that, Ms. Swearingen was Assistant Vice President with American Medical International (AMI), an investor-owned hospital company based in Beverly Hills, California. Her responsibilities involved directing strategic planning and business development for the business units within AMI. She was the director of the Washington office of Abt Associates, a Cambridge-based consulting firm. Other experience included developing and operating an ambulatory care center in rural New York under the auspices of the University of Rochester School of Medicine, research and writing for the University of Michigan, and directing a consumer health training program for boards of directors of Model Cities programs and Neighborhood Health Centers for the University of California, Berkeley. Ms. Swearingen received her bachelor of arts degree summa cum laude from Drew University and a Masters of Public Health degree from the University of Michigan. She is a member of the board of Community Connections, a D.C. based non-profit organization that serves low-income, disadvantaged persons. A-10

89 Eric R. Wagner, Executive Vice President, External Affairs and Diversified Operations (58) - Mr. Wagner is the Executive Vice President, External Affairs and Diversified Operations for MedStar. In this role, he is responsible for overseeing government affairs and managed care activities on behalf of MedStar and all of its entities. He also provides executive leadership to MedStar s non-hospital companies, including MedStar Family Choice (Medicaid HMO), MedStar Medicare Choice (Medicare HMO), MedStar Medical Group, MedStar Health Visiting Nurse Association, and MedStar Ambulatory Services. Mr. Wagner oversees MedStar s collaboration with Evolent Health for population health-related activities, including MedStar s associate health plan. He previously served as Senior Vice President for MedStar with responsibility for all managed care activities. Prior to joining MedStar in 1995, Mr. Wagner was with Ernst & Young's healthcare consulting practice. Earlier in his career, he served as President and one of four founders of a healthcare consulting and management firm. Mr. Wagner has more than 33 years of experience in the healthcare industry in operations, strategy, business development, and finance. He has published several books, chapters and articles on managed care and provider compensation. Mr. Wagner has been an adjunct faculty member at Georgetown University, where he taught courses on healthcare policy and administration. He serves on the Executive Committee of the Maryland Hospital Association, and previously served on the Board of Directors of the Maryland Chamber of Commerce. He also has been active in civic affairs in Alexandria, Virginia where he currently serves as Chairman of the Planning Commission. Mr. Wagner holds a bachelor's degree in political science from the State University of New York at Stony Brook. He received his master's degree in business administration with specializations in health administration and finance from the University of Chicago Booth School of Business, where he was the recipient of the Bachmeyer Award for Academic Excellence. ACUTE CARE FACILITIES The System operates the largest network of acute care facilities in the Baltimore-Washington, D.C. region based on admissions, number of beds, gross revenues and market share. The number of licensed beds for each of the System s nine acute care facilities and one rehabilitation facility are contained in the following chart. A-11

90 Facility Location Licensed Acute Beds (1) Licensed Post acute Beds (1) Total Licensed Beds MedStar Franklin Square Medical Center Baltimore, MD MedStar Good Samaritan Hospital Baltimore, MD MedStar Harbor Hospital Baltimore, MD MedStar Union Memorial Hospital Baltimore, MD MedStar Georgetown University Hospital Washington, DC MedStar Montgomery Medical Center Olney, MD MedStar National Rehabilitation Network Washington, DC MedStar Southern Maryland Hospital Center Clinton, MD MedStar St. Mary's Hospital Leonardtown, MD MedStar Washington Hospital Center Washington, DC Total 2, ,219 Source: (1) MedStar Health Finance Department, July 2014 The Hospitals The following is a description of each of the System s hospitals. MedStar Franklin Square Medical Center. MedStar Franklin Square Medical Center (MFSMC) is an acute care hospital located in northeast Baltimore County, Maryland. MFSMC is the largest community teaching hospital in Maryland and offers a full range of services for children and adults. A seven-story patient tower with 291 private patient rooms was completed in November 2010 and includes a new emergency department which is the busiest in the state. MFSMC s cancer institute is a 64,000 square foot facility providing cancer patients and their families a broad range of oncology services, including screening, diagnosis and treatment. MFSMC also attained Magnet Recognition by the American Nurses Credentialing Center (ANCC) in 2008 and is recognized by The Joint Commission as an Advanced Primary Stroke Center. In May 2012, MFSMC s bariatric program was designated as a Bariatric Surgery Center of Excellence by the American Society for Metabolic and Bariatric Surgery. MedStar Good Samaritan Hospital. MedStar Good Samaritan Hospital (MGSH), an acute care hospital located in northeast Baltimore City, Maryland, is known for its specialties in orthopaedics, rheumatology, nephrology, and physical medicine and its rehabilitation programs. In addition to general adult acute care services, MGSH has a comprehensive inpatient rehabilitation unit and a sub-acute care unit. In August 2012, MGSH opened the MedStar Center for Wound Healing. It also offers communitybased health services through the Good Health Center and provides senior living services through the Good Samaritan Nursing Center and two senior housing complexes located on its 43-acre campus. MGSH is recognized by The Joint Commission as an Advanced Primary Stroke Center. MedStar Harbor Hospital. MedStar Harbor Hospital (MHH), is located just south of Baltimore s Inner Harbor, in Baltimore City, Maryland. It is an acute care hospital offering clinical services in medicine, surgery, obstetrics and gynecology, oncology, orthopaedics and pediatrics. Collaboration with the National Institute on Aging (one of the National Institutes of Health) makes MHH the home of the A-12

91 Baltimore Longitudinal Study on Aging, the nation s longest running study of aging and conditions affecting the elderly. Parexel, an international clinical research organization, has its Pharmacology Research Unit located at MHH. MHH is recognized by The Joint Commission as an Advanced Primary Stroke Center and is certified in Joint Replacement of the Hip and Knee by The Joint Commission. MedStar Union Memorial Hospital. MedStar Union Memorial Hospital (MUMH), an acute care hospital, is located in the north-central section of Baltimore City, Maryland. The hospital offers clinical services in general medicine and surgery, and specialty services in cardiac care, hand surgery, orthopaedics, sports medicine, vascular surgery, and rehabilitation. It is also known for the Curtis National Hand Center, its Heart Institute, and orthopaedics and sports medicine. MUMH s Curtis National Hand Center is designated by the U.S. Congress as the National Center for the Treatment of the Hand and Upper Extremity. MUMH has the unique distinction of having its own biomechanics research facility and surgical skills training lab. In addition, the hospital is recognized as an Advanced Primary Stroke Center and is certified in Joint Replacement of the Hip and Knee by The Joint Commission. Most recently, MUMH entered into a clinical and research alliance with the Cleveland Clinic. MedStar Georgetown University Hospital. MedStar Georgetown University Hospital (MGUH) is an acute care teaching and research hospital in northwest Washington, D.C. MGUH s centers of excellence include neurosciences, transplantation, cancer and gastroenterology. The hospital is one of a few centers in the world providing living-donor liver transplantation. MGUH's neurosciences program is recognized as an Advanced Primary Stroke Center by The Joint Commission. MGUH's Lombardi Comprehensive Cancer Center is one of only 41 centers in the U.S., and the only one in Washington, D.C., designated as a Comprehensive Cancer Center by the National Cancer Institute. MGUH was the first hospital in Washington, D.C. to attain Magnet Recognition by ANCC, which was reaffirmed in MedStar Montgomery Medical Center. MedStar Montgomery Medical Center (MMMC) is located in Olney in northeastern Montgomery County, Maryland, a suburb of Washington, D.C. The acute care hospital offers a spine program, vascular program, general surgery, joint replacement, cancer care and obstetrics. With the addition of specialists from MGUH and MWHC, MMMC brings specialty care closer to its patients. In April 2010, MMMC completed an emergency department expansion that includes a dedicated Pediatric Center, a Fast-Track unit and a separate unit for crisis evaluation. It is certified as a Chest Pain Center by the Society of Chest Pain Centers, recognized as a Primary Stroke Center by The Joint Commission, and offers an ADA-certified Diabetes and Nutrition Center, a Mental Health Center and home health and private duty nursing services. MedStar National Rehabilitation Network. MedStar National Rehabilitation Network (MNRN) includes a specialty hospital located directly adjacent to MedStar Washington Hospital Center, in northwest Washington, D.C. and 44 outpatient rehabilitation centers throughout Washington, D.C., Maryland, and Virginia. MNRN is a comprehensive medical rehabilitation facility offering a full range of treatments and services for the physical rehabilitation of individuals with disabling injuries and illnesses such as stroke, traumatic brain and spinal cord injuries, arthritis, amputations, post-polio syndrome, cerebral palsy, multiple sclerosis, chronic pain, back and neck pain, occupational injuries, cancer and cardiac disease that require medical rehabilitation. The hospital also offers specialized pediatric care in partnership with Children s National Medical Center. MNRN operates or participates as a joint venture partner in outpatient centers which offer general rehabilitative care as well as distinct programs such as hand therapy, occupational rehabilitation, cancer rehabilitation and sports medicine. MNRN is nationally known for its research and body of knowledge on improving the lives of people with spinal cord injury and disease. MedStar Southern Maryland Hospital Center. MedStar Southern Maryland Hospital Center (MSMHC) is an acute care hospital located in southern Prince George s County, Maryland. The acute care hospital offers a full range of services and is known for its cardiovascular and orthopaedic programs. In November 2010, MSMHC opened its Women and Newborns Center, expanding and enhancing the obstetrics and gynecology program, which now includes private rooms and the Southern Maryland A-13

92 region s only Level 2 special care nursery. Among other specialty services and facilities, the hospital has a critical care unit, outpatient radiology, surgical center, sleep disorders lab, inpatient and outpatient behavioral health programs, asthma and allergy center, rehabilitative medicine, and cancer treatment services. MSMHC has an accredited Chest Pain Center and opened the first Primary Stroke Center in Prince George s County. MedStar St. Mary s Hospital. MedStar St. Mary s Hospital (MSMH) is located in Leonardtown, Maryland, in southern St. Mary s County, a rural community in Southern Maryland. The hospital provides general, acute care services in medicine, surgery, obstetrics and gynecology, oncology, orthopaedics, pulmonary and cardiac rehabilitation, and psychiatry. The hospital now offers kidney transplant services through the MedStar Georgetown Transplant Institute and orthopaedic services through the MedStar Georgetown Orthopaedic Institute. It also provides hospice care and is a partner in a joint venture that provides home care. It operates an urgent care facility located 15 miles north of campus as well as oncampus and mobile community based health services. In May 2011, MSMH opened a two-story outpatient pavilion that includes cancer care and infusion services, outpatient imaging and women s health services, and community outreach and physician office space. In December 2012, MSMH opened the MedStar Center for Wound Healing. Most recently, MSMH earned the Platinum Award, the highest level of achievement of the Maryland Performance Excellence Award (MPEA), the Maryland state equivalent of the Malcolm Baldrige National Quality Award. MedStar Washington Hospital Center. MedStar Washington Hospital Center (MWHC) is an acute care teaching and research hospital located in northwest Washington, D.C. It is the largest private hospital in the nation s capital. The hospital offers primary, secondary and tertiary health services to adult and neonatal patients. It is a major referral center for the most complex tertiary services and operates the region s only adult burn center. MedStar Heart and Vascular Institute, headquartered at MWHC, is a national leader in the research, diagnosis and treatment of cardiovascular disease and formed a clinical and research alliance with the Cleveland Clinic. MWHC s organ transplantation capabilities include heart, pancreas and kidney transplants. The hospital s cancer center offers cancer treatment, therapies and access to clinical trials. The hospital operates the largest, private, hospital-based ground and air ambulance shocktrauma service in the region. MWHC offers comprehensive ambulatory care through a wide range of medical and surgical specialty outpatient clinic programs. MWHC is advanced certified by The Joint Commission as a Primary Stroke Center and in Ventricular Assist Device. Medical Staff As of September 30, 2014 the System had approximately 6,000 affiliated physicians, including approximately 1,700 employed physicians and had economic affiliations with approximately 800 additional physicians. Each hospital maintains its own medical staff organization responsible for credentialing and privilege delineation. All of the active medical staff members are board certified, grand-fathered or board eligible in their respective specialties. Licenses and Accreditations Each of the System s hospital facilities is appropriately licensed and certified for Medicare and Medicaid reimbursement and each is accredited by The Joint Commission. MNRN, MGSH, and MUMH are accredited by both the Commission on Accreditation of Rehabilitation Facilities and The Joint Commission. The System s home health agencies are licensed providers of home health care and are accredited by The Joint Commission. Academic Affiliations and Research Activities The Georgetown University School of Medicine is the principal academic partner of MedStar. In addition, the Washington Region hospitals maintain local affiliations with George Washington University School of Medicine, Howard University School of Medicine and The Uniformed Services University of the Health Sciences. MedStar also maintains academic relationships with the Children s National Medical A-14

93 Center. MedStar and the University of Maryland School of Medicine have an academic affiliation agreement which principally serves the System s Maryland hospitals. In addition, a few of the System s hospitals have post-graduate programs in affiliation with The Johns Hopkins University School of Medicine. With the exceptions of MMMC, MSMH, and MSMHC, all of the hospitals in the System are teaching hospitals. Six of the hospitals (MGUH, MWHC, MNRH, MFSMC, MUMH and MHH) sponsor graduate medical education programs and are fully accredited by the Accreditation Council for Graduate Medical Education. A seventh hospital, MGSH, recently merged its residency program with MUMH. In aggregate, the System enrolls just over 1,100 residents and fellows in 80 academic programs of graduate medical education. These programs include virtually all adult specialty training and some pediatric programs; approximately 48% of the enrolled residents are in primary care training programs. MedStar teaching faculty hold academic appointments principally at Georgetown University School of Medicine, and some hold appointments at the University of Maryland School of Medicine, and/or Johns Hopkins University School of Medicine. MedStar Health Research Institute (MHRI) is the research arm for MedStar, providing scientific, administrative, and regulatory support for research programs that complement the key clinical services and teaching programs in all hospitals in the System. MHRI supports clinical research performed by private attending medical staff, hospital-employed medical staff and full-time research investigators. MHRI and its investigators participate in a wide range of research aimed at advancing health and the quality of delivered care by linking to the major clinical service lines including cardiovascular, diabetes, lipid disorders, orthopaedics, cardiac surgery, rehabilitation, renal diseases, anesthesiology, gerontology and women s health and safety. There are also active investigations in diabetes, gerontology and women's health. For fiscal year 2014, there were approximately 500 funded research projects supported by approximately $26 million of external funding, of which approximately $15.4 million was federal funding. Physician Networks NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES The System s professional network includes approximately 1,700 employed physicians and approximately 700 employed advanced practice clinicians. The provider network consists of 36% primary care, 36% medical specialties, 17% surgical specialties, 6% emergency medicine, 4% behavioral health, and 1% other. Hospital-based specialties practice at all ten of the System s hospitals, while the ambulatory providers practice at one of 175 medical offices serving the greater mid-atlantic region. All of the physicians are board certified, grand-fathered or board eligible in their respective specialties. Areas of focus include primary care, heart, cancer, orthopaedics and sports medicine, and neurosciences. Nearly 50% of primary care is certified as a Medical Home. The greatest concentration of employed physicians is the clinical faculty at MGUH and MWHC serving the Washington metropolitan area and these physicians account for over 90% of the admissions to these two hospitals. In addition, MWHC Physician-Hospital Organization, Inc. has contractual arrangements with approximately 103 private physicians and is coowned by MWHC and members of its medical staff. Health Plans The System owns and operates MedStar Family Choice, Inc. (MFC), a health maintenance organization licensed by the State of Maryland and the District of Columbia. MFC, a wholly-owned Maryland stock corporation, is one of eight Maryland-designated Medicaid Managed Care Organizations (MCOs) participating in Maryland s HealthChoice mandatory Medicaid managed care program. MFC also began participation in the District of Columbia s Medicaid managed care program on December 1, MFC established a MedStar Medicare Choice product and began participation with the federal Medicare Advantage program in the District on January 1, 2013; it has expanded the service area for this program effective January 1, 2015 to include the City of Baltimore and Baltimore, Prince George s, Anne Arundel, Charles, and St. Mary s counties in Maryland. MFC served approximately 65,900 Medicaid enrollees in the City of Baltimore and Baltimore, Harford, Anne Arundel, Montgomery, Prince George s, and St. Mary s A-15

94 counties in Maryland as well as 43,200 Medicaid enrollees and approximately 200 Medicare Advantage enrollees in the District of Columbia as of September 30, Based on preliminary enrollment results from the recently-concluded Medicare Advantage annual enrollment period, MedStar Medicare Choice will have approximately 5,000 enrollees effective January 1, MFC maintains a network of primary care and specialty providers composed of MedStar s employed physicians and community-based affiliated physicians in the geographic areas it serves. Members of MFC receive care at System hospitals, employed physician offices, through independent practices participating in the provider network, and from out-ofnetwork providers. MFC has been recognized for its quality of care by the Maryland Department of Health and Mental Hygiene s Consumer Report Card by being ranked as one of the two top performing plans each year since 2003 including a first place ranking in 2010 and in In 2009, MFC became the first Maryland Medicaid plan to achieve National Committee for Quality Assurance (NCQA) accreditation and earned an Excellent status. The NCQA and Insurance Plan Rankings for ranked MFC 17 th in the nation among Medicaid plans, making MFC the only Medicaid plan in Maryland or the District of Columbia ranked in the top 25. Home Health Care The System provides home health care primarily through its wholly-owned subsidiary, the MedStar Visiting Nurse Association (MVNA). The MVNA provides personalized home health care for homebound patients in Maryland, Northern Virginia, and Washington, D.C. The MVNA is accredited through The Joint Commission. MVNA s mission is to make a positive difference in people s lives by providing health care in the home and community. The MVNA provides the following skilled services: nursing, physical therapy, speech therapy, occupational therapy, and social services to the community. The System had approximately 20,000 home health admissions and approximately 263,000 visits for the fiscal year ended June 30, Post Acute Facilities The System s comprehensive medical rehabilitation hospital, MNRN operates 137 post acute care beds. The System owns and operates one skilled nursing facility with a total of 146 beds on the campus of MGSH and has a 50% ownership interest in a 117-bed skilled nursing facility located adjacent to the campus of MFSMC. MGSH owns and operates a post acute care unit with a total of 81 licensed beds. In addition, MUMH owns and operates a post acute care unit with a total of 18 licensed beds. Ambulatory Surgery and Urgent Care The System owns and operates one freestanding ambulatory surgery center (ASC) and participates as an investor in a second center. The wholly-owned ASC, located in downtown Washington, D.C., offers a variety of procedures primarily in pain management, plastic surgery, podiatry, gynecology, ophthalmology, urology, and gastroenterology. In addition, the System operates ten urgent care facilities. These facilities operate 12-hours per day, seven days per week. The further development of the System s ambulatory and urgent care services is a key component of the System s strategies (see STRATEGIC INITIATIVES- MedStar Ambulatory Care and Physician Alignment ). Radiation Oncology The System provides hospital-based radiation oncology services at MWHC and MGUH. The System also manages six radiation oncology centers located on the campuses of other System hospitals. In addition, management support is provided for one non-system hospital in the Baltimore-Washington area. The System operates this site through various management agreements. Rehabilitation Sites The System owns and operates, or participates as a joint venture partner in, 44 freestanding rehabilitation sites in Maryland, Washington, D.C., and Northern Virginia, as well as 10 hospital-owned A-16

95 sites. These sites provide a full range of rehabilitative services and offer specialty services at some sites in sports medicine, hand therapy, stroke rehabilitation, and orthopaedics. Air and Ground Transportation MWHC owns an air and ground emergency medical transportation service under the MedStar name. The service owns and operates two ambulances. It also owns four helicopters and contracts with an independent third party to operate the helicopters that provide medevac services in the Mid-Atlantic region for patients needing specialty care at System hospitals. The service also operates a 24/7 transfer center to coordinate transfers to System hospitals as well as ambulance and wheelchair transports for System hospitals. Retail Pharmacies The System owns and manages retail pharmacies on seven System hospital campuses as well as one freestanding senior living location. A full range of prescription and over-the-counter items are offered to patients, as well as System employees. Regional Focus / Service Area MARKET FORCES AND ENVIRONMENT As a provider of healthcare services to the Baltimore-Washington, D.C. region, the System offers a continuum of services to more than 5.8 million residents in the cities of Baltimore and Washington, D.C. and the 11 Maryland counties in and around the Baltimore-Washington, D.C. corridor (Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George s, and St. Mary s). This target service area represents MedStar s primary market focus for planning purposes as 94% of the inpatients served were from this market in fiscal year In addition, 3% of the acute inpatients are from the adjacent Northern Virginia suburbs of Washington, D.C. (i.e., Arlington, Alexandria, Fairfax, Falls Church, Loudoun, Manassas, Prince William and Stafford counties). The total market, including Northern Virginia, has a population of more than 8 million people. The following table shows the inpatient origin by jurisdiction within the System s primary service area in fiscal year 2013, the most recent data available. FY13 Target Service Area Inpatient Origin of Discharges by Jurisdiction Jurisdiction 2013 Population (1) System FY13 Inpatient (2) (3) Discharges % of Total FY13 IP Discharges (2)(3) Washington, D.C. 637,231 29, % Baltimore City, MD 632,391 25, % Baltimore County, MD 815,027 25, % Prince George's County, MD 872,758 23, % Montgomery County, MD 1,020,329 12, % St. Mary's County, MD 108,678 8, % Charles County, MD 152,484 4, % Anne Arundel, MD 535,205 4, % Harford County, MD 247,902 3, % Calvert County, MD 91,567 1, % Howard County, MD 295,888 1, % A-17

96 Jurisdiction 2013 Population (1) System FY13 Inpatient (2) (3) Discharges % of Total FY13 IP Discharges (2)(3) Frederick County, MD 251,015 1, % Carroll County, MD 162, % Total 5,823, , % 1) Claritas 2013 Population Data. (2) Source: DCHA/Webfocus, excludes MS-DRG 795 Normal Newborns. (3) System FY13 Inpatient Discharges and Percent of Total FY13 Inpatient Discharges include MedStar Southern Maryland Hospital Center for the full year. Market Regulation The System operates under two different planning and rate regulatory environments. For a discussion of the Maryland all payor system and the general third-party payor considerations applicable in the District of Columbia, see REGULATORY ENVIRONMENT and CERTAIN BONDHOLDERS RISKS in the forepart of this Offering Memorandum. Under current law, a non-federal healthcare facility in the State of Maryland may not develop, operate, or participate in any covered healthcare project unless the Maryland Health Care Commission (the Commission) has issued a certificate of need (CON) for the project. Covered healthcare projects include the construction, development, or other establishment of a new healthcare facility, certain relocations of healthcare facilities, certain changes in the type or scope of healthcare services offered, certain changes in bed capacity, certain health service-related capital expenditures, and the offering of certain new health services. A CON is not required for certain healthcare projects, including (i) transfers or acquisitions of existing healthcare facilities not involving changes in services or bed capacity, (ii) acquisition of and related costs attributable to medical equipment, (iii) patient care related capital expenditures that do not exceed $11.75 million adjusted for inflation for hospitals and $5.9 million for other healthcare facilities if the expenditures do not involve the addition of new beds or certain health care services, (iv) patient care related capital expenditures for construction or renovation in excess of the current threshold of $11.75 million for hospitals, so long as the project does not require a total cumulative increase in patient charges or hospital rates of more than $1.5 million for the capital costs associated with the project over the entire period or schedule of debt service as determined by the Commission and the hospital agrees not to seek a rate increase in excess of this amount, (v) capital expenditures not related to patient care that do not increase patient charges or other rates, and (vi) the closure of a hospital. In addition, qualified mergers and consolidations between or among healthcare facilities are exempt from CON review if certain findings are made by the Commission. The Commission annually adjusts the thresholds based on the Consumer Price Index-Urban (CPI-U) for the Baltimore Metropolitan Area published by the U.S. Department of Labor, Bureau of Labor Statistics, rounded to the nearest $50,000. According to the Commission, the CON program is intended to ensure that new health care facilities and services are developed in Maryland only as needed and if determined to be needed, that they are the most cost-effective approach to meeting identified needs, of high quality, geographically and financially accessible, and financially viable. If the Commission determines that the new health care facilities or services are needed, the Commission seeks to ensure that such facilities or services will not have a significant negative impact on the cost, quality, or viability of other health care facilities and services. MedStar is currently seeking CON approval from the Commission for a renovation project on its MSMHC campus. The proposed renovation and expansion seeks to address critical space needs, and create the facilities necessary for MSMHC to continue to upgrade its programs and services while also accommodating the growing need for specialty, sub-specialty and general medical care for patients throughout the Southern Maryland region. A-18

97 In the District of Columbia, a CON approval is needed from the State Health Planning and Development Agency (SHPDA) to offer or develop a new institutional health service, certain changes in bed capacity of a health care facility, capital expenditures by or on behalf of a healthcare facility that exceed $2.5 million, capital expenditures for medical equipment that exceed $1.5 million and capital expenditures to acquire by purchase or comparable arrangement a healthcare facility. Notice and SHPDA approval is needed for closure of a healthcare facility or service. CON approval is not needed for (i) correction of cited deficiencies that are in violation of federal and District of Columbia fire, building and safety codes and deficiencies identified by national accrediting associations and District of Columbia government licensing agencies; (ii) non-patient care projects requiring a capital expenditure of less than $8 million; (iii) the acquisition of medical equipment under certain circumstances to replace the same or similar equipment for which a CON has been granted; (iv) acquisition of major medical equipment solely for research; and (v) certain capital expenditures by health maintenance organizations. Among the CON approvals recently received by MedStar in the District of Columbia are approvals for the development of an ambulatory care center and a single treatment room proton beam facility. Service Area Competition The System is one of several health systems that provide a full range of health care services to residents of the Baltimore-Washington, D.C. region, with a leading presence in both of the anchor cities and their surrounding suburbs. A comparison of the System to other health systems in the Baltimore- Washington, D.C. region is provided in the following table, with systems listed in order of inpatient market share. Market share data is for the fiscal year ended June 30, 2013, representing the most recent data available. Comparison Benchmark Measures for Baltimore-Washington, D.C. Region Integrated Delivery Systems FY13 Inpatient System Number of Hospital Facilities (1) Market Share (2) (3) MedStar Health System % University of Maryland Medical System % Johns Hopkins Health System % LifeBridge Health System % Adventist Healthcare System % Dimensions Healthcare % INOVA Health System % (1) Source: MedStar data from internal records, all other data from AHA Guide, 2014 edition (September 2013). (2) Includes: Anne Arundel, MD; Baltimore, MD; Baltimore City, MD; Calvert, MD; Carroll, MD; Charles, MD; Frederick, MD; Harford, MD; Howard, MD; Montgomery, MD; Prince George's, MD; St. Mary's, MD; Washington, D.C. (excludes Northern Virginia). (3) Inpatient market share is based on discharges. Source: DCHA/Webfocus, excludes MS-DRG 795 Normal Newborns. In addition to the health systems identified above, there are also a number of acute care hospitals not associated with a regional system, a few of which are associated with national systems. For fiscal year 2013, Holy Cross Hospital, affiliated with Trinity Health, had a 4.8% market share; St. Agnes Hospital and Providence Hospital, both affiliated with Ascension Health, had 2.8% and 1.8% market shares respectively; George Washington University Hospital, jointly owned and operated by a partnership between George Washington University and a subsidiary of Universal Health Services Inc., had a 2.4% market share. Although the number of independent hospitals has declined in recent years through merger activity, those that remain continue to be strong acute hospital competitors and have developed a number of services and A-19

98 programs across the continuum of care. The five independent hospitals with the largest market shares in the Baltimore-Washington region are in rank order Anne Arundel Medical Center, Frederick Memorial Hospital, Greater Baltimore Medical Center, Mercy Medical Center, and Carroll Hospital Center. Carroll Hospital Center plans to be acquired by LifeBridge Health in a deal that is expected to be completed in early For the fiscal year ended June 30, 2013, these five independent hospitals respective market shares ranged from 3.9% to 1.8%. Reimbursement As described in REGULATORY ENVIRONMENT in the forepart of this Offering Memorandum, payment in the Washington, D.C. service area is predominantly based on diagnosis-related group (DRG) and other forms of case rates, per diems, and discounted fee-for-service. The major payors in the System s market area reimburse health care charges on a DRG-based reimbursement methodology, and there continues to be payor interest in moving away from percent of charges to fixed fee reimbursement for outpatient services as well as for opportunities to align incentives with providers through pay for performance metrics. Maryland hospital rates are regulated by the Health Services Cost Review Commission (HSCRC) under the state s all-payor system. MedStar is one of a select group of providers which also has alternative rate arrangements (DRG-based global rates) approved by the HSCRC related to specific payor contracts. In January 2014, CMS approved Maryland s new waiver for a five-year period beginning January 1, 2014 for inpatient and outpatient hospital services. The new waiver ties hospital per capita revenue growth to the state s economic growth of 3.58% and will require Medicare spending in Maryland to be 0.5% below the national average. CMS can require the State to submit a corrective action plan if targets for a given performance year are not met. The new waiver also imposes quality measures and encourages population health management. In connection with the new waiver, the HSCRC introduced new revenue arrangements, including the Global Budget Revenue (GBR) model. This new model for Maryland hospitals moves payment to hospitals from each individual service to a total revenue for each hospital or a combination of hospitals to provide hospitals flexibility in the objectives of better care for individuals, higher levels of overall population health, and improved health care affordability. It removes the financial incentive of increasing volume and provides incentive to work with partners to provide care in the appropriate setting. MedStar entered into a GBR arrangement covering five of its seven Maryland hospitals during the year ended June 30, In August 2014, MedStar also entered into GBR arrangements for its remaining two Maryland hospitals effective retroactively to July 1, The GBR arrangement is expected to be in place at least three years, but will be renewed annually unless terminated by either party with 180 days prior notice. MedStar recognized hospital inpatient and outpatient regulated revenue under the new arrangement for the year ended June 30, 2014 for the five hospitals that were covered as of that date. For the three months ended September 30, 2014 MedStar recognized hospital inpatient and outpatient regulated revenue under the new arrangement for the seven hospitals currently covered under the GBR arrangement. Managed care continues to be a significant factor in the provision of health insurance in the Baltimore-Washington, D.C. region. Among the commercially insured regional population virtually all enrollees have some form of managed care plan benefits, with HMO coverage accounting for over one quarter of this enrollment. The majority of managed care penetration continues to be from five companies Aetna, CareFirst BlueCross BlueShield, CIGNA, Kaiser Permanente, and United Healthcare. Within the last two and a half years, MedStar has successfully concluded negotiations with all five payors on behalf of its Washington-based hospitals, its employed physicians, and most of the System s diversified businesses. As in past years, targets were set for each payor prior to commencing the negotiation based on the financial requirements of the hospitals/entities, the market position and characteristics of the payor, and other marketplace conditions. The System achieved or exceeded its targets in each of the concluded negotiations, and was able to secure several multi-year agreements. While payor reimbursement is still predominately based on fee-for-service, some negotiations are providing for A-20

99 additional payments for performance if predetermined quality and process measures are met. The System anticipates continued success in future negotiations. As noted above, a substantial majority of individuals within the System s service area who have private insurance are covered by Aetna, CareFirst, CIGNA, Kaiser Permanente, and United Healthcare. Almost all of MedStar s provider entities contract with each of these payors, except for Kaiser Permanente. Kaiser Permanente has a small, select network that includes MWHC as one of its hub hospitals for all specialties, and also MGUH and MUMH for neurosurgery and cardiac care, respectively. Medicare Advantage enrollment in the region continues to be low compared to other parts of the country. In addition to Kaiser Permanente, Aetna, CIGNA Healthspring, and United Healthcare, MedStar also entered the managed Medicare Advantage market in the District of Columbia in 2013, and many counties in Maryland effective in January The following table provides a summary distribution of the payor mix of discharges and net revenue at the System s hospitals for inpatient and outpatient hospital services for the fiscal year ended June 30, The System s Payor Mix Payor Percent of Total Inpatient Discharges Net Revenue Percent Medicare (excludes Medicare HMO) 38.7% 35.6% Managed care (includes commercial HMO/PPO, Medicare HMO, 41.7% 46.7% and Medicaid HMO) Medicaid (excludes Medicaid HMO) 8.2% 5.4% BlueCross BlueShield (excluding HMO/PPO) 6.2% 8.7% Other commercial/indemnity (excluding PPO) 1.4% 1.7% Other (self-pay, workers compensation, etc.) 3.8% 1.9% Totals 100.0% 100.0% Fiscal Year 2014 data includes all System Hospitals, Net Revenue includes Inpatient and Outpatient payment. Source: The System s internal data. A-21

100 HISTORICAL UTILIZATION The following table presents selected historical utilization statistics for the System for the three months ended September 30, 2014 and 2013 and the fiscal years ended June 30, 2014 and Selected Utilization Statistics Three Months Ended September 30, 2014 Three Months Ended September 30, 2013 Fiscal Year Ended June 30, 2014 Fiscal Year Ended June 30, 2013 Licensed Beds 3,219 3,314 3,314 3,398 Admissions (excluding sub-acute) 36,520 38, , ,681 Patient Days 190, , , ,524 Observations 15,294 13,945 59,046 54,571 Emergency Room Visits 140, , , ,292 Home Health Visits 63,217 64, , ,333 Physician Office Visits 388, ,816 1,444,043 1,344,246 Other Outpatient Visits 444, ,090 1,679,214 1,605,466 Total Outpatient Visits 1,051, ,948 3,994,624 3,778,908 MedStar Family Choice Covered Lives 109,344 70, ,867 44,050 Source: The System s internal data. Includes MedStar Southern Maryland Hospital Center data subsequent to the acquisition date of December 10, SUMMARY FINANCIAL INFORMATION Summary of Operations The following is a summary of consolidated statements of operations of the System for the fiscal years ended June 30, 2014 and 2013 and for the three-month periods ended September 30, 2014 and Information for the fiscal years ended June 30, 2014 and 2013 is derived from the System s audited consolidated financial statements for those fiscal years, which are included in Appendix B. All eliminations and reporting adjustments have been made to present the information in accordance with U.S. generally accepted accounting principles. Certain prior year amounts have been reclassified to conform with the current period presentations, the effect of which is not material. This data should be read in conjunction with the audited financial statements for the fiscal years ended June 30, 2014 and 2013 and related notes included in Appendix B. Information for the three-month periods ended September 30, 2014 and 2013 is not based upon audited financial information but, in the opinion of management, is presented on a basis consistent with the audited consolidated financial statements in Appendix B, and includes adjustments consisting of normal recurring adjustments necessary for a fair presentation therein. Adjustments to these financial statements, while not expected by management, may occur as a result of the more comprehensive review undertaken as part of the audit process for the fiscal year ending June 30, The results of operations for the three-month period ended September 30, 2014 are not necessarily indicative of the operating results to be expected for the entire fiscal year ending June 30, A-22

101 On December 10, 2012, the System closed on an asset purchase agreement, whereby the System purchased substantially all of the assets of Southern Maryland Hospital, Inc. and its affiliated entities and assumed certain of their obligations. The System s consolidated financial statements include the acquired operations since the closing date of the agreement. The asset purchase agreement provided for certain adjustments to the purchase price and net working capital calculations, which were settled and recorded during fiscal year Consolidated Statements of Operations and Changes in Net Assets Three Months Ended September 30 Fiscal Year Ended June (1) (in millions) (in millions) (unaudited) (unaudited) (audited) (audited) Operating revenues Net patient service revenue Hospital inpatient services $ $ $2,240.1 $ 2,240.8 Hospital outpatient services , ,444.1 Physician services Other patient service revenue Total net patient service revenue 1, , , ,099.9 Provision for bad debt, net Total net patient service revenue, net 1, , ,885.4 of provision for bad debt Premium revenue Other operating revenue Net operating revenues 1, , , ,217.2 Operating expenses Personnel , ,310.7 Supplies Purchased services Other operating expenses Interest expense Depreciation and amortization Total operating expenses 1, , , ,138.4 Earnings from operations Nonoperating (losses) gains, net (29.7) (Deficiency) excess of revenue over (7.8) expenses Change in funded status of defined benefit - - (2.1) plans Other changes in net assets (3.2) Total (decrease) increase in net assets $ (11.0) $ 73.5 $323.7 $ (1) Includes MedStar Southern Maryland Hospital Center financial results subsequent to the acquisition date of December 10, Capitalization The capitalization of the System as of September 30, 2014, June 30, 2014 and June 30, 2013 is set forth below. In addition, proforma capitalization at September 30, 2014 is presented below. Proforma debt includes the effect of the issuance of the 2015 Tax-Exempt Bonds and the refunding of the Refunded Bonds, and the issuance of the Bonds in the aggregate principal amount of $100,895,000 (including costs of issuance) to fund the Company s ambulatory growth strategy. MedStar s Master Indenture prohibits the System from incurring additional debt if the debt-to-capitalization ratio shall exceed 67.0%. A-23

102 Long-Term Indebtedness (including current portion) $1,233.8 $1,253.1 $1,268.4 $1,345.2 Net Assets 1, , , ,412.9 Capitalization (Long-Term Indebtedness plus Net 2, , , ,758.1 Assets) (1) Long-term Indebtedness as a Percentage of Capitalization 46.2% 46.4% 53.0% 48.8% (1) Excludes permanently restricted net assets. (2) Debt-to-capitalization reflects all long-term debt on the balance sheet of MedStar, including the net of any premiums and discounts on bonds outstanding. The actual definition of Indebtedness in the Master Indenture may permit net premiums and discounts to be omitted from the calculation. Source: The System s internal data. Debt Service Coverage September 30, 2014 (1) (in millions) June 30, 2014 (in millions) June 30, 2013 (in millions) Estimated Proforma September 30, 2014 (in millions) (2) The following table presents the System s maximum annual debt service coverage for the fiscal years ended June 30, 2014 and June 30, 2013 and proforma debt service coverage after giving effect to the issuance of the 2015 Tax-Exempt Bonds and the Bonds and the refunding of the Refunded Bonds. Fiscal Years ended June 30 (in millions) Proforma (2) / Operating earnings before interest, depreciation $367.2 $291.6 $367.2 and amortization Investment income Net gains (losses) on sales of investments Other Non-Operating (1.6) (3.5) (1.6) Income Available for Debt Service $447.5 $328.5 $447.5 Maximum Annual Debt Service (1) $77.9 $77.6 $81.3 Maximum Annual Debt Service Coverage Ratio 5.74x 4.23x 5.50x (1) Maximum Annual Debt Service for 2013 and 2014 is calculated based on (a) actual interest rates on outstanding fixed rate bonds; (b) a fixed interest rate of approximately 3.7% per annum based on an interest rate swap agreement relating to a portion of the District of Columbia 1998 Bonds (see MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION - Interest Rate Swap Agreement ); and (c) the higher of actual interest rates paid on June 30 or the average annual rate paid on all other System variable rate indebtedness as of June 30 of each year. (2) Proforma Maximum Annual Debt Service includes the issuance of the 2015 Tax-Exempt Bonds and the incurrence of $ million for the Bonds to fund the ambulatory growth strategy (including costs of issuance), with fixed rates of interest ranging from 0.800% to 3.699%, and amortizing through Source: The System s internal data. A-24

103 MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION Overview As an integrated health system serving the Baltimore-Washington, D.C. region, MedStar owns and operates nine acute care hospitals, one rehabilitation hospital and related healthcare entities in multiple markets and different reimbursement environments. The Maryland hospitals are reimbursed through the allpayor system administered by the HSCRC, while the Washington, D.C. hospitals are reimbursed under the prospective payment system for Medicare, the District of Columbia-established fee schedules for Medicaid, and negotiated rate contracts with managed care companies. The rate system in each jurisdiction also has an impact on the reimbursement for charity care, since the unique rate structure in Maryland includes an allowance in the rates for uncompensated care. Management believes that operating in multiple markets presents certain benefits and operating within one region generates significant business efficiencies. The financial performance of MedStar continues to be positive. In fiscal year 2014, MedStar generated earnings from operations of $135.7 million and operating earnings before interest, depreciation and amortization of $367.2 million. In fiscal year 2013, MedStar generated earnings from operations of $78.8 million and operating earnings before interest, depreciation and amortization of $291.6 million. In anticipation of the future healthcare environment, management has identified a series of strategic initiatives and partnerships which management believes will be important to the System s success. System management continues to identify opportunities to further improve operational efficiencies (see STRATEGIC INITIATIVES ). Three-Month Period Ended September 30, 2014 Compared to Three-Month Period Ended September 30, 2013 MedStar generated earnings from operations for the three-month period ended September 30, 2014 of $21.9 million compared to $17.1 million for the three-month period ended September 30, 2013, an increase of $4.8 million or 28.1%. The operating margin of 1.8% exceeded the margin for the same period in the prior year of 1.5%. Operating earnings before interest, depreciation and amortization for the threemonth period ended September 30, 2014 were $80.0 million, an increase of $5.7 million compared to $74.3 million in the three-month period ended September 30, MedStar s total net operating revenues increased $90.4 million or 8.1% to $1,201.0 million for the three-month period ended September 30, 2014 from $1,110.6 million for the three-month period ended September 30, MedStar s total operating expenses for the three-month period ended September 30, 2014 increased by $85.6 million or 7.8% to $1,179.1 million from $1,093.5 million for the three-month period ended September 30, The System s total net operating revenues of $1,201.0 million for the three-month period ended September 30, 2014 increased $90.4 million or 8.1% over total net operating revenues of $1,110.6 million for the three-month period ended September 30, Net patient service revenues, net of bad debt for the three-month period ended September 30, 2014 was $1,022.0 million, a $37.9 million or 3.9% increase over revenue for the three-month period ended September 30, The increase was driven primarily by overall outpatient volume growth, increases in physician office visits related to physician employment and practice acquisitions and rate increases. The System continues to experience shifting of business from inpatient to outpatient care. System-wide admissions decreased by 1,759 or 4.6% for the three-month period ended September 30, 2014 as compared to the same period in the prior year; however observations grew by 1,349 or 9.7%. System-wide emergency room visits decreased by 944 or 0.7% for the three-month period ended September 30, 2014 as compared to the same period in the prior year. Provision for bad debts for the three-month period ended September 30, 2014 of $49.7 million was $0.5 million or 1.0% above the same period in the prior year. Premium revenue and other operating revenue of $179.0 million for the three-month period ended September 30, 2014 increased by $52.5 million or 41.5% from the three-month period ended September 30, The System continues to grow its Medicaid managed care business, as A-25

104 evidenced by covered lives of 109,344 at September 30, 2014, which are 38,581 or 54.5% above the covered lives of 70,763 at September 30, Total operating expenses of $1,179.1 million for the three-month period ended September 30, 2014 increased $85.6 million or 7.8% over the total operating expenses of $1,093.5 million for the threemonth period ended September 30, This increase is primarily due to the increase in purchased services related to growth in the System s Medicaid managed care business (see premium revenue discussion above), increased device and drug costs related to high acuity procedures and normal inflation. Non-operating activity was a net loss of $29.7 million for the three-month period ended September 30, 2014 compared to a net gain of $53.9 million for the three-month period ended September 30, The significant change in non-operating activity in the three-month period ended September 30, 2014 as compared to the three-month period ended September 30, 2013 was attributable to a decline in the investment markets performance. The deficiency of revenue over expenses for the three-month period ended September 30, 2014 was $7.8 million as compared to an excess of revenue over expenses of $71.0 million for the three-month period ended September 30, 2013, as a result of these unfavorable nonoperating results. Net assets decreased $11.0 million for the three months ended September 30, 2014 due to investment market returns, partially offset by earnings from operations. MedStar s unrestricted cash and investments (including Board-designated funds) were $1,659.3 million at September 30, 2014 and $1,737.8 million at June 30, Days cash on hand were 138 days at September 30, 2014, compared to 147 days at June 30, The decrease in unrestricted cash and investments (including Board-designated funds) is due largely to principal and interest payments and pension contributions that take place during the first quarter of each fiscal year, as well as unfavorable investment market performance during the period, and changes in the System s working capital. Fiscal Year Ended June 30, 2014 Compared to Fiscal Year Ended June 30, 2013 MedStar continues to demonstrate strong operating performance. MedStar generated earnings from operations of $135.7 million in fiscal year 2014, an improvement of $56.9 million or 72.2% compared to fiscal year The operating margin of 2.9% exceeded the prior year of 1.9%. Operating earnings before interest, depreciation and amortization for fiscal year 2014 was $367.2 million, an increase of $75.6 million compared to $291.6 million in fiscal year MedStar s total net operating revenues increased $410.9 million or 9.7% to $4,628.1 million in fiscal year 2014 from $4,217.2 million in fiscal year MedStar s total operating expenses increased by $354.0 million or 8.6% to $4,492.4 million in fiscal year 2014 from $4,138.4 million in fiscal year The System s total net operating revenues for fiscal year 2014 was $4,628.1 million, an increase of $410.9 million or 9.7% over total net operating revenues of $4,217.2 million for fiscal year Net patient service revenues, net of bad debt for fiscal year 2014 was $4,035.5 million, an increase of $150.1 million or 3.9% increase over revenues for fiscal year The increase was driven primarily by overall outpatient volume growth and increases in physician office visits related to physician employment and practice acquisitions as well as the inclusion of MedStar Southern Maryland Hospital Center (MSMHC) for a full twelve months in fiscal year 2014 and rate increases. The System continues to experience shifting of business from inpatient to outpatient care. System-wide admissions decreased by 1,996 or 1.3% from fiscal year 2013 to fiscal year 2014; however observations grew by 4,475 or 8.2%. System-wide emergency room visits decreased by 2,034 or 0.4% from fiscal year 2013 to fiscal year Provision for bad debts decreased in fiscal year 2014 by $21.3 million to $193.2 million from $214.5 million in fiscal year 2013, due to internal process improvements and expansion of Medicaid coverage during Premium revenues and other operating revenues of $592.6 million in fiscal year 2014 increased by $260.8 million or 78.6% from fiscal year 2013 premium and other operating revenues of $331.8 million. During fiscal year 2014, the System experienced significant growth in its Medicaid managed care business in Maryland and Washington, D.C. Covered lives of 106,867 at June 30, 2014 were 62,817 or 142.6% above June 30, 2013 covered lives of 44,050. Significant changes to estimates resulting from the above-referenced settlement associated with the purchase of MSMHC and amounts related to settled, or tentatively settled, prior year A-26

