THIS PRELIMINARY OFFICIAL STATEMENT IS DATED JUNE 17, 2016

Transcription

1 This Preliminary Official Statement and the information contained herein are subject to completion or amendment without notice. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the 2016 Bonds in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration, qualification or the availability of an appropriate exemption under the applicable securities laws of any such jurisdiction. THIS PRELIMINARY OFFICIAL STATEMENT IS DATED JUNE 17, 2016 NEW ISSUE: BOOK ENTRY ONLY Ratings: Moody s Investors Service - A3 S&P Global Ratings - A- In the opinion of Bond Counsel, under existing law and assuming continuing compliance by the Authority and the Borrowers with the requirements of the Internal Revenue Code of 1986, as amended (the Code ), and the regulations thereunder that relate to the 2016 Bonds, the interest on the 2016 Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, interest on the 2016 Bonds held by a corporation (as defined for federal income tax purposes) may be indirectly subject to federal alternative minimum tax because of its inclusion in the adjusted current earnings of a corporate holder. Bond Counsel is also of the opinion that, under existing law, interest on the 2016 Bonds is exempt from Pennsylvania personal income tax and from Pennsylvania corporate net income tax, and the 2016 Bonds are exempt from personal property taxes in Pennsylvania. See TAX MATTERS herein. $215,600,000* NORTHAMPTON COUNTY GENERAL PURPOSE AUTHORITY HOSPITAL REVENUE BONDS, SERIES 2016A (ST. LUKE S UNIVERSITY HEALTH NETWORK PROJECT) Dated: Date of Delivery Due: August 15, as shown on the inside front cover The Northampton County General Purpose Authority (the Authority ) is issuing its $215,600,000* aggregate principal amount of Hospital Revenue Bonds, Series 2016A (St. Luke s University Health Network Project) (the 2016 Bonds ). The 2016 Bonds will be issued under that certain Loan and Trust Agreement, dated as of July 1, 2016 (the Trust Agreement ) by and among the Authority, Saint Luke s Hospital of Bethlehem, Pennsylvania ( SLH ), St. Luke s Hospital Anderson Campus ( St. Luke s Anderson and, together with SLH, the Borrowers ) and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ). The principal or Redemption Price of, and interest on, the 2016 Bonds will be payable solely from payments and other revenues to be received by the Authority under the Trust Agreement, and from 2016 Bond proceeds and other moneys pledged to or held by the Trustee under the Trust Agreement for such purpose. Interest on the 2016 Bonds will accrue at a fixed rate as shown on the inside front cover from the date of delivery of the 2016 Bonds and will be payable on each February 15 and August 15, commencing on February 15, Interest on the 2016 Bonds will be computed on the basis of a 360-day year of twelve 30-day months. The 2016 Bonds are subject to optional, mandatory and extraordinary optional redemption prior to their maturity. The 2016 Bonds will be secured by a Master Trust Indenture promissory note (the 2016 Master Note ) issued under that certain Master Trust Indenture dated as of June 1, 1987 (as previously supplemented and amended, the Original Master Trust Indenture ) by and among the Borrowers, St. Luke s Warren Hospital, Inc., d/b/a St. Luke s Hospital Warren Campus, St. Luke s Hospital Monroe Campus and any affiliates of SLH who become members of the Obligated Group (collectively, the Obligated Group ) and The Bank of New York Mellon Trust Company, N.A., as successor master trustee (the Master Trustee ), as amended and restated by the Amended and Restated Master Trust Indenture, dated as of July 1, 2016 (the Amended and Restated Master Indenture ), by and among the Obligated Group and the Master Trustee (the Original Master Trust Indenture, as amended and restated by the Amended and Restated Master Trust Indenture, and as it may be further amended and supplemented from time to time, being referred to herein as the Master Trust Indenture ). In connection with the issuance of the 2016 Bonds and in accordance with the provisions of the Original Master Trust Indenture, the Obligated Group is executing the Amended and Restated Master Trust Indenture to amend and restate the Original Master Trust Indenture to update certain provisions therein and to make certain other amendments. See SECURITY FOR THE 2016 BONDS The Master Trust Indenture for a discussion of the Amended and Restated Master Trust Indenture. SLH has previously executed and delivered to the Master Trustee mortgages on certain real estate comprising SLH hospital campuses located in the City of Allentown, Lehigh County, Pennsylvania, the Borough of Fountain Hill, Lehigh County, Pennsylvania and Bethlehem Township, Northampton County, Pennsylvania (collectively, the Mortgage ). The Mortgage secures all obligations outstanding under the Master Trust Indenture and will also secure the 2016 Master Note. The 2016 Bonds are issuable only as fully registered bonds and, when issued, will be registered in the name of and held by Cede & Co., as nominee for The Depository Trust Company ( DTC ), New York, New York. DTC will act as securities depository for the 2016 Bonds. Purchases of beneficial interests in the 2016 Bonds will be made in book entry form, in denominations of $5,000 and integral multiples thereof. Except as herein described, purchasers will not receive certificates representing their beneficial interests in the 2016 Bonds. So long as DTC or its nominee, Cede & Co., is the registered owner of the 2016 Bonds, payments of principal or Redemption Price of and interest on the 2016 Bonds will be made directly to DTC or such nominee by the Trustee. Disbursement of such payments to the DTC Participants is the responsibility of DTC and disbursements of such payments to the Beneficial Owners is the responsibility of the DTC Participants and the Indirect Participants, as more fully described herein. See THE 2016 BONDS Book Entry Only System herein. MATURITIES, AMOUNTS, INTEREST RATES AND PRICES (Shown on inside cover) The 2016 Bonds are limited obligations of the Authority payable solely from the sources described herein. Neither the principal nor the Redemption Price of the 2016 Bonds, nor the interest accruing thereon, shall ever constitute a general indebtedness of the Authority or an indebtedness of the County of Northampton (the County ), the Commonwealth of Pennsylvania (the Commonwealth ) or any political subdivision thereof within the meaning of any constitutional or statutory provision whatsoever or shall ever constitute or give rise to a pecuniary liability of the County, the Commonwealth or any political subdivision thereof or a charge against the general credit or taxing power of the County, the Commonwealth or any political subdivision thereof, nor will the 2016 Bonds be, or be deemed to be, an obligation of the County, the Commonwealth or any political subdivision thereof. The Authority has no taxing power. The 2016 Bonds are offered, when, as and if issued and accepted by the Underwriter, subject to prior sale, withdrawal or modification of the offer without notice, and to the approval of legality of the 2016 Bonds by Reed Smith LLP, Philadelphia, Pennsylvania, Bond Counsel. Certain legal matters will be passed upon for the Underwriter by Ballard Spahr LLP, Philadelphia, Pennsylvania; for the Borrowers and the Obligated Group by Saul Ewing LLP, Philadelphia, Pennsylvania; and for the Authority by Norris McLaughlin & Marcus, P.A., Allentown, Pennsylvania. It is expected that the 2016 Bonds will be delivered to DTC on or about, BofA Merrill Lynch Dated:, 2016 * Preliminary, subject to change.

2 MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES AND YIELDS $215,600,000* NORTHAMPTON COUNTY GENERAL PURPOSE AUTHORITY HOSPITAL REVENUE BONDS, SERIES 2016A (ST. LUKE S UNIVERSITY HEALTH NETWORK PROJECT) Date (August 15) Principal Amount Interest Rate Yield Price CUSIP $ % % * Preliminary, subject to change. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein are provided by CUSIP Global Services. The CUSIP numbers listed above are being provided solely for the convenience of Holders of the 2016 Bonds only at the time of issuance of the 2016 Bonds and the Authority, the Borrowers and the Underwriter do not make any representation with respect to such numbers or undertake any responsibility for their accuracy now or at any time in the future. The CUSIP number for a specific maturity is subject to being changed after the issuance of the 2016 Bonds as a result of procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the 2016 Bonds.

3 No dealer, broker, salesman or other person has been authorized by the Authority, the Borrowers or the Underwriter to give any information or to make any representations with respect to the 2016 Bonds, other than those contained in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the 2016 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 Authority, the Borrowers, DTC and other sources which are believed to be reliable. The information and expressions of opinions herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the 2016 Bonds shall, under any circumstances, create any implication that there has been no change in any of the information set forth herein since the date hereof. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2016 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE 2016 BONDS HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THE TRUST AGREEMENT BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE 2016 BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF THE SECURITIES LAWS OF CERTAIN STATES, IF ANY, IN WHICH THE 2016 BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN CERTAIN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE 2016 BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. * * * * * * * *

4 TABLE OF CONTENTS INTRODUCTORY STATEMENT... 1 THE AUTHORITY... 5 THE 2016 BONDS... 5 REDEMPTION OF THE 2016 BONDS... 9 SECURITY FOR THE 2016 BONDS THE TRUST AGREEMENT PLAN OF FINANCE ESTIMATED SOURCES AND USES OF FUNDS AGGREGATE ANNUAL DEBT SERVICE OF THE OBLIGATED GROUP DEBT SERVICE COVERAGE OF THE OBLIGATED GROUP BONDHOLDERS RISKS LITIGATION TAX MATTERS CONTINUING DISCLOSURE UNDERWRITING FINANCIAL ADVISOR VERIFICATION AGENT INDEPENDENT ACCOUNTANTS RATINGS LEGAL MATTERS MISCELLANEOUS Appendix A Appendix B Appendix C Page Certain Information Concerning St. Luke s Health Network, Inc. and Obligated Group... A-1 Consolidated Audited Financial Statements of the St. Luke s Health Network, Inc., and Controlled Entities for Fiscal Years ended June 30, 2015 and B-1 Definitions of Certain Terms and Summary of Certain Provisions of the Loan and Trust Agreement and the Mortgage... C-1 Appendix D Form of Bond Counsel Opinion... D-1 Appendix E Form of Continuing Disclosure Agreement... E-1 Appendix F Form of Master Trust Indenture... F-1 i

5 $215,600,000 * NORTHAMPTON COUNTY GENERAL PURPOSE AUTHORITY HOSPITAL REVENUE BONDS, SERIES 2016A (ST. LUKE S UNIVERSITY HEALTH NETWORK PROJECT) INTRODUCTORY STATEMENT This Official Statement provides information in connection with the issuance by the Northampton County General Purpose Authority (the Authority ) of $215,600,000 * aggregate principal amount of Hospital Revenue Bonds, Series 2016A (St. Luke s University Health Network Project) (the 2016 Bonds ). The 2016 Bonds will be issued pursuant to a Loan and Trust Agreement, dated as of July 1, 2016 (the Trust Agreement ) by and among the Authority, Saint Luke s Hospital of Bethlehem, Pennsylvania ( SLH ), St. Luke s Hospital Anderson Campus ( St. Luke s Anderson and, together with SLH, the Borrowers ) and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ). Under the Trust Agreement, the Borrowers are obligated to make loan payments to the Trustee, as assignee of the Authority, at times and in amounts sufficient to pay the principal or Redemption Price of, and interest on, the 2016 Bonds when due and in certain instances. The payment of the principal or Redemption Price of and interest on the 2016 Bonds will be secured by a promissory note issued under the Master Trust Indenture (the 2016 Master Note ) issued to the Trustee by the Obligated Group (as defined herein) under that certain Master Trust Indenture dated as of June 1, 1987 (as previously supplemented and amended, the Original Master Trust Indenture ) by and among the Borrowers, St. Luke s Warren Hospital, Inc., d/b/a St. Luke s Hospital Warren Campus, St. Luke s Hospital Monroe Campus and any affiliates of SLH who become members of the Obligated Group (collectively, the Obligated Group ) and The Bank of New York Mellon Trust Company, N.A., as successor master trustee (the Master Trustee ), as amended and restated by the Amended and Restated Master Trust Indenture, dated as of July 1, 2016 (the Amended and Restated Master Indenture ), by and among the Obligated Group and the Master Trustee (the Original Master Trust Indenture, as amended and restated by the Amended and Restated Master Trust Indenture, and as it may be further amended and supplemented from time to time, being referred to herein as the Master Trust Indenture ). In connection with the issuance of the 2016 Bonds and in accordance with the provisions of the Original Master Trust Indenture, the Obligated Group is executing the Amended and Restated Master Trust Indenture to amend and restate the Original Master Trust Indenture to update certain provisions therein and to make certain other amendments. See SECURITY FOR THE 2016 BONDS The Master Trust Indenture for a discussion of the Amended and Restated Master Trust Indenture. This Official Statement, including the appendices, contains brief descriptions of the 2016 Bonds, together with summaries of the Trust Agreement and the Mortgage (as defined herein) and a copy of the Amended and Restated Master Trust Indenture. The descriptions and summaries of the Master Trust Indenture, the Trust Agreement, the Mortgage and other documents contained herein do not purport to be comprehensive and are qualified in their entirety by reference to such documents, and all references to the 2016 Bonds are qualified in their entirety by the definitive form thereof included in the Trust Agreement. Copies of such documents will be available upon written request to the Trustee at the expense of the person making such request. Pursuant to a Bond Purchase Agreement dated June, 2016, Merrill Lynch, Pierce, Fenner & Smith Incorporated has been appointed as the Underwriter (the Underwriter ) with respect to the 2016 Bonds. * Preliminary, subject to change. 1

6 This Introductory Statement is subject in all respects to the more complete information appearing elsewhere in this Official Statement, including the cover page and the appendices. This Introductory Statement is to be read and used only with reference to the entire Official Statement. All terms used and not otherwise defined herein shall have the respective meanings set forth in Appendix C hereto. The Authority The Authority was organized by the County Council of the County of Northampton and exists under the Pennsylvania Municipality Authorities Act, as codified at 53 Pa. Cons. Stat et seq. (the Act ). The Authority has full power and authority to issue the 2016 Bonds. See THE AUTHORITY herein. The Obligated Group The Borrowers, St. Luke s Warren Hospital, Inc., d/b/a St. Luke s Hospital Warren Campus ( St. Luke s Warren ) and St. Luke s Hospital Monroe Campus ( St. Luke s Monroe ) are currently the members of the Obligated Group (the Obligated Group ) under the Master Trust Indenture. As provided in the Master Trust Indenture and herein described, additional parties may become members of the Obligated Group in the future at which time such additional parties would become jointly and severally liable for the payment of obligations and covenants under the Master Trust Indenture and thereafter could withdraw from the Obligated Group. The Master Trust Indenture also provides that members of the Obligated Group can withdraw from the Obligated Group upon the satisfaction of certain conditions. Saint Luke s Hospital of Bethlehem, Pennsylvania. Saint Luke s Hospital of Bethlehem, Pennsylvania, a Pennsylvania nonprofit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code ), is a tertiary-care, teaching hospital with campuses in the Borough of Fountain Hill, Lehigh County (the Bethlehem Campus ) and the City of Allentown, Lehigh County (the Allentown Campus ). SLH is the flagship of a regional, integrated network of hospitals, physicians and other related organizations providing care in Lehigh, Northampton, Carbon, Schuylkill, Bucks and Monroe counties in Pennsylvania and Warren and Hunterdon counties in New Jersey. SLH, St. Luke s Monroe, St. Luke s Warren and St. Luke s Anderson are each controlled by its parent, St. Luke s Health Network, Inc. d/b/a St. Luke s University Health Network ( SLUHN ). SLUHN encompasses more than 200 sites, has 1,042 licensed beds, including 48 skilled nursing beds and 31 acute rehabilitation beds, in its six acute care hospital sites in nine counties in Pennsylvania and New Jersey. See Appendix A hereto for additional information about SLH, SLUHN and certain of their affiliates. St. Luke s Hospital Anderson Campus. St. Luke s Anderson is a nonprofit corporation organized and existing under the laws of the Commonwealth of Pennsylvania and an organization described in Section 501(c)(3) of the Code. St. Luke s Anderson is a 108-bed general acute care hospital located on a 500 acre site in Bethlehem Township, Northampton County. SLUHN is the sole member of St. Luke s Anderson. See Appendix A hereto for additional information about St. Luke s Anderson. St. Luke s Hospital Warren Campus. St. Luke s Warren is a nonprofit corporation organized and existing under the laws of the State of New Jersey and an organization described in Section 501(c)(3) of the Code. St. Luke s Warren is a 198-bed general acute care hospital located in Phillipsburg, New Jersey. On January 31, 2012, St. Luke s Warren was acquired by SLUHN. See Appendix A hereto for additional information about St. Luke s Warren. St. Luke s Hospital Monroe Campus. St. Luke s Monroe is a 108-bed community hospital currently being constructed in Bartonsville, Pennsylvania, Monroe County. The hospital is projected to open in the fall of 2016 and will provide acute inpatient and outpatient medical and surgical care. When 2

7 opened, St. Luke s Monroe will provide health care services to Monroe County. SLUHN is the sole member of St. Luke s Monroe. See Appendix A hereto for additional information about St. Luke s Monroe. The 2016 Project The 2016 Bonds are being issued to provide a portion of the funds, together with other available funds, for a project (the 2016 Project ) consisting of: (i) the advance refunding of all or a portion of the Authority s outstanding Hospital Revenue Bonds, Series A of 2008 (St. Luke s Hospital Project) (the Refunded Bonds ); (ii) the funding or reimbursement to the Borrowers of various capital projects of the Borrowers (the 2016 Capital Project ); and (iii) the payment of certain costs and expenses in connection with the issuance of the 2016 Bonds. The Trust Agreement The 2016 Bonds are being issued under the Trust Agreement. The 2016 Bonds are secured by the 2016 Master Note as described below. The Trust Agreement contains covenants and warranties of the Borrowers, which are in addition to the covenants and warranties of the Obligated Group under the Master Trust Indenture as described below. See SECURITY FOR THE 2016 BONDS and the summary of the provisions of the Trust Agreement in Appendix C hereto. See Appendix F for a form of the Master Trust Indenture. The Master Trust Indenture In connection with the issuance of the 2016 Bonds, the Obligated Group will enter into the Amended and Restated Master Trust Indenture with the Master Trustee. See SECURITY FOR THE 2016 BONDS The Master Trust Indenture for a discussion of the Amended and Restated Master Trust Indenture. Under the Master Trust Indenture, all of the Bonds (as defined herein) previously issued by the Authority, the Lehigh County General Purpose Authority (the Lehigh Authority ), the New Jersey Health Care Facilities Financing Authority (the New Jersey Authority ) and the Pocono Mountains Industrial Park Authority (the Pocono Authority ) on behalf of the Obligated Group or a member thereof, are secured by notes issued by the Obligated Group. The 2016 Bonds will be secured by the 2016 Master Note. Upon issuance of the 2016 Bonds, the Obligated Group will have approximately $599 million in aggregate principal amount of obligations outstanding under the Master Trust Indenture, representing the notes securing bonds issued by the Authority, the Pocono Authority, the New Jersey Authority and the Lehigh Authority. See Appendix A Long-Term Indebtedness of the Obligated Group for a description of the outstanding indebtedness of the Obligated Group. The Quakertown General Authority has also previously issued Bonds on behalf of SLH (the Quakertown Bonds ). The Quakertown Bonds are expected to be redeemed prior to the issuance of the 2016 Bonds. Other persons may from time to time become members of the Obligated Group under the terms of the Master Trust Indenture. The Master Trust Indenture also provides that members of the Obligated Group can withdraw from the Obligated Group upon the satisfaction of certain conditions. All members of the Obligated Group are and will be jointly and severally liable for the payment of all obligations issued under the Master Trust Indenture, including the obligations securing the 2016 Bonds. The covenants and warranties contained in the Master Trust Indenture are in addition to and are not identical to the covenants and warranties of the Borrowers under the Trust Agreement as described below. See SECURITY FOR THE 2016 BONDS and the form of the Master Trust Indenture in Appendix F hereto. 3

8 Prior Parity Bonds The Authority and the Lehigh Authority have all previously issued bonds on behalf of SLH. The New Jersey Authority has previously issued bonds on behalf of St. Luke s Warren. The Pocono Authority has previously issued bonds on behalf of St. Luke s Monroe. The Northampton Bonds, the Lehigh Bonds, the Pocono Bonds and the New Jersey Bonds (each as defined in Appendix A) are secured under the Master Trust Indenture on a parity basis with the 2016 Bonds, along with any additional bonds issued by the Authority or other entities, which are secured by notes issued under the Master Trust Indenture (any such bonds, the Additional Bonds ). The 2016 Bonds, the Northampton Bonds, the Lehigh Bonds, the New Jersey Bonds, the Pocono Bonds and the Additional Bonds are referred to herein as the Bonds. The 2016 Bonds The 2016 Bonds will be dated the date of their delivery. Interest on the 2016 Bonds will accrue at fixed rates as shown on the inside front cover hereof from the date of delivery of the 2016 Bonds and will be payable on each February 15 and August 15, commencing on February 15, Interest on the 2016 Bonds will be computed on the basis of a 360-day year of twelve 30-day months. The 2016 Bonds are subject to optional, mandatory and extraordinary optional redemption prior to their maturity. See THE 2016 BONDS herein. Security for the 2016 Bonds Under the Trust Agreement, the Borrowers will be obligated to make payments in the amounts and at the times necessary, which, together with other available funds, will be sufficient to pay the principal or Redemption Price of, and interest on, the 2016 Bonds and to perform certain other covenants set forth therein, all of which payment obligations and other covenants will be secured, under the Master Trust Indenture, by a security interest in the Gross Revenues (as defined in the Master Trust Indenture) of the Obligated Group and the Mortgage (as defined herein). As further security for the 2016 Bonds, the Authority will pledge and assign to the Trustee the Authority s rights to receive the payments to be made under the Trust Agreement and the Authority s interest in the funds and accounts (excluding the Rebate Fund, funds received by the Authority for its own use, whether as administrative fees, reimbursement or indemnification, and the rights thereto) established under the Trust Agreement. In order to secure the Obligations (as defined in the Master Trust Indenture) under the Master Trust Indenture and the performance by each member of the Obligated Group of all terms, conditions and covenants set forth in the Master Trust Indenture, the relevant members of the Obligated Group have previously executed and delivered the Mortgage to the Master Trustee. Reference should be made to SECURITY FOR THE 2016 BONDS herein and to Appendix C hereto for a further description of the security for the 2016 Bonds. Bondholders Risks The Borrowers ability to make payments under the Master Trust Indenture and the Trust Agreement, which the Authority, in turn, will apply to the payment of the principal and Redemption Price, if any, of and interest, on the 2016 Bonds, is dependent on revenues to be derived by the Obligated Group as in effect from time to time. Certain risks inherent in the generation of such revenues and otherwise generally associated with investment in the 2016 Bonds are described in the section entitled BONDHOLDERS RISKS herein. Information regarding the Obligated Group and its affiliates is included in this Official Statement in Appendix A. Audited and interim unaudited financial statements for SLUHN, the parent of the Borrowers, and its controlled entities are included in this Official Statement in Appendix B. 4

9 THE AUTHORITY General The Authority is a body corporate and politic created pursuant to an ordinance of the County Council of the County of Northampton and existing under the Act. The Authority may acquire, hold, construct, finance, improve, maintain, own, operate and lease, in the capacity of either lessor or lessee, hospitals and related facilities, and other projects acquired, constructed or improved for hospital purposes. The Authority is located at Northampton County Government Center, 1st Floor, Room 1211, of the Northampton County Courthouse, 669 Washington Street, Easton, Pennsylvania. The Authority has full power and authority to issue the 2016 Bonds. Members of the Authority The governing body of the Authority is a board (the Board ) consisting of seven members, appointed by the Northampton County Council for staggered five-year terms. A member of the Board may be reappointed at the expiration of his or her term. Board members serve until replaced. The current members of the Board are: Previous Authority Issues Member Office Shawn Langen Chairman J. Michael Dowd Vice-Chairman Margaret Ferraro Secretary Shawn Donahue Treasurer Neil Koplin Assistant Secretary Mark Schiavone Assistant Treasurer Helene Whitaker 2nd Assistant Secretary 2nd Assistant Treasurer The Authority has previously issued bonds and notes for projects of other entities which are secured by payments from such entities. All prior issues of the Authority s bonds and notes are limited revenue obligations and the revenues associated therewith are not available for payment of debt service on the 2016 Bonds. The Authority may enter into future financing agreements which will provide for the issuance of bonds or notes which will be secured by revenues derived from other projects financed. General THE 2016 BONDS The 2016 Bonds are issuable as fully registered bonds without coupons as set forth on the inside cover page of this Official Statement. The 2016 Bonds shall be in denominations of $5,000 and integral multiples thereof. The 2016 Bonds are subject to redemption prior to maturity at the option of the Borrowers, as well as mandatory sinking fund redemption and extraordinary optional redemption, as described under the caption REDEMPTION OF THE 2016 BONDS herein. Payment of the principal or Redemption Price of and interest on the 2016 Bonds at stated maturity shall be made upon presentation and surrender thereof. All payments of interest and premium, if any, on, and of principal upon redemption of the 2016 Bonds shall be paid through the securities depository established for the 2016 Bonds. The 2016 Bonds when issued, will be registered in the name 5

10 of Cede & Co., as initial nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the 2016 Bonds. See - Book-Entry Only System below. The Bank of New York Mellon Trust Company, N.A. is the Trustee under the Trust Agreement and has a corporate trust office in Philadelphia, Pennsylvania. The Trustee shall act as registrar, paying agent, and transfer agent for the 2016 Bonds. The 2016 Bonds may be transferred or exchanged as follows: (i) Any 2016 Bond may be transferred if endorsed for such transfer by the Holder thereof and surrendered by such Holder or his duly appointed attorney at the corporate trust office of the Trustee designated by the Trustee for such purpose, whereupon the Trustee shall authenticate and deliver to the transferee a new 2016 Bond or 2016 Bonds of the same maturity and in the same denomination as the 2016 Bond surrendered for transfer or in different Authorized Denominations equal in the aggregate to the principal amount of the surrendered 2016 Bond. (ii) Any 2016 Bond or 2016 Bonds of a particular maturity may be exchanged for one or more 2016 Bonds of the same maturity and in the same principal amount, but in a different Authorized Denomination or denominations. Each 2016 Bond so to be exchanged shall be surrendered by the Holder thereof or his duly appointed attorney at the corporate trust office of the Trustee designated by the Trustee for such purpose, whereupon a new Bond or Bonds shall be authenticated and delivered to such Holder. (iii) In the case of any 2016 Bond properly surrendered for partial redemption, the Trustee shall authenticate and deliver a new 2016 Bond in exchange therefor, such new 2016 Bond to be of the same maturity and in a denomination equal to the unredeemed principal amount of the surrendered 2016 Bond; provided that, in its option, the Trustee may certify the amount and date of partial redemption upon the partial redemption certificate, if any, printed on the surrendered 2016 Bond and return such surrendered 2016 Bond to the Holder in lieu of an exchange. Except as provided in subparagraph (iii) above, the Trustee shall not be required to effect any transfer or exchange during the fifteen (15) days immediately preceding the date of mailing of any notice of redemption or at any time following the mailing of any such notice, if the 2016 Bonds or any portion of a 2016 Bond to be transferred or exchanged has been called for such redemption. No charge shall be imposed in connection with any transfer or exchange, except for taxes or governmental charges related thereto. Interest on the 2016 Bonds The 2016 Bonds will bear interest at the rates as shown on the inside front cover of this Official Statement from the Interest Payment Date to which interest has been paid next preceding the date of authentication, unless the date of authentication (i) is an Interest Payment Date to which interest has been paid, in which event the 2016 Bonds will bear interest from the date of authentication, or (ii) is prior to the first Interest Payment Date for the 2016 Bonds, in which event such 2016 Bonds will bear interest from the date of their initial delivery. Interest on the 2016 Bonds will be payable on each February 15 and August 15, commencing on February 15, 2017 and will be computed on the basis of 360-day year of twelve 30-day months. Book-Entry Only System The information set forth herein concerning DTC and the book-entry-only system described below has been extracted from materials provided by DTC for such purpose, is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Borrowers, the Trustee, the Underwriter or the Authority. DTC will act as securities depository for the 2016 Bonds. The 2016 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such 6

11 other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for the 2016 Bonds of each maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.6 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has a S&P Global Ratings 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 2016 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2016 Bonds on DTC s records. The ownership interest of each actual purchaser of each 2016 Bond ( Beneficial Owner ) is in turn to be recorded on the Direct Participants 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 2016 Bonds are to be accomplished by entries made on the books of Direct Participants and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in 2016 Bonds, except in the event that use of the book-entry system for the 2016 Bonds is discontinued. To facilitate subsequent transfers, all 2016 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 2016 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 2016 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such 2016 Bonds are credited, which may or may not be the Beneficial Owners. The Direct Participants 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 2016 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2016 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Trust Agreement. For example, Beneficial Owners of 2016 Bonds may wish to ascertain that the nominee holding the

12 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the 2016 Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to 2016 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 Authority 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 2016 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments of principal and Redemption Price of and interest on the 2016 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 Authority or the Trustee, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Trustee, the Borrowers or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or 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 Direct Participants and Indirect Participants. DTC may discontinue providing its services as depository with respect to the 2016 Bonds at any time by giving reasonable notice to the Authority 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 Authority 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 will be printed and delivered in registered certificate form to such Persons, and in such maturities and principal amounts, as may be designated by DTC, in writing. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy thereof. THE AUTHORITY, THE BORROWERS AND THE TRUSTEE CANNOT AND DO NOT GIVE ANY ASSURANCES THAT THE DTC PARTICIPANTS OR THE INDIRECT PARTICIPANTS WILL DISTRIBUTE TO THE BENEFICIAL OWNERS OF THE 2016 BONDS (1) PAYMENTS OF PRINCIPAL OR REDEMPTION PRICE OF OR INTEREST ON THE 2016 BONDS, (2) CERTIFICATES REPRESENTING AN OWNERSHIP INTEREST OR OTHER CONFIRMATION OF BENEFICIAL OWNERSHIP INTERESTS IN 2016 BONDS, OR (3) NOTICES OF REDEMPTION OR OTHER NOTICES SENT TO DTC OR ITS NOMINEE, CEDE & CO., AS THE REGISTERED OWNER OF THE 2016 BONDS, OR THAT THEY WILL DO SO ON A TIMELY BASIS OR THAT DTC, DTC PARTICIPANTS OR INDIRECT PARTICIPANTS WILL SERVE AND ACT IN THE MANNER DESCRIBED IN THIS OFFICIAL STATEMENT. NONE OF THE AUTHORITY, THE BORROWERS OR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY DTC PARTICIPANT, INDIRECT PARTICIPANT 8

13 OR ANY BENEFICIAL OWNER OR ANY OTHER PERSON WITH RESPECT TO: (1) THE 2016 BONDS; (2) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT OR INDIRECT PARTICIPANT; (3) THE PAYMENT BY DTC OR ANY DTC PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL OR REDEMPTION PRICE OF OR INTEREST ON THE 2016 BONDS; (4) THE DELIVERY BY ANY DTC PARTICIPANT OR INDIRECT PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE TRUST AGREEMENT TO BE GIVEN TO BONDHOLDERS; (5) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENT IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE 2016 BONDS; OR (6) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS BONDOWNER. REDEMPTION OF THE 2016 BONDS The 2016 Bonds will be subject to mandatory sinking fund redemption, optional redemption, and extraordinary optional redemption prior to maturity as described herein. Mandatory Sinking Fund Redemption The 2016 Bonds maturing on August 15, 20 and 20 are subject to mandatory redemption prior to maturity, in direct order of maturity and within a maturity as selected by lot, at a Redemption Price equal to the principal amount thereof, without premium, plus accrued interest to the redemption date, on August 15 of the years and in the respective amounts set forth below: Date Principal Amount $ * Stated Maturity * Date Principal Amount $ * Stated Maturity * Optional Redemption The 2016 Bonds are subject to optional redemption prior to their respective stated maturities, at the option of the Authority, at the written direction of the Borrowers, in whole or in part, in such amounts as may be specified by the Borrowers on or after August 15, 2026 at a Redemption Price equal to 100% of the principal amount thereof, without premium, plus accrued interest to the date fixed for redemption. Extraordinary Optional Redemption The 2016 Bonds are subject to extraordinary optional redemption prior to maturity, in whole or in part at any time, if moneys evidencing insurance proceeds, condemnation awards or proceeds of conveyances in lieu of condemnation in the event of damage, destruction or condemnation of all or part of the property of the Borrowers are transferred to the Debt Service Fund pursuant to the Master Trust 9

14 Indenture, at a Redemption Price of 100% of the principal amount redeemed plus accrued interest to the redemption date. Notice of Redemption Notice of redemption of 2016 Bonds is required to be mailed not less than 20 days nor more than 60 days prior to a redemption date to each registered owner of 2016 Bonds to be redeemed at the address of such owner recorded in the bond register. If notice of redemption of any 2016 Bond is so given, such 2016 Bond will be due and payable on the redemption date, and, if funds sufficient and available to pay the Redemption Price therefor are deposited with the Trustee on the redemption date and absent any such revocation or cure, will cease to bear interest after such date. While 2016 Bonds are registered in the name of DTC or its nominee, as nominee for the Beneficial Owners, the foregoing notice will be given to DTC or such nominee only, which shall alone be responsible for providing such notice to the Beneficial Owners. See THE 2016 BONDS - Book-Entry Only System. If at the time of mailing of any notice of optional redemption, the Authority has not deposited or caused to be deposited with the Trustee moneys sufficient to redeem all the 2016 Bonds called for redemption, such notice shall state that it is subject to the deposit of the redemption moneys with the Trustee not later than the opening of business on the redemption date and shall be of no effect unless such moneys are so deposited. Purchase In Lieu of Redemption The Borrowers and either of them shall have the option to purchase 2016 Bonds callable for optional redemption (the Callable Bonds ) in lieu of optional redemption. Such option may be exercised by delivery to the Trustee on or prior to the Business Day preceding the optional redemption date of written notice from the Borrowers specifying that the Callable Bonds shall not be redeemed, but instead shall be purchased as described in this provision. Upon delivery of such notice from the Borrowers, the Callable Bonds shall not be redeemed, but shall instead be subject to mandatory tender on the date that would have been the optional redemption date at a purchase price equal to the Redemption Price that would have been payable with respect to such Callable Bonds. The Borrowers option to purchase as described above shall be effective whether or not the notice of optional redemption sent to Holders of the 2016 Bonds indicates that the Borrowers have exercised, or intend to exercise, such option. No further or additional notice to Holders of the 2016 Bonds shall be required in connection with the purchase in lieu of redemption. The Callable Bonds purchased as described above (i) shall not be canceled or retired, but shall continue to be outstanding, (ii) shall be registered in the name of, or as directed by, the Borrowers, and (iii) shall continue to bear interest at the rate provided for in the 2016 Bonds. General SECURITY FOR THE 2016 BONDS The 2016 Bonds are limited obligations of the Authority secured by, and payable solely from, the payments to be made by the Borrowers under the Trust Agreement, which payments will be secured by the 2016 Master Note (having the benefit of the collateral held under the Master Trust Indenture, including the Mortgage). Reference should be made to THE TRUST AGREEMENT herein and to Appendix C hereto for a more detailed summary of the Trust Agreement. See Appendix F for a form of the Master Trust Indenture. The Trust Agreement The Borrowers are liable under the Trust Agreement to make payments calculated to be sufficient to pay the debt service on the 2016 Bonds. Moneys received or held by the Trustee pursuant to the Trust Agreement will be used to make required deposits into the funds established under the Trust Agreement. The funds established under the Trust Agreement for the 2016 Bonds will be held solely as security for 10

15 the 2016 Bonds; provided, however, that funds and investments held in the Rebate Fund shall not be pledged to any indebtedness and shall be applied solely as provided in the Trust Agreement. Under the terms of the Trust Agreement, the Authority will assign and pledge to the Trustee in trust and grant to the Trustee a continuing security interest in (a) the rights, title and interest of the Authority under the Trust Agreement, (b) all of the Authority s rights, whether currently existing or hereafter acquired, to enforce the loan of the proceeds of Bonds made by the Authority to the Borrowers pursuant to the terms of the Trust Agreement and (c) all payments and other revenues to be received from the Borrowers and all funds and investments held from time to time in the funds established under the Trust Agreement; provided, however that funds and investments held in the Rebate Fund shall not be pledged to any indebtedness and shall be applied solely as provided in the Trust Agreement. Such assignment shall not include funds received by the Authority for its own use, whether as administrative fees, reimbursement or indemnification, and the rights thereto. See THE TRUST AGREEMENT herein and Appendix C hereto for a more detailed summary of the Trust Agreement. The Master Trust Indenture The Obligated Group has entered into the Master Trust Indenture with the Master Trustee. The obligations of the Obligated Group under the Master Trust Indenture in respect of the 2016 Bonds are evidenced by the 2016 Master Note, issued thereunder for the benefit of the Trustee, pursuant to which the Obligated Group will be obligated to make payments in the amounts and at the times necessary, which, together with other available funds, will be sufficient to pay the principal or Redemption Price of, and interest on, the 2016 Bonds, and to perform certain other covenants set forth therein, all of which payment obligations and other covenants will be secured, under the Master Trust Indenture, by a security interest in the Gross Revenues of the Obligated Group and the Mortgage. In connection with the issuance of the 2016 Bonds and in accordance with the provisions of the Original Master Trust Indenture, the Obligated Group is entering into the Amended and Restated Master Trust Indenture to update certain provisions therein and to make certain other amendments. The Amended and Restated Master Trust Indenture will become effective upon receipt of the consent of the holders of not less than 51% of the obligations then Outstanding (the Required Consent ) under the Original Master Trust Indenture. By purchasing the 2016 Bonds, the holders of such 2016 Bonds are deemed to have consented to the terms of the Amended and Restated Master Trust Indenture, and to have authorized and directed the Trustee, as holder of the 2016 Master Note, to consent to the amendment and restatement of the Original Master Trust Indenture by the Amended and Restated Master Trust Indenture, in substantially the form set forth in Appendix F hereto. The Amended and Restated Master Trust Indenture will become effective upon receipt of the Required Consent, which is expected to occur upon the issuance of the 2016 Bonds. The Amended and Restated Master Trust Indenture, as amended and supplemented from time to time, is referred to herein as the Master Trust Indenture. See Appendix F hereto for a form of the Master Trust Indenture. The Amended and Restated Master Indenture provides that the Series 2016 Master Note must be surrendered by the holder thereof (the Trustee) in exchange for a replacement note or notes or similar obligations issued by an obligated issuer or group of obligated issuers or other obligated entities under and pursuant to and secured by a master trust indenture or another agreement or agreements pursuant to which entities may become jointly and severally liable on specified obligations upon the satisfaction of certain requirements set forth in the Amended and Restated Master Indenture. See Section 704 of the Amended and Restated Master Indenture in Appendix F hereto. 11