105 third party cost reports resulted in gains of approximately $20.0 million and $16.0 million for fiscal year 2014 and fiscal year 2013, respectively. Total operating expenses of $4,492.4 million for fiscal year 2014 increased $354.0 million or 8.6% over the total operating expenses of $4,138.4 million for fiscal year The increase is primarily due to increased purchased services related to growth in the System s Medicaid managed care business (see premium revenue discussion above), inclusion of MSMHC for a full twelve months in fiscal year 2014 as compared to 6.5 months in fiscal year 2013 and normal inflation. Non-operating activity was a net gain of $169.0 million in fiscal year 2014 compared to net gains of $106.9 million in fiscal year The increase in non-operating income from fiscal year 2013 to fiscal year 2014 was attributable to improvement in the investment markets. MedStar s excess of revenue over expenses for fiscal year 2014 was $304.7 million as compared to an excess of revenue over expenses in fiscal year 2013 of $185.7 million. Net assets increased $323.7 million during fiscal year 2014, due to earnings from operations and investment market returns. MedStar s unrestricted cash and investments (including board-designated funds) were $1,737.8 million at June 30, 2014 and $1,431.6 million at June 30, Days cash on hand were 147 days at June 30, 2014, compared to 132 days at June 30, The increase in unrestricted cash and investments (including Board designated funds) is primarily related to cash generated from operations, favorable investment market returns and positive balance sheet management. Retirement Plans The System has two qualified defined benefit plans (MedStar Health, Inc. Pension Equity Plan (PEP) and MedStar Health, Inc. Cash Balance Retirement Plan (CBRP)) covering substantially all full-time employees hired before MSMH also has a defined benefit pension plan that substantially covers all employees of MSMH. Benefits under the plans are substantially based on years of service and the employees career earnings. MedStar contributes to the plans based on actuarially determined amounts necessary to provide assets sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and Internal Revenue Service regulations. MedStar recognizes the funded status of defined benefit pension plans in the balance sheet with a corresponding recognition in unrestricted net assets of unrecognized gains or losses, prior service costs or credits and transition assets or obligations. The funded status is measured as the difference between the fair value of the plan s assets and the projected benefit obligation of the plan. The unfunded amount recognized in the consolidated financial statements for pension liabilities as of the most recent measurement date of June 30, 2014 was $231.9 million. (See notes to financial statements in Appendix B for full disclosure of significant assumptions used to determine the funded status). Effective December 31, 2009, the System froze its defined benefit pension plans for all non-union employees (approximately 84% of the System s employees). Effective December 31, 2011 and 2010, certain union employees agreed to freeze their defined benefit accruals under new collective bargaining agreements. As of January 1, 2012 the plans were frozen for future benefit accruals for all participants. Affected employees earn all future benefits through MedStar s defined contribution retirement savings plans. Under these plans, the System matches 50% of eligible participant s salary reduction contributions up to a maximum of 6% of compensation. The System approved the temporary suspension of the 2 3% fixed discretionary tenure-based contribution to the defined contribution plan for calendar years 2011 through By letter dated March 12, 2012, the Internal Revenue Service notified MedStar that it had selected the retirement plans for a routine examination. The examination initially was expected to cover the plan year ended December 31, During the examination, the IRS extended the examination to include the plan years ended December 31, 2000, 2001, 2002 and By letter dated October 31, 2013, the IRS A-27

106 notified the Plan Administrator that it had completed the examination and had found the Plans were in compliance and that it had accepted all of the returns as filed. Liquidity and Capital Resources Investment Policy. The System held $2,057.0 million of investable assets on its balance sheet at September 30, Of this amount, approximately $637.7 million was held in cash and cash equivalents, which are largely invested on an overnight basis in Repurchase Agreements collateralized at least 100% with United States Treasury and Agency securities. The System also maintains three separate pools of longterm investments, including the Corporate Endowment, Master Retirement Trust, and the Greenspring Financial Insurance Limited (GFIL - MedStar s offshore captive insurance company) portfolios. Investments in the Corporate Endowment and the Master Retirement Trust are managed according to an investment policy adopted by the MedStar Board. MedStar retains an investment consulting firm to review the organization s asset allocation strategies and aid in the manager selection process. The Investment Committee of the MedStar Board is charged with approving all investment management decisions for these long-term investments including establishing asset allocation policies, reviewing investment performance on a quarterly basis, and retaining and terminating investment managers. MedStar s internal Treasury staff is responsible for making recommendations to the Investment Committee regarding asset allocation targets, investment manager retention and termination, and investment policies, monitoring investment managers performance and compliance with investment policies, and ongoing manager due diligence. Investments in the GFIL portfolio are managed according to an investment policy adopted by the GFIL Board of Directors. The GFIL Board of Directors and its management are charged with making all investment management decisions for these long-term investments including establishing asset allocation policies, reviewing investment performance, and retaining and terminating investment managers. For all pools of investments, professional external investment managers are retained to manage specific asset classes, and professional consulting is utilized for investment performance reporting. MedStar s primary investment objective is to achieve the highest possible total return commensurate with safety and preservation of capital in real, inflation adjusted, terms. The following table presents the actual asset allocation as of September 30, Type of Investment Corporate Endowment Master Retirement Trust GFIL Domestic Equity International Equity Emerging Markets Total Public Equity 27.1% 17.1% 7.9% 52.1% 27.4% 15.9% 7.8% 51.1% 19.7% 13.3% 5.1% 38.1% Fixed Income 16.1% 15.7% 47.9% Hedge Funds 19.9% 19.2% 10.0% Private Equity 1.5% 1.8% 0.0% Inflation Hedge 8.4% 8.0% 0.0% Cash 2.0% 4.2% 4.0% Total 100.0% 100.0% 100.0% Approximately 74% of the System s investable assets held on the System s balance sheet (which excludes investments held in the Master Retirement Trust) as of September 30, 2014 offer daily liquidity, including the cash and cash equivalents previously noted and certain investments held in the Corporate Endowment and GFIL portfolios described above. Approximately 12.5% of investments offer monthly liquidity, with 11% offering liquidity on a quarterly basis. Less than 3% of investments offer liquidity less than annually. A-28

107 Investment Performance. As of September 30, 2014, the System had balance sheet cash and cash equivalents, short-term and long-term investments and short and long-term assets whose use is limited or restricted totaling $2,057.0 million. For the fiscal years ended June 30, 2014 and 2013, the System recorded net realized investment gains of $71.8 million and $26.8 million, respectively. During this period, unrealized gains on investments were $95.2 million and $66.0 million, respectively. For the three months ended September 30, 2014 and 2013, the System recorded net realized investment gains of $10.2 million and $12.9 million, respectively. During this period, unrealized gains/ (losses) on trading investments were ($42.7) million and $41.0 million. See Note 3 to the financial statements included as Appendix B for additional information concerning the System s investments. The ability of the System to generate investment income and realized gains is dependent in large measure on market conditions. The market value of its investment portfolio, as well as its investment income, has been volatile in the past, and this volatility may continue in the future. Financing Transactions. MedStar currently maintains a $250.0 million bank line of credit with a group of banks. At September 30, 2014, approximately $129.8 million was outstanding under this facility. The facility is evidenced and secured by an obligation issued under the Master Indenture. The facility is currently due to expire in August The Credit Agreement includes certain financial covenants, including the maintenance of Maximum Annual Debt Service coverage ratio of 1.25 measured quarterly on a rolling four-quarter basis, Days Cash on Hand of 70 days calculated semi-annually at June 30 and December 31, and maintenance of minimum credit ratings at the BBB level. In addition, MedStar maintains a $30.0 million letter of credit facility, provided by a single lender. This facility is principally used to securitize certain regulatory obligations under various insurance programs. Terms and conditions, which are similar to the bank line of credit, have been established for a three-year period, but the facility can be canceled at the bank s option each year. There were approximately $16.7 million in standby letters of credit issued at September 30, The facility is currently due to expire in August The facility is evidenced and secured by an obligation issued under the Master Indenture. MedStar maintains three letters of credit supporting variable rate demand bonds. The first letter of credit, which supports the District of Columbia Series 1998A Tranche I bonds, was issued by Wells Fargo Bank, National Association, with $41.0 million of bonds outstanding as of September The second letter of credit, which supports the District of Columbia Series 1998A Tranche II bonds, was issued by JPMorgan Chase Bank, N.A., with $41.0 million of bonds outstanding as of September The third letter of credit, which supports the District of Columbia Series 1998A Tranche III bonds, was issued by PNC Bank, National Association, with $41.0 million of bonds outstanding as of September The Tranche I letter of credit expires in March 2017, the Tranche II letter of credit expires in May 2015, and the Tranche III letter of credit expires in May Terms and conditions are similar to the bank line of credit referenced above. The facilities are evidenced and secured by obligations issued under the Master Indenture. MedStar is currently in discussions with several banks regarding the renewal or replacement of the Tranche II letter of credit, and expects to have a letter of credit in place prior to the May 2015 expiration date. Debt and Interest Rate Swap Management Policy MedStar maintains a Debt and Interest Rate Swap Management Policy. This policy governs the issuance and management of all long-term debt obligations, guarantees of debt, and lease financings. In addition, the Debt and Interest Rate Swap Management Policy also governs swap products used to manage interest rate exposure, whether or not related to a specific issuance of debt. The policy dictates the authorizations required for the issuance of debt, the process for evaluating and executing such financings including the use of fixed and floating rate debt, guarantees, and structural features of transactions. In addition, the policy stipulates that MedStar will consider the impact on credit ratings prior to the issuance of additional indebtedness. The Debt and Interest Rate Swap Management Policy also provides the A-29

108 circumstances under which hedging instruments may be utilized, the process for evaluating such risks, and stipulates how hedging transactions shall be executed. Interest Rate Swap Agreement In connection with the issuance of the 1998A District of Columbia Bonds, MedStar entered into an interest rate swap agreement with Wells Fargo Bank, National Association (formerly Wachovia Bank, National Association), with a notional amount of $150.0 million (reduced to $97.5 million at August 2014). The interest rate swap agreement expires in 2027, which is prior to the maturity of the 1998A District of Columbia Bonds. The agreement has the effect of synthetically converting the interest rate on the 1998A District of Columbia Bonds from a variable rate to a fixed rate of approximately 3.7%. The percentage of LIBOR to be received under the agreement is intended to offset the variable rate payable by MedStar with respect to the 1998A District of Columbia Bonds, though the LIBOR-based rate may not (and currently does not) equal the variable rate actually paid with respect to the 1998A District of Columbia Bonds. The interest rate swap agreement is evidenced and secured by an Obligation issued under the Master Indenture. Although MedStar has never been required to post collateral under this swap agreement, certain collateral may be required to be pledged if the System s credit ratings decline below the BBB level. As of September 30, 2014, the interest rate swap had a negative mark-to-market valuation of $14.2 million. Agreements with Georgetown University In connection with the acquisition of MGUH, MedStar entered into two gain-sharing agreements with Georgetown University (the University), an Asset Purchase Agreement (APA) and an Academic Affiliation and Operation Agreement (AAOA). Under the terms of the APA, MedStar agrees to pay to the University annually 50% of the amount by which the combined operating earnings before interest, taxes, depreciation and amortization, as defined in the APA (Adjusted Washington Region EBITDA) of MedStar s Washington, D.C. businesses, including but not limited to MWHC, MNRN and MGUH, exceeds a certain threshold amount. For the fiscal year ended June 30, 2014, the threshold was $98.1 million ($60 million beginning in 2000 adjusted annually for inflation and other allowable changes). No further payments are required under this provision when the cumulative payments equal $70.0 million. MedStar has made $52.7 million of cumulative payments under the APA, inclusive of the payment made in December Pursuant to the terms of the AAOA, in support of academic programs at the University, for each fiscal year following the termination of the payment terms imposed by the APA described above, MedStar is required to pay to the University 17.5% of the Adjusted Washington Region EBITDA in excess of $60.0 million, adjusted annually as described above. No amounts were due or have been paid under this AAOA at June 30, Additionally, in accordance with the terms of the AAOA, the University is required to make payments to MedStar equal to a percentage of the University School of Medicine s total undergraduate tuition revenue, in exchange for teaching services provided by MGUH physicians. MedStar recognized $12.3 million of tuition revenue during the year ended June 30, MedStar 2020 STRATEGIC INITIATIVES Management embarked on an initiative to further define and refine the characteristics and components of the organization s distributed care delivery network, and to translate those findings into a concrete and actionable approach for transforming its business model MedStar The System expects to evolve by expanding access and resources across the region; creating new business models with more focus on post acute and primary care; and evolving focus from episodic care to a coordinated, bundled network of care across the continuum for all patients. A-30

109 The Strategic Plan is the System s roadmap to MedStar The plan addresses key market assumptions around utilization; reimbursement; quality, safety and service; and population health management. The strategies will guide the organization in building out the components of MedStar The major management initiatives are described below: Acute Care Strategy The System continues to build off its strong base of acute care facilities. This includes a focus on integrating acute care activities at its ten System hospitals with the ambulatory and physician alignment, and population health strategies and post acute care strategies noted below. In addition, within each region, service lines are being integrated. In the Washington, D.C. region, regional service line leaders have been established in heart care, cancer, orthopaedics, and neurosurgery, allowing for the standardization of patient care pathways. The MedStar Heart & Vascular Institute, a national leader in the research, diagnosis and treatment of cardiovascular disease headquartered at MWHC, formed a clinical and research alliance with the Cleveland Clinic in January In November 2014, the alliance was expanded to include MedStar Union Memorial Hospital. Under this alliance, MedStar Health and Cleveland Clinic have agreed to share best practices related to patient care, outcomes measurement, quality reporting and clinical research. Physician teams from both institutions are working together to accelerate improvements in heart care and research, to support even greater outcomes and clinical protocols. MedStar Orthopaedics includes more than 115 surgeons seeing patients in over 35 locations in the Baltimore-Washington corridor. In the Baltimore region, MedStar is also home to the Curtis National Hand Center, and MedStar s physicians serve as the official medical provider for the National Football League s (NFL) Baltimore Ravens, Major League Baseball s (MLB) Washington Nationals, National Basketball Association s (NBA) Washington Wizards, National Hockey League s (NHL) Washington Capitals, and other sports teams. In the Baltimore Region, the oncology service line program has developed services on the MHH campus, developed plans to consolidate the oncology services at MUMH on the MGSH campus, and developed plans for a comprehensive ambulatory program in Bel Air. The program has implemented an electronic medical record at all service locations, integrated tumor registries regionally, and enhanced participation in clinical trials. Ambulatory Care and Physician Alignment Management believes that one of the most critical components of MedStar s future business model is the System s ambulatory care initiative coupled with its physician strategy. As management positions the organization to provide a comprehensive and integrated system of care to a patient population, management believes that MedStar s capabilities to provide outpatient primary care and specialty care in an integrated system of care will be essential. The ambulatory care initiative is multi-faceted and is designed to improve MedStar s geographic distribution of care and to expand and better organize the MedStar physician enterprise and key diagnostic and therapeutic services. While the strategy is initially focused on restructuring the System s existing ambulatory care centers, the near-term strategy includes improving positioning through reconfiguration, consolidation, and service improvements. As of September 30, 2014 the System operated ten PromptCare sites, three family medical centers, and three multi-specialty centers. To further MedStar s Distributed Care Delivery Network, MedStar entered into a clinical affiliation with CVS Health s Minute Clinic locations distributed throughout the region. The partnership will provide coordinated care services through the integration of Electronic Health Records systems. Proceeds from the Bonds are expected to be used to fund further planned growth in the build out of this strategy. The alignment and migration of the System s employed physicians into an integrated physician organization is underway. The creation of an integrated multi-specialty group is expected by management to not only improve care delivery and coordination for the System s patients, but also create a business enterprise focused on practice management, medical A-31

110 management and performance optimization. The organization has begun to build the infrastructure needed to execute strategies to reduce costs and grow revenue through acquisitions or partnerships and recruit and retain physicians. Post Acute Care Strategy The System operates the largest home care company in the region, with over 263,000 home care visits in fiscal 2014 (see Home Health Care ). In addition, the System provides comprehensive acute and ambulatory rehabilitation services with the operation of a 137 bed rehabilitation hospital in Washington, D.C. (see MedStar National Rehabilitation Network ), has 99 licensed post acute beds in the Baltimore region (see MedStar Good Samaritan Hospital and MedStar Union Memorial Hospital ), and 24 post acute beds in the Washington region (see MedStar Southern Maryland Hospital ) as well as a number of affiliations to provide sub-acute care and other post acute care services. The System also operates two skilled nursing facilities with a total of 263 beds and an extensive retail pharmacy network (see Retail Pharmacies ). MedStar also operates 54 rehabilitation sites (44 MNRN-owned and 10 hospital-owned). Current plans are to improve integration of post acute care and enhance care coordination with acute services, strengthen the portfolio and demonstrate patient outcomes, experience and cost. This is expected to be accomplished by building an infrastructure that links post acute care to acute and physician services so as to advance the care coordination of populations with high post acute care utilization and by identifying new program and service opportunities, and developing partnerships where there are gaps in the portfolio. Population Health Recognizing the shifting reimbursement environment from fee-for-service to value-based purchasing, the System is taking a disciplined approach to better position itself for the future. The System s Medicaid managed care organization, MedStar Family Choice, has been expanded recently from Baltimore County and Baltimore City to Washington, D.C., Anne Arundel County, Howard County, Prince George s County, Montgomery County and Southern Maryland. MedStar Medicare Choice, a new Medicare Advantage Plan, has been approved by CMS to enter the Central Maryland and Southern Maryland markets for 2015 enrollment (see Health Plans ). In addition, an infrastructure has been developed to better coordinate and manage patient care for the System s communities and specific populations through a partnership with Evolent Health (Evolent), a joint-venture between University of Pittsburgh Medical Center and the Advisory Board Company. As of September 30, 2014, MedStar Family Choice had approximately 109,000 covered lives. Based on preliminary enrollment results from the recently-concluded Medicare Advantage annual enrollment period, MedStar Medicare Choice will have approximately 5,000 enrollees effective January 1, Also working with Evolent, MedStar has established MedStar Select as an option under the System s employer based health plan, available for all MedStar employees. As of January 1, 2015, approximately 9,100 employees and their dependents have enrolled through the recently-concluded annual enrollment period to be participants in MedStar Select. MedStar Visiting Nurse Association (MVNA) has taken on a larger role in providing care coordination in MedStar s Primary Care Medical Homes and Home-Based Services Program, managing transitions of care in collaboration with Cleveland Clinic and MWHC and palliative care intervention. Quality and Safety Improvements The System devotes substantial efforts under the direction of the Quality, Safety and Professional Affairs Committee of the MedStar Board to the continuous improvement in the quality of care delivered and safety of its patients. MedStar management and the boards of directors of the hospitals and home care company, clinical staff and medical staff are all engaged in this effort. A-32

111 In order to provide quality transparency to its community, MedStar posts its Centers for Medicare and Medicaid Services (CMS) clinical care measures on its website. This not only provides easier access to the measures, but also provides information to the public that is more current than the data available on the CMS website. Designed by clinicians, the web pages convey information in layman's terms for ease of understanding and are displayed in a comparative format including data from all hospitals reporting to CMS. On its website, MedStar also provides Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) information about the System s patients' perception of their experiences. The focus on clinical quality and safety performance has been extended to a number of initiatives related to service lines and patient conditions. Each initiative focuses not only on clinical quality, but also on patient safety and financial performance. Each initiative is staffed broadly, with participation from across the System to ensure wide acceptance and implementation of all measures and practices. Several of these initiatives have achieved tangible improvements in the quality of clinical care and safety for patients. Among those are the following: MedStar has long been committed to delivering the highest levels of quality and safety to its patients. As part of its continued Good to Great journey, over the last 18 months, MedStar has been driving to become a High Reliability Organization (HRO). A HRO is an organization that succeeds in avoiding unintentional patient harm due to high risk factors and complexity embedded in the provision of care. To date, over 2,000 MedStar Health leaders and over 20,000 employees and physicians have been trained on the tools and techniques used by resilient organizations. Culture of Safety Over the last five years, MedStar has conducted a System-wide employee survey on employee perceptions of the culture of patient safety. The results have provided a platform for a systematic patient safety improvement plan across all entities in the System. The System-wide activities that resulted from this planning work led to tangible (3%-7%) improvements in critical safety domains over this period. Additional plans have been developed and activities implemented for continued patient safety improvement. Council for Ideal Obstetrical Care Initially focused on risk reduction, this task force has transitioned to develop evidence-based guidelines for quality and safety in obstetrical care and is currently focusing on creating a culture of safety. As a result of these practices, birth trauma rates across the System continue to be below the national average. Stroke Task Force This group deployed evidence-based protocols across the System and received Primary Stroke Certification from The Joint Commission at all hospitals other than MSMH (MSMH has Primary Stroke Center Designation through the Maryland Institute for Emergency Medical Services System). Falls Prevention Initiative This initiative is focused on prevention of falls with serious harm. Hospitals across the System are implementing evidence-based prevention practices and developing System-wide protocols to standardize practice. Hospital Acquired Conditions and Readmissions Work to identify and implement improvement opportunities for prevention of hospital acquired conditions (e.g. infections, urinary tract infections) and readmissions to support quality, safety and pay for performance is ongoing. Heart Failure (HF) Patients A program has been developed to provide evidence based care to HF patients across the continuum of care. Implemented initially at MedStar s two tertiary heart hospitals, the program is being systematically rolled out to the other MedStar hospitals. System-wide implementation of the RL Solutions Patient Safety Event Management System The online reporting system tracks near misses and unsafe conditions that may arise across the MedStar s care facilities allowing for process improvement. A-33

112 TheraDoc This program was implemented System-wide in It is an antibiotic stewardship software program that improves infection management by matching appropriate antibiotic therapy to bacterial infection, alerting caregivers to opportunities for switching IV to PO therapy, and streamlining antibiotics to less costly and/or more targeted therapy. Supply Chain Initiatives The System continues to focus on supply chain initiatives. In November 2011, MedStar formed the MNS Network, a partnership with Novant Health and Sentara Health. The network aggregates the $1.5 billion annual supplies expenditures of the three organizations for enhanced leverage in contract negotiations with the supplier community. To date savings have been generated largely by standardizing to the lowest prices for supplies across the three healthcare systems. Facilities Management In November 2013, MedStar entered into an agreement with CBRE for a System-wide fully integrated facilities and real estate program. Under the agreement, 260 MedStar employees transferred to CBRE employment in February The scope of the engagement includes hospital facilities, property management, real estate brokerage services, design and construction, and project management. Under terms of the agreement, CBRE agrees to certain savings associated with managing MedStar s properties. MedStar Leader of the Future As a part of continuing MedStar s Good to Great Journey, MedStar is investing in its greatest asset, its people. The System has created three programs for developing physicians and management as a part of succession planning and expanding the pipeline of high performing leaders across the organization to fill a broad range of existing and new leadership positions that will emerge from the MedStar 2020 strategy. These programs are intended to better prepare the System s managers to navigate the changing healthcare environment and ensure the System is well positioned for the future. MedStar 2020 Performance Transformation The System recently commenced the MedStar 2020 Performance Transformation project, a System-wide initiative to identify and operationalize performance improvement opportunities in support of the MedStar 2020 vision. This project reflects the need for the System to evolve in a changing healthcare environment. The project will focus on improving performance through the identification of enhanced revenue opportunities, increased productivity, accelerating the implementation of the physician enterprise, and identifying strategies to reduce the overall cost per unit of service, while maintaining and improving quality of care and patient experience. Innovation and Research MedStar recognizes the importance of innovation and research in successfully responding to the changing health care environment. The MedStar Institute for Innovation (MI2), whose mission is to catalyze, support and create innovation that advances health, is expected to continue to make the System a leader in driving health care innovation. The MedStar Health Research Institute (MHRI) and MedStar s partnership with Georgetown University should continue to make the System a leader in translational and health sciences research. MHRI is the research arm for MedStar, providing scientific, administrative, and regulatory support for research programs that complement the key clinical services and teaching A-34

113 programs in all hospitals in the System. MHRI supports clinical research performed by attending medical staff and by full-time research investigators. MHRI and its investigators participate in a wide range of research aimed at advancing health and the quality of delivered care by conducting health services research. MHRI is part of the Georgetown-Howard Universities Center for Clinical and Translational Science, an NIH-sponsored program to support multidisciplinary, crossinstitutional teams of researchers in advancing science that can be used to improve the nation s health. Many of MHRI s clinical researchers and scientists are nationally and internationally known investigators, serving on NIH committees and editorial boards and fulfilling academic appointments. MHRI s research infrastructure enables it to provide a wealth of support to investigators and sponsors. In fiscal year 2014, MHRI participated in approximately 1,033 clinical trials, was awarded 235 new contracts (includes all federal, foundation, commercial and fee for service contracts) and published over 500 scientific publications (new medical discoveries). MHRI is in the top 20% of U.S. institutions receiving funds from the NIH and other federal agencies, with approximately 60% of its studies being federally funded. MI2 was founded in Its role is to foster innovation throughout MedStar by offering innovation services that include intellectual property and technology transfer expertise, either in partnership with MedStar employees or with external strategic partners. Through the MedStar Innovation Platform, employees can access tools for ideation and design, as well as respond to innovation challenges, and keep current on developments in healthcare innovation across the organization. MI2 is composed of several functional areas. MedStar Inventor Services (MIS) offers a turnkey technology transfer system in conjunction with Cleveland Clinic Innovations to help MedStar employees commercialize their best ideas and take them to the marketplace. MIS provides a full range of intellectual property protection, prototyping, market assessment, and licensing services. The National Center for Human Factors in Healthcare applies the safety science of human factors engineering and cognitive science (the design of devices and processes optimized to work in the way that people actually think and act) to improve patient care. The Human Factors Center is both a large research enterprise (with NIH funding) as well as a clinical consultation service across MedStar. MI2 s National Center for Digital Health and Data Science finds, identifies, and creates new software applications, information visualizations, predictive analytics, and other information tools to support the health and well-being of the System s patients. Enterprise Risk Management MedStar has established an Enterprise Risk Management (ERM) Program throughout MedStar. The goals of this program are to identify, assess, prioritize and implement solutions to external and internal risks impacting the mission and operations of MedStar. Information Technology Strategy MedStar continues to build out its Electronic Medical Record (EMR) system. The inpatient EMR uses the Cerner Millenium product to provide a common patient record for nursing documentation, physician orders and ancillary department support. Building on the clinical framework, MedStar has added predictive analytic tools to improve care quality. An ambulatory EMR from GE Centricity has been extended to the 1,200 MedStar physicians working in offices, clinics, and urgent care centers. The inpatient EMR, outpatient EMR, and EMR s from the three most recent hospitals to join the System are all connected through MedStar s Health Information Exchange (HIE) so physicians in any venue can see the complete patient history. MedStar s HIE has won several innovation awards and MedStar s connectivity A-35

114 has won Most Wired recognition by Hospitals & Health Networks magazine for the 10 th time. Expansion of the EMR has kept pace with Federal expectations as it has garnered meaningful use incentive payments. Further integration and extension of MedStar s EMR is planned through a strategic agreement signed with Cerner in September This agreement provides access to Cerner s complete catalog, funds joint development and locates key Cerner personnel permanently at MedStar sites. As a part of this arrangement, all ambulatory sites and physicians will move to the Cerner product so that there is a single data base for all inpatient and outpatient records. MedStar has also implemented a patient portal. The portal provides an on-line vehicle for patients to communicate with their physician offices, including requesting appointments and prescription refills, as well as test results. In 2013, this portal was extended to the hospitals to provide patients information about their stay within 36 hours of discharge. New functionality also now allows patients to pay their bills on line. MedStar is actively participating in the Maryland Health Information Exchange. Health Information Exchanges (HIE) are one component of the CMS plan to use information technology to improve care quality while reducing the cost of care delivery. Through the HIE, physicians have access to a more complete view of the care their patients received, regardless of where the care was provided in Maryland and DC hospitals, which should lead to safer and more cost effective care. MedStar has integrated access to the Maryland HIE into the patient s Electronic Health Record, which enables physicians to review both MedStar patient data and data available from non-medstar providers through a single source. Expanding its mobile technology strategy in 2014, MedStar has deployed new systems working on ipads to its visiting nurses treating patients at home, its patients registering in clinics, and its nursing managers rounding on patient rooms. A project to standardize and expand teleconferencing systems was launched in June 2014 and a vendor agreement to support telemedicine was signed in October In addition to its focus on EHRs and clinical information systems, MedStar is also redesigning and streamlining its administrative processes. In 2012, a team of more than 100 administrative leaders and staff began redesigning administrative workflows that support Human Resources, Supply Chain, and General Accounting. The Peoplesoft Enterprise Resource Planning system was rolled out to seven of MedStar s hospitals in 2014 and will be implemented in the three remaining hospitals by July RESTRICTED FUNDS All of the hospitals engage in charitable solicitation. All restricted funds are held subject to the principal and income restrictions imposed by the donors. The value of funds restricted by donors for specific purposes and endowments (controlled funds) at June 30, 2014 was $86.1 million and such funds are recorded as part of investments and assets whose use is limited or restricted. In addition to controlled funds, MGSH is the beneficiary of a trust established under the will of a generous benefactor. The funds from that bequest are held by a separately incorporated and unaffiliated foundation. Except for the payment of administrative expenses, this foundation is established to financially support MGSH and its related nursing home. MGSH and the nursing home may request expenditures of principal as well as income from this fund, subject to the approval of the foundation s board. The foundation has the exclusive authority to invest and manage and disburse its funds. MGSH s interest in the net assets of this foundation as of June 30, 2014 was $64.9 million. EMPLOYEES As of September 30, 2014, the System employed approximately 30,000 employees. There are three unions actively representing approximately 14% of the System s employees. A-36

115 The Service Employees International Union, Local 722, represents approximately 1,884 service workers at MWHC, including environmental services, dietary, nursing support and technical positions, under a contract that expires on June 30, National Nurses United (NNU) represents approximately 1,876 registered nurses at MWHC under a contract that expired on November 15, MWHC is currently negotiating the terms of a new contract with National Nurses United (see LEGAL MATTERS Labor Matters ). The Service Employees International Union, District 1199E-DC, represents approximately 534 service workers at MGUH, including housekeeping, maintenance, skilled crafts, food service, phlebotomists, nursing unit secretaries, and nurse aides under a contract that expires on October 31, VOLUNTEERS The hospitals receive support from an active volunteer program. Currently, there are approximately 1,986 volunteers. Volunteers run the Lifeline and Patient Representatives programs, thrift shops, gift shops and assist in all areas within each hospital s facilities. COMMUNITY BENEFITS The provision of a full range of quality healthcare services to MedStar s patients is an integral part of the System s not-for-profit mission. In addition, the System provides many community benefit programs, defined as programs or services designed to improve access to health services, enhance population health, advance knowledge, and relieve or reduce the burden of government or other entities. The System provides free community wellness and fitness programs including seminars, health screenings, physician hotlines and support groups for persons with chronic illnesses. Healthcare professionals visit schools to teach good health habits and through its medical house program, home visits are made to chronically ill and homebound elders. The System is involved in many community building activities, including mentoring students through school-based health careers programs, establishing community gardens, and leading community coalitions to address documented health needs. In addition, the System partners with other communitybased not-for-profits, and sponsors and supports a wide range of community causes. These programs benefit many in the Washington-Baltimore region but are especially important for low income, uninsured, and other vulnerable populations. Through its financial assistance policy, patients who meet income guidelines receive care regardless of their ability to pay. The System also provides medical education and research programs that benefit the wellbeing of the broader community. Medical education programs support a pipeline to ensure the availability of highly skilled healthcare practitioners, including workforce shortage areas. MedStar researchers participate in more than 500 clinical trials that help expand the scope of knowledge around medical practice and in areas such as health disparities. In fiscal year 2013, the System invested $309.7 million in community benefit activities (calculated in accordance with the American Hospital Association s guidelines for community benefits), including medical education, charity care, community health and community building programs, and research. Below is a brief description of several of the many community benefit programs provided by MedStar during its fiscal year ended June 30, Let s Move Challenge As part of a countywide coalition, MedStar St. Mary s Hospital partners with the University of Maryland to address child obesity by participating in the national Let s Move Challenge. The goal of the program is to prevent obesity by promoting healthy eating and physical activity among students in grades A-37

116 K-12. The hospital collaborates with a network of schools, healthcare providers, community leaders and elected officials to stimulate systemic change for healthy living. More than 500 students are directly impacted by the program s activities. Women s Health Improvement Program (WHIP) Through its partnership with Proyecto Salud Clinic, MedStar Montgomery Medical Center s Women s Health Improvement Program (WHIP) allows medically underserved women over the age of 40 to receive free mammogram screenings and follow-up care, as necessary. The culturally and linguistically tailored service meets the needs of a growing Spanish speaking population in Montgomery County. In 2014, the WHIP helped 236 women access the critical breast care services. KIDS Mobile Medical Clinic (KMMC) MedStar Georgetown University Hospital s KIDS Mobile Medical Clinic (KMMC) is a medical home on wheels that targets children in underserved communities in the District of Columbia. While primary care is the principal focus, KMMC also provides sick visits, vision and hearing screenings, lab studies, and pharmacy services. Based on a partnership with Ronald McDonald House Charities, the KMMC managed nearly 1,419 patient visits in Rx for Success MedStar s partnership with Vivien T. Thomas Medical Arts Academy in Baltimore, Maryland grooms inner city, high school, minority students for careers in nursing, biotechnology, and pharmacy and surgical services. The students are able to apply the skills they learn in a simulation lab furnished by MedStar and supporting partners. Selected students are also able to network and gain work experience through a paid summer internship offered at MedStar hospitals. During the internship, students are exposed to a variety of health careers and they are coached and mentored on the critical skills needed to be successful. Since the program s inception in 2008, more than 100 students have completed the 8-10 week internship. Hair, Heart & Health Led by the MedStar Health Research Institute, Hair, Heart & Health targets African American men by providing blood pressure screenings and culturally tailored health education for customers at participating barbershops in the District of Columbia. The program is designed to detect undiagnosed cases of hypertension and improve the health conditions of hypertensive patrons through medical management and referrals for primary care and support services, as necessary. Since the program s inception in 2012, more than 1,400 screenings have been conducted. Shepherd s Clinic Through MedStar Union Memorial Hospital s partnership with Shepherd s Clinic, low-income Baltimore city residents are able to receive primary care, specialty care and wellness services. The program relies on 350 volunteers to offer a wide range of services, including but not limited to: internal medicine, cardiology, dermatology, endocrinology, gynecology, physical therapy, podiatry and cancer screenings. In 2014, the clinic managed 6,965 patient visits. Professional and General Liability INSURANCE Coverage for medical professional liability (PL or malpractice) and comprehensive corporate general liability (GL) for all entities is provided through MedStar s wholly-owned captive insurance company, Greenspring Financial Insurance Limited (GFIL), domiciled in Grand Cayman Island. A-38

117 Funding of GFIL is annually determined based on an independent actuarial analysis. The actuarial liability and funding determination is based on actual case reserves as well as an estimate of the liability associated with claims incurred but not yet reported. The GFIL Board reviews premium adequacy annually and considers charging additional premium should there be a premium deficiency. MedStar injects additional capital as required to ensure insurance reserves and shareholder equity combined is equal to or exceeds the actuarially determined outstanding losses at a minimum of a 60% confidence level, discounted. GFIL currently purchases commercial excess reinsurance from insurance carriers rated A or better by A.M. Best. Management believes that current levels of funding along with the commercial excess reinsurance coverage purchased by GFIL are adequate to provide for all claims that have been or may be asserted against it for general or professional liability. Comprehensive Property Insurance MedStar maintains a comprehensive property insurance policy with commercial insurers in amounts that are believed to be sufficient to cover all real and personal property, boiler, machinery, and business interruption losses. The policy contains commercially reasonable provisions for deductibles and other endorsements to provide coverage on a replacement cost basis. Workers Compensation The System is a qualified self-insured employer within the District of Columbia and as such finances its exposure via a self-insurance trust. Excess insurance on a per-claim basis is purchased from a commercial insurer. The System insures its Maryland exposure (other than MSMH and MSMHC) via commercial workers compensation insurance with a per claim retained limit. MSMH and MSMHC maintain workers compensation and employers liability coverage through the Maryland Hospital Association. Other Insurance MedStar also maintains additional commercial insurance coverage customarily in place and in limits customarily maintained by similar healthcare organizations. These coverages include Directors & Officers Liability, including Employment Practices Liability, Information Security and Privacy Insurance (Cyper Liability Coverage), Automobile Liability, Garagekeeper s Liability, Non-Owned Aircraft Liability and Helipad Premises Liability Insurance, Employed Lawyers Liability, Fiduciary Liability and Crime Coverage. All programs of insurance are reviewed by management on an annual basis. LEGAL MATTERS MedStar is a large, complex, highly-regulated health care provider functioning in an extremely competitive market. The System provides a full spectrum of health care services in communities of widely varying demographics and across a very large geography. The patients it serves participate in private insurance programs, government insurance programs such as Medicare and Medicaid, and in some instances pay for care themselves. Given the nature, size and complexity of its business, the System has been, and will continue to be party to various labor matters, legal and regulatory inquiries and proceedings, and commercial litigation, as discussed below. With the exception of those matters described below which are too preliminary in nature to determine if they will have a material adverse effect on the consolidated financial position or results of operations of the System, management does not expect that the pending legal and regulatory proceedings will have a material adverse effect on the consolidated financial position or results of operations of the System. A-39

118 a. Labor Matters As previously noted in the EMPLOYEES section above, of the approximately 30,000 employees of the System, approximately 4,384 are affiliated with labor unions, with MWHC nurses representing approximately 1,900 of the System s union-affiliated employees. In September 2014, MWHC began negotiations with National Nurses United, the union that represents the nurses. The existing collective bargaining agreement with the MWHC nurses expired on November 15, On November 26, 2014, MWHC declared an impasse and implemented its last offer on the table. NNU called a one-day strike on December 22, MWHC brought in replacement nurses, and together with several hundred MWHC nurses who chose not to strike, continued to operate the hospital on a normal schedule. The striking nurses returned to work on January 1, 2015, on which date MWHC fulfilled its commitment to the replacement nurse agency. MWHC intends to continue bargaining with NNU, but the timing of resolution to the impasse is uncertain. Though the System engages in collective bargaining with unions representing its employees, at the present time, management does not expect that labor matters will have a material adverse financial impact on the System. b. Legal and Regulatory Proceedings Today s health care delivery environment is such that all large providers face increasing government scrutiny across a growing spectrum of issues. Management is currently aware of several government inquiries into the operations of MedStar providers, and the System and its providers are cooperating with the government in each. However, management cannot conclude, based on the preliminary nature of these matters, how these matters will be resolved or whether such resolutions will have a material adverse financial impact on the System. c. Commercial Litigation In the course of its operations, the System regularly enters into business arrangements with vendors and service providers. Periodically, there are disputes with regard to these arrangements which result in commercial litigation. At the present time, management is aware of several such disputes; however, these matters are not anticipated, individually or collectively, to have a material adverse financial impact on the System. d. Employment Litigation MedStar in the normal course of business is a party to legal and regulatory proceedings. These include a lawsuit filed in June 2011 by several MedStar Washington Hospital Center employees alleging violations by MedStar of wage-hour laws. The plaintiffs in this action are seeking certification of a class that would include hourly employees at all of MedStar s hospitals. MedStar is opposing class certification and taking other steps to defend itself and the hospitals in this litigation. The final outcome of this litigation cannot be determined at this time. In April 2014, another lawsuit was filed in federal court alleging similar wage-hour violations as the 2011 action. This lawsuit seeks to certify a class to include hourly employees at six of MedStar s hospitals. MedStar will oppose class certification and otherwise defend itself and the hospitals in this manner. At this time, the outcome of the class certification and these lawsuits is uncertain and it is too early to determine whether these lawsuits will have a material adverse financial impact on the System. A-40

119 APPENDIX B CONSOLIDATED FINANCIAL STATEMENTS OF MEDSTAR HEALTH, INC. AND ITS SUBSIDIARIES

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121 MEDSTAR HEALTH, INC. Consolidated Financial Statements June 30, 2014 and 2013 (With Independent Auditors Report Thereon)

122 MEDSTAR HEALTH, INC. Table of Contents Page Independent Auditors Report 1 Consolidated Financial Statements: Consolidated Balance Sheets 3 Consolidated Statements of Operations and Changes in Net Assets 5 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8

123 KPMG LLP 1 East Pratt Street Baltimore, MD Independent Auditors Report The Board of Directors MedStar Health, Inc.: We have audited the accompanying consolidated financial statements of MedStar Health, Inc. (the Corporation), which comprise the consolidated balance sheets as of June 30, 2014 and 2013, and the related consolidated statements of operations and 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 Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this responsibility 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. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

124 Opinion In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of MedStar Health, Inc. as of June 30, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. October 6,

125 MEDSTAR HEALTH, INC. Consolidated Balance Sheets June 30, 2014 and 2013 (Dollars in millions) Assets Current assets: Cash and cash equivalents $ Investments Assets whose use is limited or restricted Receivables: From patient services (less allowances for uncollectible accounts of $188.8 in 2014 and $204.3 in 2013) Other Inventories Prepaids and other current assets Total current assets 1, ,264.6 Investments Assets whose use is limited or restricted Property and equipment, net 1, ,137.1 Interest in net assets of foundation Goodwill and other intangible assets, net Other assets Total assets $ 4, , (Continued)

126 MEDSTAR HEALTH, INC. Consolidated Balance Sheets June 30, 2014 and 2013 (Dollars in millions) Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ Accrued salaries, benefits, and payroll taxes Amounts due to third-party payors, net Current portion of long-term debt Current portion of self insurance liabilities Other current liabilities Total current liabilities 1, Long-term debt, net of current portion 1, ,207.2 Self insurance liabilities, net of current portion Pension liabilities Other long-term liabilities, net of current portion Total liabilities 2, ,846.9 Net assets: Unrestricted net assets: MedStar Health, Inc. 1, ,017.4 Noncontrolling interests Total unrestricted net assets 1, ,026.8 Temporarily restricted Permanently restricted Total net assets 1, ,164.9 Total liabilities and net assets $ 4, ,011.8 See accompanying notes to consolidated financial statements. 4

127 MEDSTAR HEALTH, INC. Consolidated Statements of Operations and Changes in Net Assets Years ended June 30, 2014 and 2013 (Dollars in millions) Operating revenues: Net patient service revenue: Hospital inpatient services $ 2, ,240.8 Hospital outpatient services 1, ,444.1 Physician services Other patient service revenue Total net patient service revenue 4, ,099.9 Provision for bad debts Total net patient service revenue, net of provision for bad debts 4, ,885.4 Premium revenue Other operating revenue Net operating revenues 4, ,217.2 Operating expenses: Personnel 2, ,310.7 Supplies Purchased services Other operating Interest expense Depreciation and amortization Total operating expenses 4, ,138.4 Earnings from operations Nonoperating gains (losses): Investment income Net realized gains on investments Unrealized gains on derivative instrument Unrealized gains on investments, net Income tax (provision) benefit (3.9) 1.9 Other nonoperating losses (2.0) (6.1) Total nonoperating gains Excess of revenues over expenses $ (Continued)

128 MEDSTAR HEALTH, INC. Consolidated Statements of Operations and Changes in Net Assets Years ended June 30, 2014 and 2013 (Dollars in millions) Unrestricted net assets: Excess of revenues over expenses $ Change in funded status of defined benefit plans (2.1) Distributions to noncontrolling interests (3.7) (6.3) Net assets released from restrictions used for purchase of property and equipment and other Increase in unrestricted net assets Temporarily restricted net assets: Contributions Realized net gains on restricted investments Change in unrealized gains on restricted investments Increase in net assets of foundation Net assets released from restrictions (10.9) (8.9) Increase in temporarily restricted net assets Permanently restricted net assets: Contributions 1.5 Realized net gains on marketable restricted investments Change in unrealized gains on restricted investments Increase in permanently restricted net assets Increase in net assets Net assets, beginning of year 1, Net assets, end of year $ 1, ,164.9 See accompanying notes to consolidated financial statements. 6

129 MEDSTAR HEALTH, INC. Consolidated Statements of Cash Flows Years ended June 30, 2014 and 2013 (Dollars in millions) Cash flows from operating activities: Change in net assets $ Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Amortization of bond financing costs, premiums and discounts (1.2) (0.3) Loss (gain) on sale of property and equipment 0.2 (0.1) Change in funded status of defined benefit plans 2.1 (106.9) Realized net gains on marketable investments (71.8) (26.8) Change in unrealized gains of marketable investments (95.2) (66.1) Increase in net assets of foundation (10.1) (6.3) Unrealized gain on derivative instrument (1.4) (6.7) Net settlement payment on derivative instrument Loss on extinguishment of debt 2.5 Distributions to noncontrolling interests Deferred income tax provision (benefit) 3.6 (1.8) Provision for bad debts Temporarily and permanently restricted contributions (17.1) (18.9) Gain on sale of consolidated joint venture, net of noncontrolling interests (1.2) Changes in operating assets and liabilities: Receivables (224.3) (188.5) Inventories and other assets (28.5) (44.5) Accounts payable and accrued expenses Amounts due to third-party payors 19.0 (4.9) Other liabilities 25.0 (45.5) Net cash provided by operations Cash flows from investing activities: Proceeds (purchases) of investments and assets whose use is limited or restricted, net 81.5 (106.0) Purchases of alternative investments (240.7) (77.0) Proceeds from sales of alternative investments Proceeds from sale of consolidated joint venture 5.4 Net settlement payment on derivative instrument (3.7) (3.9) Purchases of property and equipment, acquisition of Southern Maryland Hospital Center and other (221.3) (427.1) Net cash used in investing activities (250.0) (611.2) Cash flows from financing activities: Proceeds from long-term borrowings Repayments of long-term borrowings (20.5) (18.5) Repayments of refinanced bonds and other borrowings (240.6) Payment of deferred issuance costs (0.2) (3.0) Temporarily and permanently restricted contributions and other Distributions to noncontrolling interests (3.7) (6.3) Net cash (used in) provided by financing activities (7.3) Increase (decrease) in cash and cash equivalents (123.2) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ Supplemental disclosure of cash flow information: Interest paid $ Noncash investing and financing activities: Accounts payable for fixed asset purchases $ See accompanying notes to consolidated financial statements. 7