16 The Mortgage In order to secure the Obligations under the Master Trust Indenture and the performance of each member of the Obligated Group of all terms, conditions and covenants set forth in the Master Trust Indenture, SLH has previously executed and delivered to the Master Trustee, an Open-End Mortgage, Assignment of Rents and Security Agreement, effective July 1, 2003 on certain real estate comprising SLH s Allentown and Bethlehem Campuses (the Original 2003 Mortgage ). In connection with the issuance of the 2016 Bonds, SLH will amend the Original 2003 Mortgage pursuant to a First Amendment to Open-End Mortgage, Assignment of Rents and Security Agreement, effective as of the date of closing (the 2003 Amendment and, together with the Original 2003 Mortgage, the 2003 Mortgage ) in order to increase the overall par amount of indebtedness allowed to be secured by the 2003 Mortgage. SLH has also previously executed and delivered to the Master Trustee, an Open-End Mortgage, Assignment of Rents and Security Agreement, dated April 22, 2010 on certain facilities at St. Luke s - Anderson (the Original 2010 Mortgage ). In connection with the issuance of the 2016 Bonds, St. Luke s Anderson will amend the Original 2010 Mortgage pursuant to a First Amendment to Open-End Mortgage, Assignment of Rents and Security Agreement, effective as of the date of closing (the 2010 Amendment and, together with the Original 2010 Mortgage, the 2010 Mortgage and, together with the 2003 Mortgage, the Mortgage ) to reflect that St. Luke s Anderson is successor to SLH as mortgagor with respect to the Original 2010 Mortgage. Neither St. Luke s Warren or St. Luke s Monroe has granted a mortgage in favor of the Master Trustee. See THE MORTGAGE in Appendix C hereto for a more detailed description of the Mortgage. While SLH and St. Luke s Anderson have each covenanted in the Mortgage that it has fee simple title to the applicable mortgaged property, no third party has insured the state of the title in connection with the issuance of the 2016 Bonds. See BONDHOLDERS RISKS Enforceability of the Mortgage. Prior Parity Bonds The Authority, on behalf of SLH and St. Luke s Anderson, has heretofore issued the Northampton Bonds, which are secured on a parity basis under the Master Trust Indenture with the 2016 Bonds. All such bonds are also secured on a parity basis under the Master Trust Indenture with the Lehigh Bonds issued by the Lehigh Authority, the Pocono Bonds issued by the Pocono Authority and the New Jersey Bonds issued by the New Jersey Authority. Upon issuance of the 2016 Bonds, the Obligated Group will have approximately $599 million in aggregate principal amount of obligations outstanding under the Master Trust Indenture, including the notes securing bonds issued by the Authority, the Northampton Authority, the New Jersey Authority, the Lehigh Authority and the Pocono Authority. See PLAN OF FINANCE herein. See Appendix B for a description of the other outstanding debt of the Obligated Group. The covenants, warranties and events of default in the Trust Agreement are not identical to the covenants, warranties and events of default in the bond purchase and loan agreements and trust agreements pursuant to which the prior parity bonds were issued. Further, certain holders of certain prior parity bonds have the right to accelerate such bonds, and in turn, the notes issued under the Master Trust Indenture that secure such bonds, upon the occurrence of an event of default under the applicable financing document. In the event that such holder exercises such right, all obligations issued under the Master Trust Indenture would be accelerated, including the 2016 Master Note that secures the 2016 Bonds. 12

17 Additional Long Term Indebtedness Other indebtedness, including Long Term Indebtedness secured on a parity with the 2016 Bonds, may be issued by any member of the Obligated Group upon satisfaction of certain requirements under the Master Trust Indenture which are described in the Master Trust Indenture. See Appendix F hereto for a form of the Master Trust Indenture. Certain Other Covenants Upon compliance with the terms and conditions of the Master Trust Indenture, the members of the Obligated Group may, among other things, transfer or encumber their property, merge or consolidate, incur and secure parity debt as noted above, and dispose of insurance proceeds and condemnation awards. See Appendix F hereto for a form of the Master Trust Indenture. THE TRUST AGREEMENT The following description of certain provisions of the Trust Agreement is only a brief outline of some of the provisions thereof and does not purport to summarize or describe all of the provisions thereof. A further description of certain provisions of the Trust Agreement is set forth in Appendix C hereto. Reference is made to the Trust Agreement for details of the provisions and conditions relating to the 2016 Bonds. Issuance of the 2016 Bonds, Trust Agreement and Payments by the Borrowers Under the Trust Agreement, the Authority has loaned the proceeds of the 2016 Bonds to the Borrowers, which the Borrowers agree to expend on costs of the 2016 Project. Under the Trust Agreement, the Borrowers agree to make loan payments in amounts sufficient to pay debt service on the 2016 Bonds, in full when due. The liabilities and obligations of the Borrower under the Trust Agreement are joint and several. Additional Payments by the Borrowers The Borrowers shall pay as Additional Payments, the fees, costs and expenses (including reasonable legal fees and expenses) incurred by the Authority as provided in the Trust Agreement. The Borrowers are also required to indemnify the Authority and certain other parties against certain liabilities and expenses. Covenants of the Borrowers Each Borrower agrees in the Trust Agreement to maintain its existence and its qualification to operate a hospital facility, to conduct its operations in a manner that will result in its continued qualification as an organization described in Section 501(c)(3) of the Code, to maintain its property in good repair and operating condition, to comply with applicable laws, to pay all lawful taxes, governmental charges and assessments, to pay its indebtedness, to maintain all necessary licenses, permits, approvals, certifications and accreditations, and to maintain insurance as required under the Master Trust Indenture. The Borrowers are subject to certain other additional covenants under the Master Trust Indenture and the Trust Agreement. The Trustee The obligations and duties of the Trustee are described in the Trust Agreement and the Trustee has undertaken only those obligations and duties which are expressly set out in the Trust Agreement. The Trustee has not independently passed upon the validity of the 2016 Bonds, the security therefor or the adequacy of the provisions for payment thereof. The Trust Agreement expressly provides that the Trustee shall not be responsible for any loss or damage resulting from any action taken or omitted in good faith in reliance upon an opinion of counsel. 13

18 Under the terms of the Trust Agreement, the Trustee is liable only for those damages caused by its gross negligence or willful misconduct. Under the Trust Agreement, the Trustee is not required to take notice or be deemed to have notice of any Event of Default under the Trust Agreement, except for failure by the Authority to cause to be made any of the payments required to be made for payment of principal or Redemption Price of the 2016 Bonds, when due at maturity or earlier redemption, or interest on the 2016 Bonds, unless the Trustee has been specifically notified in writing of such Event of Default by the Authority or the registered owners of at least a majority in aggregate principal amount of the 2016 Bonds then outstanding. All notices or other instruments required by the Trust Agreement to be delivered to the Trustee must be delivered at the designated corporate trust office of the Trustee. In the absence of any such notice, the Trustee may conclusively assume that no Event of Default exists, except as expressly stated above and in the Trust Agreement. Construction Fund Under the Trust Agreement, there shall be established with the Trustee a Construction Fund. The net proceeds received upon the sale of the 2016 Bonds will be deposited in the Construction Fund and disbursed from the Construction Fund to finance various costs incurred by the Borrowers in connection with the 2016 Capital Project. Debt Service Fund Under the Trust Agreement, there is established with the Trustee a Debt Service Fund. Moneys held in the Debt Service Fund shall be made available to pay the principal or Redemption Price of and interest on the 2016 Bonds. Rebate Fund Under the Trust Agreement, there is established with the Trustee a Rebate Fund for the payment of any required arbitrage rebate to the United States. Settlement Fund Under the Trust Agreement, there is established with the Trustee a Settlement Fund. The proceeds of the sale of the 2016 Bonds will be deposited in the Settlement Fund and thereafter applied to pay costs of issuance and transferred to such Person or deposited to such funds and accounts as specified in a closing statement signed by the Authority and the Borrowers. Events of Default The Trust Agreement provides that each of the following, subject to the terms and conditions therein, shall be an Event of Default : (a) if any principal or Redemption Price of, or interest on any 2016 Bond shall not be paid when due, whether at maturity, by acceleration, upon mandatory sinking fund redemption, optional redemption or extraordinary optional redemption, or otherwise; or (b) if the Borrowers shall fail to make (a) any Bond Payment when due and payable or (b) any Additional Payment within fifteen (15) days following any applicable date upon which the same becomes due and payable; or (c) if the Borrowers shall fail to make any other required payment to the Trustee or the Authority under the Trust Agreement (other than those described in (a) and (b) above), and such failure is not remedied within 30 days after written notice thereof is given by the Authority or the Trustee to the Borrowers; or the Borrowers shall fail to observe or perform any of its other agreements, covenants 14

19 or obligations under the Trust Agreement or any related bond document and such failure is not remedied within 60 days after written notice thereof is given by the Authority or the Trustee; provided, however, that if such observance or performance requires work to be done, actions to be taken or conditions to be remedied, which by their nature cannot reasonably be done, taken or remedied, as the case may be, within such 60 day period, no Event of Default shall be deemed to have occurred or to exist if and so long as the Borrowers shall commence such observance or performance within such 60 day period and shall diligently and continuously prosecute the same to completion; or (d) if there shall be a material breach of warranty made in the Trust Agreement by the Borrowers as of the date it was intended to be effective and the breach is not cured within 60 days after written notice thereof is given by the Authority or the Trustee to the Borrowers, unless the breach is not curable within 60 days and the Borrowers notify the Authority and the Trustee in writing within such 60 days that they are proceeding diligently in their efforts to cure said breach, in which event it shall be an Event of Default if said breach is not cured within 90 days after such notice is given by the Borrowers to the Authority and the Trustee; or (e) if an Event of Bankruptcy shall occur and be continuing or shall exist; or (f) if an Event of Default under and as defined in the Master Trust Indenture shall occur and be continuing or shall exist; or (g) if the 2016 Master Note shall cease to be a Debt Obligation as such term is defined in the Master Trust Indenture. Remedies Upon Event of Default If an Event of Default occurs and is continuing, the Trustee may, and upon receipt of written direction from the Holders of 25% in principal amount of the 2016 Bonds, shall, by written notice to the Borrowers, the Authority and the Holders, declare immediately due and payable the principal amount of the outstanding 2016 Bonds and the payments to be made by the Borrowers therefor, and accrued interest on the foregoing, whereupon the same shall become immediately due and payable without any further action or notice. Such acceleration shall be automatic upon the occurrence of the Event of Default described in paragraph (e) above. If an Event of Default occurs and is continuing, the Trustee may, for so long as the Master Trust Indenture is in effect, notify the Master Trustee of such Event of Default and seek enforcement of its rights under the Master Trust Indenture as the holder of the 2016 Master Note. The Trustee may enforce the provisions of the Trust Agreement by legal proceedings for the specific performance of any covenant, obligation or agreement contained herein, whether or not an Event of Default exists, or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Borrowers or the Authority of the provisions of the Trust Agreement, including court costs, reasonable attorneys fees and other costs and expenses incurred in enforcing the obligations of the Authority and the Borrowers under the Trust Agreement. The Trustee shall not be required to take, and shall not be deemed to have, notice of any other breach or default by the Borrowers or the Authority except when given written notice thereof by the Holders of at least ten percent (10%) in principal amount of the outstanding Bonds, by the Authority or the Borrowers; provided, however, that the Trustee shall, in all cases where it knows of any Default or any Event of Default which is then continuing, not later than the tenth (10th) day following such Default or Event of Default, give written notice to the Authority, the Borrowers, and each Holder of the occurrence and continuance thereof. The Trustee shall give default notices and proceed to exercise remedies when instructed to do so by the written direction of the Holders of at least twenty-five percent 15

20 (25%) in principal amount of the outstanding Bonds. The Trustee shall not be required, however, to take any remedial action, other than the giving of notice, or follow any written directions, unless indemnity to its satisfaction is furnished by the Holders for any expenses or liability to be incurred therein. No Holder shall have any right to institute any legal proceedings for the enforcement of the obligations of the Borrowers under the Trust Agreement or any applicable remedy thereunder, unless the Holders of the percentage of principal amount of the 2016 Bonds specified above have directed the Authority and the Trustee to act and furnished the Authority and the Trustee indemnity satisfactory to them and have afforded the Authority and the Trustee reasonable opportunity to proceed, and the Authority and the Trustee shall thereafter fail or refuse to take such action. Waivers of Events of Default Except as provided in the Trust Agreement, at any time, in its discretion, if the Trustee determines that an Event of Default, other than an Event of Default in the payment of principal (including sinking fund installments) or Redemption Price of, or interest on the 2016 Bonds has been cured before the entry of any final judgment or decree with respect to it, the Trustee may waive the Event of Default and its consequences, including any acceleration, by written notice to the Borrowers and shall do so upon written instruction of the Holders of at least a majority in principal amount of the outstanding Bonds. Application of Moneys In Event of Default The proceeds from the exercise of the rights and remedies of the Trustee after an Event of Default will be deposited to the Debt Service Fund and, after payment of all charges and disbursements of the Authority and the Trustee in accordance with the Trust Agreement, including, without limitation, reasonable attorneys fees and expenses, be applied first to the payment of interest, including interest on overdue principal, in the order in which the same became due (pro rata with respect to interest which became due at the same time) and second to the payment of principal (including sinking fund installments) of and premium if any, in the order in which the same became due (pro rata with respect to principal which became due at the same time). Amendments and Supplements to the Trust Agreement The Trust Agreement may be amended or supplemented from time to time, without the consent of the Holders of the 2016 Bonds, for one or more of the following purposes: (a) to add to the covenants and agreements of the Borrowers or to surrender or limit any right or power of the Borrowers; (b) to cure any ambiguity or defect, or to add provisions which are not inconsistent with the Trust Agreement and which do not impair the security for the 2016 Bonds; (c) to provide for the sharing of control of, or notices with respect to, the exercise of remedies with the Holders of the 2016 Bonds; (d) to amend the provisions of the Trust Agreement relating to the Rebate Fund; or (e) to maintain the exclusion from gross income of interest payable with respect to any Bonds. Except as provided in the foregoing paragraph, the Trust Agreement may be amended only with the written consent of the Holders of a majority in principal amount of any outstanding 2016 Bonds; provided, however, that no amendment of the Trust Agreement may be made without the unanimous written consent of the affected Holders for any, of the following purposes: (1) to extend the maturity of any 2016 Bond; (2) to reduce the principal amount or interest rate of any 2016 Bond; (3) to make any 2016 Bond redeemable other than in accordance with its terms; (4) to create a preference or priority of any Obligation over any other Obligation; or (5) to reduce the percentage of the 2016 Bonds required to be represented by the Holders giving their consent to any amendment. 16

21 Defeasance When the 2016 Bonds have been paid or redeemed in full, or after there have been deposited with the Trustee sufficient cash, or cash invested in Government Obligations in such principal amounts, bearing interest at such rates and with such maturities as will provide, in the determination of the Trustee solely in reliance on an accountant s verification, sufficient funds to pay the principal or Redemption Price of, whether at maturity or upon earlier redemption, and interest on the 2016 Bonds as the same shall become due and payable, and when all the rights under the Trust Agreement of the Authority, the Holders of the 2016 Bonds and Trustee have been provided for, and all other obligations secured by the Trust Agreement have been paid in full, upon written notice from the Borrowers to the Authority, the Holders of the 2016 Bonds and the Trustee, the Holders of the 2016 Bonds shall cease to be entitled to any benefit or security under the Trust Agreement except the right to receive payment of the cash deposited and held for payment and other rights which by their nature cannot be satisfied prior to or simultaneously with termination of the lien thereof, the security interests created by the Trust Agreement (except in such funds and investment) shall terminate, and the Authority and the Trustee shall execute and deliver such instruments as may be necessary to discharge the lien and security interests created by the Trust Agreement; provided, however, that if any 2016 Bonds are to be redeemed prior to the maturity thereof, the Borrowers shall have taken all action necessary to redeem such 2016 Bonds and notice of such redemption shall have been duly given in accordance with the Trust Agreement or irrevocable instructions shall have been given to the Trustee. Upon such defeasance, the cash and Government Obligations required to pay or redeem the 2016 Bonds in full shall be irrevocably set aside for the purpose and moneys held for defeasance shall be invested only as provided above, provided that other Government Obligations may be substituted for Government Obligations deposited with the Trustee if the Trustee receives (i) verification from an accountant in a form satisfactory to the Trustee that the principal and interest becoming due on investments held by the Trustee after such transaction and any other moneys available therefor will provide the Trustee with moneys which at all times will be sufficient to pay the principal or Redemption Price of and interest on the 2016 Bonds as the same shall become due and payable and all other amounts due under the Trust Agreement, and (ii) an opinion of Bond Counsel to the effect that such transaction is in compliance with applicable law and will not adversely affect the exclusion from gross income under Section 103 of the Code of interest paid on the 2016 Bonds. Any funds or property held by the Trustee and not required for payment or redemption of the 2016 Bonds in full or for payment of rebate obligations shall, after satisfaction of all the rights of the Authority, the Holders of the 2016 Bonds and the Trustee, be distributed pursuant to the instructions of the Borrowers upon such notification, if any, as the Trustee or the Authority may reasonably require and upon receipt by the Trustee of an Opinion of Bond Counsel that such distribution will not adversely affect the exclusion from gross income under Section 103 of the Code of interest paid on any 2016 Bonds. If the Authority or the Borrowers deposits with the Trustee money or Government Obligations sufficient to pay the principal or Redemption Price of any particular 2016 Bond or 2016 Bonds becoming due, either at maturity or by call for redemption or otherwise, together with all interest accruing thereon to the due date, interest on such 2016 Bond or 2016 Bonds shall cease to accrue on the due date and all liability of the Authority or the Borrowers, as the case may be, shall cease to accrue on the due date and all liability of the Authority or the Borrowers, as the case may be, with respect to such 2016 Bond or 2016 Bonds shall likewise cease. Thereafter, such 2016 Bond or 2016 Bonds shall be deemed not to be outstanding under the Trust Agreement and the Holder or Holders of such 2016 Bonds shall be restricted exclusively to the cash or Government Obligations so deposited for any claim of whatsoever nature with respect to such 2016 Bond or 2016 Bonds, and the Trustee shall hold such funds in trust for such Holder or Holders. 17

22 No Personal Recourse No recourse shall be had for any claim based on the Trust Agreement against any director, officer or employee, past, present or future, of the Authority, the Borrowers, the Trustee or any successor of the Authority, the Borrowers or the Trustee, under any constitutional provision, statute or rule of law or by the enforcement of any assessment or penalty or by any legal or equitable proceeding or otherwise. PLAN OF FINANCE The 2016 Bonds are being issued to provide a portion of the funds, together with other available funds, for a project (the 2016 Project ) consisting of: (i) the advance refunding of all or a portion of the Refunded Bonds; (ii) the funding of the 2016 Capital Project; and (iii) the payment of certain costs and expense in connection with the issuance of the 2016 Bonds. See ESTIMATED SOURCES AND USES OF FUNDS herein. See Appendix A for a discussion of future financing plans with respect to existing debt of the Obligated Group. Simultaneously with the issuance of the 2016 Bonds, the Authority, the Borrowers and the Trustee for the Refunded Bonds will enter into an Escrow Deposit Agreement to provide for the advance refunding of the Refunded Bonds (the Escrow Agreement ). A portion of the proceeds of the 2016 Bonds, together with the funds on hand with the Trustee for the Refunded Bonds, will be held as uninvested cash and/or used to purchase non-callable Government Obligations, the maturing principal of and interest on which, together with uninvested cash, if any, held under the Escrow Agreement, will be sufficient to provide for the principal or mandatory sinking fund redemption requirements of and interest on the certain maturities of the Refunded Bonds up to and including August 15, 2018 (the 2008 Redemption Date ) and the redemption price of and interest on the remaining Refunded Bonds on the 2008 Redemption Date. The mathematical accuracy of the computation of the adequacy of the maturing principal and interest earned on the funds to be deposited pursuant to the Escrow Agreement to provide for the payment of the principal or redemption price of and interest on the Refunded Bonds to and including the 2008 Redemption Date will be verified by Robert Thomas CPA, LLC independent certified public accountants (the Verification Agent ). See VERIFICATION AGENT. 18

23 ESTIMATED SOURCES AND USES OF FUNDS* The sources and uses of funds relating to the issuance of the 2016 Bonds are estimated as follows: Sources of Funds: 2016 Bonds Principal Amount of 2016 Bonds $ Original Issue [Premium/Discount] Funds from the 2008 Debt Service Reserve Fund Total Sources $ Uses of Funds: Deposit to Refunding Escrow $ 2016 Capital Project Costs of Issuance* Total Uses $ * Includes, among other things, Underwriter s discount, printing costs, Financial Advisor fees and expenses, Trustee fees and expenses, legal fees and expenses, rating agency fees and Authority-related fees. * Preliminary, subject to change. 19

24 AGGREGATE ANNUAL DEBT SERVICE OF THE OBLIGATED GROUP * The following table shows for each Fiscal Year ending June 30 the principal, interest and sinking fund redemption requirements on the 2016 Bonds and debt service on the existing Bonds issued on behalf of the Obligated Group. The principal amounts and sinking fund payment requirements of the 2016 Bonds will be payable on August 15. Fiscal 2016 Bonds Existing Year Principal Interest Debt Service Debt Service ** Aggregate Debt Service $5,703,188 $5,703,188 $37,315,882 $43,019, ,064,450 10,064,450 36,171,338 46,235, ,064,450 10,064,450 35,231,369 45,295, $4,360,000 9,955,450 14,315,450 33,781,983 48,097, ,585,000 9,731,825 14,316,825 32,695,639 47,012, ,825,000 9,496,575 14,321,575 29,568,877 43,890, ,070,000 9,249,200 14,319,200 25,093,212 39,412, ,330,000 8,989,200 14,319,200 23,779,676 38,098, ,605,000 8,715,825 14,320,825 23,850,227 38,171, ,890,000 8,428,450 14,318,450 22,785,353 37,103, ,195,000 8,126,325 14,321,325 22,858,187 37,179, ,515,000 7,808,575 14,323,575 22,894,037 37,217, ,845,000 7,474,575 14,319,575 22,945,169 37,264, ,200,000 7,123,450 14,323,450 22,957,635 37,281, ,565,000 6,754,325 14,319,325 22,991,483 37,310, ,955,000 6,366,325 14,321,325 23,018,557 37,339, ,365,000 5,958,325 14,323,325 23,047,805 37,371, ,790,000 5,529,450 14,319,450 23,041,326 37,360, ,160,000 5,160,850 14,320,850 22,587,174 36,908, ,495,000 4,822,100 14,317,100 22,697,112 37,014, ,880,000 4,434,600 14,314,600 22,812,705 37,127, ,500,000 4,187,000 6,687,000 30,083,343 36,770, ,385,000 3,929,300 14,314,300 18,053,057 32,367, ,815,000 3,505,300 14,320,300 16,047,908 30,368, ,450,000 3,040,000 15,490,000 16,048,583 31,538, ,791,000 2,791,000 28,534,293 31,325, ,791,000 2,791,000 28,420,033 31,211, ,791,000 2,791,000 28,303,125 31,094, ,220,000 2,435,500 16,655,500 10,664,100 27,319, ,950,000 1,706,250 16,656,250 10,664,100 27,320, ,650, ,250 27,316,250-27,316,250 Total $215,600,000 $187,800,113 $403,400,113 $738,943,290 $1,142,343,403 * Preliminary, subject to change. Amounts are rounded to the nearest dollar. ** Does not include debt service on the Refunded Bonds. Interest on existing variable rate obligations is calculated at the 20 year average of the applicable variable rate index plus related support costs. Interest cost on hedged obligations calculated as the underlying interest cost on such obligations plus/minus net swap cashflows. Fixed rate swap cashflows calculated at the stated fixed rate, where applicable. Variable swap cashflows calculated at the 20 year average of the applicable variable rate index. 20

25 DEBT SERVICE COVERAGE OF THE OBLIGATED GROUP * Fiscal Years Ended June (Dollars in thousands) Excess of Revenue over Expenses $63,049 $55,327 Plus: Depreciation, Amortization and Interest 86,303 86,207 Historic Income Available for Debt Service $149,352 $141,534 Pro Forma Obligated Group Maximum Annual Debt Service $48,097 $48,097 Historical Pro Forma Long-Term Debt Service Coverage Ratio of Obligated Group Maximum Annual Debt Service 3.10x 2.94x Source: Audited Consolidated Financial Statements for Fiscal Year 2014 and 2015 * Preliminary, subject to change. St. Luke s Monroe became a member of the Obligated Group in January of 2015 and was not a member of the Obligated Group for the Fiscal Year ended June 30, 2014 and a part of the Fiscal Year ended June 30, BONDHOLDERS RISKS The discussion herein of risks to the owners of the 2016 Bonds is not intended as dispositive, comprehensive or definitive, but rather is to summarize certain matters which could affect payment on the 2016 Bonds. General; Factors That Could Affect the Future Financial Condition of the Obligated Group The 2016 Bonds are not a debt or liability of the Commonwealth of Pennsylvania (the Commonwealth ) or of any political subdivision thereof other than the Authority to the limited extent set forth herein, or a pledge of the faith and credit of the Commonwealth or of any such political subdivision, other than the Authority, but are special and limited obligations of the Authority, payable solely from the revenues received by the Authority from the Borrowers in accordance with the Trust Agreement, the funds and accounts held pursuant to the Trust Agreement (except the Rebate Fund) and certain investment income thereon. The Authority has no taxing power. Adequacy of Revenues Except to the extent otherwise noted herein, the 2016 Bonds are payable solely from the payments required to be made by the Borrowers to the Authority under the Trust Agreement and by the Obligated Group under the 2016 Master Note. No representation or assurance can be made that revenues will be realized by the Obligated Group in amounts sufficient to pay maturing principal or Redemption Price of and interest on the 2016 Bonds. The ability of the Borrowers to make payments under the Trust Agreement and the Obligated Group to make payments under the 2016 Master Note and the ability of the Authority to make payments on the 2016 Bonds under the Trust Agreement depend, among other things, upon the capabilities of management of the Obligated Group and the ability of the Obligated Group to maximize revenues under various third party reimbursement programs and to minimize costs and to obtain sufficient revenues from its operations to meet such obligations. These revenues are affected by and subject to conditions that may change in the future and with effects that cannot be determined at this 21

26 time. The risk factors discussed below should be considered in evaluating the ability of the Obligated Group to make payments in amounts sufficient to meet its obligations under the Trust Agreement and the Master Trust Indenture, as applicable. This discussion is not, and is not intended to be, exhaustive. The ability of the Borrowers to make required payments under the Trust Agreement and the Obligated Group to make payments under the Master Trust Indenture is subject to, among other things, the capabilities of the management of the Obligated Group and future economic and other conditions, which are unpredictable and which may affect revenues and, in turn, the payment of principal or Redemption Price of and interest on the 2016 Bonds. Future revenues and expenses of the Obligated Group will be affected by events and conditions relating generally to, among other things, demand for the Obligated Group services, its ability to provide the services required by patients, physicians relationships with the Obligated Group, management capabilities, the design and success of the Obligated Group s strategic plans, economic developments in the service area, the Obligated Group s ability to control expenses, maintenance by the Obligated Group of relationships with health insurance carriers and large employer group health plans and other third-party payor programs, competition, rates, costs, third-party reimbursement, future federal, New Jersey and Commonwealth funding of health care reimbursement programs, legislation, governmental regulation, general economic conditions and other conditions which are impossible to predict. The Authority has not made any independent investigation of the extent to which any such factors may have an adverse impact on the financial condition of the Obligated Group. No assurances can be given that patient utilization or revenues available to the Obligated Group from its operations will remain stable or increase. The Obligated Group expects that it will experience increases in operating costs due to inflation and other factors. However, there is no assurance that cost increases will be matched by increased patient revenue in amounts sufficient to generate an excess of revenues over expenses or that the Obligated Group will be able to control expenses in periods of inflation. No representation or assurance can be given that the Obligated Group will generate revenues sufficient to allow payment of debt service on the 2016 Bonds when due. None of the provisions, covenants, terms and conditions of the Trust Agreement will afford the Holder or Holders any assurance that the principal and interest owing on the 2016 Bonds will be paid as and when due, if the financial condition of the Obligated Group deteriorates to a point where the Obligated Group is unable to pay its debts as they come due, or otherwise becomes insolvent. Health Care Industry Factors Affecting the Obligated Group The health care industry is highly dependent on a number of factors that may limit the ability of the Borrowers to meet their obligations under the Trust Agreement and the Obligated Group to meet its obligations under the 2016 Master Note, many of which are beyond their control. Among other things, participants in the health care industry are subject to significant regulatory requirements of federal, state and local governmental agencies and independent professional organizations and accrediting bodies, technological advances and changes in treatment modes, various competitive factors and changes in thirdparty reimbursement programs. The Borrowers ability to pay their obligations under the Trust Agreement and the Obligated Group s ability to pay its obligations under the 2016 Master Note could be adversely affected by legislation, regulatory actions, economic conditions, increased competition from other health care providers, changes in the demand for health care services, government and third-party payor reimbursement changes, demographic changes, and malpractice claims and other litigation. Neither the Underwriter nor the Authority has made any independent investigation of the extent to which any such factors may have an adverse impact on the financial condition of the Obligated Group. Discussed below are certain of these factors which could have a significant impact on the future operations and financial condition of the Obligated Group. 22

27 Patient Protection and Affordable Care Act and Health Care Reform Initiatives On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act and on March 30, 2010, the President signed the Health Care and Education Reconciliation Act of 2010, which included amendments to the earlier law (collectively, the laws are referred to as the ACA or Health Care Reform ). The ACA is intended to address disparities in access, cost, quality and the delivery of healthcare to United States residents. The changes to various aspects of the healthcare system in the ACA are far-reaching and include substantial adjustments to Medicare reimbursement, establishment of individual and employer mandates for health insurance coverage, extension of Medicaid coverage to certain populations, provision of incentives for employer-provided healthcare insurance, restrictions on physician-owned hospitals, promotion of increased quality and efficiency in health care delivery and outcomes, as well as increased oversight and enforcement provisions. Some of the provisions of the ACA took effect immediately, while others have, or are being phased in over time, ranging from one year to ten years. Many of the significant healthcare coverage reforms began in The ACA also requires the promulgation of substantial regulations with significant effects on the healthcare industry. The ACA reforms the sources and methods by which consumers will pay for healthcare for themselves and their families. The ACA also places new requirements on employers related to the provision of health insurance for their employees and dependents and expands small employers access to group health plans. These reforms are expected to expand the base of consumers of healthcare services. One of the primary goals of the ACA is to provide or make available, or subsidize the premium costs of, healthcare insurance for consumers who are currently uninsured (or underinsured) and who fall below certain income levels. The ACA proposes to accomplish that objective through various provisions, including: creating state organized insurance markets (referred to as exchanges or marketplaces) in which individuals and small employers can purchase healthcare insurance for themselves and their families or their employees and dependents, providing subsidies for premium costs to individuals and families based upon their income relative to federal poverty levels, mandating that individual consumers obtain and certain employers provide a minimum level of healthcare insurance, and providing for penalties or taxes on consumers and employers that do not comply with these mandates, establishing insurance reforms that expand access to coverage generally through such provisions as prohibitions on denials of coverage for pre-existing conditions and elimination of lifetime or annual cost caps, and expanding existing public programs, including Medicaid, for individuals and families. To the extent all or any of those provisions produce the intended result, changes in utilization of healthcare services can be expected and bad debt expenses may be reduced. Provisions of the ACA that affect hospital operations, financial performance or financial conditions are described below. This listing is not comprehensive. The ACA is complex and the process of its implementation has been modified several times, and it includes a myriad of new programs and initiatives and changes to existing programs, policies, practices and laws. 23

28 With varying effective dates, the annual Medicare market basket updates for many providers, including inpatient and outpatient hospital services, will be adjusted based on a ten-year average of national productivity and will be reduced by specified percentages each year. Commencing in federal fiscal year 2014, Medicare disproportionate share hospital ( DSH ) payments (i.e., payments a provider receives from the federal government to help defray the cost of treating the uninsured) were reduced by 75%. DSH payments are determined by a formula that takes into account the national number of consumers who do not have healthcare insurance and the amount of uncompensated care provided by a hospital. Reductions to the Medicaid DSH payments, which are paid to the states for distribution to the hospitals, have been delayed until fiscal year 2018 under the Medicare Access and CHIP Reauthorization Act of 2015 ( MACRA ). Originally, CMS proposed Medicaid DSH payment reductions of $500 million for fiscal year 2014 and $600 million for fiscal year However, due to the delay, the DSH payment reduction will increase to approximately $2 billion for fiscal year The DSH payment reductions are also extended through Through September 30, 2019, payments under the Medicare Advantage programs (Medicare managed care) have been or will continue to be reduced, which may result in increased premiums or out-of-pocket costs to Medicare beneficiaries enrolled in Medicare Advantage plans and may also lead to decreased payments to providers by managed care companies operating Medicare Advantage programs. States will have the option to expand Medicaid programs to a broader population, with incomes up to 133% of federal poverty levels. Pennsylvania opted to expand its Medicaid program. Medicare reduces payments to hospitals found to have a high rate of preventable readmissions for certain conditions; this information will be made available to the public. Commencing in federal fiscal year 2015, Medicare payments to certain hospitals that fall into the top 25% of national risk-adjusted hospital acquired conditions rates will be reduced by 1%. Federal payments to states for Medicaid services related to hospitalacquired conditions are prohibited. Medicare commenced a value-based purchasing program under the Medicare program. This program is funded with 1.75% reductions in base operating diagnosis-related group ( DRG ) payments for inpatient services for fiscal year 2016 (increasing to 2% by fiscal year 2017). These amounts are redistributed to hospitals and providers as incentive payments based on the achievement of various performance and outcome measures. In order to reduce waste, fraud, and abuse in public programs, the ACA provides for provider enrollment screening, enhanced oversight periods for new providers and suppliers, and enrollment moratoria in areas identified as being at elevated risk of fraud in all public programs. It also requires Medicare and Medicaid program providers and suppliers to establish compliance programs. The ACA requires the development of a database to capture and share healthcare provider data across federal healthcare programs and provides for increased penalties for fraud and abuse violations, and increased funding for anti-fraud activities. 24

29 The ACA establishes an Independent Payment Advisory Board to develop proposals to improve the quality of care and to recommend proposals to limit Medicare spending growth. Beginning January 15, 2019, if the Medicare spending growth rate exceeds the target recommended by the Independent Payment Advisory Board, then the Independent Payment Advisory Board is required to develop proposals to reduce the growth rate and require the Secretary of HHS to implement those proposals, unless Congress enacts legislation related to the proposals. The ACA imposes substantial new data reporting obligations on hospital initiatives to improve the quality of care, reduce errors and improve health outcomes. Health care insurers now are required to include quality improvement covenants in their contracts with hospital providers, and will be required to report their progress on such actions to HHS. Commencing January 1, 2015, health care insurers participating in the health insurance exchanges are allowed to contract only with hospitals that have implemented programs designed to ensure patient safety and enhance quality of care. The ACA immediately imposed additional requirements upon nonprofit hospitals to maintain their tax-exempt status, including obligations to adopt and publicize a financial assistance policy; limit charges to patients who qualify for financial assistance to the lowest amount charged to insured patients; and control the billing and collection processes. Additionally, tax-exempt hospitals must conduct a community needs assessment at least once every three taxable years and adopt an implementation strategy to meet those identified needs. Failure to satisfy these conditions may result in the imposition of fines and the loss of tax-exempt status. Broadly speaking, the provisions of the ACA that encourage or mandate healthcare coverage for individuals can be expected to increase demand for health care and reduce the amount of uncompensated care that the Obligated Group provides. However, revisions to the Medicare, Medicaid and third party payor reimbursement programs could reduce revenues. These reimbursement reductions, together with increases in deductibles and copays, and pricing transparency are expected to result in changes to health care utilization trends. Therefore, the impact of the ACA on the operations of the Obligated Group cannot be currently ascertained, and it may have a material impact, either positive or negative, on the Obligated Group s operations. The ACA has been challenged in numerous lawsuits. It survived a significant challenge to its constitutionality when, on June 28, 2012, the Supreme Court of the United States held that the individual mandate for individuals to buy health insurance is a constitutional exercise of Congress s power to levy taxes. However, the Court found that the provision of the ACA that requires 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 amounted to coercion. The 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. As a result, some states have elected not to expand their Medicaid program, which may affect the number of uninsured people to whom the Obligated Group provides care. New Jersey expanded its Medicaid program in 2013 in accordance with the ACA and Pennsylvania applied for approval of a revised form of expanded Medicaid coverage. In 2014, Pennsylvania obtained a waiver from the federal government to expand Medicaid eligibility based on a private-market Medicaid program, called Healthy Pennsylvania, which began on January 1, Governor Tom Wolf, who took office in January 2015, decided to end the Healthy Pennsylvania plan in favor of a traditional expansion of HealthChoices. HealthChoices became available for new enrollees as of April 2015, and all individuals previously enrolled in Healthy Pennsylvania were transitioned to HealthChoices by September 1,

30 On June 25, 2015, the United States Supreme Court issued its opinion in King v. Burwell, the case challenging whether the IRS can offer tax credit subsidies to individuals enrolled in health insurance through a federally operated exchange. The Court ruled 6-3 that this action is within the IRS s power. The decision means that low- and middle-income individuals who purchase coverage through a federal exchange will remain eligible for tax credit subsidies. As a result of the decision, Governor Tom Wolf withdrew his plan to establish a state-run exchange in Pennsylvania, for which he had received permission from HHS. Certain legal challenges to the ACA are pending and others may be filed in the future, the effect of which on the Obligated Group is unknown at the time. The Obligated Group is analyzing the ACA and will continue to do so in order to assess its effects on current and projected operations, financial performance and financial condition. However, management of the Obligated Group cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation. General Health Care Industry Factors The Obligated Group and the health care industry in general are subject to regulation by a number of governmental agencies, including those which administer the Medicare and Medicaid programs, federal, state and local agencies responsible for administration of health planning programs and the licensure of health care providers and payors, and other federal, state and local governmental agencies. The health care industry is also affected by federal, state and local policies developed to regulate the manner in which health care is provided, administered and paid for nationally and locally. As a result, the health care industry is sensitive to legislative and regulatory changes in such programs and is affected by reductions and limitations in governmental spending for such programs as well as changing health care policies. In addition, Congress and other governmental agencies have focused on the provision of care to indigent and uninsured patients, the prevention of dumping such patients on other hospitals in order to avoid provision of unreimbursed care, the tax-exempt status of not-for-profit corporations which engage in joint ventures and activities unrelated to their exempt purposes and other issues. The Obligated Group receives a portion of its revenues from government programs, and it is unlikely that the Obligated Group could ever attract sufficient numbers of private-pay or commercially insured patients to become selfsufficient without reimbursements from governmental programs. The enactment of the ACA is an example of significant changes in the laws and regulations affecting health care generally. The enactment of other new legislation or the adoption of new regulations in these areas could have an adverse effect on the results of operations of the Obligated Group. Increased Competition. The Obligated Group is likely to face increased competition in the future. The ACA has spurred increased consolidation in the health system market, regionally and nationally. Larger systems may have greater resources to invest in information systems, accountable care organizations and new technology. Increased competition could be caused by: (i) the development of integrated health care delivery systems (e.g., health maintenance organizations ( HMOs ) and preferred provider organizations ( PPOs ) affiliated with health systems) in the service areas of the Obligated Group; (ii) competition with other hospitals and nursing homes to provide health care services; (iii) competition for patients with integrated delivery systems; (iv) competition for enrollees between traditional plans, whose insureds generally have a free choice of hospitals, and narrower network plans, which may limit the hospitals or substantially restrict the hospitals and physicians from which their enrollees can receive services; (v) competition for patients between physicians, who generally use hospitals, and non-physician practitioners such as nurse-midwives, practitioners, chiropractors, physical and occupational therapists and others, who may not generally use hospitals; (vi) competition from nursing homes, home health agencies, ambulatory care facilities, ambulatory surgical centers, 26

31 rehabilitation and therapy centers, physician group practices, and other non-hospital providers that provide services for which patients currently rely on hospitals; (vii) competition with other hospitals and licensed health facilities for qualified nursing and para-professional personnel; and (viii) competition with other hospitals for physician alignment. The effects of such increased competition on the Obligated Group s revenue, including pressures for increased discounts in contracts with alternate delivery systems, cannot be predicted. Joint Operating Agreements and Joint Ventures. The Obligated Group and affiliated entities may enter into joint operating agreements or joint ventures with previously unrelated, tax-exempt health systems or corporations to develop regionally-based health care delivery systems, networks or health information exchanges. These joint operating agreements and joint ventures provide for corporations to operate hospitals and other related health care assets, subject to reserve powers vested in the corporate or sponsoring organizations. The joint operating agreements and joint ventures are intended to promote the development and operation of regional tax-exempt health care provider networks. The parties to these joint operating agreements and joint ventures remain separate corporations and retain title to their assets. Each joint operating agreement and joint venture may provide for the annual sharing of net income and imposes certain operating and organizational restrictions and conditions upon the parties thereto. The Obligated Group and affiliated entities may also be participants in ancillary joint ventures with tax-exempt or for-profit entities. Participation in joint ventures, particularly joint ventures with forprofit entities, that do not meet requirements of the Code, potentially may: (i) result in a finding of inurement or undue private benefit which could result in a loss of tax-exempt status, (ii) result in a finding of an excess benefit transaction which could result in the imposition of an excise tax on the insider involved in the transaction or on the Obligated Group s management that knowingly approved the transaction, or both, or (iii) result in a finding that the activity is unrelated to the exempt purpose of the members of the Obligated Group and a determination that certain income received by the tax-exempt organization from the joint-venture with the for-profit entity is taxable. Management of the Obligated Group does not believe that participation by the members of the Obligated Group or an affiliated entity in any such presently existing ancillary joint venture will have a material adverse effect on either member of the Obligated Group tax-exempt status or financial condition. Inadequate Payments and Uncompensated Care. The Obligated Group is also at risk for the provision of hospital services on an uncompensated or undercompensated basis. Consistent with its status as a tax-exempt 501(c)(3) organization, each member of the Obligated Group generally pursues a policy of providing care to the poor and indigent without regard to ability to pay and maintains a financial assistance policy. Governmental agencies may also compel the provision of uncompensated care. For example, federal law imposes significant fines on a hospital that denies appropriate care on the basis of the patient s ability to pay or the source of payment. As a result, the Obligated Group may be required to provide services for which it receives reimbursement below cost, or for which it may receive no reimbursement, from the patient or third party payors. While the Obligated Group attempts to provide care to the poor and indigent in a prudent manner, the continuation or expansion of such policy, or the inability to properly document its indigent care, could have an adverse financial effect on the Obligated Group. While the ACA is designed to reduce uncompensated care by expanding health care coverage to a larger portion of the population, improvements to coverage and access will not occur immediately. In addition, the Medicaid program is dependent on the continued ability 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. 27