130 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (1) Description of Organization and Summary of Significant Accounting Policies (a) Organization MedStar Health, Inc. (MedStar or the Corporation) is a tax-exempt, Maryland membership corporation which, through its controlled entities and other affiliates, provides and manages healthcare services in the region encompassing Maryland, Washington D.C. and Northern Virginia. The Corporation became operational on June 30, 1998 by the transfer of the membership interests of Helix Health, Inc. (Helix a not-for-profit Maryland Corporation) and Medlantic Healthcare Group, Inc. (Medlantic a not-for-profit Delaware Corporation) in exchange for the guarantee of the debt of both Helix and Medlantic by the Corporation. The trade names of the principal tax-exempt and taxable entities of the Corporation are: Tax-Exempt MedStar Ambulatory Services (formerly known as Bay Development Corporation) MedStar Franklin Square Medical Center MedStar Georgetown University Hospital MedStar Good Samaritan Hospital MedStar Harbor Hospital MedStar Health Research Institute MedStar Health Visiting Nurse Association, Inc. MedStar Medical Group, LLC MedStar Montgomery Medical Center MedStar National Rehabilitation Network MedStar Southern Maryland Hospital Center MedStar St. Mary s Hospital MedStar Surgery Center, Inc. MedStar Union Memorial Hospital MedStar Washington Hospital Center Church Home and Hospital of the City of Baltimore, Inc. HH MedStar Health, Inc. Taxable Greenspring Financial Insurance, LTD. MedStar Enterprises, Inc. and Subsidiaries 8 (Continued)

131 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) MedStar Family Choice, Inc. MedStar Physician Partners, Inc. Parkway Ventures, Inc. and Subsidiaries (b) Acquisition of Southern Maryland Hospital, Inc. On December 10, 2012, the Corporation and Southern Maryland Hospital, Inc. (the Hospital) closed on an asset purchase agreement, whereby the Corporation purchased substantially all of the assets and assumed certain obligations of the Hospital. The Hospital is a 263-bed acute care hospital located in Clinton, Maryland in Prince George s County. As a result of the transaction, the Corporation recognized approximately $80.0 of property, plant and equipment, approximately $150.0 of goodwill and other intangible assets, and working capital amounts. In December 2012, the Corporation entered into a $180.0 bridge loan, that was replaced by permanent financing in May 2013 (see note 6), and used the proceeds to fund the acquisition. The asset purchase agreement provided for certain adjustments to the purchase price and net working capital calculations, which were settled and recorded during fiscal The consolidated financial statements include the operations of the Hospital since the closing date. Due to significant changes in the legal, organizational and reporting structure of the Hospital subsequent to the purchase, the Corporation determined that the presentation of supplemental pro forma results for the year ended June 30, 2013 was impracticable. The net operating revenues and total operating expenses of the Hospital are less than 3% of consolidated operating revenues and expenses for the year ended June 30, 2013, which are not considered significant to the Corporation s operations for the year ended June 30, (c) (d) Basis of Presentation The consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (U.S. GAAP). All majority owned subsidiaries, direct member entities and controlled affiliates are consolidated. All entities where the Corporation exercises significant influence but for which it does not have control are accounted for under the equity method. All other entities are accounted for under the cost method. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant changes to estimates resulting from the above referenced settlement associated with the purchase of the Hospital and amounts related to settled, or tentatively settled, prior year third party cost reports (see note 9) resulted in gains of approximately $20.0 and $16.0 during the years ended June 30, 2014 and 2013, respectively. Future results could differ from those estimates. 9 (Continued)

132 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (e) (f) Cash Equivalents All highly liquid investments with a maturity date of three months or less when purchased are considered to be cash equivalents. Investments and Assets whose use is Limited or Restricted The Corporation s investment portfolio is considered trading, with the exception of the alternative investments, and is classified as current or noncurrent assets based on management s intention as to use. All securities are reported at fair value principally based on quoted market prices in the consolidated balance sheets. The Corporation has elected to use the fair value option to account for its alternative investments. The fair value of alternative investments is determined based on the Net Asset Value (NAV) of the shares in each investment company or partnership. Purchases and sales of securities are recorded on a trade-date basis. Investments in unconsolidated affiliates are accounted for under the cost or equity method of accounting, as appropriate, and are included in other assets in the consolidated balance sheets. The Corporation utilizes the equity method of accounting for its investments in entities over which it exercises significant influence. The Corporation s equity income or loss is recognized in other operating revenue on the consolidated statements of operations and changes in net assets. Assets whose use is limited or restricted include assets held by trustees under bond indenture, self-insurance trust arrangements, assets restricted by donor, and assets designated by the Board of Directors for future capital improvements and other purposes over which it retains control and may, at its discretion, use for other purposes. Amounts from these funds required to meet current liabilities have been classified in the consolidated balance sheets as current assets. Investment income (interest and dividends) and realized gains and losses on investment sales are reported as nonoperating gains and losses in the excess of revenues over expenses in the accompanying consolidated statements of operations and changes in net assets unless the income or loss is restricted by the donor or law. Investment income and realized gains and losses on funds held in trust for self-insurance purposes is included in other operating revenue. Investment income and net gains and losses that are restricted by the donor are recorded as a component of changes in temporarily or permanently restricted net assets, in accordance with donor imposed restrictions. Realized gains and losses are determined based on the specific security s original purchase price or adjusted cost if the investment was previously determined to be other-than-temporarily impaired. Unrealized gains and losses are included in nonoperating gains and losses within the excess of revenue over expenses. (g) Inventories Inventories, which primarily consist of medical supplies and pharmaceuticals at many of the operating entities, are stated at the lower of cost or market, with cost being determined primarily under the average cost or first-in, first-out methods. 10 (Continued)

133 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (h) Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated or amortized over the estimated useful lives of the assets. Estimated useful lives range from three to forty years. Amortization of assets held under capital leases is computed using the shorter of the lease term or the estimated useful life of the leased asset and is included in depreciation and amortization expense. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Depreciation is computed on a straight-line basis. Major classes and estimated useful lives of property and equipment are as follows: Leasehold improvements Buildings and improvements Equipment Lease term years 3 20 years Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support, and are excluded from the excess of revenues over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Management routinely evaluates the carrying value of its long-lived assets for impairment. No impairment charges were recorded against the carrying value of the Corporation s long-lived assets during the years ended June 30, 2014 and (i) (j) Interest in Net Assets of Foundation The Corporation recognizes its rights to assets held by a recipient organization, which accepts cash or other financial assets from a donor and agrees to use those assets on behalf of or transfer those assets, the return on investment of those assets, or both, to the Corporation. Changes in the Corporation s economic interests in the financially interrelated organization are recognized in the consolidated statements of operations and changes in net assets as a component of changes in temporarily restricted net assets. Goodwill and Other Intangible Assets Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. As of June 30, 2014 and 2013, the Corporation had one reporting unit, which included all subsidiaries of the Corporation and held goodwill, net on its balance sheet of $190.2 and $163.8, respectively. Goodwill is evaluated for impairment annually using a qualitative assessment to determine whether there are events or circumstances that indicate it is more likely than not that the reporting unit s fair value is 11 (Continued)

134 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) less than its carrying amount. Based on this qualitative assessment, the Corporation determined that there was no goodwill impairment for the years ended June 30, 2014 and Other intangible assets recorded at fair value and amortized over their estimated useful lives. Other intangible assets were $42.4 and $41.9 as of June 30, 2014 and 2013, respectively, and related accumulated amortization was $6.1 and $3.7, respectively. The Corporation recognized amortization expense of $2.4 and $2.0 for the years ended June 30, 2014 and 2013, respectively, related to identifiable intangible assets. (k) (l) (m) (n) (o) Internal-Use Software The Corporation capitalizes the direct costs, including internal personnel costs, associated with the implementation of new information systems for internal use. The Corporation capitalized $0.9 and $4.6 during the years ended June 30, 2014 and 2013, respectively. Capitalized amounts are amortized over the estimated lives of the software, which is generally three to five years. Financing Costs Financing costs incurred in issuing bonds have been capitalized and are included in other assets on the consolidated balance sheets. These costs are being amortized over the estimated duration of the related debt using the effective interest method. Accumulated amortization totaled $5.6 and $4.7 as of June 30, 2014 and 2013, respectively. Estimated Professional Liability Costs The provision for estimated self-insured professional liability claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. These estimates are based on actuarial analysis of historical trends, claims asserted and reported incidents. The receivables related to such claims are recorded at their net realizable value. Leases Lease arrangements, including assets under construction, are capitalized when such leases convey substantially all the risks and benefits incidental to ownership. Capital leases are amortized over either the lease term or the life of the related assets, depending upon available purchase options and lease renewal features. Amortization related to capital leases is included in the consolidated statements of operations and changes in net assets within depreciation and amortization expense. Derivative The Corporation utilizes a derivative financial instrument to manage its interest rate risks associated with tax-exempt debt. The Corporation does not hold or issue derivative financial instruments for trading purposes. The derivative instrument is recorded on the consolidated balance sheets at its fair value. The Corporation s current derivative investment does not qualify for hedge accounting; therefore, the changes in fair value have been recognized in the accompanying consolidated statements of operations and changes in net assets as mark-to-market adjustments in nonoperating 12 (Continued)

135 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) gains (losses). The fair market value of the derivative instrument is included in other long-term liabilities in the accompanying consolidated balance sheets. (p) Net Patient Service Revenue and Net Patient Accounts Receivable Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments due to future audits, reviews and investigations. The differences between the estimated and actual amounts are recorded as part of net patient service revenue in future periods as the amounts become known, or as years are no longer subject to audit, review or investigation. Payment arrangements include prospectively determined rates per discharge, fee-for-service, discounted charges, and per diem payments. Hospital inpatient services, hospital outpatient services, the physician component of physician/managed care networks, and other patient service revenues are recognized when the services are rendered based on billable charges. Other patient service revenue primarily consists of home care, long-term care and other non-hospital patient services. The Corporation s policy is to write-off all patient receivables which are identified as uncollectible. Patient accounts receivable are reduced by an allowance for uncollectible accounts to reserve for accounts which are expected to become uncollectible in future years. In evaluating the collectability of accounts receivable, the Corporation analyzes historical collections and write-offs and identifies trends for each of its major payor sources of revenue and amounts due from patients to estimate the appropriate allowance for uncollectible accounts and provision for bad debts. Premium revenue consists of amounts received from the State of Maryland and the District of Columbia by the Corporation s managed care organization for providing medical services to subscribing participants, regardless of services actually performed. The managed care organization provides services primarily to enrolled Medicaid beneficiaries. This revenue is recognized ratably over the contractual period for the provision of services. Medical expenses of the managed care organization include a provision for incurred but unreported claims and are included in purchased services on the consolidated statements of operations. (q) (r) Charity Care The Corporation provides care to patients who meet certain criteria under its charity care policies without charge or at amounts less than established rates. Because the Corporation does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Grants Federal grants are accounted for as either an exchange transaction or as a contribution based on terms and conditions of the grant. If the grant is accounted for as an exchange transaction, revenue is recognized as other operating revenue when earned. If the grant is accounted for as a contribution, the revenues are recognized as either other operating revenue, or as temporarily restricted contributions depending on the restrictions within the grant. 13 (Continued)

136 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (s) (t) Contributions Unconditional promises to give cash and other assets to the Corporation are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations and changes in net assets as net assets released from restrictions in other operating revenue. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted net assets and reported within other operating revenue in the accompanying consolidated financial statements. Meaningful Use Incentives Under certain provisions of the American Recovery and Reinvestment Act of 2009 (ARRA), federal incentive payments are available to hospitals, physicians and certain other professionals (Providers) when they adopt, implement or upgrade certified electronic health record (EHR) technology and become meaningful users, as defined under ARRA, of EHR technology in ways that demonstrate improved quality, safety and effectiveness of care. Incentive payments will be paid out over varying transitional schedules depending on the type of incentive (Medicare and Medicaid) and recipient (hospital or eligible provider). Eligible hospitals can attest for both Medicare and Medicaid incentives, while physicians must select to attest for either Medicare or Medicaid incentives. For Medicare incentives, eligible hospitals receive payments over four years while eligible physicians receive payments over five years. For Medicaid incentives, eligible hospitals receive payments based on the relevant State adopted payment structure and physicians receive payments over six years. The Corporation recognizes EHR incentives when it is reasonably assured that the Corporation will successfully demonstrate compliance with the meaningful use criteria. During the years ended June 30, 2014 and 2013, certain hospitals and physicians satisfied the meaningful use criteria. As a result, the Corporation recognized $23.4 and $16.6 of EHR incentives during fiscal year 2014 and 2013, respectively, in other operating revenue. (u) (v) Excess of Revenues over Expenses The consolidated statements of operations and changes in net assets include a performance indicator, which is the excess of revenues over expenses. Changes in unrestricted net assets that are excluded from excess of revenues over expenses, include contributions of long-lived assets (including assets acquired using contributions that by donor restriction were to be used for the purpose of acquiring such assets), contributions from and distributions to noncontrolling interests, and defined benefit obligations in excess of recognized pension cost, among others. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the 14 (Continued)

137 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Any changes to the valuation allowance on the deferred tax asset are reflected in the year of the change. The Corporation accounts for uncertain tax positions in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes. (w) (x) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Corporation or individual operating units has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Corporation or individual operating units in perpetuity. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and cash equivalents, receivables, other current assets, other assets, current liabilities and long-term liabilities: The carrying amount reported in the consolidated balance sheets for each of these assets and liabilities approximates their fair value. The fair value of investments, assets whose use is limited or restricted and the interest rate swap is discussed in note 3. The fair value of long term debt is discussed in note 6. (y) (z) New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards update (ASU) , Revenue from Contracts with Customers (Topic 606). This ASU establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity s contracts with customers. Particularly, that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU is effective for fiscal year The Corporation expects to record a decrease in net patient service revenue and a corresponding decrease in bad debt expense upon adoption of the standard. Reclassifications Certain prior year amounts have been reclassified to conform with current period presentation, the effect of which is not material. 15 (Continued)

138 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (2) Investments and Assets Whose Use is Limited or Restricted Investments and assets whose use is limited or restricted as of June 30, 2014 and 2013, at fair value consist of the following: Cash and cash equivalents $ Fixed income securities and funds Equity securities Alternative investments: Commingled equity funds Inflation hedging equity, commodity, fixed income fund Hedge fund of funds and private equity Total investments and assets whose use is limited or restricted 1, ,343.8 Less short-term investments and assets whose use is limited or restricted (122.7) (126.3) Long-term investments and assets whose use is limited or restricted $ 1, ,217.5 Assets whose use is limited or restricted as of June 30, 2014 and 2013, included in the table above, consist of the following: Funds held by trustees $ Self-insurance funds Funds restricted by donors for specific purposes and endowment Funds designated by board and management Total assets whose use is limited or restricted Less assets required for current obligations (61.3) (64.7) Long-term assets whose use limited or restricted $ (Continued)

139 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) Investment income and realized and unrealized gains for assets whose use is limited, cash equivalents and investments are comprised of the following for the years ended June 30, 2014 and 2013: Other operating revenue: Investment income and realized gains $ Nonoperating gains: Investment income Net realized gains on investments Unrealized gains on investments Other changes in net assets: Realized net gains on temporarily and permanently restricted net assets Change in unrealized gains on temporarily and permanently restricted net assets Total investment return $ (3) Fair Value of Financial Instruments The Corporation follows the guidance within FASB ASC Topic 820, Fair Value Measurement (ASC 820), which defines fair value and establishes methods used to measure fair value. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy under ASC 820 are described below: Level 1 Quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 Observable inputs other than quoted prices for the asset, either directly or indirectly observable, that reflect assumptions market participants would use to price the asset based on market data obtained from sources independent of the Corporation. Level 3 Unobservable inputs that reflect the Corporations own assumptions about the assumptions market participants would use to price an asset based on the best information available in the circumstances. The Corporation has incorporated an Investment Policy Statement (IPS) into the investment program. The IPS, which has been formally adopted by the Corporation s Board of Directors, contains numerous standards designed to ensure adequate diversification by asset class and geography. The IPS also limits all investments by manager and position size, and limits fixed income position size based on credit ratings, which serves to further mitigate the risks associated with the investment program. At June 30, 2014 and 2013, management believes that all investments were being managed in a manner consistent with the IPS. 17 (Continued)

140 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) The following table illustrates the actual allocations of the investment portfolio as of June 30: Actual Actual allocation allocation June 30, 2014 June 30, 2013 Publicly traded equities domestic 26% 29% Publicly traded equities international Fixed income securities Alternative investments: Commingled equity funds 12 9 Inflation hedging equity, commodity, fixed income fund 9 9 Hedge funds Private equities 1 2 Cash 2 2 Total 100% 100% The table below presents the Corporation s investable assets and liabilities as of June 30, 2014, aggregated by the three level valuation hierarchy: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ U.S. Treasury bonds U.S. agency mortgage backed securities Corporate bonds Fixed income mutual funds All other fixed income securities Equity mutual funds & ETF s Common stocks Alternative investments: Commingled equity funds Inflation hedging equity, commodity, fixed income fund Private equity Hedge funds Total assets $ 1, ,141.0 Liabilities: Interest rate swap $ Total liabilities $ (Continued)

141 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) The table below presents the Corporation s investable assets and liabilities as of June 30, 2013, aggregated by the three level valuation hierarchy: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ U.S. Treasury bonds U.S. agency mortgage backed securities Corporate bonds Fixed income mutual funds All other fixed income securities Equity mutual funds & ETF s Common stocks Alternative investments: Commingled equity funds Inflation hedging equity, commodity, fixed income fund Private equity Hedge funds Total assets $ 1, ,789.2 Liabilities: Interest rate swap $ Total liabilities $ For the years ended June 30, 2014 and 2013, there were no significant transfers between Levels 1, 2 or (Continued)

142 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) Changes to the fair values based on the Level 3 inputs are summarized as follows: Private Hedge equity funds Total Balance as of June 30, 2012 $ Additions: Contributions/purchases Disbursements: Withdrawals/sales (2.8) (2.8) Net change in value (1.1) Balance as of June 30, Additions: Contributions/purchases Disbursements: Withdrawals/sales (3.4) (125.4) (128.8) Net change in value Balance as of June 30, 2014 $ The following summarizes redemption terms for the hedge fund-of-funds vehicles held as of June 30, 2014: Redemption timing: Fund 1 Fund 2 Fund 3 Fund 4 Redemption frequency Quarterly 95% within 1 year (1) Quarterly Quarterly 5% in 1 year or longer Required notice 70 days up to 90 days 90 days 65 days Audit reserve: Percentage held back for audit reserve 10% up to 10% 10% 10% Gates: Potential gate holdback up to 7.5% Potential gate release timeframe (1) One-third of this fund is redeemable within 90 days and the remainder of the investment is redeemable within one year. Investments in hedge fund-of-funds are typically carried at estimated fair value. Fair value is based on the Net Asset Value (NAV) of the shares in each investment company or partnership. Such investment companies or partnerships mark-to-market or mark-to-fair value the underlying assets and liabilities in accordance with U.S. GAAP. Realized and unrealized gains and losses of the investment companies and 20 (Continued)

143 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) partnerships are included in their respective operations in the current year. Changes in unrealized gains or losses on investments, including those for which partial liquidations were effected in the course of the year, are calculated as the difference between the NAV of the investment at year-end less the NAV of the investment at the beginning of the year, as adjusted for contributions and redemptions made during the year and certain lock-up provisions. Generally, no dividends or other distributions are paid. The following summarizes the status of contributions to the private equity fund-of-funds vehicles held as of June 30, 2014: Percentage of Percentage of Total commitment commitment commitment contributed remaining Fund 1 $ % 7.3% Fund Fund Fund Total $ 35.2 Investments in private equity funds, typically structured as limited partnership interests, are carried at fair value using NAV or equivalent as determined by the General Partner in the absence of readily ascertainable market values. Distributions under this investment structure are made to investors through the liquidation of the underlying assets. It is expected to take up to ten years to fully distribute the proceeds of those assets. The fair value of limited partnership interests is generally based on fair value capital balances reported by the underlying partnerships, subject to management review and adjustment. Security values of companies traded on exchanges, or quoted on NASDAQ, are based upon the last reported sales price on the valuation date. Security values of companies traded over the counter, but not quoted on NASDAQ, and securities for which no sale occurred on the valuation date are based upon the last quoted bid price. The value of any security for which a market quotation is not readily available may be its cost, provided however, that the General Partner adjusts such cost value to reflect any bona fide third party transactions in such a security between knowledgeable investors, of which the General Partner has knowledge. In the absence of any such third party transactions, the General Partner may use other information to develop a good faith determination of value. Examples include, but are not limited to, discounted cash flow models, absolute value models, and price multiple models. Inputs for these models may include, but are not limited to, financial statement information, discount rates, and salvage value assumptions. The valuation of both marketable and nonmarketable securities may include discounts to reflect a lack of liquidity or extraordinary risks, which may be associated with the investment. Determination of fair value is performed on a quarterly basis by the General Partner. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market for those investments existed. 21 (Continued)

144 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (4) Property and Equipment Property and equipment as of June 30, 2014 and 2013 is as follows: Land $ Buildings and improvements 1, ,249.4 Equipment 1, , , ,966.1 Less accumulated depreciation and amortization (2,025.6) (1,914.1) 1, ,052.0 Construction-in-progress $ 1, ,137.1 Construction-in-progress includes a variety of ongoing capital projects at the Corporation as of June 30, 2014 and Depreciation and amortization expense related to property and equipment amounted to $178.5 and $165.1 for the years ended June 30, 2014 and 2013, respectively. (5) Other Assets Other assets as of June 30, 2014 and 2013 consist of the following: Deferred financing costs, net $ Investments in unconsolidated entities Reinsurance receivables Deferred tax asset Other assets $ The Corporation has investments in other healthcare related organizations that are accounted for under the equity method which total $15.2 and $15.0 at June 30, 2014 and 2013, respectively. Under the equity method, original investments are recorded at cost and adjusted by the Corporation s share of the undistributed earnings or losses of these organizations. The related ownership interest in these organizations ranges from 8% to 50%. The Corporation s share of earnings in these organizations was $3.1 and $4.2 for the years ended June 30, 2014 and 2013, respectively, and are recognized in other operating revenue in the consolidated statements of operations and changes in net assets. Certain other nonconsolidated entities are recorded under the cost method. 22 (Continued)

145 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (6) Debt As of June 30, 2014 and 2013, the Corporation s outstanding borrowings include the following: Maryland Health and Higher Educational Facilities: Authority revenue bonds: 5.25% Term bonds (Series 1998A, due 2038) $ % Term bonds (Series 1998B, due 2038) % 5.75% Serial bonds (Series 2004, due ) % Term bonds (Series 2004, due 2024) % Term bonds (Series 2004, due 2033) % Term bonds (Series 2007, due 2042) % Term bonds (Series 2007, due 2046) % 5.00% Serial bonds (Series 2011, due ) % Term bonds (Series 2011, due 2031) % Term bonds (Series 2011, due 2041) % Direct Purchase (Series 2012, due ) % 5.00% Serial bonds (Series 2013A, due ) % Term bonds (Series 2013A, due 2038) % Term bonds (Series 2013A, due 2041) % Term bonds (Series 2013A, due 2041) % 5.00% Serial bonds (Series 2013B, due ) % Term bonds (Series 2013B, due 2038) % Term bonds (Series 2013B, due 2038) Plus unamortized net premium District of Columbia Hospital Revenue Bonds: Multimodal revenue bonds: 0.03% 0.08% at June 30, 2014 Serial bonds (Series 1998A due ) (and 0.04% 0.12% at June 30, 2013) % 5.00% Serial bonds (Series 1998B, due ) % Term bonds (Series 1998B, due 2028) % Term bonds (Series 1998B, due 2038) % 5.00% Serial bonds (Series 1998C, due ) (Continued)

146 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) % Term bonds (Series 1998C, due 2028) $ % Term bonds (Series 1998C, due 2038) Less unamortized net discount (1.3) (1.2) Other: Notes payable to financial institutions or state agencies under mortgages (floating rates ranging between 0.9% 6.2%) and other Line of credit due August 2016 (0.18% 0.80% at June 30, 2014 and 0.25% 0.90% at June 30, 2013) Total debt 1, ,268.4 Less current portion of long-term debt (60.5) (61.2) Long-term debt, net $ 1, ,207.2 Scheduled maturities on borrowings, for the next five fiscal years and thereafter are as follows: 2015 $ Thereafter $ 1,226.4 The fair value of outstanding tax exempt bonds is estimated to be $1,145.4 and $1,122.4 as of June 30, 2014 and 2013, respectively. The fair value of other long-term debt approximates its carrying value. In December 1998, the Maryland Health and Higher Education Facilities Authority (MHHEFA) and the District of Columbia (District) issued bonds (Series 1998 Bonds) on behalf of the Corporation. Bond proceeds of approximately $588.6 were loaned to the Corporation under separate loan agreements with MHHEFA and the District upon execution of obligations pursuant to the Master Trust Indenture. The District issued $300.0 of Multimodal Revenue Bonds, including $150.0 Series 1998A ($27.2 repaid through August 2014), $75.0 Series 1998B ($12.7 repaid through August 2014), and $75.0 Series 1998C ($12.7 repaid through August 2014). The District Series 1998A bonds, which consist of three tranches totaling $122.9 at August 2014, trade as uninsured Variable Rate Demand Obligations backed by bank letters of credit. The Series 1998A Tranche I bonds which remained outstanding in August 2014 consisted of approximately $41.0 bonds trading in a 24 (Continued)

147 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) daily mode backed by a letter of credit issued by Wells Fargo Bank, National Association (formerly Wachovia Bank, National Association) and remarketed by J.P. Morgan Securities Inc. The letter of credit expires in March In the event of a failed remarketing, the Tranche I bonds would be tendered to the bank and repaid over a four-year period, beginning 367 days following the date of the failed remarketing. The Series 1998A Tranche II bonds totaled $41.0 in August These bonds trade in a weekly mode and are remarketed by Citigroup Global Markets Inc. The letter of credit backing these bonds was issued by JPMorgan Chase Bank, N.A. and expires in May 2015 and accordingly is included in the current portion of long-term debt. In the event of a failed remarketing, the Tranche II bonds would be tendered to the bank and repaid over a four-year period, beginning 367 days following the failed remarketing. The Series 1998A Tranche III bonds totaled $41.0 in August These bonds trade in a weekly mode and are remarketed by Citigroup Global Markets Inc. The letter of credit backing these bonds was issued by PNC Bank, National Association. The term of the letter of credit is five years, and expires in May In the event of a failed remarketing, the Tranche III bonds would be tendered to the bank and repaid over a four-year period, beginning 367 days following the failed remarketing. No portion of the Series 1998A bonds has been put at June 30, 2014 and 2013, respectively. The $62.3 Series 1998B and $62.3 Series 1998C bonds (as of August 2014) are at a fixed rate, insured by Assured Guaranty, Ltd. (Assured; formerly Financial Security Assurance, Inc.). The reimbursement obligation with respect to the letters of credit are evidenced and secured by obligations issued by the Corporation under the Master Trust Indenture. MHHEFA issued $283.5 of Revenue Bonds, including the $166.6 Series 1998A ($82.0 outstanding after August 2014) and $116.9 Series 1998B ($57.0 outstanding after August 2014). All Series 1998 MHHEFA bonds were issued at fixed rates. Principal and interest under the Series 1998 MHHEFA bonds are insured under municipal insurance policies with Assured and Ambac. Of the original Series 1998 MHHEFA bonds, $51.7 was refinanced in March 2013 in conjunction with the MHHEFA Series 2013A financing described below. Related to the District borrowings, the Corporation entered into an interest rate swap with Wells Fargo Bank, National Association in a notional amount totaling $150.0 (reduced to $97.5 at August 2014). The swap agreement expires in fiscal year The interest rate swap is part of a comprehensive and long-term capital structure strategy. The purpose of the swap is to mitigate the effect of potential interest rate volatility and minimize the variability of the Corporation s average cost of capital. Under the terms of the swap, the Corporation pays a fixed rate and receives a variable rate. Collateral is only required to be posted under the swap in the event that the Corporation s credit ratings are downgraded by two rating agencies below the BBB or Baa2 level. To date, no collateral postings have been required. As of June 30, 2014 and 2013, the variable interest rate under these agreements was 0.10% and 0.13%, respectively. The fixed rate was % as of June 30, 2014 and The variable rates are capped at 14.0%. The change in fair value of the swap is reported in nonoperating gains (losses) in the statements of operations and changes in net assets. In February 2004, MHHEFA issued $170.3 in bonds (Series 2004 Bonds) on behalf of the Corporation. The proceeds of the Series 2004 Bonds were loaned to the Corporation pursuant to a loan agreement with MHHEFA upon execution of an obligation pursuant to the Master Trust Indenture. The Series 2004 Bonds were issued as $40.5 serial bonds maturing 2009 through 2025 ($23.3 repaid through August 2014), $49.7 term bonds maturing 2024, and $80.1 term bonds maturing Such bonds were issued at fixed rates. 25 (Continued)

148 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) Series 2004 Bonds maturing on or after August 2015 are subject to redemption or purchase at the option of the Corporation. In January 2007, MHHEFA issued $145.0 in bonds (Series 2007 Bonds) on behalf of the Corporation. The Series 2007 Bonds were issued at a premium, resulting in total proceeds of $ The proceeds of the Series 2007 Bonds were loaned to the Corporation pursuant to a loan agreement with MHHEFA upon execution of an obligation pursuant to the Master Trust Indenture. The Series 2007 Bonds were issued as $56.0 term bonds maturing 2042 and $89.0 term bonds maturing Such bonds were issued at fixed rates. Series 2007 Bonds maturing on or after May 2042 are subject to redemption or purchase at the option of the Corporation prior to maturity beginning in In November 2011, MHHEFA issued $94.9 in bonds (Series 2011 Bonds) on behalf of the Corporation. The proceeds of the Series 2011 Bonds were loaned to the Corporation pursuant to a loan agreement with MHHEFA upon execution of an obligation pursuant to the Master Trust Indenture. The Series 2011 Bonds were issued as $53.9 serial bonds maturing 2012 through 2023 ($16.5 repaid through August 2014), $5.6 term bonds maturing 2031, and $35.4 term bonds maturing The Series 2011 Bonds maturing on or after August 2022 are subject to redemption or purchase at the option of the Corporation prior to maturity beginning in The Series 2011 Bonds were issued at fixed rates. The proceeds from the transaction were used to refund $20.2 of the Series 1998 A&B bonds, to refund debt outstanding on the Corporation s Revolving Credit Facility, and to refund certain debt associated with MedStar St. Mary s Hospital. In June 2012, the Corporation entered into a $38.6 MHHEFA Direct Purchase financing transaction with JP Morgan Chase Bank, N.A. (the Series 2012 Bond). The proceeds from the transaction were used to redeem certain outstanding MHHEFA Series 1998A bonds that were due to mature in 2018 as well as a portion of the outstanding MHHEFA Series 1998 A&B bonds due to mature in The repayment of the Series 2012 Bond is evidenced by an obligation issued under the Master Trust Indenture. The term of the Series 2012 Bond is ten years and the repayment terms approximate the previous repayment terms of the Series 1998 bonds that were refunded. Covenants, conditions, and security for the Series 2012 Bond is similar to the revolving credit agreement. In March 2013, MHHEFA issued $117.8 in bonds (Series 2013A Bonds) on behalf of the Corporation. The Series 2013A Bonds were issued at a premium, resulting in total proceeds of $ The proceeds of the Series 2013A Bonds were loaned to the Corporation pursuant to a loan agreement with MHHEFA upon execution of an obligation pursuant to the Master Trust Indenture. The Series 2013A Bonds were issued as $60.9 serial bonds maturing 2016 through 2028, $17.3 term bonds maturing 2038, $25.0 term bonds due 2041, and $14.6 term bonds maturing The Series 2013A Bonds maturing on or after August 2024 are subject to redemption or purchase at the option of the Corporation prior to maturity beginning in The Series 2013A Bonds were issued at fixed rates. The proceeds from the transaction were used to refund $51.7 of the Series 1998 A&B bonds, to fund various capital projects and capitalized interest on those projects. In May 2013, MHHEFA issued $149.8 in bonds (Series 2013B Bonds) on behalf of the Corporation. The Series 2013B Bonds were issued at a premium, resulting in total proceeds of $ The proceeds of the Series 2013B Bonds were loaned to the Corporation pursuant to a loan agreement with MHHEFA upon execution of an obligation pursuant to the Master Trust Indenture. The Series 2013B Bonds were issued as 26 (Continued)

149 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) $60.8 serial bonds maturing 2025 through 2033, $45.0 term bonds maturing 2038, and $44.0 term bonds maturing The Series 2013B Bonds maturing on or after August 2024 are subject to redemption or purchase at the option of the Corporation prior to maturity beginning in The Series 2013B Bonds were issued at fixed rates. The proceeds from the transaction were used to refinance a portion of the bridge loan put in place when MedStar acquired the assets of Southern Maryland Hospital Center in December The Corporation, which is currently the sole member of an obligated group as defined in the Master Trust Indenture, is bound by the provisions of the Master Trust Indenture for payment of any outstanding obligations under existing loan agreements. All of the hospitals and certain other affiliates (the guarantors) of the Corporation are parties to a guaranty agreement pursuant to which they jointly and severally guaranty the payment and performance of the obligations under the Master Trust Indenture. The obligations of the guarantors under the Guaranty Agreement are collateralized by deeds of trust granted by the hospitals. Under the Master Trust Indenture and the deeds of trust, as collateral for the payments due thereunder, the Corporation and its hospital affiliates, have granted a security interest in their revenues subject to permitted encumbrances. Under the Master Trust Indenture, the Corporation is required to maintain, among other covenants, a maximum annual debt service coverage ratio of not less than Under the loan agreements relating to the Series 1998 Bonds, the Corporation is required to maintain a historical debt service coverage ratio of not less than 2.0 and to maintain at least 65 days cash on hand. In the event the Corporation does not meet either of these requirements, it is required to fund a trustee-held debt service reserve fund securing the Series 1998 Bonds. The amount to be deposited shall equal the lesser of: 10% of the principal amount of such outstanding bonds, or the largest annual debt service with respect to such bonds in any future year, or 125% of the average annual debt service of future years. As of June 30, 2014 and 2013, there were no funds required to be held in the debt service reserve fund for the Series 1998 Bonds. The Corporation maintains a $250.0 revolving credit agreement provided by a group of banks. The facility has a three-year term expiring in August The facility is evidenced by an obligation issued under the Master Trust Indenture. The outstanding balance on the facility was $129.8 at June 30, 2014 and The facility includes certain covenants, including a requirement to maintain Days Cash on Hand of 70 days, measured semi-annually at each June 30 and December 31, and a Debt Service Coverage ratio of 1.25, measured quarterly on a rolling four quarters basis. In addition, the Corporation is required to maintain a minimum credit rating of Baa2 from Moody s Investor s Service, and BBB from Standard & Poor s and Fitch Ratings. In addition, the Corporation maintains a $30.0 letter of credit facility, provided by a single lender, which is also evidenced by an obligation issued under the Master Trust Indenture. This facility is principally used to securitize certain regulatory obligations under various insurance programs, and has terms and conditions similar to the revolving credit agreement. The facility has a three-year term expiring in August However, the standby letters of credit issued under the facility can be canceled at the bank s option each year. As of June 30, 2014 and 2013, standby letters of credit issued pursuant to the facility were $18.2. No amounts have been drawn by the beneficiaries under the standby letters of credit. 27 (Continued)

150 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (7) Retirement Plans The Corporation has two qualified defined benefit pension plans (MedStar Health, Inc. Pension Equity Plan (PEP) and MedStar Health, Inc. Cash Balance Retirement Plan (CBRP)) covering substantially all full-time employees hired before MedStar St. Mary s Hospital also has a defined benefit plan that substantially covers all employees of MedStar St. Mary s Hospital. Participation in all plans has been closed to new entrants and all plans are frozen to future benefit accruals. Benefits under the plans are substantially based on years of service and the employees career earnings. The Corporation contributes to the plans based on actuarially determined amounts necessary to provide assets sufficient to meet benefits to be paid to plan participants and to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006, and Internal Revenue Service regulations. Effective July 1, 2000, employees of the Transferred Businesses (note 17) became participants in one of the Corporation s pension plans and are reflected in the pension information provided below. The Corporation s investment policies are established by the MedStar Health, Inc. s Investment Committee, which is comprised of members of the Board of Directors, other community leaders, and management. Among its responsibilities, the Investment Committee is charged with establishing and reviewing asset allocation strategies, monitoring investment manager performance, and making decisions to retain and terminate investment managers. Assets of each of the Corporation s pension plans are managed in a similar fashion by the same group of investment managers. The Corporation has incorporated an Investment Policy Statement (IPS) into the investment program. The IPS, which has been formally adopted by the Corporation s Board of Directors, contains numerous standards designed to ensure adequate diversification by asset class and geography. The IPS also limits all investments by manager and position size, and limits fixed income position size based on credit ratings, which serves to further mitigate the risks associated with the investment program. As of June 30, 2014 and 2013, management believes that all investments were being managed in a manner consistent with the IPS. 28 (Continued)

151 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) The following table illustrates the actual allocations as of June 30: Actual Actual allocation allocation June 30, 2014 June 30, 2013 Publicly traded equities domestic 30% 34% Publicly traded equities international Fixed income securities Alternative investments: Commingled equity funds 14 9 Inflation hedging equity, commodity, fixed income fund 5 5 Hedge funds Private equities 2 2 Cash 5 4 Total 100% 100% The table below presents the Corporation s pension plans investable assets as of June 30, 2014 aggregated by the three level valuation hierarchy: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ U.S. Treasury bonds U.S. agency mortgage backed securities Corporate bonds Fixed income mutual funds All other fixed income securities Equity mutual funds and ETF s Common stocks Alternative investments: Commingled equity funds Inflation hedging equity, commodity, fixed income fund Private equity Hedge funds Total assets $ , (Continued)

152 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) The table below presents the Corporation s pension plans investable assets as of June 30, 2013 aggregated by the three level valuation hierarchy: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ U.S. Treasury bonds U.S. agency mortgage backed securities Corporate bonds Fixed income mutual funds All other fixed income securities Equity mutual funds and ETF s Common stocks Alternative investments: Commingled equity funds Inflation hedging equity, commodity, fixed income fund Private equity Hedge funds Total assets $ For the years ended June 30, 2014 and 2013, there were no significant transfers between Levels 1, 2 or (Continued)

153 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) Changes to the fair values based on the Level 3 inputs are summarized as follows: Private Hedge equity funds Total Balance as of June 30, 2012 $ Additions: Contributions/purchases Disbursements: Withdrawals/sales (2.6) (0.3) (2.9) Net change in value Balance as of June 30, Additions: Contributions/purchases Disbursements: Withdrawals/sales (3.4) (83.2) (86.6) Net change in value Balance as of June 30, 2014 $ The following summarizes redemption terms for the hedge fund-of-funds vehicles held as of June 30, 2014: Redemption timing: Fund 1 Fund 2 Fund 3 Fund 4 Redemption frequency Quarterly 95% within 1 year (1) Quarterly Quarterly 5% in 1 year or longer Required notice 70 days up to 90 days 90 days 65 days Audit reserve: Percentage held back for audit reserve 10% up to 10% 10% 10% Gates: Potential gate holdback up to 7.5% Potential gate release timeframe (1) One-third of this fund is redeemable within 90 days and the remainder of the investment is redeemable within one year. Investments in hedge fund-of-funds are typically carried at estimated fair value. Fair value is based on the Net Asset Value (NAV) of the shares in each investment company or partnership. Such investment companies or partnerships mark-to-market or mark-to-fair value the underlying assets and liabilities in accordance with U.S. GAAP. Realized and unrealized gains and losses of the investment companies and 31 (Continued)

154 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) partnerships are included in their respective operations in the current year. Changes in unrealized gains or losses on investments, including those for which partial liquidations were effected in the course of the year, are calculated as the difference between the NAV of the investment at year-end less the NAV of the investment at the beginning of the year, as adjusted for contributions and redemptions made during the year and certain lock-up provisions. Generally, no dividends or other distributions are paid. The following summarizes the status of contributions to the private equity fund-of-funds vehicles held as of June 30, 2014: Percentage of Percentage of Total commitment commitment commitment contributed remaining Fund 1 $ % 7.1% Fund Fund Fund Fund Total $ 36.0 Investments in private equity funds, typically structured as limited partnership interests are carried at fair value using NAV or equivalent as determined by the General Partner in the absence of readily ascertainable market values. Distributions under this investment structure are made to investors through the liquidation of the underlying assets. It is expected to take up to ten years to fully distribute the proceeds of those assets. The fair value of limited partnership interests is generally based on fair value capital balances reported by the underlying partnerships, subject to management review and adjustment. Security values of companies traded on exchanges, or quoted on NASDAQ, are based upon the last reported sales price on the valuation date. Security values of companies traded over the counter, but not quoted on NASDAQ, and securities for which no sale occurred on the valuation date are based upon the last quoted bid price. The value of any security for which a market quotation is not readily available may be its cost, provided however, that the General Partner adjusts such cost value to reflect any bona fide third party transactions in such a security between knowledgeable investors, of which the General Partner has knowledge. In the absence of any such third party transactions, the General Partner may use other information to develop a good faith determination of value. Examples include, but are not limited to, discounted cash flow models, absolute value models, and price multiple models. Inputs for these models may include, but are not limited to, financial statement information, discount rates, and salvage value assumptions. The valuation of both marketable and nonmarketable securities may include discounts to reflect a lack of liquidity or extraordinary risks, which may be associated with the investment. Determination of fair value is performed on a quarterly basis by the General Partner. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market for those investments existed. 32 (Continued)

155 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) The Corporation has established a long-term investment return target of 7.75% and 8.00% for both PEP and CBRP in 2014 and 2013, respectively. These assumptions are based on historical returns achieved in the investment portfolios over the last ten years and represent the return that can reasonably be expected to be generated on a similarly structured portfolio in the future. The Corporation recognizes the funded status of defined benefit pension plans in the consolidated balance sheets and the recognition in unrestricted net assets of unrecognized gains or losses, prior service costs or credits and transition assets or obligations. The funded status is measured as the difference between the fair value of the plan s assets and the projected benefit obligation of the plan. The measurement date for the plans is June 30. By letter dated March 12, 2012, the Internal Revenue Service (IRS) notified the plan administrator that it had selected the plans for a routine examination. The examination initially covered the plan year ended December 31, During the examination, the IRS extended the examination to include additional years for some of the plans. By letter dated October 31, 2013, the IRS notified the plan administrator that it had completed the examination and had found that the plans were in compliance and that it had accepted all of its returns as filed. The following are deferred pension costs which have not yet been recognized in periodic pension expense but instead are accrued in unrestricted net assets, as of June 30, 2014 and Unrecognized actuarial losses represent unexpected changes in the projected benefit obligation and plan assets over time, primarily due to changes in assumed discount rates and investment experience. Unrecognized prior service cost is the impact of changes in plan benefits applied retrospectively to employee service previously rendered. Deferred pension costs are amortized into annual pension expense over the expected future lifetime for active employees with frozen benefits. Amounts in Amounts Amounts unrestricted recognized in recognized in net assets to unrestricted unrestricted be recognized net assets net assets during the as of as of next fiscal year June 30, 2014 June 30, 2013 Net actuarial loss $ (Continued)

156 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) The following table sets forth the plans funded status and amounts recognized in the accompanying consolidated financial statements as of June 30, 2014 and 2013: Change in benefit obligation: Benefit obligation at beginning of year $ 1, ,244.1 Interest cost Actuarial loss (gain) 89.9 (74.2) Benefits paid (53.2) (42.8) Benefit obligation at end of year 1, ,183.0 Change in plan assets: Plan assets at fair value at beginning of year Actual return on plan assets Company contributions Benefits paid (53.2) (42.8) Plan assets at fair value at end of year 1, Funded status/net amount recognized $ (231.9) (302.0) The amounts recognized in the consolidated financial statements consist of the following as of June 30: Pension assets (included in other assets) $ Pension liabilities (234.3) (304.9) The Corporation has estimated $55.7 for its defined benefit contributions for the fiscal year ending June 30, The accumulated benefit obligation is $1,278.8 and $1,183.0 at June 30, 2014 and 2013, respectively. Expected fiscal year benefit payments for all defined benefit plans is as follows: 2015 $ Total $ (Continued)

157 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) Net periodic pension expense for the years ended June 30, 2014 and 2013 is as follows: Interest cost on projected benefit obligation $ Return on plan assets (69.6) (65.3) Recognized actuarial loss Net periodic pension expense $ The assumptions used in determining net periodic pension expense and accrued pension costs shown above are as follows: Discount rates for obligations at year end: MedStar Health, Inc. Pension Equity Plan 4.65% 5.20% MedStar Health, Inc. Cash Balance Retirement Plan MedStar St. Mary s Hospital Pension Plan Discount rates for pension cost: MedStar Health, Inc. Pension Equity Plan July 1 June % 4.60% MedStar Health, Inc. Cash Balance Retirement Plan July 1 June MedStar St. Mary s Hospital Pension Plan July 1 June Expected long-term rate of return on plan assets PEP and CBRP 7.75% 8.00% Expected long-term rate of return on plan assets MedStar St. Mary s Hospital The Corporation also has various contributory, tax deferred annuity and savings plans with participation available to certain employees. The Corporation matches employee contributions up to 3.0% of compensation in certain plans. The Corporation contributed approximately $27.3 and $26.1 during the years ended June 30, 2014 and 2013, respectively. (8) Business and Credit Concentrations The Corporation provides healthcare services through its inpatient and outpatient care facilities located in the State of Maryland, the District of Columbia and Northern Virginia. The Corporation generally does not require collateral or other security in extending credit; however it routinely obtains assignment of (or is otherwise entitled to receive) patients benefits receivable under their health insurance programs, plans or policies (e.g., Medicare, Medicaid, Blue Cross, Workers Compensation, health maintenance organizations (HMOs) and commercial insurance policies). 35 (Continued)

158 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) The Corporation estimates the allowance for uncollectible accounts based on the aging of accounts receivable, historical collection experience, payor mix and other relevant factors. A significant portion of the allowance for uncollectible accounts relates to self-pay patients, as well as co-payments and deductibles owed by patients with insurance. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients. Other factors include the volume of patients through the emergency departments and the increased level of co-payments and deductibles due from patients with insurance. These factors continuously change and can have an impact on collection trends and the estimation process. The activity in the allowance for uncollectible accounts is summarized as follows for the years ended June 30, 2014 and 2013: Beginning balance $ Provision for bad debts Write-offs, net of recoveries (208.7) (199.9) Ending balance $ As of June 30, 2014 and 2013, the Corporation s allowance for uncollectible accounts was approximately 25.3% and 27.2%, respectively, as a percentage of patient service receivables. The Corporation s provision for bad debts represents 4.6% and 5.2% of net patient service revenue for the years ended June 30, 2014 and 2013, respectively. A summary of net patient service revenue by major category of payor for the years ended June 30, 2014 and 2013 is as follows: Medicare and Medicare HMO 37% 36% Medicaid and Medicaid HMO Carefirst Blue Cross Blue Shield Other commercial and managed care payors Self-pay % 100% 36 (Continued)

159 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) A summary of net patient receivables by major category of payor as of June 30, 2014 and 2013 is as follows: Medicare and Medicare HMO 28% 27% Medicaid and Medicaid HMO Carefirst Blue Cross Blue Shield Other commercial and managed care payors Self-pay % 100% Certain Maryland-based hospital charges are subject to review and approval by the Health Services Cost Review Commission (HSCRC). The HSCRC has jurisdiction over hospital reimbursement in Maryland by agreement with the Centers for Medicare and Medicaid Services (CMS). This agreement is based on a waiver from the Medicare Prospective Payment System reimbursement principles granted under Section 1814(b) of the Social Security Act. Under the Maryland HSCRC rate methodology, amounts payable for services in 2014 and 2013 to Maryland hospital patients under the Medicare and Medicaid insurance programs are computed at 94% of regulated charges. This discount amount does not include MCO granted discounts for medical education. Hospital patients under the Blue Cross and approved health maintenance organization insurance programs are computed at 98% of regulated charges. Maryland accounts receivable from these third-party payors have been adjusted to reflect the difference between charges and the payable amounts. In January 2014, CMS approved Maryland s new waiver for a five-year period beginning January 1, 2014 for inpatient and outpatient hospital services. The new waiver ties hospital per capita revenue growth to the state s economic growth of 3.58% and requires Medicare spending in Maryland to be 0.5% below the national average. CMS can require the State to submit a corrective action plan if targets for a given performance year are not met. The new waiver also imposes quality measures and encourages population health management. In connection with the new waiver, the HSCRC introduced new revenue arrangements, including the Global Budget Revenue (GBR) model. This new model for Maryland Hospitals moves payment to hospitals from each individual service to a total revenue for each hospital or a combination of hospitals to provide hospitals flexibility in the objectives of better care for individuals, higher levels of overall population health, and improved health care affordability. It removes the financial incentive from increasing volume and provides incentive to work with partners to provide care in the appropriate setting. The Company entered into a GBR arrangement covering five of its seven Maryland hospitals during the year ended June 30, In August 2014, the Company also entered into GBR arrangements for its remaining two Maryland hospitals. The GBR arrangement is expected to be in place at least three years, but will be renewed annually unless terminated by either party with 180 days prior notice. The Company recognized hospital inpatient and outpatient revenue under the new arrangement for the year ended June 30, For the fiscal year ended June 30, 2013, the Company recognized hospital inpatient and 37 (Continued)

160 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) outpatient revenue under its previous agreements with the HSCRC. These agreements included reimbursement on a charge per episode target, defining episode as inpatient care provided within 30 days. The Budget Control Act of 2011 (the Budget Control Act) mandated significant reductions and spending caps on the federal budget for fiscal years 2012 through As part of this legislation, a 2% reduction in Medicare spending, known as Sequestration, was implemented beginning April 1, 2013 and the Corporation s Medicare payments subsequent to that date were reduced by the mandatory 2%. It is not possible to determine how future congressional actions to reduce the federal deficit in order to end Sequestration will impact the Corporation s revenues. Through its MedStar Family Choice, Inc. subsidiary, the Corporation enters into fee-for-service and capitation agreements with independent health professionals and organizations to provide covered services to eligible enrollees where such services cannot be provided by its employed physicians or controlled entities. Medical and clinical expenses from these agreements include claim payments, capitation payments, and estimates of outstanding claims liabilities for services provided prior to the balance sheet date. The estimates of outstanding claims liabilities ($52.2 and $17.0 as of June 30, 2014 and 2013, respectively), are based on management s analysis of historical claims paid reports and as well as review of health services utilization during the period and are included in accounts payable and accrued expenses on the consolidated balance sheets. Changes in these estimates are recorded in the period of change. Claims payments and capitation payments are expensed in the period services are provided to eligible enrollees. (9) Certain Significant Risks and Uncertainties The Corporation provides general healthcare services in the State of Maryland, the District of Columbia and Northern Virginia. As a healthcare provider, the Corporation is subject to certain significant inherent risks, including the following: Dependence on revenues derived from reimbursement by the federal Medicare and state Medicaid programs; Regulation of hospital rates by the State of Maryland HSCRC; Government regulation, government budgetary constraints and proposed legislative and regulatory changes, and; Lawsuits alleging malpractice or other claims. Such inherent risks require the use of certain management estimates in the preparation of the Corporation s consolidated financial statements and it is reasonably possible that a change in such estimates may occur. The Medicare and state Medicaid reimbursement programs represent a substantial portion of the Corporation s revenues and the Corporation s operations are subject to a variety of other federal, state and local regulatory requirements. In addition, changes in federal and state reimbursement funding mechanisms and related government budgetary constraints could have a significant adverse effect on the Corporation. Similarly, failure by the Corporation to maintain required regulatory approvals and licenses and/or changes in related regulatory requirements could have a significant adverse effect. 38 (Continued)

161 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount. Management periodically reviews recorded amounts receivable from or payable to third-party payors and may adjust these balances as new information becomes available. In addition, revenue received under certain third-party agreements is subject to audit. During 2014 and 2013, certain of the Corporation s prior year third-party cost reports were audited and settled, or tentatively settled, by third-party payors. Adjustments resulting from such audits and management reviews of unaudited years and open claims are reflected as adjustments to revenue in the year that the adjustment becomes known. Although certain other prior year cost reports submitted to third-party payors remain subject to audit and retroactive adjustment, management does not expect any material adverse settlements. The healthcare industry is subject to numerous laws and regulations from federal, state and local governments, and the government has increased enforcement of Medicare and Medicaid anti-fraud and abuse laws, as well as physician self referral laws (STARK laws and regulation). The Corporation s compliance with these laws and regulations is subject to periodic governmental review, which could result in enforcement actions unknown or unasserted at this time. The Corporation is aware of certain asserted and unasserted legal claims by the government, and has provided requested information. The final outcomes of these government investigations cannot be determined at this time. Recent federal initiatives have prompted a national review of federally funded healthcare programs. To this end, the federal government, and many states, implemented programs to audit and recover potential overpayments to providers from the Medicare and Medicaid programs. Since June 2010, the Corporation s hospitals have received audit requests from the Medicare Recovery Audit Contractor (RAC) program. These RAC audit requests have focused on medical necessity of inpatient admissions and hospital coding practices. In addition, the hospitals have continued to receive routine audit requests from other Medicare contractors and the Office of Inspector General. The Corporation s hospitals have cooperated with each of these audit requests and implemented a program to track and manage their effect. As a result of recently enacted and pending federal healthcare reform legislation, rules and regulations, substantial changes are occurring in the United States healthcare system. These include numerous provisions affecting the delivery of healthcare services, the financing of healthcare costs, reimbursement to healthcare providers and the legal obligations of health insurers, providers and employers. These provisions are currently slated to take effect at specified times over the next decade. This federal healthcare reform legislation did not significantly affect the 2014 or 2013 consolidated financial statements. The Corporation, in the normal course of business, is a party to legal and regulatory proceedings. These include a lawsuit filed in June 2011 by several MedStar Washington Hospital Center (MWHC) employees alleging violations by the Corporation of wage-hour laws. The plaintiffs in this action are seeking certification of a class that would include hourly employees at all of the Corporation s hospitals. The Corporation is opposing class certification and taking other steps to defend itself and the hospitals in this litigation. The final outcome of this litigation cannot be determined at this time. In April 2014, another lawsuit was filed in federal court alleging similar wage-hour violations as the 2011 action. This lawsuit seeks to certify a class to include hourly employees at six of the Company s hospitals. The Company will oppose class certification and otherwise defend itself and the hospitals in this matter. 39 (Continued)

162 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) In June 2014, MWHC agreed on a new collective bargaining agreement with the union that represents its service employees, SEIU, Local 722. In September 2014, MWHC began negotiations with National Nurses United, the union that represents the hospital s nurses. The existing collective bargaining agreement will expire on November 15, The Corporation, in the normal course of business, is a party to a number of legal and regulatory proceedings. Management does not expect that the results of these proceedings will have a material adverse effect on the consolidated financial position or results of operations of the Corporation. (10) Self-Insurance Programs The Corporation maintains self-insurance programs for professional and general liability risks, employee health and workers compensation. Estimated liabilities have been recorded based on actuarial estimation of reported and incurred but not reported claims. The combined accrued liabilities for these programs at June 30, 2014 and 2013 were as follows: Professional and general liability $ Employee health Workers compensation Total liabilities Less current portion (86.3) (87.5) $ The Corporation s self insurance program for professional and general liability is responsible for the following exposures as of June 30, 2014: (a) For professional liability during the periods of July 1, 2012 to June 30, 2013 and July 1, 2013 to June 30, 2014, for all MedStar entities except MedStar Montgomery Medical Center (MMMC) and MedStar St. Mary s Hospital (MSMH), the Corporation is responsible for the first $5.0 exposure for each and every claim plus an additional exposure above the $5.0 self-insured retention referred to as an inner aggregate. For the period July 1, 2011 to December 31, 2012, the applicable inner aggregate was an inner aggregate that was in effect for the 24 month period January 1, 2010 through December 31, This inner aggregate exposes the Corporation to up to $2.5 per claim with an aggregate for the 24 month period of $5.0 above the $5.0 per claim self-insured retention for all claims incurred during the period January 1, 2011 through December 31, For the period January 1, 2013 to June 30, 2013, the applicable inner aggregate was the inner aggregate in effect for the 12 month period January 1, 2013 through December 31, This inner aggregate exposes the Corporation to up to $3.0 per claim with an annual aggregate of $6.0 above 40 (Continued)

163 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) the Corporation s $5.0 per claim self-insured retention for all claims incurred during the period January 1, 2013 through December 31, For the period January 1, 2014 to June 30, 2014, the applicable inner aggregate was in effect for the 12 month period of January 1, 2014 to December 31, This inner aggregate exposes the Corporation to up to $3.0 per claim with a $6.0 annual aggregate above the Corporation s $5.0 per claim self-insured retention for all claims incurred during the period January 1, 2014 to December 31, Effective December 10, 2012, Southern Maryland Hospital joined the Corporation as MedStar Southern Maryland Hospital Center (MSMHC). MSMHC is covered for all professional liability exposure for activities on or after December 10, 2012 under the same program of coverage described above. The Corporation did not assume responsibility for MSMHC exposure or any tail claims that might arise in future years related to activities that occurred prior to the acquisition by the Corporation. For MMMC and MSMH, the Corporation is responsible for the first $2.0 exposure for each claim (not subject to the inner aggregate structures noted above). (b) (c) For general liability, the Corporation is responsible for the first $3.0 exposure for each claim (for MMMC and MSMH, the first $2.0 exposure for each claim). General liability claims are not subject to the inner aggregate excess retention as described above. MSMHC is covered for general liability exposure for activities on or after December 10, 2012 under the Corporation s general liability program. Commercial excess re-insurance has been purchased above the self-insured retentions described above in multiple layers and in twin towers; one for professional and one for general liability. During the period of July 1, 2011 to December 31, 2012, each tower has seven layers of excess re-insurance coverage which provides coverage of up to $100.0 per claim and $100.0 in the annual aggregate. Effective January 1, 2013, the Corporation purchased an additional layer of commercial excess re-insurance. During the period of January 1, 2013 through June 30, 2014, each tower has eight layers of excess re-insurance which provides coverage of up to $125.0 per claim and $125.0 in the annual aggregate. The Corporation maintains reinsurance contracts with various A rated commercial insurance companies. The professional and general liabilities as of June 30, 2014 and 2013 have been discounted at a rate of 1.75%. The workers compensation liabilities as of June 30, 2014 and 2013 have been discounted at a rate of 1.50%. Assets available to fund these liabilities are held in separate accounts (see note 2). Contributions required to fund professional and general liability, employee health benefits and workers compensation programs are determined by the plans administrators based on appropriate actuarial assumptions. The professional and general liability programs are administered through an offshore wholly owned captive insurance company, Greenspring Financial Insurance Limited (GFIL), which is domiciled in the Grand Cayman Islands. 41 (Continued)

164 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (11) Unrestricted Net Assets The Corporation accounts for and presents noncontrolling interests in a consolidated subsidiary as a separate component of the appropriate class of consolidated net assets. The income attributable to noncontrolling interests is included within operating income on the consolidated statements of operations and changes in net assets. The following table presents a reconciliation of the changes in consolidated unrestricted net assets attributable to the Corporation s controlling interest and noncontrolling interest, including amounts such as the performance indicator and other changes in unrestricted net assets as of and for the years ended June 30, 2014 and 2013: Total MedStar Noncontrolling unrestricted Health, Inc. interests net assets Balance as of June 30, 2012 $ Excess of revenues over expenses Change in funded status of defined benefit plans Net assets released for property and equipment and other Distributions to noncontrolling interests (6.3) (6.3) Increase in unrestricted net assets Balance as of June 30, , ,026.8 Excess of revenues over expenses Change in funded status of defined benefit plans (2.1) (2.1) Net assets released for property and equipment and other 4.5 (2.8) 1.7 Distributions to noncontrolling interests (3.7) (3.7) Increase (decrease) in unrestricted net assets (4.2) Balance as of June 30, 2014 $ 1, , (Continued)

165 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (12) Temporarily and Permanently Restricted Net Assets Temporarily and permanently restricted net assets as of June 30, 2014 and 2013 are available for the following purposes: Temporary restrictions: Interest in net assets of foundation $ Other $ Permanent restrictions: Investments to be held in perpetuity, the income from which is available to support healthcare services $ Temporarily restricted net assets are available for the purposes of purchasing property and equipment, providing health education, research and other healthcare services. (13) Endowment Net Assets The Corporation s endowments consist of individual donor-restricted funds established for a variety of purposes. Net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. (a) Interpretation of Relevant Law The Corporation has interpreted the State Prudent Management of Institutional Funds Act (SPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Corporation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the Corporation considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the Corporation and the donor-restricted endowment fund (3) General economic conditions 43 (Continued)

166 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Corporation (7) The investment policies of the Corporation (b) Endowment Net Assets Consist of the Following as of June 30, 2014 Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ Total endowed net assets $ (c) Endowment Net Assets Consist of the Following as of June 30, 2013 Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ Total endowed net assets $ (d) (e) Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or SPMIFA requires the Corporation to retain as a fund of perpetual duration. In accordance with U.S. GAAP, there were no deficiencies of this nature that are reported in unrestricted net assets as of June 30, 2014 and Investment Strategies The Corporation has adopted policies for corporate investments, including endowment assets, that seek to maximize risk-adjusted returns with preservation of principal. Endowment assets include those assets of donor-restricted funds that the Corporation must hold in perpetuity or for a donor-specified period(s). The endowment assets are invested in a manner that is intended to hold a mix of investment assets designed to meet the objectives of the account. The Corporation expects its endowment funds, over time, to provide an average rate of return that generates earnings to achieve the endowment purpose. 44 (Continued)

167 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (14) Income Taxes To satisfy its long-term rate-of-return objectives, the Corporation relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Corporation employs a diversified asset allocation structure to achieve its long-term return objectives within prudent risk constraints. The Corporation monitors the endowment funds returns and appropriates average returns for use. In establishing this practice, the Corporation considered the long-term expected return on its endowment. This is consistent with the Corporation s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return. The Corporation and the majority of its subsidiaries are not-for-profit corporations as defined in Section 501(c)(3) of the Internal Revenue Code (the Code) and are exempt from federal income taxes under Section 501(a) of the Code. The Corporation s tax-exempt businesses generate nominal amounts of unrelated business income subject to income tax. For corporate income tax purposes, the Corporation has two consolidated groups of for-profit, taxable entities. The parent companies of these groups are Parkway Ventures, Inc. and MedStar Enterprises, Inc. The Corporation s taxable subsidiaries have approximately $221.5 of net operating loss (NOL) carryforwards as of June 30, 2014, which expire in varying periods through 2034, available to offset future taxable income. This NOL carryforward represents $84.2 of gross deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. During the years ended June 30, 2014 and 2013, the Corporation decreased and increased its net deferred tax asset by $3.6 and $1.8 respectively, which was recorded in nonoperating income. The remaining amount of the deferred tax asset considered realizable, $27.9 as of June 30, 2014, could be reduced if estimates of future taxable income during the carry forward period are reduced. The current tax provisions for the years ended June 30, 2014 and 2013 were immaterial. (15) Charity Care The Corporation s hospitals utilize a cost to charge ratio methodology to convert charity care to cost. The estimated cost of services provided is determined based on the relationship of total operating costs to gross charges. Total operating costs for purposes of this ratio exclude bad debt expense as well as costs associated with community benefit activities. Total gross patient charges are then offset with any related reimbursements. The Corporation provided $45.5 and $51.5 of charity care at cost during the years ended June 30, 2014 and 2013, respectively, based on the cost to charge ratio. In addition to charity care, the Corporation funds numerous programs designed to benefit the healthcare interests of the communities it serves, examples of which are: health education programs and services, 45 (Continued)

168 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) health information and referral services, school-based clinics, public health screenings and home care. The costs associated with these programs are recorded in the appropriate operating expense categories. (16) Leases The Corporation is obligated under various operating leases with initial terms of one year or more. Aggregate future minimum payments as of June 30, 2014 are as follows: 2015 $ and Thereafter 41.8 Total minimum lease payments $ Certain leases include provisions allowing the minimum rental payments to be adjusted annually for increases in operating costs and, in some cases, real estate taxes attributable to leased property. Total rental expense for all operating leases amounted to approximately $65.9 and $56.0 during the years ended June 30, 2014 and 2013, respectively. (17) Commitments and Contingencies In February 2000 and on June 30, 2000, the Corporation and Georgetown University (the University) signed certain definitive agreements whereby the Corporation would receive through purchase or capital lease substantially all of the assets (including working capital) owned by the University that constitutes the MedStar Georgetown University Hospital, the Community Practice Network, the Faculty Practice Group and certain office buildings and a parking lot on the campus (collectively referred to as the Transferred Businesses). These agreements became effective July 1, 2000 and transferred control of the identified physical plant and other real property assets of the Transferred Businesses to the Corporation for use as an academic medical center for a minimum of ninety-eight years. At the end of the one hundred and fifty year lease term (including a fifty-two year renewal), the University shall convey all leased assets, excluding the underlying land, to the Corporation for a nominal amount and enter into a rent-free ground lease for the Corporation s use. This transaction was accounted for under the purchase method of accounting effective July 1, In recognition of the value of the transaction, the Corporation shall annually pay the University 50% of the amount by which the combined operating earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the asset purchase agreement, of certain entities of the Corporation in the Washington D.C. area (collectively referred to as the Washington Clinical Enterprises) exceeds $60.0, subject to certain adjustments. These additional payments expire when cumulative payments reach $70.0. The Corporation has paid $36.7 to the University as of June 30, (Continued)

169 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) The Corporation also entered into an Academic Affiliation and Operations Agreement (Affiliation Agreement) with the University. The purpose of this agreement is to make available to the University the facilities of the Transferred Businesses and provide the Corporation with a first-class University medical center. The University shall make payments to the Corporation determined by multiplying the University School of Medicine s total undergraduate tuition revenue by 36% for providing teaching services. The Corporation recognized $12.3 and $12.8 of tuition revenue during the years ended June 30, 2014 and 2013, respectively. In support of academic programs at the University, for each fiscal year following the termination of the additional payment terms in the asset purchase agreement described above, the Corporation shall pay to the University 17.5% of the operating EBITDA of the Washington Clinical Enterprises in excess of $60.0, subject to certain adjustments. No amounts have been paid under this Affiliation Agreement through June 30, The Corporation and the University also entered into a Research Agreement to sustain and advance a program of health-related University research at the Transferred Business facilities. Under this agreement the University is required to reimburse the Corporation for certain costs incurred by the Corporation in support of University sponsored research. Amounts reimbursed to the Corporation were $2.7 and $3.1 for the years ended June 30, 2014 and 2013, respectively. MedStar Georgetown University Hospital and the University are parties to a fixed fee shared services agreement. Georgetown University provided to MedStar Georgetown University Hospital the following services: utilities, telephone/it services, transportation services and library services. Expenses charged for such services were $13.6 and $12.2 for the years ended June 30, 2014 and 2013, respectively. The MedStar Washington Hospital Center campus is subject to the lien of a Permitted Encumbrance in the amount of $21.5 to the United States government. This encumbrance was created in the deed of the hospital property from the United States government to MedStar Washington Hospital Center in February There is no repayment date for this lien stated in the deed. Under enabling legislation, repayment could be required after a determination that the property is no longer required for hospital services or the property is disposed of, in which event all or a portion of the lien may be payable to the government. This lien is subordinated to the Deed of Trust on the MedStar Washington Hospital Center campus. 47 (Continued)

170 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2014 and 2013 (Dollars in millions) (18) Functional Expenses The Corporation considers integrated health services, research and management and general to be its primary functional categories for purposes of expense classification. Management and general include information systems, general corporate management, advertising and marketing. Functional categories of expenses for the years ended June 30, 2014 and 2013 are as follows: Integrated health services $ 3, ,319.9 Management and general Research Fundraising $ 4, ,138.4 (19) Subsequent Events Management evaluated all events and transactions that occurred after June 30, 2014 and through October 6, The Corporation did not have any events that were required to be recognized or disclosed. 48

171 APPENDIX B-1 SELECTED INTERIM UNAUDITED FINANCIAL INFORMATION OF MEDSTAR HEALTH, INC. AND ITS SUBSIDIARIES

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173 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) Assets 9/30/2014 (unaudited) 6/30/2014 (audited) Current assets: Cash and cash equivalents $ $ Investments Assets whose use is limited or restricted Receivables: From patient services (less allowances for uncollectible accounts of $195.9 and $188.8, respectively) Other Inventories Prepaids and other current assets Total current assets 1, ,438.3 Investments Assets whose use is limited or restricted Property and equipment, net 1, ,152.9 Interest in net assets of foundation Goodwill and other intangible assets, net Other assets Total assets $ 4,355.3 $ 4,447.8 Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ $ Accrued salaries, benefits, and payroll taxes Amounts due to third-party payors, net Current portion of long-term debt Current portion of self insurance liabilities Other current liabilities Total current liabilities 1, ,082.3 Long-term debt, net of current portion 1, ,192.6 Self insurance liabilities, net of current portion Pension liabilities Other long-term liabilities, net of current portion Total liabilities 2, ,959.2 Net assets: Unrestricted net assets: MedStar Health, Inc. 1, ,322.2 Noncontrolling interests Total unrestricted net assets 1, ,327.4 Temporarily restricted Permanently restricted Total net assets 1, ,488.6 Total liabilities and net assets $ 4,355.3 $ 4,447.8 See accompanying notes to condensed consolidated financial statements. B-1-1

174 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) (unaudited) Three months ended September 30, 2014 September 30, 2013 Operating revenues: Net patient service revenue: Hospital inpatient services $ $ Hospital outpatient services Physician services Other patient service revenue Total net patient service revenue 1, ,033.3 Provision for bad debts Total net patient service revenue, net of provision for bad debts 1, Premium revenue Other operating revenue Net operating revenues 1, ,110.6 Operating expenses: Personnel Supplies Purchased services Other operating Interest expense Depreciation and amortization Total operating expenses 1, ,093.5 Earnings from operations Nonoperating (losses) gains: Investment income Net realized gains on investments Unrealized gain on derivative instrument Unrealized (losses) gains on investments (40.9) 39.5 Income tax provision (0.7) (0.4) Other nonoperating losses - (0.1) Total nonoperating (losses) gains (29.7) 53.9 (Deficiency) excess of revenue over expenses $ (7.8) $ 71.0 See accompanying notes to condensed consolidated financial statements. B-1-2

175 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) (unaudited) September 30, 2014 Unrestricted net assets: (Deficiency) excess of revenue over expenses $ (7.8) Distributions to noncontrolling interests (0.7) Net assets released from restrictions used for purchase of property and equipment and other - Decrease in unrestricted net assets (8.5) Temporarily restricted net assets: Contributions 1.8 Realized net gains on restricted investments 0.7 Change in unrealized depreciation on restricted investments (1.7) Decrease in net assets of foundation (1.8) Net assets released from restrictions (1.6) Decrease in temporarily restricted net assets (2.6) Permanently restricted net assets: Realized net gains on marketable restricted investments 0.2 Change in unrealized losses on restricted investments (0.1) Increase in permanently restricted net assets 0.1 Decrease in net assets (11.0) Net assets, beginning of year 1,488.6 Net assets, end of year $ 1,477.6 See accompanying notes to condensed consolidated financial statements. B-1-3

176 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) (unaudited) Three months ended September Cash flows from operating activities: Change in net assets $ (11.0) $ 73.5 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Amortization of bond financing costs, premiums and discounts (0.2) (0.3) Realized gains on investments (10.2) (12.9) Unrealized losses (gains) of investments 42.7 (41.0) Decrease (increase) in net assets of foundation 1.8 (2.8) Unrealized gain on derivative instrument (0.7) (0.7) Net settlement payment on derivative instrument Deferred income tax provision Distributions to noncontrolling interests Provision for bad debts Temporarily and permanently restricted contributions (1.8) (2.6) Gain on sale of consolidated joint venture, net of noncontrolling interests - (1.2) Changes in operating assets and liabilities: Receivables (43.9) (72.0) Inventories and other assets (13.8) (9.0) Account payable and accrued expenses (51.6) (57.4) Amounts due to third-party payors (0.4) 3.1 Other liabilities Net cash provided by (used in) operating activities 11.7 (3.8) Cash flows from investing activities: (Purchases) sales of investments and assets whose use is limited or restricted, net (2.2) 42.6 Purchases of alternative investments (0.8) (99.1) Proceeds from sales of alternative investments Proceeds from sale of consolidated joint venture Net settlement payment on derivative instrument (0.9) (0.9) Purchases of property and equipment (44.1) (46.9) Net cash used in investing activities (46.9) (40.6) Cash flows from financing activities: Repayment of long-term borrowings (19.3) (18.1) Payment of deferred issuance costs - (0.2) Temporarily and permanently restricted contributions Distributions to noncontrolling interests (0.7) (0.8) Net cash used in financing activities (18.2) (16.5) Decrease in cash and cash equivalents (53.4) (60.9) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ $ Supplemental disclosure of cash flow information: Interest paid $ 21.1 $ 19.1 Noncash investing and financing activities: Accounts payable for fixed asset purchases $ 4.3 $ 6.3 See accompanying notes to condensed consolidated financial statements. B-1-4

177 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) (1) Organization and Summary of Significant Accounting Policies The organizational structure and summary of significant accounting policies of MedStar Health, Inc. (MedStar or the Corporation) are presented in Appendix B of this Offering Circular. The accompanying unaudited condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements of the Corporation. Eliminations and reporting adjustments have been made to present the information in accordance with U.S. generally accepted accounting principles. The data should be read in conjunction with the audited consolidated financial statements for the years ended June 30, 2014 and 2013 and related notes included in Appendix B. Information for the three-month periods ended September 30, 2014 and 2013 is not based upon audited financial information but, in the opinion of management, is presented on a basis consistent with the audited consolidated financial statements in Appendix B, and includes adjustments consisting of normal recurring adjustments necessary for a fair presentation therein. Adjustments to these financial statements, while not expected by management, may occur as a result of the more comprehensive review undertaken as part of the audit process for the fiscal year ended June 30, The results of operations for the three months ended September 30, 2014 are not necessarily indicative of the operating results to be expected for the entire year ending June 30, The condensed consolidated balance sheet at June 30, 2014 has been derived from the audited consolidated financial statements at that date, but does not include all the information and notes required by U.S. generally accepted accounting principles for complete financial statements (2) Fair Value of Financial Instruments The Corporation follows the guidance in ASC Topic 820, Fair Value Measurement which defines fair value and establishes methods used to measure fair value. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy under ASC 820 are described below: Level 1 Quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 Observable inputs other than quoted prices for the asset, either directly or indirectly observable, that reflect assumptions market participants would use to price the asset based on market data obtained from sources independent of the Company; and Level 3 Unobservable inputs that reflect the Corporation s own assumptions about the assumptions market participants would use to price an asset based on the best information available in the circumstances. The Corporation has incorporated an Investment Policy Statement (IPS) into the investment program. The IPS, which has been formally adopted by the Corporation s Board of Directors, contains numerous standards designed to ensure adequate diversification by asset class and geography. The IPS also limits all investments by manager and position size, and limits fixed income position size based on credit ratings, which serves to further mitigate the risks associated with the investment program. At September 30, 2014 B-1-5

178 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) and June 30, 2014, management believes that all investments were being managed in a manner consistent with the IPS. The following table illustrates the actual allocations of the investment portfolio as of: Actual Actual allocation allocation September 30, 2014 June 30, 2014 Publicly traded equities domestic 27% 26% Publicly traded equities international Fixed income securities Alternative investments: Commingled equity funds Inflation hedging equity, commodity, fixed income fund 8 9 Hedge funds Private equities 2 1 Cash 2 2 Total 100% 100% The table below presents the Corporation s investable assets and liabilities as of September 30, 2014, aggregated by the three level valuation hierarchy: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ U.S. Treasury bonds U.S. agency mortgage backed securities Corporate bonds Fixed income mutual funds All other fixed income securities Equity mutual funds & ETF s Common stocks Alternative investments: Commingled equity funds Inflation hedging equity, commodity, fixed income fund Private equity Hedge funds Total assets $ 1, ,057.0 Liabilities: Interest rate swap $ Total liabilities $ B-1-6

179 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) For the three month period ended September 30, 2014, there were no significant transfers between Levels 1, 2 or 3. The table below presents the Corporation s investable assets and liabilities as of June 30, 2014, aggregated by the three level valuation hierarchy: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ U.S. Treasury bonds U.S. agency mortgage backed securities Corporate bonds Fixed income mutual funds All other fixed income securities Equity mutual funds & ETF s Common stocks Alternative investments: Commingled equity funds Inflation hedging equity, commodity, fixed income fund Private equity Hedge funds Total assets $ 1, ,141.0 Liabilities: Interest rate swap $ Total liabilities $ For the year ended June 30, 2014, there were no significant transfers between Levels 1, 2 or 3. Changes to the fair values based on the Level 3 inputs are summarized as follows: Private Hedge equity funds Total Balance as of June 30, 2014 $ Additions: Contributions/purchases Disbursements: Withdrawals/sales (1.1) (1.1) Net change in value 0.7 (0.6) 0.1 Balance as of September 30, 2014 $ B-1-7

180 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) The following summarizes redemption terms for the hedge fund-of-funds vehicles held as of September 30, 2014: Redemption timing: Redemption frequency Fund 1 Fund 2 Fund 3 Fund 4 Quarterly 95% within 1 year (1) 5% in 1 year or longer Quarterly Quarterly Required notice 70 days up to 90 days 90 days 65 days Audit reserve: Percentage held back for audit reserve 10% up to 10% 10% 10% Gates: Potential gate holdback up to 7.5% Potential gate release timeframe (1) One-third of this fund is redeemable within 90 days and the remainder of the investment is redeemable within one year. Investments in hedge fund-of-funds are typically carried at estimated fair value. Fair value is based on the Net Asset Value (NAV) of the shares in each investment company or partnership. Such investment companies or partnerships mark-to-market or mark-to-fair value the underlying assets and liabilities in accordance with U.S. GAAP. Realized and unrealized gains and losses of the investment companies and partnerships are included in their respective operations in the current year. Changes in unrealized gains or losses on investments, including those for which partial liquidations were effected in the course of the year, are calculated as the difference between the NAV of the investment at year-end less the NAV of the investment at the beginning of the year, as adjusted for contributions and redemptions made during the year and certain lock-up provisions. Generally, no dividends or other distributions are paid. The following summarizes the status of contributions to the private equity fund-of-funds vehicles held as of September 30, 2014: Percentage of Percentage of Total commitme nt commitment commitme nt contributed re maining Fund 1 $ % 6.9% Fund Fund Fund Fund Total $ 40.2 Investments in private equity funds, typically structured as limited partnership interests, are carried at fair value using NAV or equivalent as determined by the General Partner in the absence of readily ascertainable market values. Distributions under this investment structure are made to investors through the B-1-8

181 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) liquidation of the underlying assets. It is expected to take up to ten years to fully distribute the proceeds of those assets. The fair value of limited partnership interests is generally based on fair value capital balances reported by the underlying partnerships, subject to management review and adjustment. Security values of companies traded on exchanges, or quoted on NASDAQ, are based upon the last reported sales price on the valuation date. Security values of companies traded over the counter, but not quoted on NASDAQ, and securities for which no sale occurred on the valuation date are based upon the last quoted bid price. The value of any security for which a market quotation is not readily available may be its cost, provided however, that the General Partner adjusts such cost value to reflect any bona fide third party transactions in such a security between knowledgeable investors, of which the General Partner has knowledge. In the absence of any such third party transactions, the General Partner may use other information to develop a good faith determination of value. Examples include, but are not limited to, discounted cash flow models, absolute value models, and price multiple models. Inputs for these models may include, but are not limited to, financial statement information, discount rates, and salvage value assumptions. The valuation of both marketable and nonmarketable securities may include discounts to reflect a lack of liquidity or extraordinary risks, which may be associated with the investment. Determination of fair value is performed on a quarterly basis by the General Partner. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market for those investments existed. (3) Debt The Corporation maintains a $250.0 revolving credit agreement provided by a group of banks and has a three-year term expiring in August The facility is evidenced by an obligation issued under the Master Trust Indenture. The outstanding balance on the facility was $129.8 at September 30, 2014 and June 30, The facility includes certain covenants, including a requirement to maintain Days Cash on Hand of 70 days, measured semi-annually at each June 30 and December 31, and a Debt Service Coverage ratio of 1.25, measured quarterly on a rolling four quarters basis. In addition, the Corporation is required to maintain a minimum credit rating of Baa2 from Moody s Investor s Service, and BBB from Standard & Poor s and Fitch Ratings. In connection with the issuance of the District of Columbia 1998 Bonds, the Corporation entered into an interest rate swap with Wells Fargo Bank, National Association in a notional amount totaling $150.0 (reduced to $97.5 at August 2014). The swap agreement expires in fiscal year The interest rate swap is part of a comprehensive and long-term capital structure strategy. The purpose of the swap is to mitigate the effect of potential interest rate volatility and minimize the variability of the Corporation s average cost of capital. Under the terms of the swap, the Corporation pays a fixed rate and receives a variable rate. Collateral is only required to be posted under the swap in the event that the Corporation s credit ratings are downgraded by two rating agencies below the BBB or Baa2 level. To date, no collateral postings have been required. As of September 30, 2014 and June 30, 2014, the variable interest rate under these agreements was 0.10%. The fixed rate was % as of September 30, 2014 and June 30, The variable rates are capped at 14.0%. The change in fair value of the swap is reported in nonoperating gains (losses) in the statements of operations and changes in net assets. (4) Defined Benefit Retirement Plans The Corporation has two qualified defined benefit pension plans (MedStar Health, Inc. Pension Equity Plan (PEP) and MedStar Health, Inc. Cash Balance Retirement Plan (CBRP)) covering substantially all B-1-9

182 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) full-time employees hired before MedStar St. Mary s Hospital also has a defined benefit plan that substantially covers all employees of MedStar St. Mary s Hospital. Participation in all plans has been closed to new entrants and all plans are frozen to future benefit accruals. The components of the net periodic cost for the periods ended September 30, 2014 and 2013 are as follows: Three months ended September 30, Service cost benefits earned during the year $ Interest cost on projected benefit obligation Return on plan assets (18.9) (16.9) Unrecognized losses Net periodic pension expense $ B-1-10

183 (5) Unrestricted Net Assets MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) The Corporation accounts for and presents noncontrolling interests in a consolidated subsidiary as a separate component of the appropriate class of consolidated net assets. The income attributable to noncontrolling interests is included within operating income on the consolidated statements of operations and changes in net assets. The following table presents a reconciliation of the changes in consolidated unrestricted net assets attributable to the Corporation s controlling interest and noncontrolling interest, including amounts such as the performance indicator and other changes in unrestricted net assets for the three month period ended September 30, 2014: Total MedStar Noncontrolling unrestricted Health, Inc. inte rests ne t assets Balance as of June 30, 2014 $ 1, ,327.4 (Deficiency) excess of revenues over expenses (8.4) 0.6 (7.8) Distributions to noncontrolling interests (0.7) (0.7) Decrease in unrestricted net assets (8.4) (0.1) (8.5) Balance as of September 30, 2014 $ 1, ,318.9 (6) Risks and Uncertainties Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount. Management periodically reviews recorded amounts receivable from or payable to third-party payors and may adjust these balances as new information becomes available. In addition, revenue received under certain third-party agreements is subject to audit. Although certain prior year cost reports submitted to third-party payors remain subject to audit and retroactive adjustment, management does not expect any material adverse settlements. The healthcare industry is subject to numerous laws and regulations from federal, state and local governments, and the government has increased enforcement of Medicare and Medicaid anti-fraud and abuse laws, as well as physician self referral laws (STARK laws and regulation). The Corporation s compliance with these laws and regulations is subject to periodic governmental review, which could result in enforcement actions unknown or unasserted at this time. The Corporation is aware of certain asserted and unasserted legal claims by the government, and has provided requested information. The final outcomes of these government investigations cannot be determined at this time. Recent federal initiatives have prompted a national review of federally funded healthcare programs. To this end, the federal government, and many states, implemented programs to audit and recover potential overpayments to providers from the Medicare and Medicaid programs. Since June 2010, the Corporation s hospitals have received audit requests from the Medicare Recovery Audit Contractor (RAC) program. These RAC audit requests have focused on medical necessity of inpatient admissions and hospital coding practices. In addition, the hospitals have continued to receive routine audit requests from other Medicare contractors and the Office of Inspector General. The Corporation s hospitals have cooperated with each of these audit requests and implemented a program to track and manage their effect. B-1-11

184 MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) As a result of recently enacted and pending federal healthcare reform legislation, rules and regulations, substantial changes are occurring in the United States healthcare system. These include numerous provisions affecting the delivery of healthcare services, the financing of healthcare costs, reimbursement to healthcare providers and the legal obligations of health insurers, providers and employers. These provisions are currently slated to take effect at specified times over the next decade. In January 2014, CMS approved Maryland s new waiver for a five-year period beginning January 1, 2014 for inpatient and outpatient hospital services. The new waiver ties hospital per capita revenue growth to the state s economic growth of 3.58% and requires Medicare spending in Maryland to be 0.5% below the national average. CMS can require the State to submit a corrective action plan if targets for a given performance year are not met. The new waiver also imposes quality measures and encourages population health management. In connection with the new waiver, the HSCRC introduced new revenue arrangements, including the Global Budget Revenue (GBR) model. This new model for Maryland Hospitals moves payment to hospitals from each individual service to a total revenue for each hospital or a combination of hospitals to provide hospitals flexibility in the objectives of better care for individuals, higher levels of overall population health, and improved health care affordability. It removes the financial incentive from increasing volume and provides incentive to work with partners to provide care in the appropriate setting. The Corporation entered into a GBR arrangement covering five of its seven Maryland hospitals during the year ended June 30, In August 2014, the Corporation also entered into GBR arrangements for its remaining two Maryland hospitals. The GBR arrangement is expected to be in place at least three years, but will be renewed annually unless terminated by either party with 180 days prior notice. The Corporation recognized hospital inpatient and outpatient regulated revenue under the new arrangement for the three months ended September 30, For the three months ended September 30, 2013, the Corporation recognized hospital inpatient and outpatient regulated revenue under its previous agreements with the HSCRC, which included reimbursement on a charge per episode target, defining episode as inpatient care provided within 30 days. The Corporation, in the normal course of business, is a party to legal and regulatory proceedings. These include a lawsuit filed in June 2011 by several MedStar Washington Hospital Center (MWHC) employees alleging violations by the Corporation of wage-hour laws. The plaintiffs in this action are seeking certification of a class that would include hourly employees at all of the Corporation s hospitals. The Corporation is opposing class certification and taking other steps to defend itself and the nine hospitals in this litigation. The final outcome of this litigation cannot be determined at this time. In April 2014, another lawsuit was filed in federal court alleging similar wage-hour violations as the 2011 action. This lawsuit seeks to certify a class to include hourly employees at six of the Corporation s hospitals. The Corporation will oppose class certification and otherwise defend itself and the hospitals in this matter. The Corporation, in the normal course of business, is a party to a number of legal and regulatory proceedings. Management does not expect that the results of these proceedings will have a material adverse effect on the consolidated financial position or results of operations of the Corporation. In June 2014, MWHC agreed on a new collective bargaining agreement with the union that represents its service employees, SEIU, Local 722. In September 2014, MWHC began negotiations with National Nurses United (NNU), the union that represents the hospital s nurses. The existing collective bargaining agreement expired on November 15, 2014 and the parties have not yet reached an agreement. B-1-12

185 (7) Subsequent Events MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions) Management evaluated all events and transactions that occurred after September 30, 2014 and through January 19, In February 2015, the Corporation plans to issue approximately $100.0 million of taxable fixed-rate debt to fund the Corporation s ambulatory growth strategy. In addition, the Corporation is also evaluating the tax-exempt refinancing of its Series 1998BC District bonds, Series 2004 MHHEFA bonds and Series 2007 MHHEFA bonds. The Corporation did not have any other events that were required to be recognized or disclosed. B-1-13

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187 APPENDIX C SUMMARIES OF PRINCIPAL LEGAL DOCUMENTS

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189 TABLE OF CONTENTS PAGE DEFINITIONS OF CERTAIN TERMS USED IN THE INDENTURE... 1 SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE PLEDGE PAYMENTS WITH RESPECT TO THE BONDS COVENANTS OF THE CORPORATION CERTIFICATED BONDS BOOKS TRANSFER AND EXCHANGE TAX, GOVERNMENTAL CHARGE NONPRESENTMENT OF BONDS CREATION OF FUNDS AND ACCOUNTS; DEPOSIT OF AND USE OF MONEYS PAYMENT OF INTEREST PAYMENT OF PRINCIPAL INVESTMENTS EVENTS OF DEFAULT ACCELERATION OF MATURITY PRIORITY OF PAYMENTS FOLLOWING DEFAULT ACTUAL NOTICE OF EVENTS OF DEFAULT RESTORATION TO FORMER POSITION BONDHOLDERS RIGHT TO DIRECT PROCEEDINGS LIMITATION ON BONDHOLDERS RIGHT TO INSTITUTE PROCEEDINGS NO REMEDY EXCLUSIVE NO WAIVER OF REMEDIES SUPPLEMENTAL INDENTURE WITHOUT BONDHOLDER CONSENT SUPPLEMENTAL INDENTURE WITH BONDHOLDER CONSENT NOTICE NO RIGHT TO OBJECT DISCHARGE OF INDENTURE DEFEASANCE ACCEPTANCE OF TRUSTS REMOVAL OF TRUSTEE IMMUNITY OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS OF CORPORATION SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE DEFINITIONS SERIES, DESIGNATION AND AMOUNT OF OBLIGATIONS PAYMENT OF OBLIGATIONS PAGE SECURITY FOR OBLIGATIONS SUBSTITUTE OBLIGATIONS UPON WITHDRAWAL OF A MEMBER APPOINTMENT OF OBLIGATED GROUP AGENT PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST; SYSTEM AFFILIATES PERFORMANCE OF COVENANTS ENTRANCE INTO THE OBLIGATED GROUP CESSATION OF STATUS AS A MEMBER OF THE OBLIGATED GROUP GENERAL COVENANTS; RIGHT OF CONTEST INSURANCE DEBT SERVICE COVERAGE RATIO MERGER, CONSOLIDATION, SALE OR CONVEYANCE FINANCIAL STATEMENTS INDEBTEDNESS PARTIES TO GUARANTY AGREEMENT SALE, LEASE OR OTHER DISPOSITION OF PROPERTY LIENS ON PROPERTY PLEDGE OF REVENUES OF CORPORATION RIGHT TO CONSENT EVENTS OF DEFAULT ACCELERATION REMEDIES; RIGHTS OF OBLIGATION HOLDERS DIRECTION OF PROCEEDINGS BY HOLDERS APPLICATION OF MONEYS RIGHTS AND REMEDIES OF OBLIGATION HOLDERS TERMINATION OF PROCEEDINGS WAIVER OF EVENTS OF DEFAULT SUCCESSOR MASTER TRUSTEE CORPORATE MASTER TRUSTEE REQUIRED; ELIGIBILITY RESIGNATION BY THE MASTER TRUSTEE REMOVAL OF THE MASTER TRUSTEE APPOINTMENT OF SUCCESSOR MASTER TRUSTEE BY THE OBLIGATION HOLDERS; TEMPORARY MASTER TRUSTEE SUPPLEMENTAL MASTER INDENTURES NOT REQUIRING CONSENT OF OBLIGATION HOLDERS. 65 SUPPLEMENTAL MASTER INDENTURES REQUIRING CONSENT OF OBLIGATION HOLDERS OBLIGATION AND DOCUMENT SUBSTITUTION DEFEASANCE PROVISION FOR PAYMENT OF A PARTICULAR SERIES OF OBLIGATIONS OR PORTION THEREOF.. 71 SATISFACTION OF RELATED BONDS C-i

190 SUMMARY OF CERTAIN PROVISIONS OF THE GUARANTY AGREEMENT GUARANTY COVENANTS OF GUARANTORS EVENTS OF DEFAULT REMEDIES TERMINATION OF GUARANTY AGREEMENT SUMMARY OF CERTAIN PROVISIONS OF THE DEEDS OF TRUST GRANT OF PROPERTY COVENANTS AND AGREEMENTS RELATING TO THE RELEASE OF PROPERTY AND SUBORDINATION OF LIENS EVENTS OF DEFAULT; REMEDIES C-ii