32 Physician Contracting and Relations. The Obligated Group may wish to contract with physician organizations (e.g., independent physician associations, physician-hospital organizations, etc.) ( POs ) to arrange for the provision of physician and ancillary services. Because POs are separate legal entities with their own goals, obligations to shareholders, financial status, and personnel, there are risks involved in contracting with the POs. The success of the Obligated Group will be partially dependent upon its ability to attract physicians to employ or to join the POs on the medical staffs of the Obligated Group, and to attract POs to participate in SLUHN. The Obligated Group is also dependent on the physicians abilities to perform their obligations and deliver high quality patient care in a cost-effective manner. There can be no assurance that the Obligated Group will be able to attract and retain the requisite number of physicians, or that such physicians will deliver high quality health care services. Without impaneling a sufficient number and type of providers in SLUHN, the Obligated Group could fail to be competitive, could fail to keep or attract payor contracts, or could be prohibited from operating until its panel provided adequate access to patients. Such occurrences could have a material adverse effect on the business or operations of the Obligated Group. Overview of Medicare and Medicaid Programs Medicare and Medicaid are the commonly used names for health care reimbursement or payment programs governed by certain provisions of the federal Social Security Act Amendments of The federal government, as the country s largest payer of health care services, uses reimbursement as a key tool to implement health care policies, to allocate health care resources and to control utilization, facility and provider development and expansion, and promote the use and development of health technology. Health care reform legislation continues these practices. These laws reflect the national policy that persons who are aged or disabled and persons who are poor should have access to medical care regardless of ability to pay. The Obligated Group serves this population and it is unlikely that the Obligated Group could attract sufficient numbers of private pay patients to their facilities to become self-sufficient without reimbursement from governmental sources. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or older, disabled, or qualify for Medicare s End Stage Renal Disease Program. Medicare Part A covers inpatient hospital, home health, nursing home care and certain other services, and Medicare Part B covers certain physicians services, certain outpatient ancillary care services, medical supplies and durable medical equipment. Medicare Part C, the Medicare Advantage program, enables Medicare beneficiaries to choose to obtain their benefits through a variety of private, managed care, risk-based plans. Medicare Part D makes outpatient prescription drug benefits available to Medicare beneficiaries. The private Medicare Part D plans are funded through premium payments from enrolled Medicare beneficiaries and subsidies from the federal government. Enrollment is available on an ongoing and intermittent basis. While participation in the program is voluntary, those who wait to enroll beyond their initial point of eligibility are penalized with additional surcharges which increase over time. The ACA includes changes to the Medicare Part D program, including the gradual reduction of the cost sharing burden by beneficiaries under Medicare Part D (the so-called donut hole ). Although Medicare Part D reimbursement does not cover inpatient prescriptions, changes in enrollment or program administration could affect the Obligated Group s revenue. Going forward, an expansion of coverage for outpatient pharmaceutical therapy may reduce the Obligated Group s admissions or shift the characteristics of those patients that are admitted. Medicaid is designed to pay providers for care given to the indigent and other persons who qualify based on certain conditions. Medicaid is funded by federal and state appropriations and is administered by an agency of the applicable state. Under the ACA, states have the option to expand 28

33 eligibility for Medicaid to cover individuals with income under 133% of the Federal Poverty Level ( FPL ). Conditions of Participation. Hospitals must comply with standards called Conditions of Participation in order to be eligible for Medicare and Medicaid reimbursement. Centers for Medicare and Medicaid Services ( CMS ) of the U.S. Department of Health and Human Services ( HHS ) is the federal agency responsible for ensuring that hospitals meet the regulatory Conditions of Participation. Generally, under Medicare rules, hospitals accredited by The Joint Commission (a private nonprofit corporation that accredits health care programs and providers in the United States) and other CMS approved accreditation bodies are deemed to meet the Conditions of Participation. Failure to maintain accreditation or to otherwise comply with the Conditions of Participation could have a materially adverse effect on the continued participation in the Medicare and Medicaid programs, and ultimately on the revenues of the Obligated Group. CMS issued a final rule reforming the Conditions of Participation for hospitals and critical access hospitals, which became effective July 16, The revised Conditions of Participation are an attempt to increase the flexibility and eliminate the burden of certain elements of the Conditions of Participation. The Obligated Group cannot anticipate the effect of the reformed Conditions of Participation on the Obligated Group and its affiliates but continues to analyze the full impact of the final regulation to maintain compliance with the Conditions of Participation. Medicare Reimbursement Overview. Medicare is administered by CMS, which delegates to the states the process for certifying those health care organizations to which CMS will make payment. The HHS s rule-making authority is substantial and the rules are extensive and complex. Substantial deference is given by courts to rules promulgated by HHS. Most Medicare hospital services are paid at a fixed rate per case under the reimbursement methods described below. Some Medicare recipients, however, enroll in Medicare Advantage managed care plans, which reimburse providers on a contractually determined basis. Health care providers that participate in the Medicare program must agree to be bound by the terms and conditions of the program such as meeting the quality standards for rendering covered services and adopting and enforcing policies to protect patients from certain discriminatory practices. The ACA introduces changes to the Medicare program that are estimated by the Congressional Budget Office to reduce the cost of the program over ten years by approximately $455 billion. The ACA reduces cost sharing by Medicare beneficiaries for certain preventive services and wellness visits and expands coverage for these services. In addition, the ACA includes programs that link Medicare payments for hospitals and physicians with quality outcomes and the development of new patient care models that stress primary care and community-based care. The objective of these programs is to manage chronic diseases better and to reduce inpatient admissions and other high cost care provided by health care facilities, such as hospitals and nursing homes. While additional governmental reporting, oversight and audits are a certainty, it is difficult to determine what effect the health care reform legislation and its implementation will ultimately have on the financial or operating condition of the Obligated Group or its competitors in the future. On March 1, 2013, CMS announced that reductions in Medicare doctor rates would begin with services provided on or after April 1, 2013 as a result of the federal government s sequestration order as required by the Budget Control Act of The cut was capped at 2% for payments made for services provided by physicians and hospitals, as well as monthly payments to Medicare private insurers and Part 29

34 D prescription drug plans for each year of sequestration. The Bipartisan Budget Act of 2015 continues and extends the 2% reduction to at least March 31, Inpatient Services. Medicare payments for operating expenses incurred in the delivery of inpatient hospital services are based on an inpatient prospective payment system ( PPS ) which pays hospitals a fixed amount for each Medicare inpatient discharge based upon patient diagnosis and certain other factors used to classify each patient into a Diagnosis Related Group ( DRG ), or, more recently the Medical Severity Diagnosis Related Group ( MS-DRG ). MS-DRG rates are adjusted annually by the use of an update factor based on the projected increase in a market basket inflation index which measures changes in the costs of goods and services purchased by hospitals, but the adjustments historically have not kept pace with inflation. Inpatient psychiatric services are also reimbursed on a case-mix adjusted prospective payment methodology. With limited exceptions, such payments are not adjusted for actual costs, variations in intensity of illness, or length of stay. If a hospital treats a patient and incurs less cost than the applicable MS-DRGbased payment, the hospital is entitled to retain the difference. Conversely, if a hospital s cost for treating the patient exceeds the MS-DRG-based payment, the hospital generally will not be entitled to any additional payment. If a case is unusually complex or expensive, it may qualify for an outlier payment, which is added to the MS-DRG-adjusted base rate payment. There can be no assurance that payments under the PPS will be sufficient to cover all actual costs of providing inpatient hospital services to Medicare patients. Medicare and Medicaid currently make additional payments to hospitals that serve a disproportionate share of low-income patients. The ACA incrementally decreases Medicare DSH payments by $22 billion from 2014 through 2019 and Medicaid DSH payments by $36 billion from 2018 through % of estimated DSH funding under the traditional formula will continue to be paid to each DSH-eligible hospital. The remaining 75% will be reduced to reflect the impact of insurance expansion and then redistributed to hospitals as a new and separate uncompensated care payment based on hospitals uncompensated care. Medicare also makes additional payments to hospitals engaged in graduate medical education residency training programs. The ACA includes some changes to funding for primary care residency programs and provides grants to establish teaching health centers, which are community-based ambulatory patient care centers. The ACA also establishes other programs to encourage the training and development of more primary care residents (including family medicine, internal medicine, pediatrics, obstetrics and gynecology, psychiatry and geriatrics) and the primary care workforce. The ACA continues and expands earlier Congressional measures taken to address the growing cost of the Medicare and Medicaid programs. CMS periodically promulgates regulations, such as its annual inpatient PPS rules, to adjust the rates paid to hospitals based on its continuing experience with hospital operating and capital costs, and to implement various quality improvement, patient safety and fraud and abuse programs. For example the annual inpatient PPS rules for federal fiscal years 2008 and 2009 included, and then expanded, a list of preventable conditions or consequences (so-called never events ) for which Medicare would not pay any additional costs of treatment. CMS also reduces payments to hospitals that do not successfully report quality measures adopted under the program by two percent from the percentage increase that would otherwise apply to their payment rates. In 2013, CMS adopted a policy known as the Inpatient Hospital Prepayment Review Probe & Educate review process or the Two-Midnight rule. The Two-Midnight rule 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 30

35 instead be billed as outpatient. Effective October 1, 2015, responsibility for enforcement of the Two- Midnight rule shifted from Medicare administrative contractors to quality improvement organizations ( QIOs ), and recovery audit contractors will only conduct reviews for providers that have been referred by the related QIO. The Outpatient PPS Final Rule, issued in November 2015 and effective January 1, 2016, revised the Two-Midnight rule to allow an exception for Medicare Part A payment on a case-bycase basis for inpatient admissions that do not satisfy the two-midnight benchmark if documentation in the medical records supports that the patient required inpatient care. The implementation of the Two- Midnight rule may have an adverse financial impact for hospitals. The ACA expands programs to improve the quality and cost of care. CMS reduces payments for excessive readmissions under the Hospital Readmissions Reduction Program. In 2016, hospitals will be assessed a penalty up to a maximum 3% of their Medicare revenue. Penalties are determined by a calculation of an excess readmission ratio based on 30-day readmission rates for certain conditions. This excess readmission ratio is an adjustment factor that will be applied to each DRG reimbursement, which will reduce the total Medicare revenue for the provider. Initially the program covered heart attack, heart failure and pneumonia readmissions. The number of conditions expanded for 2015 to include chronic obstructive pulmonary disease, elective total hip arthroplasty and total knee arthroplasty. No changes will be made for fiscal year 2016, but CMS will add one new condition, coronary artery bypass graft, in fiscal year As noted above, the ACA programs include penalties for high levels of hospital-acquired conditions, value-based purchasing incentives, and numerous reporting and pricing transparency initiatives. The overall impact of the programs on the Obligated Group cannot be determined at this time. Outpatient Services. Medicare payments for hospital outpatient services also are established through a PPS methodology. Under outpatient PPS, procedures, evaluations, management services, drugs and devices in outpatient departments are classified into one of approximately 750 groups called Ambulatory Payment Classifications ( APCs ). Services provided within an APC are similar clinically and in terms of the resources they require. Each APC has been assigned a weight derived from the median hospital cost of the services in the group relative to the median hospital cost of the services included in the APC for mid-level clinic visits, adjusted to account for variations in hospital labor costs across geographic regions. Payment rates for each APC are then calculated by multiplying the relative weight for an APC by a conversion factor to arrive at a dollar figure. Outpatient PPS includes additional adjustments for transitional pass-through payments and outlier payments. Transitional pass-through payments are costs associated with new technology items (drugs, biologicals and medical devices) that were not reflected in the data that CMS used to calculate outpatient PPS payment rates, and are intended to allow for adequate payment of new and innovative technology until there is enough data to incorporate the costs for these items into the base APC group. APCs include payment for related ancillary services provided in conjunction with a procedure or medical visit. Although hospitals may receive payment for more than one APC for an encounter, payment for multiple surgical APC procedures is subject to substantial discounting. Outpatient renal dialysis services are reimbursed on the basis of prospective reimbursement, though different rates are paid for hospital-based and free-standing facilities, and are adjusted for geographic differences in labor costs. This composite rate is the same regardless of whether the treatment is furnished in the facility or in the patient s home to incentivize home dialysis, and must be accepted by the facility as payment in full for covered outpatient dialysis. Under outpatient PPS, a hospital with costs exceeding the applicable payment rate would incur losses on such services provided to Medicare beneficiaries. There can be no assurance that outpatient 31

36 PPS payments will be sufficient to cover all of the Obligated Group s actual costs of providing hospital outpatient services to Medicare patients. On November 1, 2012 CMS issued a final rule that updated payment policies and rates for both outpatient hospital departments and ambulatory surgery centers. In addition to the annual rate increase for outpatient PPS, CMS will use the mean cost of services within an APC, instead of the median cost, to determine relative payment weights. The final rule became effective January 1, Physician Payments. Payment for physician services is provided by Part B of Medicare. Under Part B, physician services are reimbursed in an amount equal to the lesser of actual charges or the amount determined under a fee schedule known as the resource-based relative value scale or RBRVS. RBRVS sets a relative value for each physician service; that value is then multiplied by a geographic adjustment factor and a nationally-uniform conversion factor to determine the amount Medicare will pay for each service. The relative values for physician services contained in the RBRVS are based on a work component intended to reflect the time and intensity of effort required to provide the service; a practice expense component which includes costs such as office rents, allied health support salaries, equipment and supplies; and a component for the cost of malpractice insurance. The Medicare Access and CHIP Reauthorization Act of 2015 ( MACRA ) permanently replaces the sustainable growth rate formula (a limit on the growth of Medicare payments for physician services which was linked to changes in the U.S. Gross Domestic Product) in favor of a new system touted as promoting quality over volume. MACRA provides a combination of automatic increases for physicians and incentives for them to participate in a variety of pay-for-performance programs and alternative payment models (e.g. medical homes and accountable care organizations). Between 2015 and 2019, physicians in the Medicare program will receive an annual increase of 0.5%. The base reimbursement rate will then hold steady at 2019 levels through 2025, while giving physicians the ability to supplement their reimbursement through payment adjustments in the newly created Merit-Based Incentive Payment System and participation in alternative payment models ( APMs ). Finally, beginning January 1, 2026, physician payments will increase 0.75% annually for physicians who adequately participate in qualified APMs, but only 0.25% for those who do not. There can be no assurance that the payments under this system will be sufficient to cover all of the actual costs of providing physician services to Medicare patients. Medicare limits the total amount Non-Participating Physicians may charge Medicare patients through the establishment of a limiting charge, which restricts the total amount a Non-Participating Physician may bill and recover from a Medicare patient for a procedure to 115% of the applicable Medicare reimbursement levels (the applicable Medicare reimbursement level for Non-Participating Physicians generally is 95% of the RBRVS fee schedule amount). Thus, the limiting charge is generally set at a level equal to approximately 109% of the RBRVS fee schedule amount. CMS uses a resource-based system of calculating practice expense relative value units ( RVUs ) based on actual practice expense data to replace the historical charge-based practice expense RVU system that was previously used. The methodology for computing practice expense RVUs provides for higher practice expense RVUs for services performed in a doctor s office, the patient s home, or a facility or institution other than a hospital, skilled nursing facility ( SNF ) or ambulatory surgical center ( ASC ). CMS also uses a resource-based system of calculating malpractice expense RVUs. The formulae used to calculate physician payments under the RBRVS methodology do not necessarily reflect the actual costs of such services. There can be no assurance that payments to the Obligated Group under the Medicare program will be adequate to cover the costs of providing physician services. 32

37 Capital Expenditures. Medicare payments for capital costs are based upon a PPS system similar to that applicable to operating costs. Payment for capital related costs for all hospitals are determined based on a standardized amount referred to as the federal rate. Under PPS, payments for capital costs are calculated by multiplying the federal rate by the MS- DRG weight for each discharge and by a geographical adjustment factor. The payments are subject to further adjustment by a disproportionate share hospital factor that contemplates the increased capital costs associated with providing care to low-income patients, and an indirect medical education factor that contemplates the increased capital costs associated with medical education programs. As noted above, the ACA includes reductions over time to the disproportionate share payments. There can be no assurance that payments under the PPS inpatient capital regulations will be sufficient to fully reimburse the Obligated Group for its capital expenditures. Medical Education Costs. Under PPS, teaching hospitals receive additional payments from Medicare for certain direct and indirect costs related to their graduate medical education ( GME ) programs. Direct GME payments compensate teaching hospitals for the cost directly related to educating residents. Such costs include the residents stipends and benefits, the salaries and benefits of supervising faculty, other costs directly attributable to the GME program, and allocated overhead costs. Payment for direct medical education costs is calculated based upon set formulae taking into account hospital-specific medical education costs associated with each resident, the number of full-time equivalent residents, and the proportion of Medicare inpatient days to non-medicare inpatient days. Indirect GME payments compensate teaching hospitals for the higher patient care costs they incur relative to non-teaching hospitals. Those indirect payments are issued as a percentage adjustment to the PPS payments. The calculation for both the direct part and the indirect part of Medicare payments for GME include certain limitations on the number and classification of full-time equivalent residents reimbursed by Medicare. 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 Obligated Group under the Medicare program will be adequate to cover its direct and indirect costs of providing medical education to interns, residents, fellows and allied health professionals. Outlier Payments. As noted above, hospitals are eligible to receive additional payments under the inpatient PPS for individual cases incurring extraordinarily high costs. Historically, the amount of an outlier payment was based, in part, on the hospital charges for a particular case as compared to that hospital s cost-to-charge ratio. As the hospital specific cost-to-charge ratio was calculated based on the most recently settled cost report, it was typically many months or years old and out of date. 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 and CMS continue 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 Obligated Group believes that it has calculated its outlier payments appropriately, there can be no assurance that the Obligated Group will not become the subject of an investigation or audit with respect to its past outlier payments, or that 33