191 DEFINITIONS OF CERTAIN TERMS USED IN THE INDENTURE In addition to terms defined elsewhere in this Offering Memorandum, the following are definitions of certain terms used in this Offering Memorandum. Terms used but not defined herein shall have the meanings set forth in the Indenture. Accounts means the accounts created under the Indenture. Authenticating Agent means U.S. Bank National Association, or any successor of or agent of the Authenticating Agent, appointed pursuant to the Indenture. Beneficial Owners means when the Bonds are held by a Bond Depository, the owner of any Bonds which are held for such owner by a Bond Depository in the form of a Global Certificate. Board means the Corporation s board of trustees or other board or group of individuals in which all of the powers of the Corporation for the management of corporate assets are vested. Bond Depository means The Depository Trust Company, its successors and assigns, and any other securities depository which meets the qualifications set forth in the Indenture. Bond Payment Date means any Interest Payment Date and any other date on which the principal, Make-Whole Redemption Price (if any) or interest on the Bonds is to be paid to the Owners thereof (whether at maturity thereof, or by acceleration of maturity or after notice of redemption or purchase or prepayment or otherwise). Bondholder or Holder or Holder of Bonds or holder of Bonds or Owner or Owner of Bonds or owner of Bonds means the person in whose name any Bond is registered on the registration books maintained by the Registrar pursuant to the Indenture. Business Day means any day other than a Saturday, Sunday or other day on which (a) the New York Stock Exchange or (b) banks located in New York, New York, the State of Maryland or in any of the cities of the Principal Offices or drawing office, as applicable, of the Trustee, are authorized by law, regulation or execution order or obligated to be closed. Certificated Bonds means physical Bonds authorized to be authenticated and delivered pursuant to the Indenture. Closing Date or Closing or Issuance Date means with the date of original issuance and delivery of the Bonds. Code means the Internal Revenue Code of 1986, as amended, including, when appropriate, the statutory predecessor of the Code, and all applicable regulations (whether C-1

192 proposed, temporary or final) under the Code and the statutory predecessor of the Code, and any official rulings and judicial determinations under the foregoing applicable to the Bonds. Corporation Representative shall mean the Executive Vice President, Chief Administrative and Financial Officer and the Vice President and Treasurer of the Corporation and, in the case of any act to be performed or duty to be discharged, any other member, officer or employee of the Corporation then authorized to perform such act or discharge such duty in writing reciting that such authorization is effective pursuant to the by-laws of the Corporation then in effect accompanied by a written certificate of the Secretary or Assistant Secretary of the Corporation furnished to the Trustee containing the specimen signature of such person. Counsel shall mean any attorney or attorneys duly admitted to practice law before the highest court of any state or the District of Columbia and acceptable to the Corporation who have regularly engaged in the practice of law as their primary occupation for at least five (5) years and none of whom are officers, full-time employees, directors or members of the Corporation. Cost of Issuance Fund means the fund by that name established pursuant to the Indenture. Debt Service Fund means the Debt Service Fund created under the Indenture. Default and Event of Default means any Default or Event of Default under the Indenture. Defeasance Securities means any of the following: (a) Cash. (b) U.S. Treasury Certificates, Notes and Bonds (including State and Local Government Series SLGs ). (c) Direct obligations of the Treasury which have been stripped by the Treasury itself. (d) Only the interest component of Resolution Funding Corp. (REFCORP) REFCORP strips which have been stripped by request to the Federal Reserve Bank of New York in book-entry form are acceptable. (e) Pre-refunded municipal bonds rated Aaa by Moody s and AAA by S&P. If however, the issue is only rated by S&P (i.e., there is no Moody s rating), then the pre-refunded bonds must have been pre-refunded with cash, direct U.S. or U.S. guaranteed obligations, or AAA rated pre-refunded municipals to satisfy this condition. (f) Obligations issued by the following agencies which are backed by the full faith and credit of the U.S.: C-2

193 (i) U.S. Export-Import Bank (Eximbank) Direct obligations or fully guaranteed certificates of beneficial ownership (ii) Farmers Home Administration (FmHA) Certificates of beneficial ownership (iii) (iv) Federal Financing Bank General Services Administration Participation certificates (v) U.S. Maritime Administration Guaranteed Title XI financing (vi) U.S. Department of Housing and Urban Development (HUD) Project Notes Local Authority Bonds New Communities Debentures - U.S. government guaranteed debentures U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds. Disclosure Agreement means the Continuing Disclosure Agreement dated as of February 1, 2015 by and between the Corporation and U.S. Bank National Association, as trustee and dissemination agent, as the same may be amended, supplemented or restated. DTC, Depository, Bond Depository or Securities Depository means The Depository Trust Company, of New York, New York and/or its nominee, Cede & Co. or any successors, Substitute Depositories or assigns thereof in whose name or names the Global Certificates shall be registered on the books of the Registrar and its successors and assigns. Fiscal Year means a period of 12 consecutive months ending on June 30, or on such other date, specified by the Board, of which the Trustee is given written notice. Fitch means Fitch Ratings, its successors and assigns. Funds means, collectively, the funds and accounts created under the Indenture. C-3

194 Global Certificate means when the Bonds are held by a Bond Depository, the Bonds in the form of one (1) Global Certificate representing the aggregate principal amount of Bonds due on a maturity date which shall be registered in the name of such Bond Depository. Guaranty Agreement means the Guaranty Agreement dated as of February 1, 2004, by the Guarantors to the Master Trustee, as amended, modified and supplemented from time to time. Guarantors means HH MedStar Health, Inc., Washington Hospital Center Corporation, MedStar-Georgetown Medical Center, Inc., The Union Memorial Hospital, The Good Samaritan Hospital of Maryland, Inc., Harbor Hospital, Inc. (formerly known as Harbor Hospital Center, Inc.), Franklin Square Hospital Center, Inc., St. Mary s Hospital of St. Mary s County, Inc., Montgomery General Hospital, Inc., Parkway Ventures, Inc., National Rehabilitation Hospital, Inc., VNA, Inc., MedStar Enterprises, Inc., MedStar Southern Maryland Hospital Center, Inc. and any other person that shall become a guarantor under the Guaranty Agreement, subject to the withdrawal of any of the foregoing persons as a Guarantor under the Guaranty Agreement in accordance with the provisions of the Guaranty Agreement. Indenture means the Indenture of Trust, dated as of February 1, 2015, between the Corporation and the Trustee, and any and all amendments, modifications and supplements thereto. Independent means any Person not an employee or officer of the Corporation or its affiliates. Interest Account means the account by that name in the Debt Service Fund established pursuant to the Indenture. Interest Payment Date means: (i) each February 15 and August 15, commencing August 15, 2015, provided, however, that if any such date is not a Business Day, the Interest Payment Date shall be the next succeeding day which is a Business Day with the same effect as if such interest payment was made on the original interest payment date; and (ii) the maturity date and any other date on which any Bond service charges shall be due and payable, whether at maturity, upon acceleration, call for redemption or otherwise. Mail or Notice or notice or Notice by Mail means mail by first class prepaid postage to Owners of the Bonds at the addresses shown in the registration books maintained pursuant to the Indenture or delivery of all notices or instruments in accordance with the Indenture to the Corporation, the Trustee, the Paying Agent, the Registrar, the Rating Agency or the Bond Depository. Any notice to Owners given by mail shall be deemed given and received when delivered by the Registrar to the United States Postal Service, or its successor, postage C-4

195 prepaid. In case, by reason of suspension of regular mail service or by reason of any other cause, it shall be impracticable to give such notice by Mail, then such notification as shall be made with the approval of the Registrar shall constitute a sufficient notification for every purpose under the Indenture. Make-Whole Redemption Price has the meaning set forth in THE BONDS Redemption Optional Redemption in the forepart of this Offering Memorandum. Master Trust Indenture means the Master Trust Indenture dated as of December 1, 1998, between the Corporation and the Master Trustee, as amended, modified and supplemented from time to time. Master Trustee means U.S. Bank National Association, as successor to SunTrust Bank, or any other successor trustee under the Master Trust Indenture. Moody s means Moody s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns. Note means MedStar Obligation No. 42 issued by the Corporation to secure the obligations of the Corporation under the Indenture with respect to the Bonds. Outstanding or outstanding means, except as provided in the Indenture, when used with reference to Bonds, as of any particular date, all Bonds, authenticated and delivered under the Indenture, as applicable, except: (i) any Bond canceled by the Registrar or the Trustee, as applicable, (or delivered to the Registrar or Trustee for cancellation, as applicable) at or before such date; (ii) any Bond for the payment, redemption or purchase and cancellation of the principal and interest on which provision shall have been made as provided in the Indenture; and (iii) any Bond paid or in lieu of or in substitution for which a new Bond shall have been authenticated and delivered pursuant to the Indenture. Paying Agent means U.S. Bank National Association, or any successor corporation of or agent of the Paying Agent, substituted in its place in accordance with the Indenture and its successors. Permitted Investments means the following obligations: (a) Direct obligations of the United States of America (including obligations issued or held in book entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America; C-5

196 (b) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (i) U.S. Export-Import Bank (Eximbank) Direct obligations or fully guaranteed certificates of beneficial ownership (ii) Rural Economic Community Development Administration (formerly the Farmers Home Administration) Certificates of beneficial ownership (iii) (iv) (v) Federal Financing Bank Federal Housing Administration Debentures (FHA) General Services Administration Participation certificates (vi) Government National Mortgage Association (GNMA) GNMA - guaranteed mortgage-backed bonds GNMA - guaranteed pass-through obligations (vii) U.S. Maritime Administration Guaranteed Title XI financing (viii) U.S. Department of Housing & Urban Development Project Notes Local Authority Bonds New Communities Debentures - U.S. government guaranteed debentures U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds; (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): C-6

197 (i) Federal Home Loan Bank System Senior debt obligations; (ii) Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac ) Participation Certificates Senior debt obligations; (iii) Federal National Mortgage Association (FNMA or Fannie Mae ) Mortgage-backed securities and senior debt obligations; (iv) Student Loan Marketing Association (SLMA or Sallie Mae ) Senior debt obligations; (v) (vi) Resolution Funding Corp. (REFCORP) obligations; and Farm Credit System Consolidated systemwide bonds and notes; (d) Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm-G, AAA-m; or AA-m and if rated by Moody s rated Aaa, AA1 or AA2 (including investments for which the Trustee serves as investment adviser or manager); (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks. The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral; (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including EIF and SAIF; (g) Investment Agreements, including GIC s, Forward Purchase Agreements and Reserve Fund Put Agreements; (h) Commercial paper rated, at the time of purchase, Prime-1 by Moody s and A1 or better by S&P; (i) Bonds or notes issued by any state or municipality which are rated by Moody s and S&P in one of the highest rating categories assigned by such agencies; (j) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of Prime-1 or A3 or better by Moody s and A1 or A or better by S&P; and (k) Repurchase agreements for 30 days or less provided such agreements follow the criteria described below. C-7

198 are: (i) Repurchase agreements with a dealer bank or securities firm which a. Primary dealers on the Federal Reserve reporting dealer list which are rated A or better by S&P and Moody s, or b. Banks rated A or above by S&P and Moody s. (ii) The written repurchase contract must include acceptable securities: a. Acceptable securities are: (1) Direct U.S. governments, or (2) Federal agencies backed by the full faith and credit of the U.S. government (and FNMA and FHLMC). (iii) The collateral must be delivered to the trustee (if trustee is not supplying the collateral) or third party acting as agent for the trustee (if the trustees is supplying the collateral) before/simultaneous with payment (perfection by possession of certificated securities). (iv) Valuation of Collateral a. The securities must be valued weekly, marked to market at current market price plus accrued interest. b. The value of collateral must be equal to 104% of the amount of cash transferred to the dealer bank or security firm under the repurchase agreement plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. Person or person means an individual, a corporation, a partnership, an association, a joint stock company, a joint venture, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. Pre-Refunded Municipal Obligations has the meaning set forth in paragraph (e) of the definition of Defeasance Securities. Principal Account means the account by that name in the Debt Service Fund established pursuant to the Indenture. C-8

199 Principal Office means the office maintained by any person for the transaction of business or such other office as shall be designated by such person in writing to the Trustee, the Paying Agent, the Registrar, the Authenticating Agent and the Corporation, and specifically shall mean the office or offices with respect to: (i) the Trustee, the office designated in the Indenture or such other office as is designated in writing to the Paying Agent, the Registrar, the Authenticating Agent and the Corporation; (ii) the Paying Agent, the office designated in the Indenture or such other office as is designated in writing to the Trustee, the Registrar, the Authenticating Agent and the Corporation; (iii) the Authenticating Agent, the office designated in the Indenture or such other office as is designated in writing to the Trustee, the Registrar and the Corporation; (iv) the Registrar, the office designated in the Indenture or such office as is designated in writing to the Trustee, the Paying Agent, the Authenticating Agent and the Corporation; and (v) the Corporation, the office designated in the Indenture or such other office as is designated in writing to the Trustee, the Paying Agent, the Authenticating Agent and the Registrar. Rating Agency means S&P, Moody s, Fitch or any other securities rating agency that shall have assigned a rating with respect to the Bonds upon the application of the Corporation, which rating is in effect at the time in question, and the successors and assigns of any such rating agencies, and the term Rating Agencies shall mean all of the foregoing, collectively. Record Date shall mean, with respect to each Interest Payment Date, the first day of the month of such Interest Payment Date, or, if such day shall not be a Business Day, the next succeeding Business Day. Redemption Fund means the fund by that name established pursuant to the Indenture. Registrar means U.S. Bank National Association, or any successor of or agent of the Registrar, appointed in accordance with the Indenture and their respective successors. S&P means Standard & Poor s Ratings Group, a division of McGraw Hill, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns. Securities Exchange Act means the Securities Exchange Act of 1934, as amended. C-9

200 Special Record Date means the special record date established by the Trustee pursuant to the Indenture for the purpose of paying principal and interest to Bondholders upon an Event of Default. Substitute Depository means a Depository appointed pursuant to the Indenture and qualified in accordance with the provisions of the Indenture to replace a predecessor Bond Depository but shall not include a successor of any Bond Depository. Supplemental Indenture means any instrument entered into by the Corporation and the Trustee executed and delivered in accordance with the terms and provisions of the Indenture for the purpose of amending, modifying or supplementing the Indenture. Trust Estate means, at any particular time, all cash and securities now or hereafter held in the Funds and Accounts, all moneys, securities and obligations, including Permitted Investments (including the investment income from Permitted Investments) which at such time are deposited or are required to be deposited with, or are held or are required to be held by or on behalf of, the Trustee in trust under any of the provisions of the Indenture, created or established under the Indenture and all investment earnings on the Funds and Accounts, the Note and all other property of every name and nature which is now pledged, assigned or transferred, or which may from time to time in the future be pledged assigned or transferred, to the Trustee, by delivery or by writing of any kind, as and for security under the Indenture, except for moneys or obligations deposited with or paid to the Trustee for the redemption or payment of Bonds which are deemed to have been paid in accordance with the Indenture, and funds held pursuant to the Indenture for Bonds which have not been presented for payment. Trustee means U.S. Bank National Association, a national banking association organized and existing under the laws of the United States, as trustee under the Indenture, its successors in trust and its and their assigns, and any co-trustee appointed and serving under the Indenture. UCC means the Uniform Commercial Code as in effect in the District. Value means with respect to funds held as part of any fund or account under the Indenture, shall be determined as of the end of each month and as otherwise required under the Indenture and shall mean the value of any investments calculated as follows: (a) as to investments the bid and asked prices of which are published on a regular basis in The Wall Street Journal (or, if not there, then in The New York Times): the average of the bid and asked prices for such investments so published on or most recently prior to such time of determination; (b) as to investments the bid and asked prices of which are not published on a regular basis in The Wall Street Journal or The New York Times: the average bid price at such time of determination for such investments by any two nationally recognized government securities dealers (selected by the Corporation in its absolute discretion) at C-10

201 the time making a market in such investments or the bid price published by a nationally recognized pricing service; and (c) as to certificates of deposit and bankers acceptances: the face amount thereof, plus accrued interest. SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE The following is a summary of certain provisions of the Indenture. Such summary does not purport to be complete or definitive and reference is made to the Indenture for a full and complete statement of the terms and provisions and for the definition of capitalized terms used in this summary and not otherwise defined under Definitions of Certain Terms in the Indenture or elsewhere in this Offering Memorandum. Pledge. In order to secure the payment of the principal of, and interest and Make-Whole Redemption Price, if any, on the Bonds issued under the Indenture either at their maturity or prior redemption according to their tenor and effect and to secure the performance and observance by the Corporation of all the covenants and obligations expressed or implied in the Indenture and in the Bonds, the Corporation conveys, transfers, assigns and pledges the Trust Estate to, and grants a security interest in the Trust Estate to the Trustee and to its successors in trust and assigns, forever, such conveyance, transfer, assignment, pledge and security interest to be effective without the recording of the Indenture or any other instrument. (Granting Clauses) Payments with Respect to the Bonds. The Corporation will make payments which shall be sufficient to pay the principal of, purchase price, or Make-Whole Redemption Price, if any, and interest on, the Bonds, on the dates, in the amounts, at the times and in the manner provided in the Indenture and in the Bonds, whether at maturity, upon acceleration, upon redemption or otherwise. The obligation of the Corporation to make payments for deposit into the Interest Account of the Debt Service Fund for the payment of interest on the Bonds on the Interest Payment Date and into the Principal Account of the Debt Service Fund and the Redemption Fund for payment of principal of, and Make-Whole Redemption Price, if any, on the Bonds on the date for payment, as required pursuant to the Indenture, shall be reduced by the amount of moneys in the Debt Service Fund or the Redemption Fund, as applicable, available for such purposes. The Corporation shall pay to the Trustee, at the Trustee s Principal Office, all payments payable by the Corporation pursuant to the Indenture. (Section 4.04) Covenants of the Corporation. Pursuant to the Indenture, the Corporation covenants, represents and warrants, so long as any Bond is outstanding, as follows: Payment of Principal, Make-Whole Redemption Price, Purchase Price and Interest. The Corporation agrees that it will duly and punctually make all payments required by the Indenture and the Bonds on the dates, at the times, at the place and in the manner provided in the Indenture and in the Bonds when and as the same become payable, whether at maturity, upon call for redemption, by acceleration of maturity or otherwise, according to the true intent and meaning thereof. C-11

202 On the date of execution and delivery of the Indenture, the Corporation shall execute and deliver to the Trustee the Note in substantially the form provided in the Master Trust Indenture to secure the obligation of the Corporation to make the payments required by the Indenture. The obligations of the Corporation under the Note shall be deemed to be amounts payable under the Indenture. Each payment made pursuant to the Note shall be deemed to be a credit against the corresponding obligation of the Corporation under the Indenture and any such payment shall fulfill the Corporation s obligation to pay such amount under the Indenture. (Section 5.01) Proceeds of the Bonds. The Corporation shall use the proceeds of the Bonds to finance and refinance the acquisition and renovation of ambulatory care facilities or other capital projects of the System and for other general corporate purposes of the System consistent with the Corporation s charitable purposes and to pay costs of issuance relating to the Bonds. (Section 5.02) Enforcement of Duties and Obligations of the Corporation. The Corporation shall take all legally available action to fully perform all duties and acts and fully comply with the covenants of the Corporation contained in the Indenture in the manner and at the times provided in the Indenture and to comply with the laws, rules and regulations to which the Corporation is bound. (Section 5.03) Maintenance of Books and Records. The Corporation will keep and maintain full and accurate books and records with respect to the Bonds and provide full and prompt access thereto (excluding confidential records) to the Trustee upon reasonable request therefor. (Section 5.04) Financing Statements. The Corporation shall cause appropriate financing statements and continuation statements naming the Trustee as pledgee and assignee of the Trust Estate, to be duly filed and recorded in the appropriate offices, in order to perfect and maintain the security interests created by the Indenture. (Section 5.05) Master Trust Indenture. The Corporation covenants and agrees that it shall comply, and shall cause the System Affiliates (as defined in the Master Trust Indenture) to comply (subject to contractual and organizational limitations, as the case may be), with the provisions of the Master Trust Indenture and the Guaranty Agreement. Notwithstanding the provisions of Section 703(b) of the Master Trust Indenture, the Master Trust Indenture shall not be replaced or substituted in its entirety so long as the Bonds remain Outstanding and the Corporation agrees that any purported substitution in its entirety shall be of no force or effect unless the consent of the majority in the aggregate principal amount of the holders of Outstanding Bonds has been secured. (Section 5.07) Continuing Disclosure. The Corporation, on behalf of the Obligated Group, covenants and agrees that it will comply with and carry out all of the provisions of the C-12

203 Disclosure Agreement. Notwithstanding any other provision of the Indenture, failure of the Corporation to comply with the Disclosure Agreements shall not be considered an Event of Default; however, pursuant to the Disclosure Agreement, the Trustee or any Bondholder may and, upon the written direction of any Participating Underwriter (as defined in the Disclosure Agreement) or any Bondholders owning not less than 25% in aggregate principal amount of all the Bonds then Outstanding, the Trustee, after being indemnified to its satisfaction, shall take such actions as it may deem necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the Corporation to comply with its continuing obligations under the Indenture. (Section 5.08) Certificated Bonds. When Bonds are no longer held by a Bond Depository or Substitute Depository, upon the conditions specified in the Indenture, the Corporation shall direct that Certificated Bonds be issued in lieu of Global Certificates. In such event, the Global Certificates shall be canceled and disposed of by the Trustee in accordance with its customary procedures. The Trustee shall notify the Paying Agent, the Authenticating Agent and the Corporation of the cancellation and disposition of such Global Certificates specifying such Global Certificates by number, and the Corporation shall thereupon execute and the Authenticating Agent shall authenticate and deliver Certificated Bonds. Upon the issuance of Certificated Bonds, the Trustee and the Authenticating Agent may require payment by the Bondholder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation to the issuance of such Certificated Bonds. The execution by the Corporation of any Certificated Bonds shall constitute full and due authorization of such Certificated Bonds. Certificated Bonds shall be entitled to the same benefits under the Indenture as Global Certificates. (Section 2.11) Books. The Corporation shall cause books for the registration and registration of transfer of the Bonds as provided in the Indenture to be kept by the Registrar. The Registrar shall maintain and keep, at the Principal Office of the Registrar, books for the registration and registration of transfer of Bonds, which at all reasonable times shall be open for inspection by the Corporation, the Trustee and the Paying Agent. Upon presentation of any Bond entitled to registration or registration of transfer at the Principal Office of the Registrar, the Registrar shall register or register the transfer of the Bond in the registration books, under such reasonable regulations, as the Registrar may prescribe. The Registrar shall make all necessary provisions to permit the exchange or registration and transfer of Bonds at the Principal Office of the Registrar. (Section 2.05) C-13

204 Transfer and Exchange. The Bonds shall be transferred and exchanged as provided in the Indenture, provided that the Trustee and Registrar shall not register the transfer or exchange of any Bonds or any portion thereof subject to redemption (i) after the Trustee has received written notice from the Corporation of its intent to redeem such Bond or (ii) after a notice of the redemption of such Bond or portion thereof has been mailed pursuant to the Indenture, unless the transferee of such Bond or portion thereof delivers to the Registrar a written acknowledgement of such call for redemption and agrees in writing to be bound by such call for redemption. (Section 2.06) Tax, Governmental Charge. The Registrar shall require the payment by any Owner requesting exchange or transfer of any Bond of a sum sufficient to cover any tax or other governmental charge required to be paid with respect to such exchange or transfer. (Section 2.08) Nonpresentment of Bonds. In the event any Bond is not presented for payment when principal of such Bond becomes due, either at maturity or at the date fixed for redemption of the Bond, or otherwise, or if any interest check is not cashed, if sufficient funds to pay such Bond or interest has been made available by the Corporation to the Trustee or the Paying Agent for the benefit of the Owner of the Bond, all liability of the Corporation to the Owner of the Bond for the payment of such Bond, or interest, as the case may be, will forthwith cease, terminate and be completely discharged, upon which event it will be the duty of the Trustee to segregate such funds and to hold such segregated funds in trust, uninvested and without liability for interest on such funds, for the benefit of the Owner of such Bond or interest, as the case may be, who will thereafter be restricted exclusively to such funds for any claim of whatever nature on his part under the Indenture or on, or with respect to, such Bond or interest, as the case may be, provided that any money deposited with the Trustee for the payment of the principal of, and Make-Whole Redemption Price, if any, on, or interest on, any Bond and remaining unclaimed for two (2) years (or such shorter period of time as is then specified by the law governing unclaimed or abandoned property) after such principal, Make-Whole Redemption Price, if any, or interest has become due and payable shall be paid pursuant to the law governing unclaimed or abandoned property. (Section 2.15) Creation of Funds and Accounts; Deposit of and Use of Moneys. The Funds and separate Accounts within the Funds created with respect to the Bonds under the Indenture shall be held and administered by the Trustee in accordance with the terms of the Indenture and as described below concerning certain Funds: Cost of Issuance Fund. A Cost of Issuance Fund will be established. There will deposited in the Cost of Issuance Fund on the Closing Date a portion of the net proceeds from the sale of the Bonds representing the costs of issuance of the Bonds. The Trustee shall disburse moneys in the Cost of Issuance Fund upon receipt of a written order signed by an authorized officer of the Corporation. Any moneys in the Cost of Issuance Fund that are not disbursed within 90 days following the delivery date of the Bonds shall be transferred to the Debt Service Fund or to the Corporation in accordance with the instructions provided by the Corporation to the Trustee. (Section 4.03) C-14

205 Debt Service Fund. A Debt Service Fund will be established comprised of a Principal Account and an Interest Account. There will be deposited in the Debt Service Fund by the Trustee Payments allocated to principal of and Make-Whole Redemption Price, if any, and interest on the Bonds. Except as otherwise provided in the Indenture, moneys in the Debt Service Fund shall be used solely for the payment of the principal of and Make-Whole Redemption Price, if any, and interest on the Bonds as the same become due and payable. The balance of any moneys remaining in the Interest Account and the Principal Account after payment of the foregoing amounts will be remitted to the Corporation. (Sections 4.04 and 4.05) Redemption Fund. A Redemption Fund will be established. Moneys in the Redemption Fund shall be used solely for the payment of principal of, and accrued interest and Make-Whole Redemption Price, if any, on the Bonds upon the redemption thereof. (Sections 4.07 and 4.08) Payment of Interest. On each Interest Payment Date, the Trustee shall transfer to the Paying Agent and the Paying Agent shall pay the interest due on the Bonds on such date from moneys transferred to it by the Trustee from amounts on deposit in the Interest Account of the Debt Service Fund. (Section 4.06) Payment of Principal. On each date on which the principal of any of the Bonds becomes due and payable, at maturity, upon redemption or otherwise, the Trustee shall transfer to the Paying Agent and the Paying Agent shall pay such principal from moneys transferred to it from the Trustee from amounts on deposit, as applicable, in the Principal Account of the Debt Service Fund. (Sections 4.06) Investments. Moneys in any Fund or Account created under the Indenture shall, at the specific written direction of the Corporation, be invested and reinvested by the Trustee in Permitted Investments and such investments applied pursuant to and in accordance with the Indenture. (Section 4.09) Events of Default. Each of the following events shall constitute an Event of Default under the Indenture: (a) A failure to pay the principal, or purchase price of, or Make-Whole Redemption Price, if any, on any Bond when the same becomes due and payable, at maturity or redemption or otherwise; (b) A failure to pay any installment of interest on any Bond when the same becomes due and payable; (c) A failure by the Corporation to observe or perform any covenant, condition, agreement or provision, other than as specified in clauses (a) or (b) above, contained in the Bonds or in the Indenture which is to be observed or performed by the Corporation, which failure continues for a period of sixty (60) days after written notice, C-15

206 specifying the failure and requesting that it be remedied, has been given to the Corporation by the Trustee, unless the Trustee agrees in writing to an extension of such period prior to its expiration, provided however, that the Trustee will be deemed to have agreed to such extension if corrective action is initiated by the Corporation within such period and is being diligently pursued; and (d) if the Corporation shall: (i) voluntarily be adjudicated as bankrupt or insolvent, (ii) seek or consent to the appointment of a receiver or trustee for itself or for all or any part of its property, (iii) file a petition seeking relief under the bankruptcy or similar laws of the United States, or any state or any other competent jurisdiction, (iv) make a general assignment for the benefit of creditors, (v) admit in writing its inability to pay its debts as they mature, (vi) be involuntarily declared bankrupt if a court of competent jurisdiction shall enter an order, judgment or decree appointing, without the consent of the Corporation, a receiver or trustee for it for all or any part of the Corporation s property or approving a petition filed against the Corporation seeking relief under the bankruptcy or other similar laws of the United States, or any state or other competent jurisdiction, and such order, judgment or decree shall be consented to or remain in force undischarged or unstayed for a period of 120 days after the date on which such petition was filed, or (vii) have a creditor file a petition in bankruptcy or for the appointment of a receiver or for similar relief against the Corporation or for reorganization of the Corporation pursuant to any Federal, or state bankruptcy similar laws, and if such petition shall be consented to by the Corporation or not be discharged or dismissed within 120 days after the date on which such petition was filed; and (e) an Event of Default under and as defined in the Master Trust Indenture shall occur and be continuing (after taking into account an applicable notice and cure period thereunder). The provisions of paragraph (c) above are subject to the following limitations: If by reason of acts of God, strikes, lockouts or other industrial disturbances, acts of public enemies, orders of any kind of the government of the United States or of the State of Maryland, or any department, agency, political subdivision or official thereof, or any civil or military authority, insurrections, riots, infection, epidemics, landslides, lightning, earthquakes, fires, hurricanes, storms, floods, washouts, droughts, arrests, restraint of government and people, civil disturbances, explosions, breakage or accident to machinery, partial or entire failure of utilities, or any cause or event not reasonably within the control of the Corporation, the Corporation is unable in whole or in part to carry out its agreements referred to in paragraph (c) above, the Corporation shall not be deemed in default during the continuance of such inability. The Corporation shall use its best efforts to remedy with all reasonable dispatch the cause preventing it from carrying out its agreements, provided, that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Corporation, and the Corporation shall not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of the opposing party when such C-16

207 course is, in the judgment of the Corporation, unfavorable to the Corporation. (Section 7.01) Acceleration of Maturity. Upon the occurrence of an Event of Default, the Trustee may, and will, at the direction of the owners of Bonds representing 25% of the aggregate principal amount of Outstanding Bonds of the affected series, by written notice to the Corporation, declare the principal of the Bonds to be immediately due and payable, whereupon that portion of the principal of the Bonds thereby coming due and the interest thereon accrued to the date of payment will, without further action, become and be immediately due and payable, anything in the Indenture or in the Bonds to the contrary notwithstanding. At any time after the principal of the Bonds shall have been so declared to be due and payable, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under the Indenture, the Trustee, by written notice to the Corporation, the Registrar and the Paying Agent, may annul such declaration and its consequences if: (i) moneys shall have accumulated in the Debt Service Fund sufficient to pay all arrears of interest, if any, upon all of the Outstanding Bonds (except the interest accrued on such Bonds since the last Interest Payment Date) and the principal and Make-Whole Redemption Price, if any, of all matured Bonds (except the principal of any Bonds due solely as a result of such declaration); (ii) moneys shall have accumulated and be available sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Trustee; and (iii) every other default known to the Trustee in the observance or performance of any covenant, condition or agreement contained in the Bonds or in the Indenture (other than a default in the payment of the principal of such Bonds then due solely as a result of such declaration) shall have been remedied to the satisfaction of the Trustee. No such annulment shall extend to or affect any subsequent default or impair any right consequent thereon. In the enforcement of any remedy under the Indenture, the Trustee shall be entitled to appoint a receiver, to sue for, enforce payment of and receive any and all amounts then or during any default becoming, and at any time remaining, due on the Bonds or otherwise under any of the provisions of the Indenture or of the Bonds, with interest on overdue payments at the rate or rates of interest specified in such Bonds, together with any and all costs and expenses of collection and of all proceedings under the Indenture and under such Bonds, without prejudice to any other right or remedy of the Trustee or the Bondholders, and to recover and enforce judgment or decree against the Corporation for any portion of such amounts remaining unpaid, with interest, costs and expenses, and to collect in any manner provided by law the moneys adjudged or decreed to be payable. (Section 7.02) C-17

208 Priority of Payments following Default. Any moneys received by the Trustee, by any receiver or by any Bondholder pursuant to any right given or action taken under the provisions of the Indenture upon an Event of Default, after payment of the costs and expenses, liabilities and advances incurred or made by the Trustee, including, but not limited to all outstanding fees and expenses of the Trustee and other fiduciaries as provided in the Indenture, shall be deposited into the Debt Service Fund and all moneys so deposited into the Debt Service Fund during the continuance of an Event of Default (other than moneys held pursuant to the Indenture for the payment of specific Bonds), shall be applied by the Trustee as follows: (a) Unless the principal of all the Bonds shall be due and payable, all such moneys shall be applied: FIRST: to the payment to the persons entitled thereto of the interest then due and unpaid on the Bonds and, if the amount available shall not be sufficient to pay in full all such interest, then to the payment of such interest, ratably, to the persons entitled thereto, without any discrimination or preference; SECOND: to the payment to the persons entitled thereto of the unpaid principal and Make-Whole Redemption Price, if any, due on any of the Outstanding Bonds in the order of the due dates for such payments, with interest upon such principal and Make-Whole Redemption Price, if any, from the respective dates upon which such amounts shall have become due and payable (whether upon proceedings for redemption or otherwise), and, if the amount available shall not be sufficient to pay in full the principal and Make-Whole Redemption Price, if any, due and payable on any particular date, together with such interest, then to the payment first, of such interest, ratably, according to the amount of interest due on such date, and then, to the payment of such principal and Make-Whole Redemption Price, if any, ratably, according to the amount due on such date, to the persons entitled thereto, without any discrimination or preference; and THIRD: to the payment of the interest on and the principal of the Bonds as the same become due and payable (whether upon proceedings for redemption or otherwise); and direct. FOURTH: to the Corporation or as a court of competent jurisdiction shall (b) If the principal of all the Bonds shall have become due and payable, either by their terms or by a declaration of acceleration, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Outstanding Bonds, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or preference. C-18

209 (c) Whenever moneys are to be applied by the Trustee pursuant to the provisions of the Indenture such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its sole discretion shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. The setting aside of such moneys in trust for the benefit of all Holders of the Outstanding Bonds shall constitute proper application by the Trustee, and the Trustee shall incur no liability whatsoever to the Corporation, to any Bondholder or to any other person for any delay in applying any such moneys, so long as the Trustee acts with reasonable diligence, having due regard to the circumstances, and ultimately applies the same in accordance with such provisions of the Indenture as may be applicable at the time of application by the Trustee. Whenever the Trustee shall exercise such discretion in applying such moneys, it shall fix the date (which shall be an Interest Payment Date unless the Trustee shall deem another date more suitable) upon which such application is to be made, and upon such date interest on the amounts of principal of the Bonds paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date. The Trustee shall not be required to make payment to the Holder of any Bond unless such Bond shall be presented to the Trustee for appropriate endorsement. (Section 7.03) Actual Notice of Events of Default. The Trustee will provide written notice of the occurrence and continuing of any Event of Default to the Corporation and all Owners of Bonds within thirty (30) days after obtaining knowledge of such Event of Default. (Section 7.10) Restoration to Former Position. In case any proceedings taken by the Trustee or the Bondholders on account of default in respect of the Bonds have been discontinued or abandoned for any reason, or shall have been determined adversely to the Corporation or the Bondholders, then the Corporation, the Trustee and the Bondholders will be restored to their respective former positions and rights under the Indenture, and all rights, remedies, powers and duties of the Trustee will continue as though no such proceeding had been taken. (Section 7.04) Bondholders Right to Direct Proceedings. Anything in the Indenture to the contrary notwithstanding, except with regards to payments under the Indenture following Default and as described in the sections entitled Trustee Entitled to Indemnity, Acceleration of Maturity, Priority of Payments following Default and Restrictions Upon Action by Individual Bondholders, the Bondholders of a majority in aggregate principal amount of the Bonds then Outstanding under the Indenture have the right, by an instrument in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings available to the Trustee under the Indenture, provided that (i) such direction will not be otherwise than in accordance with law and the provisions of the Indenture, and (ii) the Trustee will have the right to decline to follow such direction. (Section 7.05) Limitation on Bondholders Right to Institute Proceedings. No Bondholder has any right to institute any suit, action or proceeding in equity or at law for the execution of any trust under the Indenture or for any other remedy under the Indenture unless (i) such Holder C-19

210 previously has given to the Trustee written notice of the Event of Default on account of which such suit, action or proceeding is to be instituted, (ii) the Holders of not less than twenty-five percent (25%) of the aggregate principal amount of the Outstanding Bonds have made written request to the Trustee after the right to exercise such powers or right of action, as the case may be, shall have accrued, and have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers granted by the Indenture or to institute such action, suit or proceeding in its or their name, and (iii) there has been offered to the Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee has refused or neglected to comply with such request within a reasonable time. Such notification, request and offer of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers and trusts of the Indenture or to any other remedy under the Indenture; provided, however, that the Holders of not less than twenty-five percent (25%) of the aggregate principal amount of the Outstanding Bonds may institute any such suit, action or proceeding in their own names for the benefit of all Bondholders. It is understood and intended that, except as otherwise provided above, (i) no one or more Bondholders has any right in any manner whatsoever to affect, disturb or prejudice the security of the Indenture or to enforce any right thereunder except in the manner provided in the Indenture, (ii) all proceedings at law or in equity shall be maintained in the manner therein provided and for the benefit of all Holders of the Outstanding Bonds, and (iii) that any individual right of action or other right given by law to one or more of such Holders is restricted by the Indenture to the rights and remedies therein; provided, however, that nothing in the foregoing shall affect or impair the right of any Holder of any Bond to receive payment of the principal, Make-Whole Redemption Price, if any and interest on such Bond at the time and place, from the source and in the manner expressed in the Indenture and in the Bonds or to institute suit for the enforcement of any such payment on and after the date such payment is due, without the consent of such Bondholder. (Section 7.06) No Remedy Exclusive. No remedy conferred upon or reserved to the Trustee or to the Bondholders under the Indenture is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Indenture or now or in the future existing at law or in equity or by statute. (Section 7.08) No Waiver of Remedies. No delay or omission of the Trustee or of any Bondholder to exercise any right or power accruing upon any default will impair any such right or power or be construed to be a waiver of any such default, or an acquiescence in the default. Every power and remedy given under the Indenture to the Trustee and to the Bondholders may be exercised from time to time and as often as may be deemed expedient. Subject to the provisions of "Acceleration of Maturity" above, the Trustee shall, upon the written request of the Owners of not less than twenty percent (20%) of the aggregate principal amount of the Outstanding Bonds, waive any default that shall have been remedied before the entry of final judgment or decree in any suit, action or proceeding instituted by it under the C-20

211 provisions of the Indenture or before the completion of the enforcement of any other remedy under the Indenture; but no such waiver shall extend to or affect any other existing or any subsequent default or defaults or impair any rights or remedies consequent thereon. (Section 7.09) Supplemental Indenture Without Bondholder Consent. The Corporation and the Trustee may, from time to time and at any time, without the consent of or notice to the Bondholders enter into Supplemental Indentures as follows: (i) To cure any formal defect, omission, inconsistency or ambiguity in, or to clarify any provision contained in, the Indenture. (ii) To grant or confer or impose upon the Trustee, the Registrar or the Paying Agent, for the benefit of the Bondholders, any additional rights, remedies, powers, authority, security, liabilities or duties which may lawfully be granted, conferred or imposed and which are not contrary to or inconsistent with the Indenture as previously in effect, provided that no such additional liabilities or duties shall be imposed upon the Trustee, the Registrar or the Paying Agent without their respective consents. (iii) To make correlative amendments and modifications to the Indenture regarding exchangeability of Bonds of different denominations and similar amendments and modifications of a technical nature. (iv) To make necessary or advisable amendments or additions which do not affect adversely the interests of Holders of Outstanding Bonds. (v) To comply with the requirements of the Trust Indenture Act of 1939, as from time to time amended. (vi) To modify, alter, amend or supplement the Indenture in any other respect which is not materially adverse to the Bondholders and which does not involve certain changes described in the immediately following section and which, in judgment of the Trustee, the Paying Agent, the Registrar or the Authenticating Agent, as applicable, is not to the prejudice of such entity. (vii) To provide for the amendment of the provisions concerning registration of the Bonds under or outside a book entry system. (viii) To provide additional security to the Bondholders, including the provision of any bond insurance policy, guaranty, letter of credit or any type of credit facility. (ix) To obtain or maintain the rating of the Bonds by Moody s, S&P or Fitch. (Section 8.01) C-21

212 Supplemental Indenture with Bondholder Consent. Bondholders of not less than 51% in aggregate principal amount of the affected Bonds then Outstanding have the right from time to time to consent to and approve the execution and delivery by the Corporation and the Trustee of any Supplemental Indenture consistent with the provisions of the Indenture and which is deemed necessary or desirable by the Corporation for the purposes of modifying, altering, amending, supplementing or rescinding, in any particular, any of the terms or provisions contained in the Indenture, provided, however, that, unless approved in writing by the Bondholders of all the Bonds then Outstanding, nothing contained in the Indenture shall permit, or be construed as permitting, (i) a change in the times, amounts or currency of payment of the principal amount or Make-Whole Redemption Price, if any, or interest on any Outstanding Bond, a change in the terms of the principal amount or Make-Whole Redemption Price, if any, of any Outstanding Bond or the rate of interest on any Outstanding Bond or a reduction in the principal amount, or Make-Whole Redemption Price, if any, of any Outstanding Bond, or (ii) the creation of a claim, lien or pledge ranking prior to the claim, lien or pledge created by the Indenture, or (iii) a preference or priority of any Bond or Bonds over any other Bond or Bonds, except as provided in the Indenture, or (iv) a reduction in the aggregate principal amount of Bonds, the consent of the Bondholders of which is required for any such Supplemental Indenture under the Indenture. (Section 8.02(a)) Notice. If at any time the Corporation requests the Trustee to enter into any Supplemental Indenture for any of the purposes described in the preceding paragraph, the Trustee shall cause notice of the proposed Supplemental Indenture to be given by mail to all Owners of Outstanding Bonds not less than 15 days in advance of the proposed effective date of such amendment. Such notice shall be prepared by the Corporation and will briefly set forth the nature of the proposed Supplemental Indenture and state that a copy of it is on file at the office of the Trustee for inspection by all Bondholders. Within two (2) years after the date of the first publication of such notice, the Corporation and the Trustee may enter into such Supplemental Indenture in substantially, the form described in such notice, but only if there shall have first been delivered to the Trustee (i) the required consents, in writing, of Bondholders and (ii) an opinion of Counsel stating that such Supplemental Indenture is authorized or permitted by the Indenture, complies with its respective terms and, upon its execution and delivery, will be valid and binding upon the Corporation in accordance with its terms. (Sections 8.01(b) and 8.01(c)) No Right to Object. If Bondholders of not less than the percentage of Bonds required by the Indenture consent to and approve the execution and delivery of the Supplemental Indenture as provided in the Indenture, no Bondholder will have any right to object to the execution and delivery of such Supplemental Indenture, or to object to any of the terms and provisions contained in it or to its operation, or in any manner to question the propriety of its execution and delivery, or to enjoin or restrain the Corporation or the Trustee from executing and delivering the same or from taking any action pursuant to its provisions. (Section 8.01(d)) Discharge of Indenture. If the Corporation pays or causes to be paid to the Owner of any Bond secured by the Indenture, the principal of, as of the redemption date, Make-Whole Redemption Price, if any, and interest due and payable, and thereafter to become due and payable, on that Bond or Series of Bonds, or any portion of that Bond (whether such due date is C-22

213 by reason of maturity or upon redemption as provided in the Indenture), then that Bond or portion of that Bond will cease to be entitled to the lien, benefit and security of the Indenture. If the Corporation pays or causes to be paid to the Owners of all the Bonds secured by the Indenture, the principal of, Make-Whole Redemption Price, if any, and interest due and payable on the Bonds and thereafter to become due and payable on the Bonds, and shall pay or cause to be paid, or make other satisfactory arrangements with respect to, all other sums owing under the Indenture by the Corporation, including all necessary and proper fees, compensation and expenses of the Trustee, the Registrar, the Paying Agent and any co Paying Agent, then, and in that case, the right, title and interest of the Trustee in and to the Trust Estate will terminate. In, that event, the Trustee will assign, transfer and turn over the Trust Estate, including, without limitation, any surplus in the Debt Service Fund and any balance remaining in any other Fund created under the Indenture to the Corporation except as otherwise provided in the Indenture. (Section 9.01) Defeasance. Any Bond will be deemed to be paid within the meaning of the preceding paragraph and for all purposes of the Indenture when (i) payment of the principal, as of the redemption date, Make-Whole Redemption Price, if any, plus interest on, the Bond to its due date (whether such due date is by reason of maturity or upon redemption as provided in the Indenture) either (A) will have been made or caused to be made in accordance with the terms of the Bond or (B) will have been provided for by irrevocably depositing in trust for the benefit of the Bondholders and irrevocably setting aside exclusively for such payment, Defeasance Securities and (ii) all necessary and proper fees, compensation and expenses of the Trustee, the Authenticating Agent, the Registrar and the Paying Agent pertaining to the Bonds will have been paid or the payment of such amount will have been provided for to the satisfaction of the Trustee. At such times as a Bond is deemed to be paid under the Indenture, as provided above, such Bond will no longer be secured by or entitled to the lien or benefit of the Indenture. Notwithstanding the foregoing, no deposit under clause (i)(b) above will be deemed a payment of such Bonds until (A) proper notice of redemption of such Bonds has been previously given in accordance with the Indenture and (B) in the event such Bonds are not to be redeemed within the next succeeding ninety (90) days, the Corporation has given the Trustee irrevocable instructions to notify, as soon as practicable, the Owners of the Bonds in accordance with the Indenture that the deposit required by clause (i)(b) above has been made with the Trustee and that the Bonds are deemed to have been paid in accordance with the Indenture and further stating the maturity or redemption date upon which moneys are to be available for the payment of the principal of, or Make-Whole Redemption Price, if any, on such Bonds, plus interest on such Bonds to their redemption date or the maturity of such Bonds. The Trustee shall be entitled to receive, at the expense of the Corporation, and may conclusively rely upon a verification report from a firm of nationally recognized, independent certified accountants and an opinion of Counsel stating that all conditions set forth in the Indenture have been satisfied. (Section 9.02) C-23

214 Acceptance of Trusts. The Trustee accepts and agrees to execute the trusts created under the Indenture, but only upon the terns set forth therein, to all of which the Corporation agrees and the respective Bondholders agree by their acceptance of delivery of any of the Bonds. The obligations and duties of the Trustee shall be determined solely by reference to the Indenture and, except as expressly set forth in the Indenture, no duties, express or implied shall be imposed on the Trustee. The Trustee will be permitted in the ordinary course of its business to engage in banking business with the Corporation as if it were not Trustee under the Indenture, provided, however, that upon the occurrence of an Event of Default, the Trustee shall conduct a review for potential conflicts of interest involving the Trustee and shall report the same to the Corporation. The Trustee may execute any of the trusts or powers contained in the Indenture and perform the duties required by it under the Indenture by or through agents, receivers or employees and shall be entitled to rely on the advice of independent counsel concerning all matters relating to the trusts and its duties under the Indenture. The Trustee shall not be responsible for any willful misconduct or negligence of any agent or receiver selected and supervised by it with due care. The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request or direction of any of the Bondholders pursuant to the Indenture, unless such Bondholders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. (Sections 6.01, 6.03 and 6.04) Removal of Trustee. The Trustee may be removed at any time by the Corporation, with or without cause, by providing notice, in writing, of an appointment of a successor to the Trustee to be removed, the Paying Agent, the Authenticating Agent and the Registrar. Such removal shall take effect upon the appointment of a successor Trustee and the acceptance of such appointment by such successor. Upon the termination of the Indenture, and upon the removal or resignation of the Trustee, any reasonable costs associated with any accounting or similar process requested of the Trustee which is not duplicative in nature or in excess of the accounting or similar process ordinarily required under the Indenture and previously provided by the Trustee, shall be a proper charge against the Trust Estate pursuant to the Indenture. (Section 6.09) Immunity of Directors, Officers, Employees and Agents of Corporation. No recourse shall be had for the payment of the principal of or Make-Whole Redemption Price or interest on the Bonds or under the Indenture or any claim based thereon or upon any obligation, covenant or agreement in the Indenture or in the Bonds against any past, present or future director, officer, employee or agent of the Corporation, or any successor thereto, as such under any rule of law or equity, statute or constitution or by the enforcement of any assessment or penalty or otherwise, and all such liability of any such directors, officers, employees or agents as such is hereby expressly waived and released as a condition of and consideration for the execution of the Indenture and the delivery of the Bonds. C-24

215 SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE The following is a summary of certain provisions of the Master Indenture. This summary should not be regarded as a full statement of the Master Indenture or of the portions summarized. Reference is made to the Master Indenture in its entirety for the complete statements of the provisions thereof, a copy of which is on file at the principal corporate trust office of the Master Trustee. Definitions Accelerable Instrument means any Obligation or any mortgage, indenture, loan agreement or other instrument under which there has been issued or incurred, or by which there is secured, any Indebtedness evidenced by an Obligation, which Obligation or instrument provides that, upon the occurrence of an event of default under such Obligation or instrument, the holder thereof (or a credit enhancer exercising the rights of such holder) may declare such Obligation or Indebtedness due and payable prior to the date on which it would otherwise become due and payable. Adjusted Expenses means, for any period, the aggregate of all expenses calculated under generally accepted accounting principles, including without limitation any taxes, incurred by the Person or group of Persons involved during such period, minus (a) interest on Long-Term Indebtedness, (b) Obligation Payments to the extent that such Obligation Payments are treated as an expense during such period of time in accordance with generally accepted accounting principles and are included in the definition of Debt Service Requirements, (c) depreciation and amortization, (d) any unrealized loss resulting from changes in the value of investment securities, (e) extraordinary expenses (including without limitation losses on the sale of assets other than in the ordinary course of business and losses on the extinguishment of debt), (f) any expenses resulting from a forgiveness of or the establishment of reserves against Indebtedness of an Affiliate subject to the provisions of the Master Indenture which does not constitute an extraordinary expense and, if such calculation is being made with respect to the System, excluding any such expenses attributable to transactions between any System Affiliate and any other System Affiliate, (g) losses resulting from any reappraisal of a non-recurring nature, revaluation or write-down of assets, and (h) any items which would be considered by nationally recognized independent certified public accountants to be non-cash items of a non-recurring nature of the Person or group of Persons involved in accordance with generally accepted accounting principles. Affiliate means a corporation, limited liability company, partnership, joint venture, association, business trust or similar entity (a) which is controlled directly or indirectly by a Member; or (b) a majority of the members of the Directing Body of which are members of the Directing Body of a Member. For the purposes of this definition, control means with respect to: (a) a corporation having stock, the ownership, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a C-25

216 majority of the directors of such corporation; (b) a not for profit corporation not having stock, having the power to elect or appoint, directly or indirectly, a majority of the members of the Directing Body of such corporation; or (c) any other entity, the power to direct the management of such entity through the ownership of at least a majority of its voting securities or the right to designate or elect at least a majority of the members of its Directing Body, by contract or otherwise. For the purposes of this definition, Directing Body means with respect to: (a) a corporation having stock, such corporation s board of directors and the owners, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporation s directors (both of which groups shall be considered a Directing Body); (b) a not for profit corporation not having stock, such corporation s members if the members have complete discretion to elect the corporation s directors, or the corporation s directors if the corporation s members do not have such discretion; and (c) any other entity, its governing board or body. For the purposes of this definition, all references to directors and members shall be deemed to include all entities performing the function of directors or members however denominated. Balloon Indebtedness means any Long-Term Indebtedness of a System Affiliate other than a Demand Obligation, more than 25% of the principal amount of which is payable in the same period of twelve consecutive calendar months (after taking into account all scheduled mandatory redemptions or prepayments payable over the life of the Indebtedness). Board Resolution means a resolution certified by the Secretary or an Assistant Secretary of a Person to have been duly adopted by the Governing Body of such Person and to be in full force and effect on the date of such certification, and delivered to the Master Trustee. Book Value when used with respect to Property, means the value of such Property, net of accumulated depreciation and amortization, as reflected in the most recent consolidated audited financial statements of the System (or, if the financial statements of the owner of such Property are not included in the most recent consolidated audited financial statements of the System, as reflected in the most recent audited financial statements of such owner) which have been prepared in accordance with generally accepted accounting principles, provided that such aggregate shall be calculated in such a manner that no portion of the value of any Property of any System Affiliate is included more than once. Business Day means a day which is not (a) a Saturday, Sunday or legal holiday on which banking institutions in the State of New York or the state in which the principal office of the Obligated Group Agent or a Related Bond Trustee is located are authorized or required by law to close or (b) a day on which the New York Stock Exchange is closed. Capitalized Interest means amounts deposited in escrow to pay interest on Long- Term Indebtedness or Related Bonds and interest earned on amounts deposited in escrow to the extent such interest earned is available to be applied to pay interest on Long-Term Indebtedness or Related Bonds. C-26

217 Capitalized Lease means any lease of real or personal property which, in accordance with generally accepted accounting principles, is required to be capitalized on the balance sheet of the lessee. Capitalized Rentals means, as of the date of determination, the amount at which the aggregate Net Rentals due and to become due under a Capitalized Lease under which a Person is a lessee would be reflected as a liability on a balance sheet of such Person. Code means the Internal Revenue Code of 1986, as amended from time to time. Each reference to a section of the Code herein shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations, relating to such section which are applicable to the Related Bonds or the use of the proceeds thereof. Consultant means a professional consulting, financial advisory, accounting, investment banking or commercial banking firm selected by the Obligated Group Agent and not unacceptable to the Master Trustee, having the skill and experience necessary to render the particular report required and having a favorable and nationally recognized reputation for such skill and experience, which firm does not control any Member of the Obligated Group or any Affiliate thereof and is not controlled by or under common control with any Member of the Obligated Group or an Affiliate thereof. Contract Participant means any Person (other than a System Affiliate) designated by the Obligated Group Agent with whom a Member or any other System Affiliate has entered into a contract or other agreement under which such Person is obligated to make all or any portion of the payment required with respect to any Obligation issued under the Master Indenture. Controlling Member means the Member designated by the Obligated Group Agent to establish and maintain control over a System Affiliate. Corporation means MedStar Health, Inc. f/k/a Medlantic/Helix Parent, Inc., a Maryland nonstock corporation, and its successors and assigns and any surviving, resulting or transferee corporation. Counsel means an attorney duly admitted to practice law before the highest court of any state or the District of Columbia and, without limitation, may include legal counsel for the Corporation, any other Member or the Master Trustee. Credit Facility means a letter of credit, line of credit, standby bond purchase agreement or other form of liquidity facility, bond insurance policy, guaranty, or an indemnity or surety insurance policy or bond which is issued to secure any Related Bonds or other Indebtedness of a System Affiliate. Current Assets means cash and cash equivalent deposits, marketable securities, accounts receivable, accrued interest receivable and any other assets of a Person ordinarily considered current assets under generally accepted accounting principles. C-27

218 Current Value means the estimated fair market value of Property, which fair market value shall be evidenced by an Officer s Certificate of the Obligated Group Agent delivered to the Master Trustee. Days Cash on Hand means the amount determined by dividing (a) the sum of cash, cash equivalents and marketable securities, including board or management designated assets but excluding (i) funds restricted by the donor in a manner not permitting their use for normal operating expenses of the System and (ii) trustee-held funds including debt service funds, construction funds, debt service reserve funds, malpractice funds, self-insurance or captive insurer funds and pension or retirement funds, by (b) the quotient obtained by dividing the sum of Adjusted Expenses for the most recent Fiscal Year plus interest on Long-Term Indebtedness unless funded with proceeds of such Long-Term Indebtedness by 365. Debt Service Coverage Ratio means the ratio of Income Available for Debt Service of the System to Maximum Annual Debt Service Requirements on all Outstanding Long-Term Indebtedness of all System Affiliates. Debt Service Requirements means, with respect to the period of time for which calculated, (a) the aggregate of the payments required to be made during such period in respect of principal (whether at maturity, as a result of mandatory sinking fund redemption, mandatory prepayment or otherwise) and interest on outstanding Long-Term Indebtedness of each Person or a group of Persons with respect to which calculated; provided that: (i) interest shall be excluded from the determination of the Debt Service Requirements to the extent that Capitalized Interest is available to pay such interest; and (ii) principal of Indebtedness shall be excluded from the determination of Debt Service Requirements to the extent that amounts are on deposit in an irrevocable escrow and such amounts (including, where appropriate, the earnings or other increment to accrue thereon) are required to be applied to pay such principal and such amounts so required to be applied are sufficient to pay such principal and (b) the aggregate amount of Obligation Payments becoming due and payable during such period, provided that with respect to (a) and (b) above, (x) if a Financial Products Agreement has been entered into by any Member with respect to Long-Term Indebtedness, interest on such Long-Term Indebtedness shall be included in the calculation of Debt Service Requirements by including for such period an amount equal to the amount payable on such Long-Term Indebtedness in such period at the rate or rates stated in such Long-Term Indebtedness plus any Financial Products Payments payable in such period minus any Financial Products Receipts receivable in such period; and (y) if a Financial Products Agreement represented by or evidenced by an Obligation has been entered into by any Member without respect to Long-Term Indebtedness, there shall be included in the calculation of Debt Service Requirements Financial Products Payments payable during such period minus any Financial Products Receipts receivable during such period. For purposes of calculating Debt Service Requirements on certain forms of Long-Term Indebtedness, the following shall apply: (1) Balloon Indebtedness. The Debt Service Requirements on Balloon Indebtedness for each Fiscal Year, including any such year in which 25% or more of the principal amount of C-28

219 the Balloon Indebtedness is due (each such year being herein referred to as a balloon payment year and the principal amount payable in any such balloon payment year being herein referred to as a balloon payment ), shall be an assumed level principal or level debt service payment over thirty years at the actual rate of interest on the Balloon Indebtedness if such rate is fixed or, if such Balloon Indebtedness constitutes Variable Rate Indebtedness, at a rate of interest determined pursuant to paragraph (4) below. (2) Demand Obligations. The Debt Service Requirements on Demand Obligations shall be determined in the manner described in paragraph (1) above. (3) Interim Indebtedness. The Debt Service Requirements on Interim Indebtedness shall be determined in the manner described in paragraph (1) above. (4) Variable Rate Indebtedness. For purposes of determining the Debt Service Requirements on any Variable Rate Indebtedness, the interest rate thereon shall be deemed to be equal to (1) in the case of any period during which such Indebtedness shall have been Outstanding, the weighted average interest rate per annum borne by such Indebtedness during such period and (2) in any other case, the higher of (a) the weighted average interest rate per annum borne by such Indebtedness during the 12-month period ending on the date of calculation (or, in the case of any Variable Rate Indebtedness to be issued or issued during the immediate preceding 12-month period, the weighted average interest rate per annum borne by other outstanding indebtedness having comparable terms and issued by, or secured by agreements issued by, entities of comparable creditworthiness as the obligors with respect to such Variable Rate Indebtedness during the immediately preceding 12-month period) and (b) the interest rate per annum borne by such Indebtedness on the date of calculation. Demand Obligation means any Indebtedness of a System Affiliate which: (a) has a stated maturity later than 365 days after the date of incurrence, (b) is incurred as Long-Term Indebtedness, and (c) is subject to repurchase or repayment as to principal on specified dates, upon the occurrence of specified events or upon demand by the holder thereof (including any Indebtedness which is subject to such repurchase or repayment within 365 days from the date of incurrence). Escrow Obligations means, (i) with respect to any Obligation which secures a series of Related Bonds, the obligations permitted to be used to defease such series of Related Bonds under the Related Bond Indenture, or (ii) with respect to any other Obligation, those securities identified in the Supplemental Master Indenture pursuant to which such Obligations were issued. Facilities means all land, leasehold interests and buildings and all fixtures and equipment (as defined in the Uniform Commercial Code or equivalent statute in effect in the state where such fixtures or equipment are located) of a Person. Financial Products Agreement means an interest rate swap, cap, collar, option, floor, forward or other hedging agreement, arrangement or security, however denominated, identified C-29

220 to the Master Trustee in an Officer s Certificate of the Obligated Group Agent as having been entered into by a System Affiliate or Contract Participant with a Qualified Provider. Financial Products Payments means payments periodically required to be paid to a counterparty by a System Affiliate or Contract Participant pursuant to a Financial Products Agreement. Financial Products Receipts means amounts periodically required to be paid to a System Affiliate or a Contract Participant by a counterparty pursuant to a Financial Products Agreement. Fiscal Year means any twelve-month period beginning on July 1 of any calendar year and ending on June 30 of the next calendar year or such other consecutive twelve-month period selected by the Obligated Group Agent as the fiscal year for the System and designated from time to time in writing by the Obligated Group Agent to the Master Trustee; for purposes of making historical calculations or determinations set forth in the Master Indenture on a Fiscal Year basis, or for purposes of combinations or consolidation of accounting information, with respect to those entities whose actual fiscal year is different from that designated above, the actual fiscal year of such entities which ended within the Fiscal Year of the Obligated Group shall be used; provided, however, that for purposes of making any calculations or determinations as set forth in the Master Indenture, the Obligated Group Agent may designate in writing to the Master Trustee as the Fiscal Year any twelve-month period. Whenever the Master Indenture refers to a Fiscal Year of a specific entity, such reference shall be to the actual fiscal year adopted by such entity. Fitch means Fitch IBCA, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns. Governing Body means the board of directors, board of trustees or similar group in which the right to exercise the powers of corporate directors or trustees is vested or an executive committee of such board or any duly authorized committee of that board to which the relevant powers of that board have been lawfully delegated. Guaranty means all obligations of a Person guaranteeing, or in effect guaranteeing, any Indebtedness, any obligation under a Financial Products Agreement or other obligation of any Primary Obligor in any manner, whether directly or indirectly including but not limited to obligations incurred through an agreement, contingent or otherwise, by such Person: (1) to purchase such Indebtedness or obligation or any Property constituting security therefor; (2) to advance or supply funds: (i) for the purchase or payment of such Indebtedness or obligation, or (ii) to maintain working capital or other balance sheet condition; (3) to purchase securities or other Property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the Primary Obligor to make payment of the Indebtedness or obligation; (4) otherwise to assure the owner of such Indebtedness or obligation against loss in respect thereof; or (5) to make Obligation Payments pursuant to a Financial Products Agreement. C-30

221 Historical Debt Service Coverage Ratio means, for any Fiscal Year, the ratio determined by dividing (i) Income Available for Debt Service for such Fiscal Year by (ii) the Debt Service Requirements on Long-Term Indebtedness or with respect to Financial Products Agreements for such Fiscal Year; provided that, when such calculation is being made with respect to the System, Income Available for Debt Service and Debt Service Requirements shall be determined only with respect to those Persons who are System Affiliates at the close of such Fiscal Year; and provided further that, in making such calculation with respect to any Contract Participant, for purposes of such calculation, such Contract Participant s Income Available for Debt Service and Debt Service Requirements on Long-Term Indebtedness (or with respect to Financial Products Agreements) shall include only the amounts paid by such Contract Participant pursuant to an agreement between it and a System Affiliate respecting an Obligation issued under or pursuant to the Master Indenture and the amounts required to be paid by such Contract Participant pursuant to such agreement in respect of such Obligation, respectively, and no other income available for debt service or debt service requirements of the Contract Participant shall be taken into consideration in the calculation of Historical Debt Service Coverage Ratio for the purposes hereof. For purposes of calculating the Historical Debt Service Coverage Ratio, a Guaranty which would otherwise be considered Long-Term Indebtedness shall only be included in the calculation if any payments have been made thereon and otherwise, to the extent the aggregate principal amount of all Indebtedness guaranteed exceeds two percent (2%) of System Revenues, the applicable percentage of the guaranteed debt service to be included in Debt Service Requirements shall be calculated as follows: if the beneficiary s debt service coverage ratio is equal to or less than 1.10 to 1, seventy-five percent (75%); if the beneficiary s debt service coverage ratio is greater than 1.10 to 1 but less than 1.50 to 1, fifty percent (50%); if the beneficiary s debt service coverage ratio is greater than 1.50 to 1 but less than or equal to 2.00 to 1, thirty-five (35%); if the beneficiary s debt service coverage ratio is greater than 2.00 to 1 but less than or equal to 2.50 to 1, twenty percent (20%); and, if the beneficiary s debt service coverage ratio is greater than 2.50 to 1, zero percent (0%). This ratio shall only apply in the Master Indenture for purposes of calculating the requirements for the funding of a debt service reserve fund in connection with certain applicable Related Bonds. Income Available for Debt Service means for any period, the excess of Revenues over Adjusted Expenses of the Person or group of Persons involved. Indebtedness means, for any Person, (a) indebtedness incurred or assumed by such Person for borrowed money or for the acquisition, construction or improvement of Property other than goods that are acquired in the ordinary course of business of such Person; (b) Capitalized Rentals or Capitalized Lease obligations of such Person; and (c) all Guaranties by such Person, and shall include Non-Recourse Indebtedness; provided that Indebtedness shall not include Indebtedness of one System Affiliate to another System Affiliate, any Guaranty by any System Affiliate of Indebtedness of any other System Affiliate, the joint and several liability of any System Affiliate on Indebtedness issued by another System Affiliate, any Financial Products Agreement or any obligation to repay moneys deposited by patients or others with a System Affiliate as security for or as prepayment of the cost of patient care or any rights of residents of life care, elderly housing or similar facilities to endowment or similar funds deposited by or on behalf of such residents. C-31

222 Interim Indebtedness means any Indebtedness of a System Affiliate which (a) is incurred as Long-Term Indebtedness and (b) is anticipated to be paid or refunded with the proceeds of Long-Term Indebtedness; provided that the term Interim Indebtedness shall not be deemed to include any Non-Recourse Indebtedness or any Indebtedness incurred as a Demand Obligation by a System Affiliate. Lien means any mortgage, lease or pledge of, security interest in or lien, charge, restriction or encumbrance on any Property of the Person involved which secures Indebtedness (other than from one System Affiliate or Member to another System Affiliate or Member). Long-Term Indebtedness means, with respect to any Person, (a) all Indebtedness of such Person for money borrowed or credit extended which is not Short-Term; (b) all Indebtedness of such Person incurred or assumed in connection with the acquisition or construction of Property which is not Short-Term; (c) the Person s Guaranties of Indebtedness which are not Short-Term; and (d) Capitalized Rentals under Capitalized Leases entered into by the Person; provided, however, that (i) Indebtedness that could be described by more than one of the foregoing categories shall not in any case be considered more than once for the purpose of any calculation made pursuant to the Master Indenture and (ii) for purposes of calculating the Debt Service Coverage Ratio, a Guaranty which would otherwise be considered Long-Term Indebtedness shall only be included in the calculation of the Debt Service Coverage Ratio if any payments have been made thereon and otherwise, to the extent the aggregate principal amount of Indebtedness guaranteed exceeds two percent (2%) of System Revenues, the applicable percentage of the guaranteed debt service to be included in Debt Service Requirements shall be calculated as follows: if the beneficiary s debt service coverage ratio is equal to or less than 1.10 to 1, seventy-five percent (75%); if the beneficiary s debt service coverage ratio is greater than 1.10 to 1 but less than 1.50 to 1, fifty percent (50%); if the beneficiary s debt service coverage ratio is greater than 1.50 to 1 but less than or equal to 2.00 to 1, thirty-five (35%); if the beneficiary s debt service coverage ratio is greater than 2.00 to 1 but less than or equal to 2.50 to 1, twenty percent (20%); and, if the beneficiary s debt service coverage ratio is greater than 2.50 to 1, zero percent (0%). Master Indenture means the Master Trust Indenture dated as of December 1, 1998 between the Corporation and the Master Trustee, as it may from time to time be further amended or supplemented in accordance with the terms thereof. Master Trustee means U.S. Bank National Association, successor to SunTrust Bank, or any other successor trustee under the Master Indenture. Material System Affiliate means any System Affiliate whose total revenues for the most recently completed Fiscal Year for such System Affiliate exceed 5% of the combined total revenues of the Obligated Group and the System Affiliates as set forth on the combined financial statements for the most recently completed Fiscal Year of the System. Maximum Annual Debt Service Requirements means, as of the date of calculation, the highest annual Debt Service Requirements payable during the then current or any succeeding C-32

223 Fiscal Year over the remaining term of all Outstanding Long-Term Indebtedness of any System Affiliate. If any calculation of Income Available for Debt Service of the System as a percentage of Maximum Annual Debt Service Requirements is required to be made for any period ending between the date of incurrence of any Long-Term Indebtedness to finance or refinance any construction or renovation and the completion date of such construction or renovation, the Maximum Annual Debt Service Requirements to be used for the purpose of such calculation shall be deemed equal to the sum of: (a) the Maximum Annual Debt Service Requirements on all Outstanding Long-Term Indebtedness of any System Affiliate excluding the Long-Term Indebtedness incurred to finance or refinance the construction or renovation in question; and (b) the Debt Service Requirements on the excluded Long-Term Indebtedness for the period in question. The foregoing adjustments may not be made for the purposes of any calculation in which Maximum Annual Debt Service Requirements are compared to Income Available for Debt Service on a pro forma basis for any prior or current Fiscal Year. The foregoing adjustments may be made for the purposes of required projections or forecasts, but only if the projection or forecast period extends through the first two Fiscal Years following the completion of the construction or renovation in question and if the required percentage of Income Available for Debt Service to Maximum Annual Debt Service Requirements (adjusted only for Fiscal Years ending before completion of the construction or renovation) is projected or forecasted to be achieved for each Fiscal Year during such period. Member or Member of the Obligated Group means the Corporation and any Person who is listed on Exhibit A to the Master Indenture after designation as a Member of the Obligated Group pursuant to the terms of the Master Indenture. The Obligated Group Agent may from time to time deliver a revised Exhibit A to the Master Trustee, indicating additions or deletions of Members of the Obligated Group. Moody s means Moody s Investors Service Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns. Net Proceeds means, when used with respect to any insurance or condemnation award or sale consummated under threat of condemnation, the gross proceeds from the insurance or condemnation award or sale with respect to which that term is used less all expenses (including attorney s fees and expenses, adjuster s fees and any expenses of the Master Trustee) incurred in the collection of such gross proceeds. Net Rentals means all fixed rents (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the Property other than upon termination of the lease for a default thereunder) payable under a lease or sublease of real or personal Property excluding any amounts required to be paid by the lessee (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and similar charges. Net Rentals for any future period under any so-called percentage lease shall be computed on the basis of the amount reasonably estimated to be payable thereunder for such period, but in any event not less than the amount paid or payable thereunder during the immediately preceding period of the same duration as such future period; provided that the C-33

224 amount estimated to be payable under any such percentage lease shall in all cases recognize any change in the applicable percentage called for by the terms of such lease. Non-Recourse Indebtedness means any Indebtedness the liability for which is effectively limited to Property, Plant and Equipment and the proceeds therefrom, the cost of which Property, Plant and Equipment shall have been financed solely with the proceeds of such Indebtedness with no recourse, directly or indirectly, to any other Property of any System Affiliate. Obligated Group means the Corporation and any other Person which has fulfilled the requirements for entry into the Obligated Group and which has not ceased such status. Obligated Group Agent means the Corporation or such other Member as may be designated from time to time pursuant to written notice to the Master Trustee, executed by an authorized officer of the Corporation or, if the Corporation is no longer a Member of the Obligated Group, of each Member of the Obligated Group. Obligation holder, holder or owner of the Obligation means the registered owner of any fully registered or book entry Obligation unless alternative provision is made in the Supplemental Master Indenture pursuant to which such Obligation is issued for establishing ownership of such Obligation, in which case such alternative provision shall control. Obligation Payments means payments (however designated) required under any Obligation then Outstanding which does not constitute Indebtedness. Obligations means any obligation authorized to be issued by a Member pursuant to the Master Indenture which has been authenticated by the Master Trustee including, without limitation, obligations in the form of a Financial Products Agreement. Officer s Certificate means a certificate signed, in the case of a certificate delivered by a corporation, by the President or any Vice-President or any other officer or designated agent authorized to sign by resolution of such corporation or, in the case of a certificate delivered by any other Person, the chief executive or chief financial officer of such other Person. Outstanding means, in the case of Indebtedness of a Person other than Related Bonds or Obligations, all such Indebtedness of such Person which has been issued except any such portion thereof canceled after purchase on the open market or surrendered for cancellation or because of payment at or redemption prior to maturity, any such Indebtedness in lieu of which other Indebtedness has been duly issued and any such Indebtedness which is no longer deemed outstanding under its terms and with respect to which such Person is no longer liable under the terms of such indebtedness. Outstanding Obligations or Obligations outstanding means all Obligations which have been duly authenticated and delivered by the Master Trustee under the Master Indenture, except: C-34

225 (a) Obligations canceled after purchase in the open market or because of payment at or prepayment or redemption prior to maturity; (b) (i) Obligations for the payment or redemption of which cash or Escrow Obligations shall have been theretofore deposited with the Master Trustee (whether upon or prior to the maturity or redemption date of any such Obligations); provided that if such Obligations are to be prepaid or redeemed prior to the maturity thereof, notice of such prepayment or redemption shall have been given or irrevocable arrangements satisfactory to the Master Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Master Trustee shall have been filed with the Master Trustee and (ii) Obligations securing Related Bonds for the payment or redemption of which cash or Escrow Obligations shall have been theretofore deposited with the Related Bond Trustee whereby such Related Bonds are considered defeased under the Related Bond Indenture (whether upon or prior to the maturity or redemption date of any such Obligations); provided that if such Related Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the Related Bond Trustee shall have been made therefor, or waiver of notice satisfactory in form to the Related Bond Trustee shall have been filed with the Related Bond Trustee; (c) Obligations in lieu of which others have been authenticated under the Master Indenture; and (d) For the purpose of all consents, approvals, waivers and notices required to be obtained or given under the Master Indenture, Obligations held or owned by a Member of the Obligated Group or by a System Affiliate. Notwithstanding the foregoing, any Obligation securing Related Bonds shall be deemed outstanding if such Related Bonds are Outstanding. Outstanding Related Bonds or Related Bonds outstanding means all Related Bonds which have been duly authenticated and delivered by the Related Bond Trustee under the Related Bond Indenture and are deemed outstanding under the terms of such Related Bond Indenture or, if such Related Bond Indenture does not specify when Related Bonds are deemed outstanding thereunder, all such Related Bonds which have been so authenticated and delivered, except: (a) Related Bonds canceled after purchase in the open market or because of payment at or redemption prior to maturity; (b) Related Bonds for the payment or redemption of which cash or Escrow Obligations shall have been theretofore deposited with the Related Bond Trustee (whether upon or prior to the maturity or redemption date of any such Bonds) in accordance with the Related Bond Indenture whereby such Related Bonds are considered defeased under the Related Bond Indenture; provided that, if such Related Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the Related C-35

226 Bond Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Related Bond Trustee shall have been filed with the Related Bond Trustee; (c) Related Bonds in lieu of which others have been authenticated under the Related Bond Indenture; and (d) For the purposes of all covenants, approvals, waivers and notices required to be obtained or given under the Related Bond Indenture, Related Bonds held or owned by a Member or by a System Affiliate. Paying Agent means the bank or banks, if any, designated pursuant to a Related Bond Indenture to receive and disburse the principal of and interest on any Related Bonds or designated pursuant to the Master Indenture to receive and disburse the principal of and interest on any Obligations. Permitted Encumbrances means the Master Indenture and, as of any particular time: (a) Liens arising by reason of good faith deposits in connection with tenders, leases of real estate, bids or contracts (other than contracts for the payment of money), deposits to secure public or statutory obligations, or to secure or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges; (b) any Lien on any Property of any System Affiliate granted in favor of or securing Indebtedness to any other System Affiliate; (c) any Lien on Property if such Lien equally and ratably secures all of the Obligations and, if the Obligated Group Agent shall so determine, any other Indebtedness of any System Affiliate; (d) Liens on or in Property given, granted, bequeathed or devised by the owner thereof existing at the time of such gift, grant, bequest or devise; (e) Liens on proceeds of Indebtedness (or on income from the investment of such proceeds) that secure payment of such Indebtedness and any security interest in any rebate fund established pursuant to the Code, any depreciation reserve, debt service or interest reserve, debt service fund or any similar fund established pursuant to the terms of any Supplemental Master Indenture, Related Bond Indenture or Related Loan Document in favor of the Master Trustee, a Related Bond Trustee, a Related Issuer or the holder of the Indebtedness issued pursuant to such Supplemental Master Indenture, Related Bond Indenture or Related Loan Document or the provider of any liquidity or credit support for such Related Bond or Indebtedness; (f) Liens on funds held by an escrow agent in Escrow Obligations for defeased Indebtedness; C-36

227 (g) any Lien on any Related Bond or any evidence of Indebtedness of any System Affiliate acquired by or on behalf of any System Affiliate by the provider of liquidity or credit support for such Related Bond or Indebtedness; (h) Liens on accounts receivable arising as a result of the sale of such accounts receivable with or without recourse, if (a) cash is maintained as of the date of such sale or encumbrance in an amount not less than an amount equal to one hundred (100) Days Cash on Hand, in which case up to fifty percent (50%) of the accounts receivable may be so sold or encumbered; (b) cash is maintained as of the date of such sale or encumbrance in an amount not less than an amount equal to sixty-five (65) Days Cash on Hand, in which case up to thirty-five percent (35%) of the accounts receivable may be so sold or encumbered; or (c) cash is maintained as of the date of such sale or encumbrance in an amount not less than an amount equal to thirty (30) Days Cash on Hand, in which case up to twenty percent (20%) of the accounts receivable may be so sold or encumbered. Notwithstanding the terms and conditions of the preceding sentence, in the event that the Debt Service Coverage Ratio of the System for the most recent Fiscal Year for which audited combined or consolidated financial statements of the System have been delivered is less than 1.25 to 1 or cash is maintained as of the date of such sale or encumbrance in an amount less than an amount equal to thirty (30) Days Cash on Hand, no accounts receivable may be sold or encumbered; (i) Liens on any Property of a System Affiliate in effect on the effective date of the Master Indenture, as listed on Exhibit C to the Master Indenture, or existing at the time any Person becomes a System Affiliate; provided that no such Lien (or the amount of Indebtedness secured thereby) may be increased, extended, renewed or modified to apply to any Property of such System Affiliate not subject to such Lien on such date unless such Lien as so increased, extended, renewed or modified is otherwise permitted under the Master Indenture; (j) any Lien on Property acquired subject to an existing Lien as well as Liens on Property of a Person existing at the time such Person is merged into or consolidated with a System Affiliate, or at the time of a sale, lease or other disposition of the properties of a Person as an entirety or substantially as an entirety to a System Affiliate which becomes part of a Property that secures Indebtedness that is assumed by a System Affiliate as a result of any such merger, consolidation or acquisition; provided, that no such Liens may be increased, extended, renewed, or modified after such date to apply to any Property of a System Affiliate not subject to such Liens on such date unless such Liens as so increased, extended, renewed or modified is otherwise permitted under the Master Indenture; (k) Liens which secure Non-Recourse Indebtedness provided that the Book Value of the Property subject to such Liens or the principal amount of the Indebtedness secured by such Liens are limited to twenty percent (20%) of System Revenues; (1) Liens arising out of Capital Leases provided that such Liens shall be subject to the twenty-five percent (25%) limitation set forth in subsection (m) of this definition; C-37

228 (m) Liens on Property of a System Affiliate securing Indebtedness or Financial Products Agreements, in addition to those Liens permitted as defined elsewhere in this definition of Permitted Encumbrances, if the total aggregate Book Value (or at the option of the Obligated Group Agent, Current Value) of the Property subject to a Lien of the type described in this subsection (m) does not exceed twenty-five percent (25%) of the greatest of Long Term Indebtedness, unrestricted net assets or net Property, Plant and Equipment (calculated on the same basis as the value of Property subject to such Lien); (n) Reserved; (o) any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any System Affiliate to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with worker s compensation, unemployment insurance, old age pensions or other social security, or to share in the privileges or benefits required for institutions participating in such arrangements; (p) rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law, affecting any Property, to (i) terminate such right, power, franchise, grant, license or permit, or (ii) purchase, condemn, appropriate or recapture, or designate a purchaser of such Property; (q) any Liens on any Property for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any liens of mechanics, materialmen and laborers for work or services performed or materials furnished in connection with such Property (i) which are not due and payable or are not delinquent, (ii) the amount or validity of which is being contested in good faith and on which execution is stayed or (iii) the existence of which will not subject any material portion of the Property of the System to material loss or forfeiture; (r) easements, rights-of-way, restrictions and other minor defects, encumbrances and irregularities in the title to any Property; and (s) rights reserved to or vested in any municipality or public authority to control or regulate any Property or to use such Property in any manner. Permitted Investments shall mean (i) with respect to any Obligation which secures a series of Related Bonds, the investments in which the Related Bond Trustee may invest funds under the Related Bond Indenture, (ii) with respect to any Obligations which do not secure a series of Related Bonds for which a Supplemental Master Indenture specifies certain permitted investments, the investments so specified and (iii) in all other cases such legal and prudent investments as are specified and directed to be invested by the Obligated Group Agent. C-38

229 Person means any natural person, firm, joint venture, joint operating agency, association, partnership, limited liability partnership, business trust, limited liability company, corporation, public body, agency or political subdivision thereof or any other similar entity. Pledged Revenues means (a) all receipts, revenues, income and other moneys acquired by or on behalf of the Corporation from its operations whether now existing or hereafter acquired, and all rights to receive the same (including accounts, instruments, chattel paper and general intangibles representing a right to payment constituting revenues of the Corporation), whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by the Corporation and all proceeds of the foregoing and (b) the non-operating revenues associated with the Corporation, including, without limitation, contributions, donations and pledges whether in the form of cash, securities or other personal property that are legally available to meet the Obligated Group s obligations under the Master Indenture; provided, however, that (1) gifts, grants, bequests, donations and contributions made to the Corporation designated at the time of making thereof by the donor or maker as being for certain specific purposes, and the income derived therefrom, to the extent required by such designation, shall be excluded from (a) and (b) above and (2) all receipts, revenues, income and other moneys subject to Permitted Encumbrances, as defined in the Master Indenture and permitted therein, at present or in the future, other than the security interest in the Pledged Revenues, shall be excluded from (a) and (b) above. Primary Obligor means the Person who is primarily obligated on an obligation which is guaranteed by another Person. Property means any and all rights, titles and interests in and to any and all property, whether real or personal, tangible (including cash) or intangible, wherever situated and whether now owned or hereafter acquired. Property, Plant and Equipment means all Property of each Member which is classified as property, plant and equipment under generally accepted accounting principles. Qualified Provider means any financial institution or insurance company which is a party to a Financial Products Agreement if the unsecured long-term debt obligations of such financial institution or insurance company (or of the parent or a subsidiary of such financial institution or insurance company if such parent or subsidiary guarantees the performance of such financial institution or insurance company under such Financial Products Agreement), or obligations secured or supported by a letter of credit, contract, guarantee, agreement, insurance policy or surety bond issued by such financial institution or insurance company (or such guarantor parent or subsidiary), are rated in one of the three highest rating categories of a Rating Agency at the time of the execution and delivery of the Financial Products Agreement. Rating Agency means Moody s, Fitch or Standard & Poor s and their respective successors and assigns. C-39

230 Related Bonds means (a) any revenue bonds or similar obligations issued by any state, commonwealth or territory of the United States or any municipal corporation or other political subdivision formed under the laws thereof or any constituted authority, agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, issued in consideration, whether in whole or in part, of the execution, authentication and delivery of an Obligation or Obligations to or upon the order of such governmental issuer and (b) any revenue or general obligation bonds issued by the Corporation, any Member, any System Affiliate or any other Person in consideration, whether in whole or in part, of the execution, authentication and delivery of an Obligation or Obligations to the holder of such bonds or the Related Bond Trustee. Related Bond Indenture means any indenture, bond resolution or similar instrument pursuant to which any series of Related Bonds is issued. Related Bond Trustee means the trustee under any Related Bond Indenture and any successor trustee thereunder or, if no trustee is appointed under a Related Bond Indenture, the Related Issuer. Related Issuer means the issuer of a series of Related Bonds. Related Loan Document means any document or documents (including without limitation any loan agreement, lease, sublease or installment sales contract) pursuant to which any proceeds of any Related Bonds are loaned to, advanced to or made available to or for the benefit of any Member or System Affiliate (or pursuant to which any Property financed or refinanced with such proceeds is leased, sublet or sold to a Member or System Affiliate). Revenues means, for any period, (a) in the case of any Person providing health care services, the sum of (i) net patient service revenues plus (ii) other operating revenues, plus (iii) non-operating revenues (other than income derived from the sale of assets not in the ordinary course of business or any gain from the extinguishment of debt or other extraordinary item or earnings which constitute Capitalized Interest or earnings on amounts which are irrevocably deposited in escrow to pay the principal of or interest on Indebtedness); and (b) in the case of any other Person, gross revenues less sale discounts and sale returns and allowances, as determined in accordance with generally accepted accounting principles; but excluding in any event in both clause (a) and clause (b): (i) any unrealized gain or loss resulting from changes in the value of investment securities, (ii) any gains on the sale or other disposition of fixed or capital assets not in the ordinary course, (iii) earnings resulting from any reappraisal, revaluation or write-up of fixed or capital assets or (iv) any revenues constituting deferred revenues related to entrance fees; provided, however, that if such calculation is being made with respect to the System, such calculation shall be made in such a manner so as to exclude any revenues attributable to transactions between any System Affiliate and any other System Affiliate or any Contract Participant (except as required by the Master Indenture). Short-Term, when used in connection with Indebtedness, means Indebtedness of a Person for money borrowed or credit extended having an original maturity less than or equal to C-40

231 one year and not renewable at the option of the debtor for, or subject to any binding commitment to refinance or otherwise provide for such Indebtedness having, a term greater than one year beyond the date of original issuance. Standard & Poor s means Standard & Poor s Ratings Services, a division of The McGraw-Hill Companies, Inc., its successors and assigns. Supplemental Master Indenture means an indenture amending or supplementing the Master Indenture entered into pursuant to Article VII of the Master Indenture on or after the date thereof. System means the affiliated group of Persons comprised of all the System Affiliates. System Affiliate means each Member of the Obligated Group and each Affiliate of any Member of the Obligated Group. Tax-Exempt Organization means a Person organized under the laws of the United States of America or any state thereof which is an organization described in Section 501(c)(3) of the Code, which is exempt from federal income taxation under Section 501(a) of the Code, and which is not a private foundation within the meaning of Section 509(a) of the Code, or corresponding provisions of federal income tax laws from time to time in effect. Variable Rate Indebtedness means any Long-Term Indebtedness, the rate of interest on which is subject to change prior to maturity. Series, Designation and Amount of Obligations No Obligations may be issued under the provisions of the Master Indenture except in accordance with the Master Indenture and with the approval of the Obligated Group Agent as evidenced by its execution of the Supplemental Master Indenture authorizing the issuance of an Obligation. The total principal amount of Obligations, the number of Obligations and the series of Obligations that may be created under the Master Indenture is subject to the provisions of the Master Indenture and shall be as set forth in the Supplemental Master Indenture providing for the issuance thereof. Each series of Obligations shall be issued pursuant to a Supplemental Master Indenture. Each series of Obligations shall be designated so as to differentiate the Obligations of such series from the Obligations of any other series. Unless provided to the contrary in a Supplemental Master Indenture, Obligations shall be issued as fully registered Obligations. Payment of Obligations The principal of, premium, if any, and interest on the Obligations shall be payable in any currency of the United States of America which, at the respective dates of payment thereof, is legal tender for the payment of public and private debts, and such principal, premium, if any, and interest shall be payable at the principal corporate trust office of the Master Trustee or at the C-41

232 office of any alternate Paying Agent or Agents named in any such Obligations or in a Related Bond Indenture. Unless contrary provision is made in the Supplemental Master Indenture pursuant to which such Obligation is issued or the election referred to in the next sentence is made, payment of the interest on the Obligations shall be made to the person appearing on the registration books of the Obligated Group (kept in the principal corporate trust office of the Master Trustee as Obligation registrar) as the registered owner thereof and shall be paid by check or draft mailed to the registered owner at its address as it appears on such registration books or at such other address as is furnished to the Master Trustee in writing by such holder; provided, however, that any Supplemental Master Indenture creating any Obligation may provide that interest on such Obligation may be paid, upon the request of the holder of such Obligation, by wire transfer or by such other means as are then commercially reasonable and acceptable to the holder thereof and the Master Trustee. The foregoing notwithstanding, if a Member so elects, payments on such Obligation shall be made directly by such Member, by check or draft hand delivered to the holder thereof or its designee or shall be made by such Member by wire transfer to such holder, or by such other means as are then commercially reasonable and acceptable to the holder thereof, in any case delivered on or prior to the date on which such payment is due. Upon the reasonable written request of the Master Trustee, each Member shall provide information identifying the Obligation or Obligations with respect to which such payment, specifying the amount, was made, by series, designation, number and registered holder. Except with respect to Obligations directly paid to or upon the order of the holder thereof, the Members agree to deposit with the Master Trustee prior to each due date of the principal of, premium, if any, or interest on any of the Obligations a sum sufficient to pay such principal, premium, if any, or interest so becoming due. Any such moneys shall upon written request and direction of the Obligated Group Agent be invested in Permitted Investments. The foregoing notwithstanding, amounts deposited with the Master Trustee to provide for the payment of Obligations pledged to the payment of Related Bonds shall be invested in accordance with the provisions of the Related Bond Indenture and Related Loan Document. The Master Trustee shall not be liable or responsible for any loss resulting from any such investments made in accordance with the terms of the Master Indenture. Supplemental Master Indentures may create such security including debt service reserve funds and other funds as are necessary to provide for payment or to hold moneys deposited for payment or as security for a related series of Obligations. Security for Obligations All Outstanding Obligations issued under the Master Indenture are equally and ratably secured by the Master Indenture except to the extent specifically provided otherwise as permitted by the Master Indenture. Any one or more series of Obligations issued under the Master Indenture may, so long as any Liens created in connection therewith constitute Permitted Encumbrances, be secured by security (including without limitation letters or lines of credit, insurance or Liens on Property, including health care Facilities or Property of the Obligated Group or other System Affiliates, or security interests in a depreciation reserve, debt service or interest reserve or debt service or similar funds). Such security need not extend to any other Indebtedness (including any other Obligations or series of Obligations). Consequently, the Supplemental Master Indenture pursuant to which any one or more series of Obligations is C-42

233 issued may provide for such supplements or amendments to the provisions of the Master Indenture, as are necessary to provide for such security and to permit realization upon such security solely for the benefit of the Obligations entitled thereto. Substitute Obligations Upon Withdrawal of a Member In the event any Member ceases to be a Member of the Obligated Group in accordance with the Master Indenture and another Member issues an Obligation under the Master Indenture pursuant to a Supplemental Master Indenture evidencing or assuming the Obligated Group s obligation in respect of Related Bonds, if so provided for in such Obligation originally issued by such withdrawing Member, such Obligation shall be surrendered to the Master Trustee in exchange for a substitute Obligation without notice to or consent of any Related Bondholder, provided that such substitute Obligation provides for payments of principal, interest, premium and other amounts identical to the surrendered Obligation and sufficient to provide all payments on the Related Bonds. Appointment of Obligated Group Agent Each Member, by becoming a Member of the Obligated Group, irrevocably appoints the Obligated Group Agent as its agent and true and lawful attorney in fact and grants to the Obligated Group Agent (a) full and exclusive power to execute Obligations and Supplemental Master Indentures and (b) full power to prepare, or authorize the preparation of, any and all documents, certificates or disclosure materials reasonably and ordinarily prepared in connection with the issuance of Obligations under the Master Indenture, or Related Bonds associated therewith, and to execute and deliver such items to the appropriate parties in connection therewith. Payment of Principal, Premium, if any, and Interest; System Affiliates (A) Each Member unconditionally and irrevocably (subject to the right of such Member to cease its status as a Member of the Obligated Group pursuant to the Master Indenture), as coobligor and not guarantor, jointly and severally covenants that it will promptly pay the principal of, premium, if any, and interest on every Obligation issued under the Master Indenture and any other payments, including, if applicable, the purchase price of Related Bonds tendered or deemed tendered for purchase pursuant to the terms of a Related Bond Indenture or Related Loan Document required by the terms of such Obligations, at the place, on the dates and in the manner provided in the Master Indenture and in said Obligations according to the true intent and meaning thereof. If any Member does not tender payment of any installment of principal, premium or interest on any Obligation when due and payable, the Master Trustee shall provide prompt written notice of such nonpayment to such Member and the Obligated Group Agent. (B) Each Controlling Member shall cause each of its System Affiliates (subject to contractual and organizational limitations) to pay, loan or otherwise transfer to the Obligated Group Agent or other Member such amounts as are necessary to duly and punctually pay the principal of, premium, if any, and interest on all Outstanding Obligations and any other C-43