38 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 the Obligated Group, or that any such reduction will not have a material adverse impact on the Obligated Group. Medicare Managed Care Program. Every individual entitled to Medicare Part A benefits, and who is enrolled in Medicare Part B, with the exception of individuals who suffer from End Stage Renal Disease, may elect coverage under either the traditional Medicare fee for service program (Parts A and B) or a Medicare managed care (Part C) program, known as the Medicare Advantage Program. The Medicare Advantage Program is designed to expand the number and types of private regional plans available to beneficiaries as an alternative to traditional Parts A and B Medicare coverage. Payments for Medicare Advantage plans are based on competitive bids to the government rather than administered pricing. Public and private health maintenance organizations, preferred provider organizations, fee for service and medical savings account plans may qualify as authorized Medicare Advantage plans. With limited exceptions, Medicare Advantage plans are risk-bearing programs that accept a fixed annual amount in return for providing beneficiaries with a defined level of benefits (basic or basic plus supplemental), either directly or through arrangements with other providers. All Medicare Advantage plans are required to provide coverage, even if out of network, for emergency services, renal dialysis services provided while the enrollee was temporarily outside of the plan s service area, post-stabilization care services (under limited circumstances) and services for which coverage was denied but, following appeal by the enrollee, were determined to be covered services. Providers wishing to participate in Medicare Advantage plans are subject to specific requirements concerning enrollee protection and accountability. The shift of Medicare eligible beneficiaries from traditional Part A and Part B coverage to Part C Medicare Advantage programs was intended to increase competitive pressure to improve benefits, reduce premiums and generate cost reductions. However, because the cost to the Medicare program was on average 114% higher than traditional Medicare, the ACA changed some of the Medicare Advantage payment methodologies and plans that achieve certain quality metrics receive bonus payments. Reductions in the Medicare Part C program may have an impact on reimbursement from these insurance plans, which in turn may have a material negative impact upon the revenue of the Obligated Group. Audits, Exclusions, Fines and Enforcement Actions. Hospitals participating in Medicare are subject to audits and retroactive audit adjustments under the Medicare program. Based on an audit, a Medicare contractor may conclude that a patient discharge has been claimed under an incorrect MS-DRG, that services may not have been provided under the direct supervision of a physician (to the extent so required), that a patient should not have been characterized as an inpatient, that certain services provided prior to admission as an inpatient should not have been billed as outpatient services or that certain required procedures or processes were not satisfied. As a consequence, payments may be disallowed retroactively. Under certain circumstances, payments made may be determined to have been made as a consequence of improper claims subject to the federal False Claims Act or other federal statutes, subjecting the hospital to civil or criminal sanctions and/or possible exclusions from the federal health care programs. The federal government uses a national recovery audit contractor ( RAC ) program to identify overpayments and underpayments to providers under the Medicare program. The RAC auditors are compensated on a contingent fee basis. The ACA expands the scope of the RAC program to include Medicare Parts C and D and Medicaid. In April 2013, SLH settled charges of overpayment under the Medicare Program that arose due to billing errors. 34

39 In addition to the RAC program, the federal government has a number of other health care audit programs that subject healthcare providers to scrutiny and potential liability. Provider-Based Designation. CMS regulations describe the criteria and procedures for determining whether a facility or organization is provider-based and thereby treated as part of a hospital campus (with often higher reimbursement levels for certain services), rather than as a freestanding entity. In the event that a facility or department that bills for outpatient services as a provider-based entity is found to be out of compliance with the current provider-based regulations, a member of the Obligated Group could be liable for Medicare overpayments. New Models for Care Under Health Care Reform. The ACA directed HHS to establish 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 ). Under this shared savings program, Medicare providers are offered a financial incentive to band together in an ACO with the shared goals of improving the quality of care provided to Medicare beneficiaries and coordinating care to achieve cost savings. If an ACO realizes savings in Medicare expenditures above an expenditure benchmark established by CMS for the group, and meets or exceeds quality performance standards established by HHS, it will be paid a share of Medicare s savings. The shared savings program began operating January 1, Additionally, depending upon the particular track the ACO is participating in, the ACO can be risk-based, meaning the ACO shares not only in savings but also in losses. It is unclear what effect the ACO program and regulations promulgated with respect thereto will have on the Obligated Group and its revenues should it choose to participate in the program. Medicaid Reimbursement and Other State Healthcare Programs Medicaid Overview. Unlike Medicare which is an exclusively federal program, Medicaid is a partially federally-funded state program of medical care for the poor. States obtain federal funds for their Medicaid programs by obtaining the approval of CMS of a state plan which conforms to Title XIX of the Social Security Act and its implementing regulations. Within broad national guidelines which the federal government provides, each of the states establishes its own eligibility standards, determines the type, amount, duration, and scope of services, sets the rate of payment for services, and administers its own program. Thus, the Medicaid program varies considerably from state to state, as well as within each state over time. After its state plan is approved, a state is entitled to federal matching funds for Medicaid expenditures. In New Jersey, the Medicaid program, including the managed care program, is administered by the State s Department of Human Services ( DHS ) and in Pennsylvania, the Medicaid program, including the managed care program, is administered by the Commonwealth s Department of Human Services ( PADHS ). Hospitals are reimbursed for inpatient services using diagnosis-related groupings ( DRG ) rates. These rates are based on the average cost of hospital care for Medicaid patients at hospitals in each respective state. Because hospitals are reimbursed the median rate per case, there can be no assurance that Medicaid revenues will cover expenses for Medicaid patients. Further reduction in Medicaid payments and/or the conversion of Medicaid recipients to managed care Medicaid coverage would reduce the amount of reimbursement that the Obligated Group receives for providing services to Medicaid beneficiaries. There can be no assurances that the Obligated Group can reduce the costs associated with treating Medicaid patients to offset these potential reimbursement reductions. The ACA offers States the option and funding to expand Medicaid program eligibility to cover individuals with household income up to 133% of the FPL. The federal government is responsible for the cost of the coverage for newly eligible individuals in the first three years ( ). Thereafter, the federal government s share will phase down to 90% the of expanded coverage costs. 35

40 Medicaid Payments to Health Care Providers. Medicaid operates as a vendor payment program. Subject to federally-imposed upper limits and specific restrictions, states may either pay providers directly or may pay for Medicaid services through various prepayment arrangements such as HMOs, subject to federal approval. Providers participating in Medicaid must accept Medicaid payment rates as payment in full. States must make additional payments to qualified hospitals that provide services to a disproportionately large number of Medicaid, low-income and/or uninsured patients. States may impose nominal deductibles, coinsurance, or co-payments on some Medicaid recipients for certain services. Emergency services and family planning services must be exempt from such co-payments. Certain Medicaid recipients must be excluded from this cost sharing: pregnant women, children under age 18, hospital or nursing home patients who are expected to contribute most of their income to institutional care, and categorically needy HMO enrollees. Medicaid Managed Care. Under this program, PADHS contracts with managed care companies to arrange for the provision of health care services to most of the Medicaid recipients in the Commonwealth. The managed care companies are paid a fixed amount per enrollee per month by the Commonwealth. These companies in turn negotiate rates for services with hospitals and other health care providers. There can be no assurance that the negotiated rates will cover expenses incurred in providing care to the Medicaid patients. Pennsylvania Health Care. PADHS administers the Medical Assistance program for eligible residents. To be eligible, residents must meet income, resource, and other criteria and fall into one of the following categories: individuals who are age 65 and older, blind and disabled; families with children under age 21; or single and married individuals ages with a temporary disability, limited income or special circumstance; and special medical assistance conditions. There are also two waiver programs that provide support and services to eligible persons with an intellectual disability ages age three and older so they can remain in their home and community. Financial eligibility is based only on the income of the individual, not the income of the parents. Pennsylvania has expanded the Medical Assistance program under the ACA. New Jersey Medicaid. DHS administers Medicaid and NJ Family Care. Medicaid provides health insurance to parents/caretakers and dependent children, pregnant women, and people who are aged, blind or disabled. These programs pay for hospital services, doctor visits, prescriptions, nursing home care and other healthcare needs, depending on which Medicaid program the person is eligible for. NJ FamilyCare is a Medicaid program for uninsured children whose family income is too high for them to qualify for Medicaid but not high enough to be able to afford private health insurance. Some low-income uninsured parents/caretakers may also be eligible for NJ FamilyCare. In 1995, New Jersey Medicaid began moving Medicaid clients from a traditional fee-for-service health insurance program into a managed care program. Most individuals on Medicaid are enrolled in a managed care program. In 2012, CMS approved a comprehensive waiver program allowing the operation of a statewide health reform effort that expanded existing managed care programs to include managed long term services and supports and expands home and community based services to some populations. New Jersey also operates several other Medicaid waiver programs. New Jersey has expanded Medicaid coverage under the ACA. State Children s Health Insurance Program The State Children s Health Insurance Program ( SCHIP ) provides federal matching funds to states that cover 65% to 84% of the costs of health care coverage, primarily for low-income children. CMS administers SCHIP, but each state creates its own program based on minimum federal guidelines, or 36

41 the state may apply for a waiver, which allows the state to create its own program using the federal funds, but often with different criteria for eligibility. 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/or the President seek to expand or contract SCHIP. The ACA authorized an extension of the SCHIP program through September 30, 2015, and the adoption of MACRA extended the program for an additional two years. The loss of federal approval for a state s program or a reduction in the amounts available under SCHIP could have an adverse impact on the financial condition of the Obligated Group. Pennsylvania s CHIP program fully covers children and teens in households with income levels up to 208% of FPL, and subsidizes insurance coverage in households with income levels up to 314% of FPL. In December 2015, Governor Wolf signed a new law extending Pennsylvania s CHIP program through New Jersey s SCHIP program, NJ FamilyCare, covers children in households with income levels up to 355% of FPL. Under New Jersey s waiver program, NJ FamilyCare also covers parents and guardians with income levels up to 138% of FPL. Because of state budget shortfalls in New Jersey, eligibility requirements are subject to change. 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 Obligated Group. Third-Party Reimbursement A significant portion of the net patient service revenue of the Obligated Group is received from commercial third-party payors and other non-governmental agencies, which provide third-party reimbursement for patient care on the basis of various formulae. Renegotiations of such formulae and changes in such reimbursement systems may reduce such third-party reimbursements to the Obligated Group. The reimbursement currently paid by third parties is likely to be subject to more restrictions in the future, and there can be no assurance that such payments will be adequate to cover the cost of care for the beneficiaries in the future. The ACA includes insurance market reforms that, among other things, require individual and group health insurance plans to offer coverage (including renewability) on a guaranteed basis. The ACA prohibits pre-existing conditions limitations, certain coverage limitations, lifetime and annual dollar limits for essential health benefits, and requires coverage of certain preventive health benefits. Every individual is required to enroll in a health plan through an employer, a federal government health program such as Medicare, Medicaid or Tricare, or purchase insurance through a health insurance exchange established by each state. Individuals who do not enroll for coverage, and employers who do not offer affordable and adequate coverage, are subject to tax penalties. It is unclear at this time whether the tax penalties will result in substantial compliance with the mandate to obtain insurance. The ACA establishes the criteria for Qualified Health Plans ( QHPs ) that may participate in the state run exchanges. A QHP must meet certain minimum essential coverage requirements. Minimum essential coverage requirements may be offered at one of four levels of coverage: bronze, silver, gold or platinum. Each QHP must agree to offer at least one plan at the silver and gold level. The ACA sets forth the minimum coverage offered under each plan level and limits the variations in premiums that may be charged for exchange coverage on the basis of age and tobacco use. A QHP must also be certified by 37

42 each exchange through which the plan is offered, must be licensed in each state where it offers insurance, and the QHP must limit cost sharing with the insured. Under the ACA, individuals with family income under 400% of the FPL are eligible for subsidized premiums, deductibles and co-pays for exchange plan coverage. Initially, only individuals and small employers are able to access coverage through the exchanges. By 2017, large employers will also be able to use the exchanges to provide employer-based coverage to their employees. Although existing health insurance plans may continue to offer coverage as grandfathered plans in the individual and group markets, enrollment in such plans will be limited to those who were currently enrolled, their families, or new employees and their families in the case of grandfathered employer-sponsored coverage. At this time, it is not possible to project what impact the exchanges will have on competition in the insurance markets, the cost of coverage for employers, reimbursement rates for hospitals and physicians or the number of uninsured patients that the Obligated Group will still need to treat. Currently, most private insurance companies contract with hospitals on an exclusive or preferredprovider basis. Under these plans, there may be financial incentives for subscribers to use only those hospitals and physicians who contract with those plans. Under an exclusive provider plan, an arrangement that includes most HMOs, private payors limit coverage to those services provided by network hospitals and physicians. With this contracting authority, private payors may direct patients away from hospitals not in the network by denying coverage for services provided by them. Most PPOs and HMOs pay hospitals on a discounted fee-for-service basis or on a discounted fixed rate per day of care. The discounts offered to HMOs and PPOs may result in payment at less than actual cost, and the volume of patients directed to a hospital under an HMO or PPO contract may vary significantly from projections. Therefore, the financial consequences of such arrangements cannot be predicted with certainty and may be different from current or prior experience. Some HMOs offer or mandate a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned to, or otherwise directed to receive care at, a particular hospital. In a capitation payment system, the hospital assumes an insurance risk for the cost and scope of care given to the HMO s enrollees. If payment under an HMO or PPO contract is insufficient to meet the hospital s costs of care, or if use by enrollees materially exceeds projections, the financial condition of that hospital may be adversely affected. HMOs and other third-party payors that contract on a discounted fee-for-service or discounted fixed rate-per-day basis also exert strong controls over the utilization of health care resources. Strong utilization management by managed care plans has led to reduction in the number of hospitalizations and lengths of hospital stays, both of which may reduce patient service revenue to hospitals. Furthermore, shortened hospital lengths of stay have not necessarily been accompanied by a reduced demand for services while a patient is hospitalized and in fact may lead to more intensive hospital visits and correspondingly increased costs to hospital providers. The Obligated Group also may be affected by the financial instability of HMOs and other thirdparty payors from which it receives reimbursement for furnishing health care services. For example, if regulators place a financially-troubled HMO into rehabilitation under state law, or if a third-party payor files for protection under the federal bankruptcy laws, it is unlikely that health care providers will be reimbursed in full for services furnished to enrollees of the HMO or the third-party payor. Health care providers also may be required by law or court order to continue furnishing health care services to the enrollees of an insolvent HMO or third-party payor, even though the providers may not be reimbursed in full for such services. Employer-sponsored health insurance plans are adopting health care benefits that create incentives for employees to participate in preventative care programs and better manage chronic diseases. 38

43 These programs may reduce the costs of providing health care benefits and help maintain a healthier workforce. Employers also are adding alternatives to traditional fee for service health insurance programs, by offering a variety of health insurance programs that increase cost sharing by employees or reduce cost by limiting access to only preferred providers. These types of insurance programs are expected to cover an increasing share of health care services being provided in the future. Per diem rates, other risk-based payment systems and discounts pose major challenges to hospital providers. In order to enter into such contracts, hospitals not only must anticipate the cost of rendering specific services to patients, but also estimate the likelihood and severity of illness or injury within the population which the hospital serves. If payment under a managed care plan contract is insufficient to meet a hospital s costs of caring for the needs of the population it serves, that hospital s financial condition may erode rapidly and significantly. Often, managed care plan contracts are enforceable for the stated term, regardless of provider losses. Furthermore, managed care plan contracts and insurance laws may require that a hospital continue to provide care for enrollees for a certain period of time irrespective of whether the managed care plan has funds to make payment to the hospital. Increasingly, physician practice groups, independent practice associations and other physician management companies have become a part of the process of negotiating payment rates to hospitals by managed care plans. This involvement has taken many forms but typically increases the competition for limited payment resources from managed care plans. For example, it is increasingly common for managed care plans to enter into contracts with physicians that may give physicians incentives in patient care decisions which may result in reduced hospital admissions and procedures. Any new payment methods implemented by the Medicare and Medicaid programs in response to the ACA provisions are likely to drive similar changes in the private payor market. Programs designed to encourage coordination of care, value-based purchasing and quality outcomes will likely evolve in the private payor market. There is no assurance that the reimbursement contracts of the Obligated Group or its physicians with commercial carriers, HMOs, PPOs or other third-party payors will be maintained, that other similar contracts will be obtained in the future, or that payments from such payors will be sufficient to cover all of the costs the Obligated Group incurs in providing services to their beneficiaries. Failure to execute and maintain such contracts could have the effect of reducing the patient base or health care revenues of the Obligated Group. Conversely, participation may maintain or increase the patient base, but may result in reduced payments. Termination of Managed Care Contracts. The Obligated Group derived approximately 34% of its gross inpatient revenue for its fiscal year ended June 30, 2015 from HMOs, PPOs and other managed care organizations. Some of these contracts with managed care organizations can be terminated by the third-party payor at any time without the necessity of showing cause upon approximately six months prior written notice. Termination of contracts between the Obligated Group and managed care organizations could have an adverse effect on the financial performance of the Obligated Group. Healthcare Legislative and Regulatory Environment Effect of Regulation Generally. The Obligated Group and the health care industry in general are subject to regulation by a number of governmental agencies, including those that administer the Medicare and Medicaid programs, federal, state and local agencies responsible for administration of health care planning programs, and other federal, state and local governmental agencies. These laws and regulations also require hospitals to meet various detailed standards relating to the adequacy of medical care, equipment, personnel, information technology, patient confidentiality, operating policies and procedures, maintenance of adequate records, utilization, rate setting, compliance with building codes and 39

44 environmental protection laws, and numerous other matters. Failure to comply with applicable regulations can jeopardize a hospital s licenses, ability to participate in the Medicare, Medicaid and other federal healthcare programs, and ability to operate as a hospital, and may also result in repayment obligations, civil penalties and possible False Claims Act liability. The ACA significantly increases funding for enforcement actions under these laws and authorizes the Secretary of HHS to exclude a provider s participation in Medicare, Medicaid and SCHIP as well as suspend payments to a provider pending an investigation of a credible allegation of fraud against a provider. These laws and regulations, as well as similar laws and regulations now in effect, and the adoption of additional laws and regulations in these and other areas could have an adverse effect on the Obligated Group s ability to generate revenues in sufficient amounts to timely pay the 2016 Bonds. There are multiple federal laws covering the submission of inaccurate or fraudulent claims for reimbursement and errors or misrepresentations on cost reports by hospitals and other health care providers. The coding, billing and reporting obligations of Medicare providers are extensive, complex and highly technical. In some cases, errors and omissions by billing and reporting personnel may result in liability under one of the federal False Claims Act or similar laws, exposing a health care provider to civil and criminal monetary penalties, as well as exclusion from participation in the Medicare and Medicaid programs. Some of these laws and regulations are discussed below. Federal False Claims Act and Civil Money Penalties Law. The federal False Claims Act prohibits knowingly submitting a false or fraudulent claim for payment to the United States. This statute is violated if a person acts with actual knowledge, or in deliberate ignorance or reckless disregard of the falsity of the claim. Penalties under the False Claims Act include fines of up to $11,000 per claim (subject to upward adjustment by regulatory action), plus treble damages, potentially resulting in penalties aggregating millions of dollars for ongoing claims submission errors. Anyone who knowingly makes a false statement or representation in any claim to the Medicare or Medicaid programs may be subject to criminal penalties, including fines and imprisonment. The False Claims Act includes whistleblower provisions under which a person who believes that someone is violating the False Claims Act can file a sealed complaint against the alleged violator in the name of the United States government. The nature of the allegations is not revealed to the target during the time the United States Justice Department investigates the complaint and determines whether to join in the suit. If the Justice Department decides not to join in the suit, the original whistleblower nonetheless can proceed. If the case is successful, the whistleblower is entitled to between 15% and 30% of the proceeds of any fines or damages paid. 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 whistleblower allegations filed under the False Claims Act, a large number of which involve the health care and pharmaceutical industries. In 2009, President Obama signed into law the Fraud Enforcement Recovery Act ( FERA ) which authorized increased funding for fraud investigation and prosecution, and expanded the scope of the False Claims Act. A health care provider may face severe penalties for the knowing retention of government overpayments even though the provider or contractor made no false or improper claim for such payments. Under FERA, the False Claims Act applies even if a false claim was not submitted directly to the government. In addition, FERA enhances whistleblowers ability to investigate alleged False Claims Act violations and provides them enhanced protections. Under the ACA, the False Claims Act has been expanded to include overpayments that are discovered by a health care provider and are not promptly refunded to the applicable federal health care program, even if the claims relating to the overpayment were initially submitted without any knowledge 40

45 that they were false. The ACA requires that providers return identified overpayments within 60 days of identification or the overpayment becomes an obligation under the False Claims Act. There is great uncertainty in the industry as to when an overpayment is technically "identified" and the ability of a provider to determine the total amount of an overpayment and satisfy its repayment obligation within the 60 day time period. CMS adopted regulations interpreting this requirement in 2016, but significant uncertainty remains. This expansion of the False Claims Act exposes hospitals and other health care providers to liability under the False Claims Act for a considerably broader range of claims than in the past. The Civil Money Penalties Law under the Social Security Act ( CMP Law ) provides for the imposition of civil money penalties against any person who submits a claim to Medicare, Medicaid or any other federal health care program that the person knows or should know: (a) is for items or services not provided as claimed; (b) is false or fraudulent; (c) is for services provided by an unlicensed or uncertified physician or by an excluded person; (d) represents a pattern of claims that are based on a billing code higher than the level of service provided; or (e) is for services that are not medically necessary. Penalties under the CMP Law include up to $50,000 for each item or service claimed, and damages of up to three times the amount claimed for each item or service, and exclusion from participation in the federal health care programs. 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 or CMP Law could have an adverse financial impact on the Obligated Group, regardless of the merits of the case. The Anti-Kickback Law. The federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act (known as the Anti-Kickback Law ) prohibit the knowing and willful offer, payment or receipt of remuneration in exchange for or as an inducement to make or influence a referral of a patient for the provision of goods or services that may be reimbursed under federal health benefit programs. The scope of the Anti-Kickback Law is very broad, and it potentially implicates many practices and arrangements common in the health care industry, including space and equipment leases, personal services contracts, purchase of physician practices, joint ventures, and relationships with vendors. Penalties for violation of the Anti-Kickback Law include criminal prosecution, criminal fines of up to $25,000, civil penalties of up to $50,000 per violation, as well as exclusion from the federal health care programs. The ACA 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. The ACA also clarified that claims submitted in violation of the Anti-Kickback Law constitute false claims for purposes of the False Claims Act. Penalties for the failure to grant timely access to HHS were also added by the ACA. Federal safe harbor regulations describe certain arrangements that will be deemed not to violate the Anti-Kickback Law. However, the safe harbors are narrow and do not cover a wide range of economic relationships that many hospitals, physicians and other health care providers historically have considered to be legitimate business arrangements not prohibited by the Anti-Kickback Law. Because the safe harbor regulations do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, it is uncertain whether hospitals, physicians and other health care providers that have these arrangements or relationships may need to alter them in order to ensure compliance with the Anti-Kickback Law. Failure to comply with a safe harbor does not mean an arrangement necessarily violates the Anti-Kickback Law. However, because the safe harbor exceptions are narrowly drawn, there can be no assurances that a 41

46 member of the Obligated Group will not be found to be in violation of the Anti-Kickback Law. If such a violation were found, any sanctions imposed could have a material adverse effect upon the future operations and financial condition of the Obligated Group. Restrictions on Self-Referrals. The federal Ethics in Patient Referrals Act (commonly known as the Stark Law ) prohibits a physician, or an immediate family member of that physician, who has a financial relationship with an entity that provides certain designated health services from referring Medicare patients to that entity for the provision of such designated health services, with limited exceptions. The Stark Law designated health services 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, clinical laboratory services and diagnostic and therapeutic nuclear medicine services. The Stark Law prohibits an entity that receives a prohibited referral from filing a claim or billing for the services arising out of that prohibited referral. There are certain exceptions to the Stark Law, based on the nature of the financial relationship between the referring physician and the entity. Unlike the Anti-Kickback Statute, the Stark Law is not an intent based statute. No wrongful intent or culpable conduct is required for violation of the Stark Law. When a financial relationship exists between an entity and a physician, the arrangement must meet the necessary elements of a Stark Law exception in order for a referral to be made for designated health services to that entity and for that entity to bill for those designated health services generated by the referral. Sanctions under the Stark Law include denial and refund of payments, civil monetary penalties of up to $15,000 for each service arising out of the prohibited referral, a civil penalty of up to $100,000 against parties that enter into a scheme to circumvent the Stark Law's prohibition and exclusions from the Medicare and Medicaid programs. Also, because the Stark Law is a Medicare payment rule, claims prohibited by the Stark Law may also be the predicate for liability under the False Claims Act. As required under the ACA, in 2010, CMS released a protocol under which health care providers can make self-disclosures of actual and potential Stark violations, with reduced penalties for self-disclosed violations. In addition, CMS has made several changes to existing Stark regulations in the final 2016 Physician Fee Schedule, affecting hospital- physician recruitment arrangements, timeshare arrangements, Stark s writing and signature requirements, requirements concerning term of agreements and holdover leases, as well as changes in the regulatory definitions of remuneration and stand in the shoes. Because of the complexity of the Stark Law and the evolving nature of quality improvement and cost-reduction efforts, there can be no assurances that a member of the Obligated Group will not be found to have violated the Stark Law or the state law equivalent. If such violation were found to have occurred, any sanctions imposed could have a material adverse effect upon the future operations and financial condition of the Obligated Group. HIPAA. Congress enacted The Health Insurance Portability and Accountability Act of 1996 ( 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. This expanded enforcement activity, 42

47 together with the whistleblower provisions of the False Claims Act, has significantly increased the likelihood that health care providers, including the Obligated Group, could face inquiries or investigations concerning compliance with the many laws governing claims for payment and cost reporting under the federal health care programs. In addition to the expanded enforcement activity noted above, the Administrative Simplification provisions of HIPAA mandate the use of uniform standard electronic formats for certain administrative and financial health care transactions, the adoption of minimum security standards for individually identifiable health information maintained or transmitted electronically, and compliance with privacy standards adopted to protect the confidentiality of protected health information. The Administrative Simplification provisions apply to health care providers, health plans, and health care clearinghouses (collectively Covered Entities ). HHS issued final regulations strengthening many aspects of the privacy and security rules under HIPAA so that they are more aligned with the Health Information Technology for Economic and Clinical Health Act ( HITECH Act ). The final rules change certain requirements for Covered Entities and establish rules that now apply directly to their vendors that handle protected health information (PHI) and qualify as business associates under HIPAA. A Covered Entity and its business associates must make reasonable efforts to use, disclose and request only the minimal amount of protected health information needed to accompany the intended use. HIPAA confidentiality provisions extend not only to patient medical records, but also to a wide variety of healthcare clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These confidentiality provisions add costs and create potentially unanticipated sources of legal liability. The ACA also includes new electronic transaction and operating guidelines that must be used by all HIPAA Covered Entities for electronic funds transfers and various claim forms. The financial costs of continuing compliance with HIPAA and the Administrative Simplification regulations are significant. The HITECH Act. The American Recovery and Reinvestment Act of 2009 ( ARRA ) appropriated approximately $20 billion for the development and implementation of health information technology standards and the adoption of electronic health care records. ARRA also included the HITECH Act, which contains a number of provisions that affect HIPAA privacy and security regulations and significantly expands the HIPAA privacy and security provisions applicable to Covered Entities and their business associates. The law includes a notice requirement when there is a breach of protected health information, increased civil monetary and criminal penalties for HIPAA violations, and authorizes the state attorneys general to enforce its provisions. 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 costs of complying with HIPAA are substantial and will increase as a result of the ARRA amendments. Covered Entities that use an electronic health record are required to account for disclosures of information, 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 includes provisions requiring Covered Entities to agree to a patient request to restrict disclosure of information to a health plan, 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 communications and fundraising communications. 43

48 In the event of an unauthorized disclosure of protected health information, Covered Entities now are required to notify the affected individuals, HHS and sometimes the media of the unauthorized disclosure, depending on the nature of the breach, the type of unauthorized disclosure and its scope. The HITECH Act revises 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 damages assessment of $100 per violation or an injunction against the violator. The revised civil monetary penalties range: (a) in the case of violations due to willful neglect, from a minimum of $10,000 to $50,000 per violation depending on whether the violation was corrected within 30 days of the date the violator knew or should have known of the violation; and (b) in the case of all other violations, from a minimum of $100 to $1,000 per violation. ARRA mandated that the Office for Civil Rights ( OCR ) of HHS perform periodic audits to ensure Covered Entities and business associates are complying with the HIPAA Privacy and Security Rules and Breach Notification standards. To implement this mandate, OCR piloted a program to perform 115 audits of Covered Entities to assess privacy and security compliance. Audits conducted during the pilot phase began November 2011 and concluded in December Phase 2 of the audits is currently underway. Phase 2 will focus on areas of greater risk to the security of protected health information and on pervasive non-compliance based on OCR's initial audit findings and observations, rather than a comprehensive review of all of the HIPAA Standards. Covered Entities and their business associates can expect continued audit activity by OCR in the future. The Obligated Group is actively engaged in continuing compliance efforts with HIPAA and the HITECH Act regulations. However, no guarantee can be made that the Obligated Group will remain HIPAA compliant in the future. Coding Changes. The coding standards used by health care providers and payors to classify diseases and causes of death changed on October 1, 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 hospital and providers. Emergency Medical Treatment and Active Labor Act. Congress enacted the Emergency Medical Treatment and Active Labor Act ( EMTALA ), in response to allegations of inappropriate hospital transfers of indigent and uninsured emergency patients. EMTALA imposes strict requirements on hospitals in the treatment and transfer of patients with emergency medical conditions. EMTALA requires hospitals to provide a medical screening examination to any individual who comes to a hospital s emergency department for treatment, without regard to ability to pay, to determine whether the individual suffers from an emergency medical condition within the meaning of EMTALA. A participating hospital may not delay providing a medical screening examination in order to inquire about method of payment or insurance status. If an emergency medical condition is present, the hospital must provide such additional medical examination and treatment as may be required to stabilize the emergency medical condition. If the hospital deems it in the best interest of the individual to transfer the individual to another medical facility, the treating physician must execute a transfer certificate complying with the standards of EMTALA and must provide a medically appropriate transfer. In regulations, CMS has extended the application of EMTALA beyond the hospital emergency department to any individual who is on hospital property and requests an examination or treatment, including individuals who are anywhere on the hospital s main campus, in a hospital-owned ambulance, or in a facility determined by CMS to be an off-campus department of the hospital. Off-campus departments might include, for example, urgent care centers, primary care clinics and physical therapy and radiology facilities. 44

49 EMTALA imposes significant costs on hospitals, including the costs of treatment of individuals who may not be able to pay for those services, costs to develop and implement protocols covering medical screening examinations, stabilization and appropriate transfers and, in some cases, costs associated with assuring on-call availability of specialty physicians. In addition, the expansion of the requirements of EMTALA to off-campus departments may result in significant costs in training personnel and the development of protocols for screening, stabilization and transportation of patients. If a hospital violates EMTALA, whether knowingly or negligently, it is subject to a civil money penalty of up to $50,000 per violation. Failure to satisfy the requirements of EMTALA also may result in termination of the hospital s provider agreement with Medicare. 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. Enforcement activity under EMTALA has increased dramatically in recent years, and because of the broad interpretation of the reach of EMTALA, there can be no assurance that the Obligated Group will not have been found to have violated EMTALA, and if such a violation were found, that any sanctions imposed would not have a material adverse effect upon the future operations and financial condition of the Obligated Group. The Deficit Reduction Act. The Deficit Reduction Act ( DRA ) introduced significant new quality reporting initiatives for hospitals. Acute care hospitals such as the Obligated Group are required to submit quality performance measures; the penalty for hospitals not reporting quality measures is a two percentage point reduction in the market basket update for that fiscal year. The ACA expands those reporting obligations. The DRA 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: (i) the federal False Claims Act and remedies under the law, (ii) administrative remedies for false claims and statements established by the federal Program Fraud Civil Remedies Act of 1986, (iii) any state law false claims act and its remedies, (iv) the whistleblower protections provided under such laws, (v) the role of such laws in preventing and detecting fraud, waste and abuse, and (vi) the provider s (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. Environmental Laws Affecting Health Care Facilities. Hospitals are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations that address, among other things, hospital operations or facilities and properties owned or operated by hospitals. In their role as owners and/or operators of properties or facilities, hospitals may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including any such substances that may have migrated off the property. Typical hospital operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants, or contaminants. For these reasons, hospital operations are particularly susceptible to the practical, financial, and legal risks associated with compliance with such laws and regulations. Such risks may result in damage to individuals, property, or the environment; may interrupt operations and/or increase their cost; may result in legal liability, damages, injunctions or fines; or may trigger investigations, administrative proceedings, penalties or other governmental agency actions. There can be no assurance that the Obligated Group will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of the Obligated Group. 45

50 Transparency in Pricing. The ACA requires hospitals to establish and make public a list of the hospital s standard charges for items and services, including MS-DRGs. A 2006 executive order was issued requiring the same public reporting of cost and quality data at four federal agencies. CMS also has made outcomes reporting a condition of Medicare participation. These requirements are examples of a trend in which hospitals will be required to divulge proprietary information to the general public in order to participate in federal health care programs. The disclosure of proprietary information may have a negative impact on the Obligated Group s ability to gain advantages in negotiations with payors. This, in turn, could negatively influence the Obligated Group s revenues. The ACA includes various public disclosure obligations for financial arrangements between hospitals, physicians, imaging centers, and pharmaceutical and medical device manufacturers. Due to the relative novelty of these disclosure requirements, it is impossible to predict the effect, if any, that cost and outcomes reporting will have on the Obligated Group s finances. Future Federal Legislation. The Obligated Group anticipates that the federal government s health care reform initiatives will result in further legislation, regulation, and other actions that will continue the trend toward reduced reimbursement for hospital services and more pervasive regulation of operations. At present, no determination can be made concerning whether, or in what form, such legislation could be introduced and enacted into law. Similarly, the impact of future cost control programs and future regulations on the forecasted financial performance of the Obligated Group cannot be determined at this time. Any future changes to the Medicare and Medicaid programs could result in substantial reductions in the amounts of Medicare and Medicaid payments to hospital providers in the future, which could substantially reduce the revenues available to the Obligated Group, and any reduction in the levels of payment in these government payment programs could adversely affect the Obligated Group s financial condition and its ability to fulfill its obligations. Commonwealth Regulatory Issues Health care providers in the Commonwealth are subject to a variety of state laws and regulations, including, but not limited to, those described below. Insurance Fraud. 18 Pa. Cons. Stat. 4117(a) prohibits a person s or entity s submission of false or misleading claims for payment or approval by an insurance company, and allows the Commonwealth to recover substantial damages from persons or entities that knowingly present or cause to be presented a false or misleading claim for payment or approval by an insurance company. Any person or entity that violates the statute may be liable for, among other things, a penalty of $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each subsequent violation. In addition to or as an alternative to the civil sanctions provided in the statute, the Attorney General may bring a criminal action under other applicable statutes. False Claims. 62 P.S. 1407(a) prohibits a Medical Assistance provider from knowingly or intentionally submitting a false or fraudulent claim for furnishing services or merchandise or for medically unnecessary services or merchandise under the Medical Assistance program. It also prohibits submission of duplicate or misleading claims and submission of claims for services or equipment not rendered by the provider. Violation of this statute may lead to termination of the provider agreement and a civil penalty of twice the amount of excess benefits or payments plus legal interest from the date the violation or violations occurred. Anti-Kickback Laws. 18 Pa. Cons. Stat. 4117(b) prohibits health care providers from compensating or giving anything of value to a person for providing names, addresses, telephone numbers or other identifying information of individuals seeking or receiving medical or rehabilitative care for 46

51 accident, sickness or disease, except to the extent a referral and receipt of compensation is permitted under applicable professional rules of conduct. Health care providers may not compensate or give anything of value to a person to recommend or secure the provider's service for having made a recommendation resulting in the provider's service, except that the provider may pay the reasonable cost of advertising or written communication as permitted by rules of professional conduct. 62 P.S. 1407(a)(2) prohibits solicitation or receipt of any form of remuneration, including any kickback, bribe or rebate for referrals, services or merchandise which may be paid whole or in part under the Medical Assistance program. Violation of 18 Pa. Cons. Stat. 4117(b) may lead to civil and criminal penalties, as well as suspension or revocation of the health care provider s license. Violation of 62 P.S may lead to termination of the provider agreement and a civil penalty of twice the amount of excess benefits or payments plus legal interest from the date the violation or violations occurred. The Borrowers attempt to comply with the provisions of these regulations. However, at the present time, there can be no assurance that the Borrowers or the physicians with whom it has relationships will not be found to have violated these Commonwealth Anti-Kickback prohibitions. The mere allegation of such a violation, if such violation were found to have occurred, or any sanctions imposed, could have a material adverse effect upon the operations and financial condition of the Obligated Group. Future Commonwealth Legislation. From time to time, the Pennsylvania Legislature considers certain reforms aimed at containing health care costs and increasing coverage. Such reforms often include provisions to provide more affordable coverage through expanded government health care programs, subside low-income residents to enable them to purchase health care coverage and study and implement payment system reforms. At this time, it is impossible to measure the overall financial impact that current and future legislation, if enacted into law, would have on the Obligated Group. New Jersey Regulatory Issues Health care providers in New Jersey, including St. Luke s Warren, are subject to a variety of state laws and regulations, including, but not limited to, those described below. Insurance Fraud. The New Jersey Insurance Fraud Prevention Act ( FPA ) prohibits a person s or entity s submission of false or misleading claims for payment or approval by an insurance company, and allows New Jersey to recover substantial damages from persons or entities that knowingly present or cause to be presented a false or misleading claim for payment or approval by an insurance company. Any person or entity that violates the FPA may be liable for, among other things, a penalty of $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each subsequent violation. In addition to or as an alternative to the civil sanctions provided in the FPA, the Attorney General of New Jersey may bring a criminal action under applicable statutes. Health Care Claims Fraud. N.J.S.A. 2C: and N.J.S.A. 2C:51-5 complements the FPA and prohibits a practitioner s submission of bills or claims for payment reimbursement of health care services that contain false, fictitious, fraudulent and misleading statements of material fact, or omissions of material fact. In addition to other criminal penalties allowed by other applicable laws, under this body of law, a practitioner may be guilty of the crime of health care claims fraud. Practitioners can be guilty of a crime in the second or third degree depending upon the severity of the claims fraud, may be subject to a fine of up to five times the pecuniary benefit obtained or sought to be obtained, and may be subject to imprisonment, if convicted. A practitioner may in some cases, also have his license revoked or suspended. Non-practitioners can also be found guilty of health care claims fraud in the third and fourth degrees. New Jersey False Claims Act. The New Jersey False Claims Act authorizes a person to bring an action against any other person who knowingly causes New Jersey to pay a false claim. A person who 47

52 violates this law is subject to civil penalties in the amounts set forth in the federal False Claims Act and be liable for treble damages. The New Jersey False Claims Act contains whistleblower provisions similar to the federal Civil False Claims Act. (See Healthcare Legislative and Regulatory Environment Federal Civil False Claims Act and Civil Money Penalties Law above). The New Jersey False Claims Act amended the existing Medicaid fraud statute so that civil penalties for Medicaid fraud committed under that statute are consistent with, and supplement, those under the New Jersey False Claims Act. As noted above under Healthcare Legislative and Regulatory Environment Federal Civil False Claims Act and Civil Money Penalties Law, the potential imposition of large monetary penalties, criminal sanctions, and the significant costs of mounting a defense, create serious pressures to settle on providers who are targets of false claims actions or investigations. Therefore, an action under the FPA or the New Jersey False Claims Act could have a material adverse financial impact on the Obligated Group, regardless of the merits of the case. New Jersey Anti-Kickback Law. The New Jersey Board of Medical Examiners regulations contain provisions which prohibit Board licensees from, directly or indirectly, giving or receiving from any licensed or unlicensed source a gift of more than nominal value, or any fee, commission, rebate, bonus or other compensation however denominated, which a reasonable person would recognize as having been given or received in appreciation for or to promote certain conduct by a licensee, including making or receiving a referral to or from another for professional services. Additionally, provisions of New Jersey law make it a criminal offense to offer, solicit or receive any kickback, rebate or bribe in order to induce business for which reimbursement is provided under the Medicaid or other New Jersey health care programs. Violation of the New Jersey Anti-Kickback Law may lead to civil and criminal penalties, as well as exclusion from the Medicaid program. St. Luke s Warren attempts to comply with the provisions of these regulations. However, at the present time, there can be no assurance that St. Luke s Warren or the physicians with whom it has relationships will not be found to have violated these New Jersey Anti-Kickback prohibitions. The mere allegation of such a violation, or if such violation were found to have occurred, or any sanctions imposed, could have a material adverse effect upon the operations and financial condition of the Obligated Group. New Jersey Anti-Referral Law. The New Jersey law governing referrals by physicians, which is commonly referred to as the Codey Law, and regulations promulgated thereunder by the New Jersey Board of Medical Examiners, prohibit the referral of a patient to a health care service by practitioners who have, or whose immediate family members have, a significant beneficial interest in an entity providing such services. Under the Codey Law, a health care service means a business entity that provides on an inpatient or outpatient basis testing or diagnosis, or treatment of human disease or dysfunction or dispensing of drugs or medical devices for the treatment of human disease or dysfunction, and also includes the following businesses: bioanalytical laboratory; pharmacy; home health care agency; rehabilitation facility; nursing home; hospital; or facility which provides radiological or other diagnostic imaging services; physical therapy services; ambulatory surgery; or ophthalmic services. A significant beneficial interest means any financial interest, including an equity or ownership interest in a practice or a commercial entity holding itself out as offering health care services, but the law makes several exceptions for certain employment and contractual arrangements. Referrals for lithotripsy and radiation pursuant to an oncological protocol are excepted if the practitioner discloses his or her financial interest. Violations of the Codey Law could result in civil penalties and could also result in a physician s loss of his or her license to practice medicine in New Jersey. Health Claims Authorization, Processing and Payment Act. Carriers and health care providers must comply with New Jersey s Health Claims Authorization, Processing and Payment Act ( HCAPPA ) which contains provisions relating to handling of claims, claims payment appeals, prior 48