234 payments, including the purchase price of Related Bonds tendered for purchase pursuant to the terms of a Related Bond Indenture or Related Loan Document, required by the terms of such Obligations, on the dates, at the times and at the places and in the manner provided in such Obligations, the applicable Supplemental Master Indenture and the Master Indenture, when and as the same become payable, whether at maturity, upon call for redemption, by acceleration of maturity or otherwise. (C) The Obligated Group Agent shall at all times maintain an accurate and complete list of all Persons that are Obligated Group Members, Contract Participants and System Affiliates. The Obligated Group Agent by an Officer s Certificate delivered to the Master Trustee shall designate the Corporation or any other Member as the Controlling Member of any such additional System Affiliate. With respect to each such Person, and so long as such Person is a System Affiliate, the Obligated Group Agent, or any Member designated by the Obligated Group Agent as the Controlling Member, shall either (a) maintain, directly or indirectly, control of each System Affiliate, including the power to direct the management, policies, disposition of assets and actions of such System Affiliate to the extent required to cause such System Affiliate to comply with the terms and conditions of the Master Indenture, whether through the ownership of voting securities, by contract, partnership interests, membership, reserved powers, or the power to appoint members, trustees or directors or otherwise, to the extent required to enable the Members to comply with this Master Indenture, or (b) execute and have in effect such contracts or other agreements with a System Affiliate that the Obligated Group Agent or Controlling Member, in its sole discretion, deems sufficient for it to cause such System Affiliate to comply with the terms and conditions of this Master Indenture. Subject to the provisions of the next sentence, System Affiliates may cease to be such in accordance with the provisions of the Master Indenture. No Person shall cease to be a System Affiliate if any Outstanding Related Bonds have been issued for the benefit of such Person until there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, the cessation by such Person of its status as a System Affiliate will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable thereon to which such Related Bond would otherwise be entitled. (D) Each Controlling Member covenants that it will cause (subject to contractual and organizational limitations) each of its System Affiliates to comply with the terms and conditions of the Master Indenture which are applicable to such System Affiliate, and of the Related Loan Document, if any, to which such System Affiliate is a party. Performance of Covenants Each Member covenants that it will faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in the Master Indenture and in each and every Obligation executed, authenticated and delivered under the Master Indenture and will perform all covenants and requirements imposed on the Corporation, the Obligated Group Agent or any Member under the terms of any Related Bond Indenture. C-44

235 Entrance into the Obligated Group Any Person may become a Member of the Obligated Group if: (a) Such Person is a corporation, association, partnership, limited liability partnership, business trust, limited liability company or any other similar entity; (b) Such Person shall execute and deliver to the Master Trustee a Supplemental Master Indenture acceptable to the Master Trustee which shall be executed by the Master Trustee and the Obligated Group Agent on behalf of each then current Member of the Obligated Group, containing the agreement of such Person (i) to become a Member of the Obligated Group and thereby to become subject to compliance with all provisions of the Master Indenture and (ii) unconditionally and irrevocably (subject to the right of such Person to cease its status as a Member of the Obligated Group) to jointly and severally make payments upon each Obligation at the times and in the amounts provided in each such Obligation; (c) The Obligated Group Agent shall have approved the admission of such Person into the Obligated Group; (d) The Master Trustee shall have received (1) an Officer s Certificate of the Obligated Group Agent which demonstrates that, immediately upon such Person becoming a Member of the Obligated Group, the Members would not, as a result of such transaction, be in default in the performance or observance of any covenant or condition to be performed or observed by them under the Master Indenture, (2) an opinion of Counsel to the effect that (x) the instrument described in paragraph (b) above has been duly authorized, executed and delivered and constitutes a legal, valid and binding agreement of such Person, enforceable in accordance with its terms, subject to customary exceptions for bankruptcy, insolvency and other laws generally affecting enforcement of creditors rights and application of general principles of equity and other exceptions as set forth in the Master Indenture and (y) the addition of such Person to the Obligated Group will not adversely affect the status as a Tax Exempt Organization of any Member (including such Person) which otherwise has such status, and (3) if all amounts due or to become due on all Related Bonds have not been paid to the holders thereof and provision for such payment has not been made in such manner as to have resulted in the defeasance of all Related Bond Indentures, an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, the consummation of such transaction will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable on such Related Bond to which such Bond would otherwise be entitled; (e) Exhibit A to the Master Indenture shall be amended or replaced to add such Person as a Member; (f) The Master Trustee shall have received an Officer s Certificate demonstrating that if such Person had been a Member of the Obligated Group as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements C-45

236 of the System have been prepared, the Debt Service Coverage Ratio of the System would not have been less than 1.10 to 1; and (g) The Master Trustee shall have received an Officer s Certificate demonstrating that if such Person had been a Member of the Obligated Group as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, the Debt Service Coverage Ratio of the System would be at least seventy-five (75%) of what the coverage would have been if such Person had not become a Member of the Obligated Group. This provision shall not apply in instances when the Debt Service Coverage Ratio of the System for such Fiscal Year is above 2.5 to 1 after giving effect to such Person becoming a Member of the Obligated Group. Each successor, assignee, surviving, resulting or transferee corporation of a Member must agree to become, and satisfy the above-described conditions to becoming, a Member of the Obligated Group prior to any such succession, assignment or other change in such Member s corporate status. Cessation of Status as a Member of the Obligated Group Each Member covenants that it will not take any action, corporate or otherwise, which would cause it or any successor thereto into which it is merged or consolidated to cease to be a Member of the Obligated Group under the terms of the Master Indenture unless: (a) if the Member proposing to withdraw from the Obligated Group is a party to any Related Loan Documents with respect to Related Bonds which remain outstanding, another Member of the Obligated Group has issued an Obligation under the Master Indenture evidencing or assuming the obligation of the Obligated Group in respect of such Related Bonds; (b) prior to cessation of such status, there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, the cessation by the Member of its status as a Member will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable on such Related Bond to which such Bond would otherwise be entitled; (c) immediately after such cessation, no event of default exists under the Master Indenture and no event shall have occurred which with the passage of time or the giving of notice, or both, would become such an event of default; (d) prior to such cessation there is delivered to the Master Trustee an opinion of Counsel to the effect that the cessation by such Member of its status as a Member will not adversely affect the status as a Tax-Exempt Organization of any Member which otherwise has such status; (e) prior to the cessation of such status, the Obligated Group Agent consents in writing to the withdrawal of such Member; C-46

237 (f) Exhibit A to the Master Indenture shall be amended or replaced to delete such Person as a Member; (g) prior to cessation, the Master Trustee shall have received an Officer s Certificate demonstrating that if such Person had not been a Member of the Obligated Group as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, the Debt Service Coverage Ratio of the System would not have been less than 1.10 to 1; and (h) The Master Trustee shall have received an Officer s Certificate demonstrating that if such Person had withdrawn as a Member of the Obligated Group as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, the Debt Service Coverage Ratio of the System would be at least seventy-five (75%) of what the coverage would have been if such Person had not withdrawn as a Member of the Obligated Group. This provision shall not apply in instances when the Debt Service Coverage Ratio of the System for such Fiscal Year is above 2.5 to 1 after giving effect to such Person withdrawing as a Member of the Obligated Group. General Covenants; Right of Contest Each Member covenants to, and each Controlling Member covenants to cause each of its System Affiliates (subject to contractual and organizational limitations) to: (a) Except as otherwise expressly provided in the Master Indenture (i) preserve its corporate or other separate legal existence, (ii) preserve all its rights and licenses to the extent necessary or desirable in the operation of its business and affairs as then conducted and (iii) be qualified to do business and conduct its affairs in each jurisdiction where its ownership of Property or the conduct of its business or affairs requires such qualification, if failure to preserve such existence, rights, licenses or qualifications would have a material adverse effect on the operations or financial condition of the System taken as a whole; provided, however, that nothing contained in the Master Indenture shall be construed to obligate such Member or System Affiliate to retain, preserve or keep in effect the rights, licenses or qualifications no longer used or useful in the conduct of its business. (b) In the case of the Corporation and any Person which is a Tax-Exempt Organization at the time it becomes a Member or System Affiliate, so long as the Master Indenture shall remain in force and effect and so long as all amounts due or to become due on all Related Bonds have not been fully paid to the holders thereof or provision for such payment has not been made, to take no action or suffer any action to be taken by others, including any action which would result in the alteration or loss of its status as a Tax-Exempt Organization, which could result in any such Related Bond being declared invalid or result in the interest on any Related Bond, which is otherwise exempt from federal or state income taxation, becoming subject to such taxation. C-47

238 (c) At its sole cost and expense, promptly comply with all present and future laws, ordinances, orders, decrees, decisions, rules, regulations and requirements of every duly constituted governmental authority, commission and court and the officers thereof which may be applicable to it or any of its affairs, business, operations and Property, any part thereof, any of the streets, alleys, passageways, sidewalks, curbs, gutters, vaults and vault spaces adjoining any of its Property or any part thereof, or to the use or manner of use, occupancy or condition of any of its Property or any part thereof, if the failure to so comply would have a materially adverse affect on the operations or financial affairs of the System, taken as a whole. The foregoing notwithstanding, any Member or System Affiliate may (i) cease to be a not for profit corporation or (ii) take actions which could result in the alteration or loss of its status as a Tax-Exempt Organization if prior thereto there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that such actions would not adversely affect the validity of any Related Bond, the exemption from federal or state income taxation of interest payable on any Related Bond otherwise entitled to such exemption or adversely affect the enforceability in accordance with its terms of the Master Indenture against any Person. No Member or other System Affiliate shall be required to remove any Lien required to be removed under the Master Indenture, pay or otherwise satisfy and discharge its obligations, Indebtedness (other than any Obligations), demands and claims against it or to comply with any Lien, law, ordinance, rule, order, decree, decision, regulation or requirement referred to in the Master Indenture, so long as such Member or other System Affiliate is contesting, in good faith and at its cost and expense, in its own name and behalf, the amount or validity thereof, in an appropriate manner or by appropriate proceedings which shall operate during the pendency thereof to prevent the collection of or other realization upon the obligation, Indebtedness, demand, claim or Lien so contested, and the sale, forfeiture, or loss of its Property or any part thereof, provided, that no such contest shall subject any Related Issuer, any Obligation holder or the Master Trustee to the risk of any liability. While any such matters are pending, such Member or other System Affiliate shall not be required to pay, remove or cause to be discharged the obligation, Indebtedness, demand, claim or Lien being contested unless such Member or other System Affiliate agrees to settle such contest. Each such contest shall be promptly prosecuted to final conclusion (subject to the right of such Member or other System Affiliate engaging in such a contest to settle such contest), and in any event the Member or other System Affiliate will save all Obligation holders and the Master Trustee harmless from and defend against all losses, judgments, decrees and costs (including attorneys fees and expenses in connection therewith) as a result of such contest and will, promptly after the final determination of such contest or settlement thereof, pay and discharge the amounts which shall be determined to be payable therein, together with all penalties, fines, interests, costs and expenses (including attorney s fees) thereon or incurred in connection therewith. Insurance Each Member shall, and each Controlling Member covenants to cause each of its System Affiliates (subject to contractual and organizational limitations) to, maintain or cause to be C-48

239 maintained at its sole cost and expense, insurance (or self-insurance, as the case may be) with respect to its Property, the operation thereof and its business against such casualties, contingencies and risks (including but not limited to public liability and employee dishonesty) and in amounts not less than is customary in the case of corporations engaged in the same or similar activities and similarly situated and as is adequate to protect its Property and operations, provided however, that self-insurance may not be used to insure Property, Plant and Equipment other than in the form of commercially reasonable deductibles under any insurance secured. In addition, the insurance maintained by the System will be subject to review by a Consultant once every two years. An insurance company providing insurance will be required to have an A rating from Standard and Poor s or Moody s. Debt Service Coverage Ratio Each Member covenants and agrees to, and each Controlling Member covenants to cause (subject to contractual and organizational limitations) each of its System Affiliates to, charge such fees and rates and to exercise such skill and diligence as to provide income from its Property together with other available funds sufficient to pay promptly all payments of principal and interest on its Indebtedness, all expenses of operation, maintenance and repair of its Property and all other payments required to be made by it under the Master Indenture to the extent permitted by law. Each Member further covenants and agrees that it will, and each Controlling Member covenants that it will cause (subject to contractual and organizational limitations) each of its System Affiliates to, from time to time as often as necessary and to the extent permitted by law, revise its rates, fees and charges in such manner as may be necessary or proper to comply with the provisions of the Master Indenture. At the end of each Fiscal Year or as soon as practicable thereafter, the Obligated Group Agent shall calculate the Income Available for Debt Service and the Debt Service Coverage Ratio of the System as of the end of such Fiscal Year. A copy of such calculations shall be delivered to the Persons to whom financial statements are required to be delivered under the Master Indenture, at the time of delivery of its financial report as required by the Master Indenture. If, at the end of any Fiscal Year, the Debt Service Coverage Ratio of the System is less than 1.10 to 1, the Master Trustee shall require the Obligated Group Agent at its expense to retain a Consultant to make recommendations with respect to the rates, fees and charges of the System Affiliates and the System s methods of operation and other factors affecting their financial condition in order to increase such Debt Service Coverage Ratio to at least 1.10 to 1 in the next succeeding Fiscal Year. A copy of the Consultant s report and recommendations, if any, shall be filed with the Obligated Group Agent and the Master Trustee. Each Member shall follow and each Controlling Member shall cause (subject to contractual and organizational limitations) each of its System Affiliates to follow each recommendation of the Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of such Member) and permitted by law. This section shall not be construed to prohibit any Person from serving indigent patients to the extent required for such Person to continue its qualification as a Tax-Exempt Organization or from serving any other class or classes of patients C-49

240 without charge or at reduced rates so long as such service does not prevent the System from satisfying the other requirements of the Master Indenture. The foregoing provisions notwithstanding, if, at the end of any Fiscal Year, the Debt Service Coverage Ratio of the System is less than 1.10 to 1, the Master Trustee shall not be obligated to require the Obligated Group Agent to retain a Consultant to make such recommendations if: (a) there is filed with the Master Trustee a written report addressed to it of a Consultant which contains an opinion of such Consultant to the effect that applicable laws or regulations have prevented the System from generating Income Available for Debt Service during such Fiscal Year in an amount sufficient to produce a Debt Service Coverage Ratio of the System of 1.10 to 1 or higher; (b) the report of such Consultant indicates that the fees and rates charged by the System Affiliates are such that, in the opinion of the Consultant, the System Affiliates have generated the maximum amount of Revenues reasonably practicable given such laws or regulations; and (c) the Debt Service Coverage Ratio of the System was at least 1.00 to 1 for such Fiscal Year. The Obligated Group Agent shall not be required to cause the Consultant s report referred to in the preceding sentence to be prepared more frequently than once every two Fiscal Years if at the end of the first of such two Fiscal Years the Obligated Group Agent provides to the Master Trustee an Officer s Certificate or an opinion of Counsel to the effect that the applicable laws and regulations underlying the Consultant s report delivered in respect of the previous Fiscal Year have not changed in any material way. In addition, if at any time during a Fiscal Year, any bankruptcy, dissolution, reorganization, arrangement, insolvency or liquidation proceedings, proceedings under Title 11 of the United States Code, as amended, or other proceedings for relief under any bankruptcy law or similar law for the relief of debtors are instituted by or against any System Affiliate other than a Member of the Obligated Group (other than bankruptcy proceedings instituted by any such System Affiliate against third parties), and if instituted against any System Affiliate other than a Member of the Obligated Group are allowed against such System Affiliate or are consented to or are not dismissed, stayed or otherwise nullified within 90 days after such institution, the Master Trustee shall require the Obligated Group Agent to deliver an Officer s Certificate calculating the Debt Service Coverage Ratio of the System for the previously completed Fiscal Year excluding such System Affiliate in the calculations. As a result of such calculation, if the Debt Service Coverage Ratio is less than 1.10 to 1, the Master Trustee shall require the Obligated Group Agent at its expense to retain a Consultant as if the System had not achieved a Debt Service Coverage Ratio of at least 1.10 to 1 for such Fiscal Year unless not required, all pursuant to the provisions of the two preceding paragraphs. Merger, Consolidation, Sale or Conveyance (a) Each Member agrees that it will not merge into, or consolidate with, one or more corporations which are not Members, or allow one or more of such corporations to merge into it, or sell or convey all or substantially all of its Property to any Person who is not a Member, unless: C-50

241 (i) Any successor corporation to such Member (including without limitation any purchaser of all or substantially all the Property of such Member) is a corporation organized and existing under the laws of the United States of America or a state thereof and shall execute and deliver to the Master Trustee an appropriate instrument, satisfactory to the Master Trustee, containing the agreement of such successor corporation to assume, jointly and severally, the due and punctual payment of the principal of, premium, if any, and interest on all Obligations according to their tenor and the due and punctual performance and observance of all the covenants and conditions of the Master Indenture to be kept and performed by such Member; and prior to such merger or consolidation, or such sale or conveyance, the Master Trustee shall have received an Officer s Certificate demonstrating that if the action had been taken as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, (a) the Debt Service Coverage Ratio of the System would not have been less than 1.10 to 1 and (b) that the Debt Service Coverage Ratio of the System would be at least seventy-five percent (75%) of what the coverage would have been absent such action. The limitation in clause (b) of the preceding sentence shall not apply in instances when the Debt Service Coverage Ratio of the System for such Fiscal Year is above 2.5 to 1 after giving effect to such action; (ii) Immediately after such merger or consolidation, or such sale or conveyance, no Member would be in default in the performance or observance of any covenant or condition of any Related Loan Document or this Master Indenture; and (iii) If all amounts due or to become due on all Related Bonds have not been fully paid to the holders thereof or fully provided for, there shall be delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that under then existing law the consummation of such merger, consolidation, sale or conveyance would not adversely affect the validity of such Related Bonds or the exemption otherwise available from federal or state income taxation of interest payable on such Related Bonds. (b) In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation, such successor corporation shall succeed to and be substituted for its predecessor, with the same effect as if it had been named in the Master Indenture as such Member and the Member party to such transaction, if it is not the survivor, shall thereupon be relieved of any further obligation or liabilities under the Master Indenture or upon the Obligations and such Member as the predecessor or non-surviving corporation may thereupon or at any time thereafter be dissolved, wound up or liquidated. Any successor corporation to such Member thereupon may cause to be signed and may issue in its own name Obligations under the Master Indenture and the predecessor corporation shall be released from its obligations under the Master Indenture and under any Obligations, if such predecessor corporation shall have conveyed all Property owned by it (or all such Property shall be deemed conveyed by operation of law) to such successor corporation. All Obligations so issued by such successor corporation under the Master Indenture shall in all respects have the same legal rank and benefit under the Master Indenture as Obligations theretofore or thereafter issued in accordance with the terms of the Master Indenture as though all of such Obligations had been C-51

242 issued under the Master Indenture by such prior Member without any such consolidation, merger, sale or conveyance having occurred. (c) In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in Obligations thereafter to be issued as may be appropriate. (d) The Master Trustee may rely upon an opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of the Master Indenture and that it is proper for the Master Trustee under the provisions of the Master Indenture to join in the execution of any instrument required to be executed and delivered by the Master Indenture. (e) Except as may be expressly provided in any Supplemental Master Indenture, the ability of any System Affiliate to merge into, or consolidate with, one or more corporations, or allow one or more corporations to merge into it, or sell or convey all or substantially all of its Property to any Person is not limited by the provisions of the Master Indenture. Notwithstanding anything to the contrary in the Master Indenture, no System Affiliate shall engage in any merger or consolidation or disposition of substantially all of its assets if any Outstanding Related Bonds have been issued for the benefit of such System Affiliate until there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, such action will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable thereon to which such Related Bond would otherwise be entitled. Financial Statements The Obligated Group Agent and each Member covenant that they will, and will cause (subject to contractual and organizational limitations) each System Affiliate controlled by the Obligated Group Agent or such Member to, keep or cause to be kept proper books of records and accounts in which full, true and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the System Affiliates in accordance with generally accepted accounting principles consistently applied except as may be disclosed in the notes to the audited financial statements referred to in subparagraph (A) below, and will furnish to the Master Trustee: (A) As soon as practicable after they are available, but in no event more than 120 days after the last day of each Fiscal Year, a financial report of the System for such Fiscal Year certified by a firm of nationally recognized independent certified public accountants selected by the Obligated Group Agent prepared on a combined or consolidated, or combining or consolidating, basis in accordance with generally accepted accounting principles covering the operations of the System for such Fiscal Year and containing an audited consolidated statement of financial position of the System as of the end of such Fiscal Year and an audited consolidated and an unaudited consolidating statement of changes in net assets and statement of cash flows of the System for such Fiscal Year and an audited consolidated and an unaudited consolidating C-52

243 statement of operations of the System for such Fiscal Year, showing in each case in comparative form the financial figures for the preceding Fiscal Year. In the event that any System Affiliate s financial report, statement of financial position and statement of changes in net assets and statement of cash flows are not included in the financial report of the System delivered in accordance with the previous sentence, such System Affiliate s financial report otherwise meeting the requirements of the previous sentence shall be delivered as soon as practicable after they are available, but in no event more than 120 days after the last day of each Fiscal Year of such System Affiliate. (B) In the event that Obligations are Outstanding which were issued for the benefit of any Contract Participant that represent more than ten percent (10%) of the Outstanding Obligations, the Obligated Group Agent shall cause audited financial statements of such Contract Participant to be delivered as soon as practicable after they are available, but in no event more than 120 days after the last day of such Contract Participant s fiscal year. (C) If the statements referred to in subsection (A) above do not include the results of operations of any Material System Affiliate, as soon as practicable, but in no event more than 120 days after the last day of each Fiscal Year for such Material System Affiliate, a financial statement for such Material System Affiliate for such Fiscal Year prepared by or at the direction of the chief financial officer of such Material System Affiliate on a combined or consolidated basis to include the results of operations of all Persons required to be consolidated or combined with such Material System Affiliate in accordance with generally accepted accounting principles and containing at least the results of operations of such Material System Affiliate for the Fiscal Year and a statement for financial position as of the end of such Fiscal Year, showing in each case in comparative form the financial figures for the preceding Fiscal Year for such Material System Affiliate. (D) If financial statements have been delivered to the Master Trustee pursuant to the provisions of subsection (C) above, then, as soon as practicable, but in no event more than 120 days after the last day of each Fiscal Year of the Obligated Group Agent, the result of operations and statement of financial position of the Obligated Group prepared by or at the direction of the chief financial officer of the Obligated Group Agent based upon the financial statements described in subsections (A) and (C) above (such result of operations and statement of financial position being referred to as the Obligated Group Financial Statements ), together with a certificate of the chief financial officer of the Corporation stating that the Obligated Group Financial Statements were prepared in accordance with generally accepted accounting principles (except for required consolidations) and that the Obligated Group Financial Statements reflect the results of the operations of only the Members of the Obligated Group and that all Members of the Obligated Group are included. (E) At the time of delivery of the financial report referred to in subsection (A) above, an Officer s Certificate of the Obligated Group Agent, stating that the Obligated Group Agent has made a review of the activities of each Member and other System Affiliate during the preceding Fiscal Year for the purpose of determining whether or not the Members and other System Affiliates have complied with all of the terms, provisions and conditions of the Master C-53

244 Indenture and that each Member and System Affiliate has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Master Indenture on its part to be performed and is not in default in the performance or observance of any of the terms, covenants, provisions or conditions of the Master Indenture, or if any such Person shall be in default such certificate shall specify all such defaults and the nature thereof. (F) As soon as practicable after they are available, but in no event more than 60 days after the end of each quarter of each Fiscal Year excluding the last quarter of each Fiscal Year, unaudited combined or consolidated financial statements of the System in accordance with generally acceptable accounting principles. Indebtedness Additional Long-Term Indebtedness (other than Non-Recourse Indebtedness or Long- Term Indebtedness issued to refinance or refund any Outstanding Indebtedness of any System Affiliate whereby the Maximum Annual Debt Service Requirements on all Outstanding Long- Term Indebtedness of the System Affiliates will not be increased by more than ten percent (10%)) may not be incurred by any System Affiliate unless an Officer s Certificate is provided to the Master Trustee evidencing the fact that the incurrence of such Indebtedness shall not cause the Debt to Capitalization Ratio to exceed For purposes of this provision, Debt to Capitalization Ratio is defined to mean, as of any particular date, the quotient obtained by dividing (a) the total Outstanding principal amount of Long-Term Indebtedness of the System Affiliates as of such date by (b) the sum of: (i) the total Outstanding principal amount of Long-Term Indebtedness of the System Affiliates; and (ii) the sum of the unrestricted and temporarily restricted net assets and equity accounts (as the case may be) of the System Affiliates as of such date less the accumulated deficit of taxable System Affiliates as of such date, determined in accordance with generally accepted accounting principles. In addition, additional Short-Term Indebtedness may not be incurred by any System Affiliate unless the aggregate amount of all Outstanding Short-Term Indebtedness including such additional Short-Term Indebtedness but excluding any current portion of Outstanding Long-Term Indebtedness is less than ten percent (10%) of the net operating revenues of the System provided that the aggregate amount of all Outstanding Short-Term Indebtedness must be reduced to at least five percent (5%) of net operating revenues of the System for twenty consecutive days within each Fiscal Year. Notwithstanding the above, $70,000,000 of existing Long-Term Indebtedness of a System Affiliate may be converted to Short-Term Indebtedness without complying with the above, provided however, that such Long-Term Indebtedness will continue to be treated as Outstanding Long-Term Indebtedness even after conversion to Short- Term Indebtedness. C-54

245 Parties to Guaranty Agreement The Corporation shall, at all times, cause all Material System Affiliates to be a party to the Guaranty Agreement assuming the addition of such Material System Affiliate would comply with the applicable provisions of the Guaranty Agreement for the addition of parties; provided, however, that MedStar Family Choice, Inc. ( MFC ) will not be required to become a party to the Guaranty Agreement unless (i) it generates in excess of 5.0% of the System s revenues after deducting its regulatory required amounts to meet its insurance liability obligations, administrative expenses and reserves and (ii) it secures approval of the State of Maryland and District of Columbia insurance commissioners, as well as, the insurance commissioner of any other jurisdiction in which it may operate in the future. Upon securing the consent of a majority of the holders of Obligations and Related Bonds, the Master Indenture will be amended to provide that no Material System Affiliate that constitutes a regulated insurance entity (including MFC) will ever be required to become a party to the Guaranty Agreement. The holders of the Bonds and the 2015 Taxable Bonds (and the Obligations securing the Bonds and the 2015 Taxable Bonds) and the holder of each Obligation and Related Bonds issued after the date of issuance of the Bonds will be deemed to have consented to this amendment by their purchase of the Bonds, the 2015 Taxable Bonds or such Obligations or Related Bonds, respectively. Sale, Lease or Other Disposition of Property No System Affiliate shall sell, transfer or dispose of Property in any Fiscal Year except to another System Affiliate, other than; (1) a sale or transfer of Property (other than cash or cash equivalents) for fair market value; or (2) Property which has become worn out, obsolete or unnecessary for the operations of a System Affiliate; or (3) Property which has been replaced or disposed of in the ordinary course of business; or (4) sales, transfers and dispositions (other than cash or cash equivalents) pursuant to which the Debt Service Coverage Ratio of the System is greater or the same after giving effect to such sale, transfer or disposition calculated as if such action occurred on the first day of the most recent Fiscal Year for which audited combined or consolidated financial statements of the System have been delivered; or (5) Property constituting medical office buildings located on the Washington Hospital Center campus, Franklin Square Hospital campus and in Essex, Maryland; the Kober Cogen building and adjacent parcel known as Parking Lot A on the Georgetown University Hospital campus; Property leased to Children s Hospital National Medical Center on the Washington Hospital Center campus as well as any Property located on the campus of Good Samaritan Hospital but not constituting the acute care facilities of Good Samaritan Hospital and, C-55

246 in connection with any of the foregoing, a grant or acceptance of any easements, covenants, restrictions, and other rights that affect the Property not so released and that are appurtenant to the portion of the Property that is being sold, transferred or disposed of; or (6) Property constituting restricted gifts, grants and bequests that are not available to pay debt service on Indebtedness; or (7) Property (other than cash or cash equivalents) with a Book Value of less than five percent (5%) of net Property, Plant and Equipment of the System; or (8) Property constituting cash or cash equivalents (i) for fair market value or (ii) the cash or cash equivalents of the System would be at least seventy-five percent (75%) of the greater of (a) the cash or cash equivalents of the System as of the end of the most recent Fiscal Year for which audited combined or consolidated financial statements of the System have been delivered and (b) the cash or cash equivalents of the System as of the date of the relevant action; and the cash or cash equivalents of the System would be not less than the greater of (a) a dollar amount equal to fifty-five (55) Days Cash on Hand, calculated as of the end of the most recent Fiscal Year and (b) a dollar amount equal to fifty-five (55) Days Cash on Hand, calculated as of the date of the relevant action; or (9) in connection with a true sale and leaseback transaction; or (10) sales, transfers and dispositions (other than cash or cash equivalents) resulting in (i) the Debt Service Coverage Ratio of the System exceeding ninety percent (90%) of what the coverage would have been absent such sale, transfer or disposition and (ii) the Debt Service Coverage Ratio of the System being greater than 1.75 to 1 after giving effect to such sale, transfer or disposition. Compliance with these provisions would be calculated as if such action occurred on the first day of the most recent Fiscal Year for which audited combined or consolidated financial statements of the System have been delivered. Compliance with each of the above will be evidenced for each Fiscal Year by delivery of an Officer s Certificate to the Master Trustee annually; provided, however, with regard to clauses (4) and (10) above, compliance will be evidenced by delivery of an Officer s Certificate to the Master Trustee prior to such sales, transfers or dispositions of Property. The Master Trustee may solely rely on such Officer s Certificate to evidence compliance with the above provisions of the Master Indenture. Liens on Property No Member shall create or incur or permit to be created or incurred or to exist any Lien on any Property of such Member, and no Controlling Member (subject to contractual and organizational limitations) shall permit to be created or incurred or to exist any Lien on any Property of any System Affiliate controlled by it except, in each instance, Permitted Encumbrances. C-56

247 Pledge of Revenues of Corporation The Corporation, to the extent permitted by law, grants for the benefit of the holders of Outstanding Obligations a security interest in the Pledged Revenues in order to secure the Obligated Group s obligations under the Master Indenture. Right to Consent Each Member shall have the right to agree in any Related Bond Indenture, Related Loan Document or Supplemental Master Indenture pursuant to which an Obligation is issued that, so long as any Related Bonds remain outstanding under such Related Bond Indenture or such Obligation remains outstanding, any or all provisions of the Master Indenture which provide for approval, consent, direction or appointment by the Master Trustee, provide that anything must be satisfactory or acceptable to the Master Trustee or not unacceptable to the Master Trustee, allow the Master Trustee to request anything or contain similar provisions granting discretion to the Master Trustee may also require or allow, as the case may be, the approval, consent, appointment, satisfaction, acceptance, request or like exercise of discretion by the Related Issuer, the Related Bond Trustee or the holders of some specified percentage of such Obligations as provided for in such Obligations, or any one thereof and that all items required to be delivered or addressed to the Master Trustee under the Master Indenture may also be delivered or addressed to the Related Issuer, such Obligation holders and the Related Bond Trustee, or any one thereof, unless waived thereby. Events of Default Each of the following events is pursuant to the Master Indenture declared an event of default : (a) failure of the Obligated Group to pay any installment of interest or principal, or any premium, on any Obligation when the same shall become due and payable, whether at maturity, upon any date fixed for prepayment or by acceleration or otherwise and the continuance of such failure for ten days (or any shorter grace period required in the Supplemental Master Indenture pursuant to which such Obligation was issued); provided, however, that in no event shall any grace period continue for a period of time longer than is allowed under the Related Bonds Indenture to which the Related Bonds were issued; or (b) failure of any Member to comply with, observe or perform any other covenants, conditions, agreements or provisions of the Master Indenture and to remedy such default within 60 days after written notice thereof to such Member and the Obligated Group Agent from the Master Trustee or the holders of at least 20% in aggregate principal amount of the outstanding Obligations; provided, that if such default cannot with due diligence and dispatch be wholly cured within 60 days but can be wholly cured, the failure of the Member to remedy such default within such 60-day period shall not constitute a default under the Master Indenture if the Member shall immediately upon receipt of such notice commence with due diligence and C-57

248 dispatch the curing of such default and, having so commenced the curing of such default, shall thereafter prosecute and complete the same with due diligence and dispatch; or (c) any representation or warranty made by any Member in the Master Indenture or in any Supplemental Master Indenture or in any statement or certificate furnished to the Master Trustee or the purchaser of any Obligation or Related Bond in connection with the delivery of any Obligation or sale of any Related Bond or furnished by any Member pursuant the Master Indenture or any Supplemental Master Indenture proves untrue in any material respect as of the date of the issuance or making thereof and shall not be corrected or brought into compliance within 60 days after written notice thereof to the Obligated Group Agent by the Master Trustee or the holders of at least 20% in aggregate principal amount of the outstanding Obligations; or (d) default in the payment of the principal of, premium, if any, or interest on any Indebtedness for borrowed money (other than Non-Recourse Indebtedness) of any Member, including without limitation any Indebtedness created by any Related Loan Document, as and when the same shall become due, or an event of default as defined in any mortgage, indenture, loan agreement or other instrument under or pursuant to which there was issued or incurred, or by which there is secured, any such Indebtedness (including any Obligation) of any Member, and which default in payment or event of default entitles the holder thereof (or any credit enhancer exercising the rights of such holder) to declare or, in the case of any Obligation, to request that the Master Trustee declare, such Indebtedness due and payable prior to the date on which it would otherwise become due and payable; provided, however, that if such Indebtedness is not evidenced by an Obligation or issued, incurred or secured by or under a Related Loan Document, a default in payment thereunder shall not constitute an event of default under the Master Indenture unless the unpaid principal amount of such Indebtedness, together with the unpaid principal amount of all other Indebtedness so in default, exceeds 1% of the Revenues of the System as shown on or derived from the then latest available audited consolidated financial statements of the System; or (e) any judgment or similar process shall be entered or filed against any Member or against any Property of any Member and remains unvacated, unpaid, unbonded, unstayed or uncontested in good faith for a period of 60 days; provided, however, that the foregoing shall not constitute an event of default where (i) the judgment or similar process is payable from proceeds of insurance (including self-insurance or a captive insurance company), (ii) the judgment or similar process remains unvacated, unpaid, unbonded, unstayed or uncontested due to a good faith dispute as to the insurance coverage of the underlying claim to which the judgment or similar process pertains or (iii) the amount of such judgment or similar process, together with the amount of all other such judgments or similar processes so unvacated, unpaid, unbonded, unstayed or uncontested, does not exceed 1% of the Revenues of the System as shown on or derived from the then latest available audited consolidated financial statements of the System; or (f) any Member admits insolvency or bankruptcy or its inability to pay its debts as they mature, or is generally not paying its debts as such debts become due, or makes an assignment for the benefit of creditors or applies for or consents to the appointment of a trustee, custodian or receiver for such Member, or for the major part of its Property; or C-58

249 (g) a trustee, custodian or receiver is appointed for any Member or for the major part of its Property and is not discharged within 90 days after such appointment; or (h) bankruptcy, dissolution, reorganization, arrangement, insolvency or liquidation proceedings, proceedings under Title 11 of the United States Code, as amended, or other proceedings for relief under any bankruptcy law or similar law for the relief of debtors are instituted by or against any Member (other than bankruptcy proceedings instituted by any Member against third parties), and if instituted against any Member are allowed against such Member or are consented to or are not dismissed, stayed or otherwise nullified within 90 days after such institution; or (i) the Debt Service Coverage Ratio of the System was less than 1 to 1 as of the end of two consecutive Fiscal Years and, as of the end of the second of such Fiscal Years, the Corporation had less than 55 Days Cash on Hand; or (j) an event of default under the Guaranty Agreement delivered by certain System Affiliates to the Master Trustee. Acceleration If an event of default has occurred and is continuing, the Master Trustee may, and if requested by the holders of not less than 20% in aggregate principal amount of Outstanding Obligations shall, by notice in writing delivered to the Obligated Group Agent, declare the entire principal amount of all Obligations then outstanding under the Master Indenture and the interest accrued thereon immediately due and payable, and the entire principal and such interest shall thereupon become immediately due and payable, subject, however, to the provisions of the Master Indenture with respect to waivers of events of default. The foregoing notwithstanding, if the Supplemental Master Indenture creating an Obligation or Obligations includes a requirement that the consent of any credit enhancer, liquidity provider or any other Person be obtained prior to the acceleration of such Obligation or Obligations, the Master Trustee may not accelerate such Obligation or Obligations without the consent of such Person. In addition, the holder of any Accelerable Instrument under which Accelerable Instrument an event of default exists (which event of default permits the holder thereof to request that the Master Trustee declare such Indebtedness evidenced by an Obligation due and payable prior to the date on which it would otherwise become due and payable) may direct that the Master Trustee accelerate such Indebtedness. Remedies; Rights of Obligation Holders Upon the occurrence of any event of default under the Master Indenture, the Master Trustee may pursue any available remedy including a suit, action or proceeding at law or in equity to enforce the payment of the principal of, premium, if any, and interest on the Obligations outstanding under the Master Indenture and any other sums due under the Master Indenture and may collect such sums in the manner provided by law out of the Property of any Member wherever situated. C-59

250 If an event of default shall have occurred, and if it shall have been requested so to do by either the holders of 20% or more in aggregate principal amount of Obligations outstanding or the holder of an Accelerable Instrument upon whose request the Master Trustee has accelerated the Obligations (and upon the provision of indemnity satisfactory to the Master Trustee in its sole discretion), the Master Trustee shall be obligated to exercise such one or more of the rights and powers conferred by the Master Indenture as the Master Trustee shall deem most expedient in the interests of the holders of Obligations; provided, however, that the Master Trustee shall have the right to decline to comply with any such request if the Master Trustee shall be advised by Counsel (who may be its own Counsel) that the action so requested may not lawfully be taken or the Master Trustee in good faith shall determine that such action would be unjustly prejudicial to the holders of Obligations not parties to such request. No remedy by the terms of the Master Indenture conferred upon or reserved to the Master Trustee (or to the holders of Obligations) is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to any other remedy given to the Master Trustee or to the holders of Obligations under the Master Indenture now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default or event of default shall impair any such right or power or shall be construed to be a waiver of any such default or event of default, or acquiescence therein; and every such right and power may be exercised from time to time and as often as may be deemed expedient. No waiver of any default or event of default under the Master Indenture, whether by the Master Trustee or by the holders of Obligations, shall extend to or shall affect any subsequent default or event of default or shall impair any rights or remedies consequent thereon. Direction of Proceedings by Holders The holders of a majority in aggregate principal amount of the Obligations then outstanding which have become due and payable in accordance with their terms or have been declared due and payable pursuant to the Master Indenture and have not been paid in full in the case of remedies exercised to enforce such payment, or the holders of a majority in aggregate principal amount of the Obligations then outstanding in the case of any other remedy, shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Master Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Master Indenture or for the appointment of a receiver or any other proceedings under the Master Indenture; provided, that such direction shall not be otherwise than in accordance with the provisions of law and of the Master Indenture and that the Master Trustee shall have the right to decline to comply with any such request if the Master Trustee shall be advised by Counsel (who may be its own Counsel) that the action so directed may not lawfully be taken or the Master Trustee in good faith shall determine that such action would be unjustly prejudicial to the holders of the Obligations not parties to such direction. Pending such direction from the holders of a majority in aggregate principal amount of the Obligations outstanding, such direction may be given in the same C-60

251 manner and with the same effect by the holder of an Accelerable Instrument upon whose request the Master Trustee has accelerated the Obligations. The foregoing notwithstanding, the holders of a majority in aggregate principal amount of the Obligations then outstanding which are entitled to the exclusive benefit of certain security in addition to that intended to secure all or other Obligations shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Master Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Master Indenture, the Supplemental Master Indenture or Indentures pursuant to which such Obligations were issued or so secured or any separate security document in order to realize on such security; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of the Master Indenture. Application of Moneys All moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of the Master Indenture (except moneys held for the payment of Obligations called for prepayment or redemption which have become due and payable and moneys which have been deposited with the Master Trustee in connection with the defeasance of any Obligation) shall, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys and of the fees of, expenses, liabilities and advances incurred or made by the Master Trustee, any Related Issuers and any Related Bond Trustees, be applied as follows: (a) Unless the principal of all the Obligations shall have become or shall have been declared due and payable, all such moneys shall be applied: First: To the payment to the persons entitled thereto of all installments of interest then due on the Obligations, in the order of the maturity of the installments of such interest, and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or privilege; and Second: To the payment to the persons entitled thereto of the unpaid principal and premium, if any, on the Obligations which shall have become due (other than Obligations called for redemption or payment for payment of which moneys are held pursuant to the provisions of the Master Indenture), in the order of the scheduled dates of their payment, and, if the amount available shall not be sufficient to pay in full Obligations due on any particular date, then to the payment ratably, according to the amount of principal and premium due on such date, to the persons entitled thereto without any discrimination or privilege. (b) If the principal of all the Obligations shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal, premium, if any, and interest then due and unpaid upon the Obligations without preference or C-61

252 priority of principal, premium or interest over the others, or of any installment of interest over any other installment of interest, or of any Obligation over any other Obligation, ratably, according to the amounts due respectively for principal, premium, if any, and interest to the persons entitled thereto without any discrimination or privilege; and (c) If the principal of all the Obligations shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled then, subject to the provisions of paragraph (b) of this section in the event that the principal of all the Obligations shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of paragraph (a) of this section. Whenever moneys are to be applied by the Master Trustee pursuant to the provisions of this section, such moneys shall be applied by it at such times, and from time to time, as the Master Trustee shall determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Master Trustee shall apply such moneys, it shall fix the date (which shall be an interest payment date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date shall cease to accrue. The Master Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the holder of any unpaid Obligation until such Obligation shall be presented to the Master Trustee for appropriate endorsement or for cancellation if fully paid. Whenever all Obligations and interest thereon have been paid under the provisions of this section and all expenses and charges of the Master Trustee have been paid, any balance remaining shall be paid to the person entitled to receive the same; if no other person shall be entitled thereto, then the balance shall be paid to the Obligated Group Agent on behalf of the Members. Rights and Remedies of Obligation Holders No holder of any Obligation shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of the Master Indenture or for the execution of any trust of the Master Indenture or for the appointment of a receiver or any other remedy under the Master Indenture, unless a default shall have become an event of default and (a) the holders of 20% or more in aggregate principal amount (i) of the Obligations which have become due and payable in accordance with their terms or have been declared due and payable under the Master Indenture and have not been paid in full in the case of powers exercised to enforce such payment or (ii) of the Obligations then outstanding in the case of any other exercise of power or (b) the holder of an Accelerable Instrument upon whose request the Master Trustee has accelerated the Obligations, shall have made written request to the Master Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers granted under the Master Indenture or to institute such action, suit or proceeding in its own name, and shall have offered indemnity to the Master Trustee for its fees and expenses in an amount satisfactory to the C-62

253 Master Trustee in its sole discretion, and unless the Master Trustee shall thereafter fail or refuse to exercise the powers granted under the Master Indenture, or to institute such action, suit or proceeding in its own name; and such notification, request and offer of indemnity are pursuant to the Master Indenture declared in every case at the option of the Master Trustee to be conditions precedent to the execution of the powers and trusts of the Master Indenture and to any action or cause of action for the enforcement of the Master Indenture, or for the appointment of a receiver or for any other remedy under the Master Indenture; it being understood and intended that no one or more holders of the Obligations shall have any right in any manner whatsoever to affect, disturb or prejudice the lien of the Master Indenture by its, his, her or their action or to enforce any right under the Master Indenture except in the manner provided in the Master Indenture, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner provided in the Master Indenture and for the equal benefit of the holders of all Obligations outstanding. Nothing in the Master Indenture contained shall, however, affect or impair the right of any holder to enforce the payment of the principal of, premium, if any, and interest on any Obligation at and after the maturity thereof, or the obligation of the Members to pay the principal, premium, if any, and interest on each of the Obligations issued under the Master Indenture to the respective holders thereof at the time and place, from the source and in the manner in said Obligations expressed. Termination of Proceedings In case the Master Trustee shall have proceeded to enforce any right under the Master Indenture by the appointment of a receiver, or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Master Trustee, then and in every case the Members and the Master Trustee shall, subject to any determination in such proceeding, be restored to their former positions and rights under the Master Indenture with respect to the Property pledged and assigned under the Master Indenture, and all rights, remedies and powers of the Master Trustee shall continue as if no such proceedings had been taken. Waiver of Events of Default If, at any time after the principal of all Obligations shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as provided in the Master Indenture and before the acceleration of any Related Bond, any Member shall pay or shall deposit with the Master Trustee a sum sufficient to pay all matured installments of interest upon all such Obligations and the principal and premium, if any, of all such Obligations that shall have become due otherwise than by acceleration (with interest on overdue installments of interest and on such principal and premium, if any, at the rate borne by such Obligations to the date of such payment or deposit, to the extent permitted by law) and the expenses of the Master Trustee, and any and all events of default under the Master Indenture, other than the nonpayment of principal of and accrued interest on such Obligations that shall have become due by acceleration, shall have been remedied, then and in every such case the holders of a majority in aggregate principal amount of all Obligations then outstanding and the holder of each Accelerable Instrument who requested the giving of notice of C-63

254 acceleration, by written notice to the Obligated Group Agent and to the Master Trustee, may waive all events of default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or affect any subsequent event of default, or shall impair any right consequent thereon. Successor Master Trustee Any corporation or association into which the Master Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which it is a party, ipso facto, shall be and become successor Master Trustee under the Master Indenture and vested with all of the title to the whole property or trust estate and all the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or conveyance on the part of and of the parties to the Master Indenture, anything in the Master Indenture to the contrary notwithstanding. Corporate Master Trustee Required; Eligibility There shall at all times be a Master Trustee under the Master Indenture which shall be a bank or trust company organized under the laws of the United States of America or any state thereof, authorized to exercise corporate trust powers, subject to supervision or examination by federal or state authorities, and (except for the Master Trustee initially appointed under the Master Indenture and its successors) having a reported combined capital and surplus of at least $50,000,000. If at any time the Master Trustee shall cease to be eligible, it shall resign immediately in the manner provided in the Master Indenture. No resignation or removal of the Master Trustee and no appointment of a successor Master Trustee shall become effective until the successor Master Trustee has accepted its appointment. Resignation by the Master Trustee The Master Trustee and any successor Master Trustee may at any time resign from the trusts created under the Master Indenture by giving thirty days written notice to the Obligated Group Agent and by registered or certified mail to each registered owner of Obligations then outstanding and to each holder of Obligations as shown by the list of Obligation holders required by the Master Indenture to be kept at the office of the Master Trustee or its agent and to any Related Issuer of Related Bonds. Such resignation shall take effect at the end of such thirty days or when a successor Master Trustee has been appointed and has assumed the trusts created by the Master Indenture, whichever is later, or upon the earlier appointment of a successor Master Trustee by the Obligation holders or by the Obligated Group. Such notice to the Obligated Group Agent may be served personally or sent by registered or certified mail. C-64

255 Removal of the Master Trustee The Master Trustee may be removed at any time, by an instrument or concurrent instruments in writing delivered to the Master Trustee and to the Obligated Group Agent, and signed by the owners of a majority in aggregate principal amount of Obligations then outstanding. So long as no event of default or event which with the passage of time or giving of notice or both would become such an event of default has occurred and is continuing under the Master Indenture, the Master Trustee may be removed with or without cause at any time by an instrument or concurrent instruments in writing signed by the Obligated Group Agent, delivered to the Master Trustee. Appointment of Successor Master Trustee by the Obligation Holders; Temporary Master Trustee. In case the Master Trustee under the Master Indenture shall resign or be removed, or be dissolved, or shall be in the process of dissolution or liquidation, or otherwise becomes incapable of acting under the Master Indenture, or in case it shall be taken under the control of any public officer or officers, or of a receiver appointed by a court, a successor may be appointed by the owners of a majority in aggregate principal amount of Obligations then outstanding, by an instrument or concurrent instruments in writing signed by such owners, or by their attorneys in fact, duly authorized. The foregoing notwithstanding, so long as the Obligated Group is not in default under the Master Indenture, the Obligated Group shall have the right to approve any such successor trustee and to appoint any such successor trustee in lieu of the owners of a majority of the aggregate principal amount of the Obligations then Outstanding. Every such successor Master Trustee shall be a trust company or bank in good standing under the law of the jurisdiction in which it was created and by which it exists, having corporate trust powers and subject to examination by federal or state authorities, and having a reported capital and surplus of not less than $50,000,000. Supplemental Master Indentures Not Requiring Consent of Obligation Holders Except as provided in any Related Bond Indenture, subject to the limitations set forth in the Master Indenture, the Members and the Master Trustee may, without the consent of, or notice to, any of the Obligation holders, amend or supplement the Master Indenture, for any one or more of the following purposes: (a) To cure any ambiguity or defective provision in or omission from the Master Indenture in such manner as is not inconsistent with and does not impair the security of the Master Indenture or adversely affect the holder of any Obligation; (b) To grant to or confer upon the Master Trustee for the benefit of the Obligation holders any additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon the Obligation holders and the Master Trustee, or either of them, to add to the covenants of the Members for the benefit of the Obligation holders or to surrender any right or power conferred under the Master Indenture upon any Member; C-65

256 (c) To assign and pledge under the Master Indenture any additional revenues, properties or collateral; (d) To evidence the succession of another entity to the agreements of a Member or the Master Trustee, or the successor of any thereof under the Master Indenture; (e) To permit the qualification of the Master Indenture under the Trust Indenture Act of 1939, as then amended, or under any similar federal statute hereafter in effect or to permit the qualification of any Obligations for sale under the securities laws of any state of the United States; (f) (g) To provide for the refunding or advance refunding of any Obligation; To provide for the issuance of Obligations; (h) To reflect the addition to or withdrawal of a Member from the Obligated Group, including the necessary changes to Exhibit A to the Master Indenture as permitted by the Master Indenture; (i) To provide for the issuance of Obligations with original issue discount, provided such issuance would not materially adversely affect the holders of Outstanding Obligations; (j) To permit an Obligation to be secured by security which is not extended to all Obligation holders; note; (k) To permit the issuance of Obligations which are not in the form of a promissory (l) To modify or eliminate any of the terms of the Master Indenture; provided, however, that such Supplemental Master Indenture shall expressly provide that any such modifications or eliminations shall become effective only when there is no Obligation outstanding of any series created prior to the execution of such Supplemental Master Indenture the consent of a majority of the holders of which shall not have been obtained; (m) To modify, eliminate or add to the provisions of the Master Indenture if the Master Trustee shall have received (i) written confirmation from each Rating Agency that such change will not result in a withdrawal or reduction of its credit rating assigned to any series of Obligations or Related Bonds, as the case may be, or a report, opinion or certification of a Consultant to the effect that such change is consistent with then current industry standards, (ii) an Officer s Certificate of the Obligated Group Agent to the effect that, in the judgment of the Obligated Group Agent, such change is necessary to permit any Member of the Obligated Group to affiliate or merge with, on acceptable terms, one or more corporations that provide health care services and such modification is in the best interests of the holders of the Outstanding Obligations and (iii) an opinion of Counsel acceptable to the Master Trustee that such change or changes to the Master Indenture will not materially adversely affect the holders of any of the Obligations and does not materially adversely affect the holders of any Related Bonds; and C-66

257 (n) To make any other change which does not materially adversely affect the holders of any of the Obligations and does not materially adversely affect the holders of any Related Bonds, including without limitation any modification, amendment or supplement to the Master Indenture or any indenture supplemental hereto in such a manner as to establish or maintain exemption of interest on any Related Bonds under a Related Bond Indenture from federal income taxation under applicable provisions of the Code. Any Supplemental Master Indenture providing for the issuance of Obligations shall set forth the date thereof, the date or dates upon which principal of, premium, if any, and interest on such Obligations shall be payable, the other terms and conditions of such Obligations, the form of such Obligations and the conditions precedent to the delivery of such Obligations which shall include, among other things: (a) delivery to the Master Trustee of an opinion of Counsel acceptable to the Master Trustee to the effect that all requirements and conditions to the issuance of such Obligations, if any, set forth in the Master Indenture and in the Supplemental Master Indenture have been complied with and satisfied; and (b) delivery to the Master Trustee of an opinion of Counsel acceptable to the Master Trustee to the effect that neither registration of such Obligations under the Securities Act of 1933, as amended, nor qualification of such Supplemental Master Indenture under the Trust Indenture Act of 1939, as amended, is required, or, if such registration or qualification is required, that the Obligated Group has complied with all applicable provisions of said acts. Supplemental Master Indentures Requiring Consent of Obligation Holders The holders of not less than a majority in aggregate principal amount of the Outstanding Obligations under the Master Indenture at the time of the execution of such Supplemental Master Indenture or, in case less than all of the several series of Obligations are affected thereby, the holders of not less than a majority in aggregate principal amount of the Outstanding Obligations of each series affected thereby at the time of the execution of such Supplemental Master Indenture, shall have the right, from time to time, anything contained in the Master Indenture to the contrary notwithstanding, to consent to and approve the execution by the Members and the Master Trustee of such Supplemental Master Indentures as shall be deemed necessary and desirable by the Members for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Master Indenture or in any Supplemental Master Indenture; provided, however, that nothing contained in the Master Indenture shall permit, or be construed as permitting, (a) an extension of the stated maturity or reduction in the principal amount of or reduction in the rate or extension of the time of paying of interest on or reduction of any premium payable on the redemption of, any Obligation, without the consent of the holder of such Obligation, (b) a reduction in the aforesaid aggregate principal amount of Obligations the holders of which are required to consent to any such Supplemental Master Indenture, without the consent of the holders of all the Obligations at the time outstanding which would be affected by the action to be taken, (c) the creation of any lien ranking prior to or on a parity with the lien of the Master Indenture with respect to the trust C-67

258 estate, if any, subject thereto or termination of the lien of the Master Indenture on any Property at any time subject thereto or deprivation of the holder of any Obligation of the security afforded by the lien of the Master Indenture except as otherwise provided in the Master Indenture, or (d) modification of the rights, duties or immunities of the Master Trustee, without the written consent of the Master Trustee. If at any time the Obligated Group Agent shall request the Master Trustee to enter into any such Supplemental Master Indenture, the Master Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed execution of such Supplemental Master Indenture to be mailed by first class mail postage prepaid to each holder of an Obligation or, in case less than all of the series of Obligations are affected thereby, of an Obligation of the series affected thereby. Such notice shall briefly set forth the nature of the proposed Supplemental Master Indenture and shall state that copies thereof are on file at the principal corporate trust office of the Master Trustee identified in such notice for inspection by all Obligation holders. The Master Trustee shall not, however, be subject to any liability to any Obligation holder by reason of its failure to mail such notice, and any such failure shall not affect the validity of such Supplemental Master Indenture when consented to and approved as provided in the Master Indenture. If the holders of not less than a majority in aggregate principal amount of the Outstanding Obligations or the Outstanding Obligations of each series affected thereby, as the case may be, at the time of the execution of any such Supplemental Master Indenture shall have consented to and approved the execution thereof as provided in the Master Indenture, no holder of any Obligation shall have any right to object to any of the terms and provisions contained therein, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Master Trustee or the Members from executing the same or from taking any action pursuant to the provisions thereof. Upon the execution of any such Supplemental Master Indenture as permitted and provided in the Master Indenture, the Master Indenture shall be and be deemed to be modified and amended in accordance therewith. Obligation and Document Substitution (a) The Master Indenture may be amended or supplemented as provided in the Master Indenture. (b) In addition, except as provided in any Related Bond Indenture, the Obligated Group and the Master Trustee, may, without the consent of any of the Holders of any Obligations or any Related Bonds, but only with the prior written consent of the credit enhancers of the Related Bonds of the affected series of Related Bonds, enter into one or more supplements, amendments, restatements, replacements or substitutions to the Master Indenture, to modify, amend, restate, supplement, replace, substitute, change or remove any covenant, agreement, term or provision of the Master Indenture, in whole or in part, including, but not limited to, an amendment, restatement or substitution of the Master Indenture, in whole to relate to all Related Bonds, or in part to relate to a portion of the Related Bonds, including but not limited to a series or subseries of the Related Bonds secured by payment obligations of the Persons on whose behalf the allocable portion of the proceeds of the Related Bonds were utilized, or an affiliate of such Persons, in order to effect (i) the affiliation of the Corporation, the C-68

259 Obligated Group, any Members of the Obligated Group or any System Affiliates with any of the foregoing or with another entity or entities in order to create a new or modified credit group or structure or in order to provide for the inclusion of the Corporation, the Obligated Group, any Members of the Obligated Group or any System Affiliates in another obligated group, combined group or other unified credit group or structure, (ii) the release or discharge of any collateral securing the Related Bonds, including, but not limited to, the release or discharge of (A) any or all Obligations, in whole or in part, issued pursuant to the Master Indenture to secure the Related Bonds and (B) the Corporation, the Obligated Group, any Members of the Obligated Group or any System Affiliates from any or all liability (whether direct or indirect) with respect to the Related Bonds or a portion thereof, any Related Loan Document, any Related Bond Indenture, the Obligations, or the Master Indenture or any portion of any thereof, in consideration for the issuance of a note or notes to secure the Related Bonds or portion of the Related Bonds that are to become an obligation of the new affiliated entities or the new obligated group, combined group or other unified credit group, which note or notes constitutes an obligation of the new affiliated entities or the members of the new obligated group, combined group or other unified credit group to make all payments required under such Obligation and any Related Loan Agreement, when due, and (iii) the replacement of all or a portion of the financial and operating covenants and related definitions set forth in the Master Indenture with those of the new affiliated entities or the new obligated group, combined group or other unified credit group, set forth in the new agreement or master indenture (such transaction is referred to collectively as the Substitution Transaction ); provided, however, that the Master Indenture and any replacement or substitution thereof shall at all times contain certain covenants set forth in the Master Indenture. (c) If all amounts due or to become due on the Related Bonds have not been fully paid to the Holder thereof, at or prior to the implementation of the Substitution Transaction there shall also be delivered to the Master Trustee, among other things,: (i) an opinion of nationally recognized bond counsel to the effect that under then existing law the implementation of the Substitution Transaction and the execution of the amendments, supplements, restatements, replacements or substitutions contemplated in the Master Indenture, in and of themselves, would not adversely affect the validity of the Related Bonds or the exclusion from federal income taxation of interest payable on the Related Bonds, (ii) an opinion of counsel to the new affiliated entities or the new obligated group, combined group or other unified credit group to the effect that (1) the note or notes of the new affiliated entities or the new obligated group, combined group or other unified credit group to be delivered to secure the Related Bonds constitute legal, valid and binding obligations of the new affiliated entities or the new obligated group, combined group or other unified credit group enforceable in accordance with their terms, except to the extent that the enforceability of such note or notes may be limited by any applicable bankruptcy, insolvency, liquidation, rehabilitation or other similar laws or enactment affecting the enforcement of creditors rights, and (2) the issuance of the note or notes will not cause the Related Bonds or such note or notes to become subject to the registration requirements pursuant to the Securities Act of 1933, as amended, (iii) an Officer s Certificate demonstrating that if the new affiliated entity, obligated group, combined group or unified credit group as a result of the Substitution Transaction had been System Affiliates under the Master Indenture as of the first C-69

260 day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, the Debt Service Coverage Ratio would not have been less than 1.10 to 1; and (iv) if any Related Bonds are then rated by a Rating Agency, written confirmation from the Rating Agencies of the then existing rating on the Related Bonds. (d) In addition, upon the implementation of the Substitution Transaction, the Corporation shall direct the Master Trustee to give written notice thereof, by first-class mail, to the Holders of the Outstanding Obligations. (e) Notwithstanding the provisions described above within this subsection entitled Obligation and Document Substitution, the Master Indenture may be replaced or substituted in its entirety while the Bonds remain Outstanding only with the prior written consent of the Authority and the holders of a majority of the aggregate principal amount of Outstanding Bonds. Nothing herein shall limit any other rights of the Obligated Group and the Master Trustee in effect as set forth above. Defeasance If the Members shall pay or provide for the payment of the entire indebtedness on all Obligations (including, for the purposes of the Master Indenture, any Obligations owned by a Member) outstanding in any one or more of the following ways: (a) by paying or causing to be paid the principal of (including redemption premium, if any) and interest on all Obligations outstanding, as and when the same become due and payable; (b) by depositing with the Master Trustee, in trust, at or before maturity, moneys in an amount sufficient to pay or redeem (when redeemable) all Obligations outstanding (including the payment of premium, if any, and interest payable on such Obligations to the maturity or redemption date thereof), provided that such moneys, if invested, shall be invested at the direction of the Obligated Group Agent in Escrow Obligations, in an amount, without consideration of any income or increment to accrue thereon, sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations outstanding at or before their respective maturity dates; it being understood that the investment income on such Escrow Obligations may be used at the direction of the Obligated Group Agent for any other purpose permitted by law; (c) by delivering to the Master Trustee, for cancellation by it, all Obligations outstanding; or (d) by depositing with the Master Trustee, in trust, before maturity, Escrow Obligations in such amount as the Master Trustee shall determine, based upon a verification report of independent certified public accountants, will, together with the income or increment to accrue thereon, without consideration of any reinvestment thereof, be fully sufficient to pay or C-70

261 redeem (when redeemable) and discharge the indebtedness on all Obligations outstanding at or before their respective maturity dates; and if the Obligated Group shall also pay or cause to be paid all other sums payable under the Master Indenture and any Related Bond Indenture or Indentures by the Obligated Group and, if any such Obligations are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given in accordance with the requirements of the Master Indenture or provisions satisfactory to the Master Trustee shall have been made for the giving of such notice, then and in that case (but subject to the provisions of the Master Indenture) the Master Indenture and the estate and rights granted under the Master Indenture shall cease, determine, and become null and void, and thereupon the Master Trustee shall, upon written request of the Obligated Group Agent, and upon receipt by the Master Trustee of an Officer s Certificate from the Obligated Group Agent and an opinion of Counsel acceptable to the Master Trustee, each stating that in the opinion of the signers all conditions precedent to the satisfaction and discharge of the Master Indenture have been complied with, forthwith execute proper instruments acknowledging satisfaction of and discharging the Master Indenture and the lien of the Master Indenture. The satisfaction and discharge of the Master Indenture shall be without prejudice to the rights of the Master Trustee to charge and be reimbursed by the Obligated Group for any expenditures which it may thereafter incur in connection therewith. Any moneys, funds, securities, or other property remaining on deposit under the Master Indenture (other than said Escrow Obligations or other moneys deposited in trust as above provided) shall, upon the full satisfaction of the Master Indenture, forthwith be transferred, paid over and distributed to the Obligated Group Agent. The Obligated Group may at any time surrender to the Master Trustee for cancellation by it any Obligations previously authenticated and delivered which the Obligated Group may have acquired in any manner whatsoever, and such Obligations, upon such surrender and cancellation, shall be deemed to be paid and retired. Provision for Payment of a Particular Series of Obligations or Portion Thereof If the Obligated Group shall pay or provide for the payment of the entire indebtedness on all Obligations of a particular series or a portion of such a series (including any such Obligations owned by a Member) in one of the following ways: (a) by paying or causing to be paid the principal of (including redemption premium, if any) and interest on all Obligations of such series or portion thereof outstanding, as and when the same shall become due and payable; (b) by depositing with the Master Trustee, in trust, at or before maturity, moneys in an amount sufficient to pay or redeem (when redeemable) all Obligations of such series or portion thereof outstanding (including the payment of premium, if any, and interest payable on such Obligations to the maturity or redemption date), provided that such moneys, if invested, shall be invested at the direction of the Obligated Group Agent in Escrow Obligations in an C-71

262 amount, without consideration of any income or increment to accrue thereon, sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations of such series or portion thereof outstanding at or before their respective maturity dates; it being understood that the investment income on such Escrow Obligations may be used at the direction of the Obligated Group Agent for any other purpose permitted by law; (c) by delivering to the Master Trustee, for cancellation by it, all Obligations of such series or portion thereof outstanding; or (d) by depositing with the Master Trustee, in trust, Escrow Obligations in such amount as the Master Trustee shall determine, based upon a verification report of independent certified public accountants, will, together with the income or increment to accrue thereon without consideration of any reinvestment thereof, be fully sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations of such series or portion thereof at or before their respective maturity dates; and if the Obligated Group shall also pay or cause to be paid all other sums payable under the Master Indenture by the Obligated Group with respect to such series of Obligations or portion thereof, and, if any such Obligations of such series or portion thereof are to be redeemed prior to the maturity of the Master Indenture, notice of such redemption shall have been given in accordance with the requirements of the Master Indenture or provisions satisfactory to the Master Trustee shall have been made for the giving of such notice, then in that case (but subject to the provisions of the Master Indenture) such Obligations shall cease to be entitled to any lien, benefit or security under the Master Indenture. Satisfaction of Related Bonds The provisions of other sections of the Master Indenture notwithstanding, any Obligation which secures a Related Bond shall be deemed paid and shall cease to be entitled to the lien, benefit and security under the Master Indenture in the circumstances described in subsection (b)(ii) of the definition of Outstanding Obligations contained in the Master Indenture. SUMMARY OF CERTAIN PROVISIONS OF THE GUARANTY AGREEMENT The following is a summary of certain provisions of the Guaranty Agreement. This summary should not be regarded as a full statement of the Guaranty Agreement or of the portions summarized. Reference is made to the Guaranty Agreement in its entirety for the complete statements of the provisions thereof, a copy of which is on file at the principal corporate trust office of the Master Trustee. Capitalized terms used herein and not defined shall have the meanings given to them in the forepart of this Official Statement or in the Master Indenture. Guaranty Under the provisions of the Guaranty Agreement, the Guarantors have absolutely and unconditionally guaranteed jointly and severally (a) the full and prompt payment of the principal C-72

263 and prepayment premium on the Obligations when and as the same shall become due, whether at the stated maturity thereof, by acceleration, call for prepayment or otherwise, (b) the full and prompt payment of any interest on any Obligations when and as the same shall become due, (c) any other payment required to be made by a Member of the Obligated Group with respect to an Obligation, including but not limited to payments pursuant to a Financial Products Agreement or a liquidity or credit agreement and (d) the full and complete performance by a Member of the Obligated Group of any other covenants, warranties, duties and obligations of a Member of the Obligated Group under the provisions of any Obligation and the Master Indenture. A Guarantor may be released from the provisions of the Guaranty Agreement by amendment by complying with the provisions of the Master Indenture, as if such Guarantor were a member of the Obligated Group and such release constituted withdrawal of such Guarantor from the Obligated Group. A Guarantor may be added to the Guaranty Agreement by amendment by complying with the provisions of the Master Indenture, as if such Guarantor were to be admitted to the Obligated Group. Covenants of Guarantors Each Guarantor agrees that, so long as any of the Obligations are Outstanding and the Master Indenture has not been satisfied or discharged, it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets, and will not consolidate with or merge into another corporation or permit one or more corporations to consolidate with or merge into it; except as permitted by the disposition, consolidation and merger provisions of the Master Indenture, as if such Guarantor were a member of the Obligated Group provided that after giving effect thereto, no Event of Default shall exist under the Guaranty Agreement and no event shall exist which, with notice or lapse of time or both, would become such an Event of Default. This covenant does not apply to the merger or consolidation of one Guarantor into another Guarantor or into the Corporation nor does it apply to the transfer of all or substantially all of the assets of a Guarantor to another Guarantor or to the Corporation. Each Guarantor also covenants to comply with each of the other covenants, warranties, and obligations set forth within the Master Indenture that relate to Systems Affiliates or each Member of the Obligated Group and such provisions are incorporated in the Guaranty Agreement by reference as if such provisions were stated in the Guaranty Agreement in their entirety. Events of Default An Event of Default under the Guaranty Agreement shall exist if any of the following occurs and is continuing: (a) The Guarantors fail to perform or observe their obligations as described in the first paragraph under the heading Guaranty above; C-73

264 (b) Any Guarantor fails to comply with any other provision of the Guaranty Agreement, and such failure continues for more than sixty (60) days after written notice specifying such failure and requesting that it be remedied shall have been given to such Guarantor by the Master Trustee, unless the Master Trustee shall agree in writing to an extension of such time prior to its expiration; provided, however, that if the failure stated in the notice cannot be corrected within the applicable period, the Master Trustee will not unreasonably withhold its consent to an extension of such time if corrective action is instituted by such Guarantor within the applicable period and diligently pursued until the failure is corrected; (c) Any material warranty, representation or other statement by or on behalf of any Guarantor contained in the Guaranty Agreement is false or misleading in any material respect on the date when made; (d) A receiver, liquidator or trustee of any Guarantor or of any of its properties is appointed by court order and such order remains in effect for more than ninety (90) days; or such Guarantor is adjudicated bankrupt or insolvent; or any of its properties is sequestered by court order and such order remains in effect for more than ninety (90) days; or a petition is filed against such Guarantor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within ninety (90) days after such filing; (e) Any Guarantor files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under such law; (f) Any Guarantor makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee or liquidator of such Guarantor or of all or any part of its properties; and (g) The occurrence of an Event of Default under the Deeds of Trust. Remedies If an Event of Default exists, the Master Trustee may proceed to enforce the provisions of the Guaranty Agreement and to exercise any other rights, powers and remedies available to the Master Trustee including those available at law or in equity or under the Deeds of Trust. The Master Trustee, in its sole discretion, shall have the right to proceed first and directly against the Guarantors under the Guaranty Agreement without proceeding against or exhausting any other remedies which it may have and without resorting to any other security held by the Master Trustee. No remedy under the Guaranty Agreement conferred upon or reserved to the Master Trustee is intended to be exclusive of any other available remedy or remedies, but each and C-74

265 every such remedy shall be cumulative and shall be in addition to every other remedy given under the Guaranty Agreement or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon the occurrence of any Event of Default under the Guaranty Agreement shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. Termination of Guaranty Agreement The obligations of the Guarantors under the Guaranty Agreement shall be satisfied in full and discharged upon the payment by the Guarantors to the Master Trustee of any amount due and owing on all Outstanding Obligations less all amounts theretofore deposited with the Master Trustee, whether under the Master Indenture or otherwise for the payment thereof resulting in the discharge and satisfaction of the Master Indenture. SUMMARY OF CERTAIN PROVISIONS OF THE DEEDS OF TRUST The following is a summary of certain provisions of the Deeds of Trust. This summary should not be regarded as a full statement of the Deeds of Trust or of the portions summarized. Reference is made to the Deeds of Trust in their entirety for the complete statements of the provisions thereof, copies of which are on file at the principal corporate trust office of the Master Trustee. Capitalized terms used herein and not defined shall have the meanings given to them in the forepart of this Official Statement. Grant of Property Under the terms of the Deeds of Trust, the System Hospitals each grant, bargain, sell and convey for the benefit of the Master Trustee as well as grant a security interest in, the following: The Real Property, as hereinafter defined, to include: (i) the parcels of land upon which the System Hospitals respective hospital facilities are located (collectively, the Land ); (ii) all right, title and interest of the System Hospitals, including any afteracquired right, title or reversion, in and to the streets and alleys adjoining the Land; (iii) all and singular the rights, alleys, ways, tenements, hereditaments, easements, appurtenances, passages, waters, water rights, water courses, riparian rights, liberties, advantages, accessions and privileges now or hereafter appertaining to the Property (as hereinafter defined) or any part thereof, including, but not limited to, any homestead or other claim at law or in equity, the reversion or reversions, remainder or remainders thereof, and also C-75

266 all the estate, property, claim, right, title or interest now owned or hereafter acquired by the System Hospitals in or to the Property or any part thereof; (iv) all improvements, structures and buildings now or hereafter erected or placed on the Land and all replacements thereof (collectively, the Improvements ); and (v) all tangible personal property of every kind and nature whatsoever, deemed to be, or permitted by law to be, fixtures and part of the Land and of the Improvements; Unless specifically designated otherwise, the Land, the Improvements, and all other items and property described in the preceding paragraphs, together with all additions and improvements thereto, shall be referred to collectively as the Real Property. The following categories of collateral: (i) any and all judgments, awards of damages (including but not limited to consequential damages), payments, proceeds, settlements or other compensation made, including interest thereon, and the right to receive the same, as a result of, in connection with, or in lieu of (a) any taking of the Property or any part thereof under the power of eminent domain, either temporarily or permanently, (b) any change or alteration of the grade of any street, and (c) any other injury or damage to, or decrease in value of, the Property or any part thereof (all the foregoing being hereinafter sometimes referred to collectively as the Condemnation Awards, or singularly a Condemnation Award ), to the extent of all System Hospitals Indebtedness (hereinafter defined) which may be secured by the Deeds of Trust at the date of receipt of any such Condemnation Award by the Master Trustee, and of the reasonable counsel fees, costs and disbursements, if any, incurred by the Master Trustee in connection with the collection of such Condemnation Award; (ii) any and all payments, proceeds, settlements or other compensation made, including any interest thereon, and the right to receive the same, from any and all insurance policies covering the Property or any portion thereof; and (iii) all the System Hospitals right, title and interest in and to (but not the System Hospitals obligations and burdens under) all architectural, engineering and similar plans, specifications, drawings, reports, surveys, plats, permits and the like, contracts for construction, operation and maintenance of, or provision of services to, the Property, and all sewer taps and allocations, agreements for utilities, bonds and the like, all relating to the Land and the Improvements (all such collateral being referenced herein as the Miscellaneous Collateral ). Except as prohibited by law, (a) all receipts, revenues, income and other moneys acquired by or on behalf of the System Hospitals from the operation of their respective hospital facilities whether now existing or hereafter acquired, and all rights to receive the same (including accounts, instruments, chattel paper and general intangibles representing a right to payment constituting revenues of their respective hospitals), whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by their respective hospitals C-76

267 and all proceeds of the foregoing and (b) the non-operating revenues associated with their respective hospitals, including, without limitation, contributions, donations and pledges whether in the form of cash, securities or other personal property that are legally available to meet the System Hospitals obligations under the Guaranty Agreement; provided, however, that (1) gifts, grants, bequests, donations and contributions made to the System Hospitals designated at the time of making thereof by the donor or maker as being for certain specific purposes, and the income derived therefrom, to the extent required by such designation, shall be excluded from (a) and (b) above and (2) all receipts, revenues, income and other moneys subject to Permitted Encumbrances, in this context as defined in the Master Indenture and permitted therein, at present or in the future, other than the security interest in the Pledged Revenues, shall be excluded from (a) and (b) above (all of the foregoing being referenced herein as the Pledged Revenues and the Real Property, the Miscellaneous Collateral and the Pledged Revenues being collectively referenced herein as the Property ). The Deeds of Trust are intended to secure to the Master Trustee the prompt payment and performance by the System Hospitals of the Guaranty Agreement and the prompt performance of, observance of and compliance with, by the System Hospitals, all of the terms, covenants, conditions, stipulations, and agreements, express or implied, contained in the Deeds of Trust (all of the foregoing obligations of the System Hospitals being referred to herein as the System Hospitals Indebtedness ). Covenants and Agreements Relating to the Release of Property and Subordination of Liens Without the prior written consent of the Master Trustee, except as permitted under the Deeds of Trust as described below and the sale, lease and disposition of property provisions contained in the Master Indenture (the Release Conditions ), the System Hospitals will not encumber, transfer, sell, assign, lease, dispose of, or contract to transfer all or any part of the Property. The System Hospitals may, without the consent of the Master Trustee, transfer, sell, assign or convey the Property to the Corporation, any System Affiliate, or any entity directly or indirectly owned or the controlled by or directly or indirectly under common ownership or control with the System Hospitals, the Corporation or any System Affiliate; provided, however, unless the Release Conditions are met, any such conveyance of the Property shall be subject to the lien of the applicable Deed of Trust. Further, no consent of the Master Trustee is required for the encumbrance, transfer, sale or other conveyance of any interest in the System Hospitals. The System Hospitals shall be entitled to the release of the Property or any portion thereof from the lien and security interest of the Deeds of Trust, and the Master Trustee shall release the Property or such portion thereof, if the Release Conditions are met or if the requirements of the Guaranty Agreement are met with respect to the release of any System Hospital. The Master Trustee shall rely solely upon a certificate of an officer of the Corporation as evidence that the Release Conditions have been met without the need for further documentation, inquiry or investigation. Upon receipt of such certificate of an officer of the Corporation, the Master Trustee immediately and without delay shall execute and deliver to the System Hospitals any and all releases requested by the System Hospitals and, in addition, the C-77

268 Master Trustee shall subordinate the lien and the effect of the Deeds of Trust to any easements, covenants, restrictions, and other rights that affect the Property not so released and that are appurtenant to the portion of the Property that is being released. As to the Property or portion thereof so released and as to any easements, covenants, restrictions and other rights that affect the Property not so released and that are appurtenant to the portion of the Property that is being released, the System Hospitals may thereafter take any action with respect thereto as if the same had never been subject to the lien and security interest of the Deeds of Trust. The Deeds of Trust shall also be subordinate and inferior to Permitted Encumbrances, as defined in the Master Indenture, which exist at this time or are created in the future. Events of Default; Remedies Events of Default. Any of the following events shall be an Event of Default under the Deeds of Trust: (i) an Event of Default occurs under the Guaranty Agreement; (ii) a System Hospital fails to fully and promptly perform, comply with or observe any term, covenant or agreement contained in the Deeds of Trust, and such failure remains unremedied for 60 days after written notice thereof shall have been given to the System Hospital by the Master Trustee, provided, however, if such failure be such that it can not be corrected within 60 days, it shall not be an Event of Default if a System Hospital is diligently taking appropriate corrective action to cure such failure; or (iii) an Event of Default occurs under any of the Deeds of Trust. Remedies. Upon the occurrence of an Event of Default, the Master Trustee may at any time thereafter exercise any of the following powers, privileges, discretions, rights and remedies, in addition to the powers, privileges, discretions, rights and remedies available to the Master Trustee under the Guaranty Agreement: Foreclosure. The Master Trustee may take possession of and sell the Property, any substitutions or replacements thereto, or any part thereof subject to any lease which the Master Trustee elects to maintain. In connection therewith the System Hospitals authorize and empower the Master Trustee to take possession of and sell (or in case of any default of any purchaser to resell) the Property, or any part thereof, all in accordance with applicable law. Receiver. As a matter of right and to the extent permitted by law, without notice to the System Hospitals, and without regard to the adequacy of the security, and upon application to a court of competent jurisdiction, the Master Trustee shall be entitled to the immediate appointment of a receiver for all or any part of the Property, and of the rents, income, profits, issues and proceeds, whether such receivership be C-78

269 incidental to a proposed sale of the Property or otherwise, and the System Hospitals consent to the appointment of such a receiver under the Deeds of Trust. Uniform Commercial Code. The Master Trustee may proceed under the Uniform Commercial Code as to all or any part of the Miscellaneous Collateral or the Pledged Revenues and any other security granted under the Deeds of Trust and in conjunction therewith, to exercise all of the rights, remedies and powers of a secured party under the Uniform Commercial Code. Each right, power and remedy of the Master Trustee as provided for in the Deeds of Trust or in the Guaranty Agreement shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in the Deeds of Trust or in the Guaranty Agreement, and the exercise or beginning of the exercise by the Master Trustee of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by the Master Trustee of any or all such other rights, powers or remedies. C-79

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271 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement (the Disclosure Agreement ) is executed and delivered by MedStar Health, Inc., a Maryland non-stock corporation (the Corporation ), on its own behalf and on behalf of the Obligated Group and the Guaranty System Affiliates (as defined below), and U.S. Bank National Association (the Trustee and Dissemination Agent ), in connection with the issuance by the Corporation of $100,895,000 MedStar Health, Inc. Taxable Bonds, Series 2015 (the Bonds ). The Bonds are being issued pursuant to an indenture of trust (the Indenture ) between the Corporation and the Trustee. The obligations of the Corporation under the Indenture are secured by payments made by the Obligated Group (the Obligated Group ) on Obligation No. 42 ( Obligation No. 42 ) issued by the Corporation under the Master Trust Indenture (the Master Indenture ), dated as of December 1, 1998, as supplemented and amended, including by the Forty-Third Supplemental Master Trust Indenture, between the Corporation and U.S. Bank National Association, as successor master trustee. The payment and performance of the obligations of the Corporation under the Master Indenture is guaranteed by certain Material System Affiliates (as defined in the Master Indenture) as well as certain other System Affiliates (the Material System Affiliates together with the other System Affiliates party to the Guaranty Agreement, collectively referred to herein as the Guaranty System Affiliates ) pursuant to a Guaranty Agreement between the Guaranty System Affiliates and the Master Trustee. The Corporation (on its own behalf and on behalf of the Obligated Group and the Guaranty System Affiliates), the Dissemination Agent and the Trustee covenant and agree as follows: SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Corporation, the Dissemination Agent and the Trustee for the benefit of the Holders and Beneficial Owners of the Bonds. SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: Annual Report shall mean any Annual Report provided by the Corporation pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. Beneficial Owner shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries). Corporation shall mean the Corporation as defined in the introductory paragraph to this Disclosure Agreement. Dissemination Agent shall mean U.S. Bank National Association, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Corporation and which has filed with the Trustee a written acceptance of such designation. Holder shall mean the person in whose name any Bond shall be registered. Listed Events shall mean any of the events listed in Section 5 of this Disclosure Agreement. MSRB shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at Offering Memorandum means the offering memorandum relating to the Bonds, dated January 29, D-1

272 Participating Underwriter shall mean any of the original underwriters of the Bonds. Repository shall mean (i) for so long as the Corporation has tax-exempt obligations outstanding, the MSRB, and (2) thereafter, another nationally recognized disclosure site selected by the Corporation or through a website maintained by the Corporation. Rule shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. System has the meaning set forth in the Master Indenture. Trustee shall mean U.S. Bank National Association, acting in its capacity as Trustee for the Bonds, or any successor trustee. SECTION 3. Provision of Annual and Quarterly Reports. (a) The Corporation shall, or shall cause the Dissemination Agent to, not later than January 1 of each year, commencing January 1, 2016 for the fiscal year ending June 30, 2015, provide to the Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the System may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the Corporation s fiscal year changes, it shall give notice of such change in a filing with the Repository and the date above shall be deemed modified to a date six months following the changed fiscal year date. (b) Not later than 15 business days prior to the date specified in subsection (a) for providing the Annual Report to the Repository, the Corporation shall provide the Annual Report to the Dissemination Agent and the Trustee (if the Trustee is not the Dissemination Agent). The Corporation shall provide a written certification with each Annual Report furnished to the Dissemination Agent and the Trustee to the effect that such Annual Report constitutes the Annual Report required to be furnished by it hereunder. The Dissemination Agent and the Trustee may conclusively rely upon such certification of the Corporation and shall have no duty or obligation to review such Annual Report. If by such date the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the Corporation to determine if the Corporation is in compliance with subsection (a). (c) In addition to the Annual Report required to be filed pursuant to subsection (a), the Corporation shall, or shall cause the Dissemination Agent to, provide to the Repository, not later than 75 days after the end of each quarter of the Corporation s fiscal year (except for the fourth fiscal quarter), beginning with the second fiscal quarter of fiscal year 2015, unaudited financial information for the System for such fiscal quarter, including a balance sheet, a cash flow statement and a consolidated statement of operations. (d) If the Dissemination Agent is unable to verify that an Annual Report has been provided to the Repository by the date required in subsection (a), the Dissemination Agent shall, in a timely manner, send or cause to be sent to the Repository a notice in substantially the form attached as Exhibit A. (e) The Dissemination Agent shall file a report with the Corporation and the Trustee (if the Dissemination Agent is not the Trustee) certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided to the Repository. SECTION 4. reference the following: Content of Annual Reports. The Corporation s Annual Report shall contain or include by 1. The audited consolidated financial statements for the System for the prior fiscal year, prepared in accordance with generally accepted accounting principles as promulgated from time to time by the Financial Accounting Standards Board. If the audited financial statements are not available by the time the Annual Report is D-2

273 required to be provided to the Repository pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Offering Memorandum relating to the Bonds, and the audited financial statements shall be provided to the Repository in the same manner as the Annual Report when they become available. 2. Unless contained in the audited consolidated financial statements for the System provided in Section 4 (1) above, an update of the information of the type contained in Appendix A to the Offering Memorandum relating to the Bonds: a. A list of Members of the Obligated Group, the Material System Affiliates and any Guaranty System Affiliates. b. A table showing the licensed acute beds and licensed post-acute beds by facility and location. c. A summary of the System s payor mix for the preceding fiscal year. d. A summary table of historical utilization statistics for the preceding fiscal year of the type under the heading Historical Utilization. e. A summary table showing the capitalization of the System for the preceding fiscal year. f. A summary table showing the debt service coverage of the System for the preceding fiscal year. g. Information for the most recent fiscal year similar to the information under the caption MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION - Retirement Plans. h. Information for the most recent fiscal year similar to the information under the caption MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION - Liquidity and Capital Resources. Any or all of the items listed above may be set forth in one or a set of documents or may be included by specific reference to other documents, including official statements of debt issues with respect to which the Corporation is an obligated person (as defined by the Rule), which have been made available to the public on the MSRB s website. The Corporation shall clearly identify each such other document so included by reference. Neither the Trustee nor the Dissemination Agent need verify the content or correctness of the Annual Report. SECTION 5. Reporting of Significant Events. The Corporation shall give, or cause to be given, notice to the Repository of the occurrence of any of the following events with respect to the Bonds, in a timely manner not in excess of ten business days after the occurrence of the event: 1. Principal and interest payment delinquencies; 2. Non-payment related defaults; if material; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Modifications to rights of Bond holders; if material 7. Bond calls; if material, and tender offers; 8. Defeasances; 9. Release, substitution, or sale of property securing repayment of the Bonds; if material; D-3

274 10. Rating changes; 11. Bankruptcy, insolvency, receivership or similar event of the obligated person; Note: for the purposes of the event identified in subparagraph (12), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. 12. The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; if material; or 13. Appointment of a successor or additional trustee or the change of name of a trustee, if material. SECTION 6. Format for Filings with Repository. Any report or filing with the Repository pursuant to this Disclosure Agreement must be submitted in electronic format, if required by the Repository, accompanied by such identifying information as is prescribed by the Repository. SECTION 7. Termination of Reporting Obligation. The Corporation s, the Dissemination Agent s and the Trustee s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If the Corporation s obligations under the Indenture are assumed in full by some other entity, such person shall be responsible for compliance with this Disclosure Agreement in the same manner as if it were the Corporation and the original Corporation shall have no further responsibility hereunder. If such termination or substitution occurs prior to the final maturity of the Bonds, the Corporation shall give notice of such termination or substitution in a filing with the Repository. SECTION 8. Dissemination Agent. The Corporation may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Corporation pursuant to this Disclosure Agreement. The Dissemination Agent may resign by providing 30 days written notice to the Corporation and the Trustee. If at any time there is not any other designated Dissemination Agent, the Trustee shall be the Dissemination Agent. SECTION 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Corporation and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the Corporation which does not impose any greater duties, nor greater risk of liability or, on the Dissemination Agent or the Trustee) and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied: (a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law or change in the identity, nature or status of the Corporation or any other obligated person with respect to the Bonds or the type of business conducted; and (b) The amendment or waiver either (i) is approved by the Holders of the Bonds in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Holders, or (ii) does not, in the D-4

275 opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Corporation shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Corporation. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in a filing with the Repository, and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. SECTION 10. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Corporation from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report, quarterly report or notice required to be filed pursuant to this Disclosure Agreement, in addition to that which is required by this Disclosure Agreement. If the Corporation chooses to include any information in any Annual Report, quarterly report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Agreement, the Corporation shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report, quarterly report or notice of occurrence of a Listed Event or any event required to be reported. SECTION 11. Default. In the event of a failure of the Corporation or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Trustee (at the written request of any Participating Underwriter or the Holders of at least twenty-five percent (25%) aggregate principal amount of Outstanding Bonds, shall but only to the extent funds in an amount satisfactory to the Trustee have been provided to it or if it has been otherwise indemnified to its satisfaction from any cost, liability, expense or additional charges and fees of the Trustee whatsoever, including, without limitation, fees and expenses of its attorneys), or any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Corporation or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the Corporation or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. SECTION 12. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. Article VI of the Indenture is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Indenture and the Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforded the Trustee thereunder. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Corporation agrees to indemnify and save the Dissemination Agent and its respective officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent s negligence or willful misconduct. The Dissemination Agent shall have no duty or obligation to review any information provided to them hereunder and shall not be deemed to be acting in any fiduciary capacity for the Corporation, the Bondholders or any other party. The obligations of the Corporation under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. D-5

276 SECTION 13. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows: To the Corporation: To the Trustee and Dissemination Agent: MedStar Health, Inc Sterrett Place, 5th Floor Columbia, Maryland Attention: Chief Financial Officer Telephone: (410) Facsimile: (410) U.S. Bank National Association Two James Center 1021 E. Cary St., Suite 1850 Richmond, VA Attention: U.S. Bank Corporate Trust Services Telephone: (804) Facsimile: (804) Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent. SECTION 14. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Corporation, the Dissemination Agent, the Participating Underwriters and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. D-6

277 SECTION 15. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Dated: February 11, MEDSTAR HEALTH, INC. By: Authorized Representative U.S. BANK NATIONAL ASSOCIATION, as Trustee and Dissemination Agent By: Authorized Officer D-7

278 EXHIBIT A NOTICE TO REPOSITORY OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: MedStar Health, Inc. Name of Bond Issue: MedStar Health Inc. Taxable Bonds, Series 2015 Date of Issuance: February 11, 2015 NOTICE IS HEREBY GIVEN that MedStar Health, Inc. (the Corporation ) has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Agreement, dated the above-mentioned date of issuance. [The Corporation anticipates that the Annual Report will be filed by.] Dated:. U.S. BANK NATIONAL ASSOCIATION, as Trustee and Dissemination Agent By: D-8

279 APPENDIX E BOOK-ENTRY SYSTEM The Depository Trust Company ( DTC ) New York, NY, will act as securities depository for the Bonds. The Bonds will be offered 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 Bond certificate will be issued for each maturity of the Bonds in the aggregate principal amount of each maturity of the Bonds and deposited with DTC. DTC 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 of 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 the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are however expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their beneficial ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of the Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, defaults, and proposed amendments to the bond documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Trustee and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in the Bonds to be redeemed. E-1

280 Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Corporation 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 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, premium, redemption proceeds and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts, upon DTC s receipt of funds and corresponding detail information from the Corporation or the Trustee, on a 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 securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participants and not of DTC, its nominee, the Trustee or the Corporation, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium, redemption proceeds and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of the Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Corporation or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The Corporation may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bond certificates for such Bonds will be printed and delivered to DTC or Owners, as applicable. THE PRECEDING INFORMATION PROVIDED IN THIS APPENDIX E HAS BEEN PROVIDED BY DTC. NO REPRESENTATION IS MADE BY THE CORPORATION, THE UNDERWRITERS OR THE TRUSTEE AS TO THE ACCURACY OR ADEQUACY OF SUCH INFORMATION PROVIDED BY DTC OR AS TO THE ABSENCE OF MATERIAL ADVERSE CHANGES IN SUCH INFORMATION SUBSEQUENT TO THE DATE OF THIS OFFERING MEMORANDUM. THE TRUSTEE, AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE BONDS, WILL SEND ANY NOTICE OF REDEMPTION OR OTHER NOTICES TO OWNERS OF SUCH BONDS ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY PARTICIPANT, OR OF ANY PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY SUCH NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OR SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE REDEMPTION OF THE BONDS CALLED FOR REDEMPTION OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE. The Corporation, the Underwriters and the Trustee cannot and do not give any assurances that DTC will distribute to Participants, or that Participants or others will distribute to the Beneficial Owners, payments of principal of and interest and Make-Whole Redemption Price, if any, on the Bonds paid or any redemption or other notices or that they will do so on a timely basis or will serve and act in the manner described in this Offering Memorandum. None of the Corporation, the Underwriters or the Trustee is responsible or liable for the failure of DTC or any Direct Participant or Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Bonds or any error or delay relating thereto. E-2

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284 MEDSTAR HEALTH, INC. Taxable Bonds, Series 2015