53 authorization processes, utilization management appeals rights and obligations, and information about clinical guidelines and claims submissions procedures. Carriers and health care providers have an obligation to meet certain requirements of the HCAPPA with respect to both claims payment and the establishment of an independent claims arbitration program to be administered through the New Jersey Department of Banking and Insurance. No assurance can be given at this time as to the impact, if any, of the provisions of the HCAPPA on the operations of St. Luke s Warren and the financial condition of the Obligated Group. Certificate of Need. New Jersey law requires a health care facility, under certain circumstances, to obtain a Certificate of Need from the Department of Health prior to the initiation of certain new health care services, bed additions, bed reductions, or conversions, and certain transfers of ownership. The existence of Certificate of Need requirements tends to inhibit St. Luke s Warren from initiating certain types of projects or services which might enhance its competitive position or revenue sources. Over the past several years, relaxation of Certificate of Need rules have allowed health care providers to expand activities without adhering to the more rigorous requirements previously imposed. One of the purposes of these changes is to increase opportunities for competition in the health care market. Although these changes may increase St. Luke s Warren s opportunities to provide additional services, they also may increase its exposure to competition from other health care providers. Future New Jersey Legislation. From time to time, the New Jersey State Legislature considers certain reforms aimed at containing health care costs and increasing coverage. Such reforms often include provisions to provide more affordable coverage through expanded government health care programs, subsidize low-income residents to enable them to purchase health care coverage and study and implement payment system reforms. At this time, it is impossible to measure the overall financial impact that current and future legislation, if enacted into law, would have on the Obligated Group. Other Legislative and Regulatory Actions The Obligated Group is subject to regulation, certification and accreditation by various federal, state and local government agencies and by certain nongovernmental agencies such as The Joint Commission. The Obligated Group is also subject to regulatory actions and policy changes by the various federal, New Jersey, Commonwealth and local agencies created by the National Health Planning and Resources Development Act, the Occupational Safety Health Act, the act creating the Environmental Protection Agency and other federal, New Jersey, Commonwealth and local governmental agencies. No assurance can be given as to the effect on future hospital operations of existing laws, regulations and standards for certification or accreditation or of any future changes in such laws, regulations and standards. Legislative proposals which could have an adverse effect on the Obligated Group include, but are not limited to: (a) any change in the taxation of not-for-profit corporations or in the scope of their exemption from income or property taxes; (b) limitations on the amount or availability of tax-exempt financing for charitable organizations described in Section 501(c)(3) of the Code; (c) regulatory limitations affecting the ability of the Obligated Group to undertake capital projects or develop new services; and (d) a requirement that nonprofit health care institutions pay real estate property tax and sales tax on the same basis as for-profit entities. Licensing, Surveys and Accreditations. Health care facilities, including those of the Obligated Group, also are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. Those requirements include credentialing and survey requirements relating to Medicare and Medicaid participation and payment, state licensing agencies, private payor participation, The Joint Commission, the National Labor Relations Board and other federal, state and local government agencies. Renewal and continuance of certain of these licenses, certifications and accreditations are based 49

54 on inspections, surveys, audits, investigations or other reviews. These activities are generally conducted in the normal course of business of health care facilities. Nevertheless, an adverse result could be the cause of loss of or reduction in a facility s scope of licensure, certification or accreditation or reduce payments received. Management of the Obligated Group currently anticipates no difficulty in renewing or maintaining currently held licenses, certifications or accreditations that are material to its operations, and does not anticipate a reduction in third-party payments that would materially adversely affect the financial condition, operations, revenues and expenses of the Obligated Group due to licensing, certification or accreditation difficulties. Nevertheless, there can be no assurance that the requirements of present or future laws, regulations, certifications, and licenses will not materially and adversely affect the operations of the Obligated Group. Actions in any of these areas could occur and could result in a reduction in utilization or revenues or both, or the loss of the Obligated Group s ability to operate all or a portion of its health care facilities, and, consequently, could adversely affect the Obligated Group s financial condition, operations, revenues and expenses or its ability to make payments of principal, interest or any premium coming due on the 2016 Bonds. Additional Considerations In Healthcare Delivery The laws and regulations governing federal reimbursement programs and the laws governing the health care industry generally (such as the False Claims Act, the Civil Money Penalties Law, the Anti- Kickback Law and the Stark Law) are complex and subject to varying interpretations, and the Obligated Group and its affiliates are subject to contractual reviews and program audits in the normal course of business. Penalties for violations of federal regulations governing health care providers can be severe, including treble damages, fines, and suspension from federal reimbursement programs such as Medicare and Medicaid. Federal agencies have initiated nationwide investigations into several areas of concern, including, among others: (a) teaching hospitals, (b) home health care services, (c) investigational devices, (d) laboratory billing, and (e) cost reporting. The Obligated Group expects that the level of review and audit to which it and other health care providers are subject will increase. The ACA includes additional funding and resources to increase enforcement actions. Corporate Compliance. The sentencing of organizations for federal health care crimes is governed by the U.S. Sentencing Guidelines, which permit the imposition of extremely large fines in many instances. The Guidelines permit the fine to be reduced significantly if the provider had in place at the time of the crime an effective corporate compliance program and/or accepts responsibility for its actions. As a result of the current environment of increased enforcement against health care fraud and abuse, health care organizations have established compliance programs to prevent or detect violations of federal law. The OIG issued a Compliance Program Guideline for Hospitals in 1998 and Supplemental Compliance Program Guidance for Hospitals in 2005 to assist hospitals in the development and implementation of effective controls and to promote adherence to applicable federal and state laws and program requirements of federal, state and private health plans. The Board of Trustees of each Borrower adopted a Corporate Compliance Program ( Compliance Program ) to demonstrate its commitment to compliance with legal and ethical responsibilities. The goal of the Compliance Program is to help ensure that the Borrowers and its affiliated business entities, including its physicians, comply with the following list of laws and standards: the federal False Claims Act; all applicable regulations governing participation in the Medicare and Medicaid programs; requirements necessary to maintain each Borrower s exemption from federal, state, and local taxes; Stark Law; Anti-Kickback Law; EMTALA; the federal Hill-Burton program and DHS licensure regulations for acute care hospitals. Each Borrower has established compliance standards and procedures that are reasonably capable of reducing the prospect of misconduct and prevent fraud and abuse. The Compliance Program follows the Compliance Guidance for Hospitals Plan established by the OIG. All of the 50

55 Borrowers employees are required to participate in periodic corporate compliance training and an employee s failure to complete the required training has a negative impact on his or her annual performance evaluation. Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures. Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and physicians. Published rankings (such as score cards ), pay for performance, never-events and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals and the members of their medical staffs and to influence the behavior of consumers and providers such as the Obligated Group. 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 negatively may adversely affect its reputation and financial condition. Medical Professional Liability Insurance Market. Deteriorating underwriting results have generated substantial premium increases and coverage reductions in the medical professional liability insurance marketplace in recent years. A rise in claim severity nationwide, coupled with the lower investment returns available to insurers, have resulted in substantial reductions in medical professional liability insurance capacity. Several major medical professional liability insurance carriers have been forced into rehabilitation and/or liquidation, or have voluntarily withdrawn from this line of business. The insurance carriers who are still writing medical professional liability coverage are requiring substantial premium increases, reductions in the breadth of coverage afforded by the policy(ies), more stringently enforced policy terms, and increases in required deductibles or self-insured retentions. Health care entities that have self-funded programs are also experiencing similar difficulties with respect to fronting carriers, reinsurance on their captive insurance companies and/or with respect to insurance placements excess of the primary coverage layers. Furthermore, insurance carrier insolvencies are forcing health care providers to either repurchase insurance coverage from new carriers at substantially higher rates, or self insure exposures for which they had previously purchased insurance. There can be no assurance that the reduction in coverage availability and the rising cost of professional liability coverage will not adversely affect the operations or financial condition of the Obligated Group. Insurance Coverage Limits. The Master Trust Indenture requires the members of the Obligated Group to maintain levels of liability and property hazard insurance as may customarily be carried or maintained under similar circumstances by healthcare service providers of established reputation engaged in similar businesses, on such terms and conditions as shall be customary for corporations similarly situated in the industry, and the Obligated Group is currently complying with such requirements. The Obligated Group believes that its present insurance coverage limits are sufficient to cover any reasonably anticipated malpractice or property hazard exposures. No assurance can be given, however, that the Obligated Group will always be able to procure or maintain such levels of insurance in the future.the members of the Obligated Group are occasionally named as a defendant in malpractice actions and there remains a risk that individual or aggregate judgments or settlements will exceed the Obligated Group s coverage limits, or that some allegations or damages will not be covered by the Obligated Group s existing insurance coverage. To the extent that the professional liability insurance coverage maintained by the Obligated Group is inadequate to cover settlements or judgments against it, claims may have to be discharged by payments from current funds and such payments could have a material adverse impact on the Obligated Group. Nationwide Nursing Shortage. The health care industry is facing a nationwide shortage of nursing professionals, including registered nurses. A shortage of nursing staff could result in escalating 51

56 labor costs, delays in providing care, and patient care management issues, among other adverse effects. The shortage of nurses and other primary care healthcare practitioners may be exacerbated if the increase in access to coverage provided under the ACA leads to an increase in demand for medical care. The ACA includes numerous workforce programs that should have an impact on existing and projected nursing shortages and increase the availability of other primary care health practitioners. The Obligated Group is not currently experiencing difficulty in recruiting or retaining nursing professionals. There can be no assurance that a nursing or other non-physician health care practitioner shortage in the future would not adversely affect the operations or financial condition of the Obligated Group. Although legislation has been introduced at both the state and federal level to mitigate the impact of the existing and projected nursing shortages, there can be no assurance that a nursing shortage will not adversely affect the operations or financial condition of the Obligated Group. Physician Relations. The primary relationship between a hospital and physicians who practice in it is through the hospital s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may 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. 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 oversee adequately the conduct of its medical staff may result in hospital liability to third parties. The Obligated Group is subject to such risks. Technology and Services. Scientific and technological advances, new procedures, drugs and appliances, preventive medicine, occupational health and safety and outpatient healthcare delivery may reduce utilization and revenues of the Obligated Group 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 Obligated Group to offer such equipment or services may be subject to the availability of equipment or specialists, governmental approval, the ability to finance such acquisitions or operations, or reimbursement at levels sufficient to support the cost of such equipment or services. Affiliation, Merger, Acquisition and Divestiture The Obligated Group evaluates and pursues potential acquisition, merger and affiliation candidates as part of the overall strategic planning and development process. As part of its ongoing planning and property management functions, the Obligated Group reviews the use, compatibility and business viability of many of the operations of the Obligated Group, and from time to time the Obligated Group may pursue changes in the use of, or disposition of, the facilities. Likewise, the Obligated Group occasionally receives offers from, or conducts discussions with, third parties about the potential acquisition of operations or properties which may become subsidiaries or affiliates of the Obligated Group in the future, or about the potential sale of some of the operations and properties which are currently conducted or owned by the Obligated Group. Discussions with respect to affiliation, merger, acquisition, disposition, or change of use of facilities, including those which may affect the Obligated Group, are held from time to time with other parties. These may be conducted with acute care hospital facilities and may relate to potential affiliation with the Obligated Group. As a result, it is possible that the current organizations and assets of the Obligated Group may change from time to time. Antitrust Laws The Obligated Group, like other providers of health care services, is subject to antitrust laws. Those laws generally prohibit agreements that restrain trade and prohibit the acquisition or maintenance 52

57 of a monopoly through anticompetitive practices. The legality of particular conduct under the antitrust laws generally depends on the specific facts and circumstances and, in some circumstances, cannot be predicted in advance. Antitrust actions against health care providers have become increasingly common in recent years. Antitrust liability can arise in a number of different contexts, including medical staff privilege disputes, third-party payor contracting, joint ventures and affiliations between health care providers, and mergers and acquisitions by health care providers. Actions can be brought by federal and state enforcement agencies seeking criminal and civil penalties and, in some instances, by private plaintiffs seeking damages for harm from allegedly anticompetitive behavior. Recent judicial decisions have permitted physicians who are subject to disciplinary or other adverse actions by a hospital at which they practice, including denial or revocation of medical staff privileges, to seek treble damages from the hospital under the federal antitrust laws. The Federal Health Care Quality Improvement Act of 1986 provides immunity from liability for discipline of physicians by hospitals under certain circumstances, but courts have differed over the nature and scope of this immunity. In addition, hospitals occasionally indemnify medical staff members who incur costs as defendants in lawsuits involving medical staff privilege decisions. Recent court decisions have also permitted recovery by competitors claiming harm from a hospital s use of its market power to obtain unfair competitive advantage in expanding into ancillary health care businesses. Antitrust liability in any of these contexts can be substantial, depending upon the facts and circumstances involved. The United States Department of Justice and the Federal Trade Commission issued Statements of Antitrust Enforcement Policy in the Health Care Area. The statements, which have been revised from time to time, generally describe certain analytical principles which the agencies will apply to certain factual situations and also establish certain antitrust safety zones. Conduct within the safety zones will not be challenged by the agencies, absent extraordinary circumstances. Many activities frequently engaged in by health care providers fall outside of the zones but are not challenged, and failure to fall within a safety zone does not mean that a participant will be investigated or prosecuted, or even that the activity violated the antitrust laws. There cannot be any assurances that enforcement authorities or private parties will not assert that the Obligated Group, or any transaction in which it is involved, is in violation of the antitrust laws. Tax Exemption for Nonprofit Corporations Loss of tax-exempt status by a Borrower or other Obligated Group member could result in loss of tax exemption for interest on the 2016 Bonds and other tax-exempt bonds issued for the benefit of the Borrowers or other members of the Obligated Group, and defaults in covenants regarding the 2016 Bonds and other related tax-exempt bonds could be triggered. Such an event would have material adverse consequences on the financial condition of the Obligated Group. In addition to the impact on the 2016 Bonds, loss of tax-exempt status by a Borrower or other Obligated Group members could have other adverse effects on the Obligated Group as discussed below. The maintenance by the Obligated Group members of their tax-exempt status depends, in part, upon maintaining their status as organizations described in Section 501(c)(3) of the Code. Maintaining that status is contingent upon 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 that would cause their assets to inure to the benefit of private persons. The IRS indicated that it intends to issue compliance checks relating to post-issuance compliance of tax-exempt bonds issued for exempt organizations. The IRS also has announced that it intends to closely scrutinize transactions between nonprofit organizations and for-profit entities, and in particular has issued audit guidelines for tax-exempt hospitals. Although specific activities of hospitals, such as medical office building leases and compensation 53

58 arrangements, joint ventures and other contracts with independent physicians, have been the subject of interpretations by the IRS in the form of private letter rulings, many activities have not been addressed in any official opinion, interpretation or policy of the IRS. Under IRS form 990 tax information reporting requirements, tax-exempt hospitals must disclose certain joint venture arrangements. Because the Obligated Group members conduct large scale and diverse operations involving private parties, there can be no assurances that certain of its transactions would not be challenged by the IRS. The IRS has taken the position that hospitals that are in violation of the Anti-Kickback Law may also be subject to revocation of their federal tax-exempt status. As a result, tax-exempt entities such as the Obligated Group members that have, and will continue to have, extensive transactions with physicians are subject to an increased degree of scrutiny and perhaps enforcement by the IRS. The Taxpayer Bill of Rights 2 (the Intermediate Sanctions Law ) allows the IRS to impose intermediate sanctions against certain individuals in circumstances involving the violation by taxexempt organizations of the prohibition against private inurement. Prior to the enactment of the Intermediate Sanctions Law, the only sanction available to the IRS was revocation of an organization s tax-exempt status. Intermediate sanctions may be imposed in situations in which a disqualified person (such as an insider ) (a) engages in a transaction with a tax-exempt organization on other than a fair market value basis, (b) receives unreasonable compensation from a tax-exempt organization, or (c) receives payment in an arrangement that violates the prohibition against private inurement. These transactions are referred to as excess benefit transactions. A disqualified person who benefits from an excess benefit transaction will be subject to an excise tax equal to 25% of the amount of the excess benefit. Organizational managers who participate in the excess benefit transaction knowing it to be improper are subject to an excise tax equal to 10% of the amount of the excess benefit, subject to a maximum penalty of $10,000. A second penalty, in the amount of 200% of the excess benefit, may be imposed on the disqualified person (but not on the organizational manager) if the excess benefit is not corrected within a specified period of time. The IRS revenue rulings provide guidance on joint ventures between nonprofit and for-profit health care entities. The revenue rulings provide generally that a nonprofit hospital must retain control over certain of the key aspects of such a joint venture (e.g., control of the governing body of the joint venture, change in types of services offered, etc.) in order to assure that the joint venture s activities are treated as primarily furthering the exempt purposes of the nonprofit, charitable organization. It is not possible at this point to determine whether the IRS guidelines for joint ventures will restrict the ability of the Obligated Group members to enter into joint ventures with for-profit entities. The IRS has stepped up its oversight activities of nonprofit corporations, particularly health care systems and hospitals. These efforts include a report on compensation practices of health care organization practices based on questionnaires the IRS sent to 500 tax-exempt hospitals in 2007 and revisions to the annual IRS reporting form for nonprofit corporations commencing in The new IRS Form 990 requires nonprofit hospitals to report additional information about joint ventures, compensation arrangements and the charitable benefits that the hospital provides to the community. The IRS s enforcement efforts on issues applicable to tax-exempt organizations such as excessive compensation, private inurement, unrelated business tax and political intervention are expected to increase. The ACA imposes additional reporting requirements relating to the organization s provision of charitable care and community health based needs assessment. Organizations that fail to comply with the tax-exempt requirements may be subject to an excise tax of $50,000 per year. 54

59 The tax-exempt status of nonprofit corporations, and the exclusion from taxation of income earned by them, has been the subject of review by various federal, state and local legislative, regulatory and judicial bodies. This review has included proposals to broaden and strengthen existing federal tax law with respect to unrelated business income of nonprofit corporations. Bills have been introduced from time to time in Congress that would require a nonprofit hospital to provide a certain amount of charity care and care to Medicare and Medicaid patients in order to maintain its tax-exempt status and avoid the imposition of an excise tax. The ACA imposes additional requirements for tax-exempt organizations, including obligations to: adopt and publicize a financial assistance policy; limit charges to patients who qualify for financial assistance to the lowest amount charged to insured patients; and control the billing and collection processes. Additionally, effective for tax years beginning January 1, 2013, tax-exempt hospitals must conduct periodic community needs assessments and adopt an implementation strategy to meet needs identified in the assessment. Failure to satisfy these conditions may result in the imposition of fines and the loss of tax-exempt status. The Subcommittee on Oversight of the United States House of Representatives Ways and Means Committee has considered options and recommendations in the area of taxation of unrelated business income of nonprofit organizations. Hearings have been held on these options and recommendations and legislation may be drafted to clarify and strengthen existing law with respect to the unrelated business income tax. The scope and effect of legislation, if any, that may be adopted at the federal and state levels with respect to unrelated business income cannot be predicted. Any such legislation could have the effect of subjecting a portion of a hospital s income to federal or state income taxes. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to federal, state or local taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of the federal, state or local governments, or audits or examinations of the activities of the Obligated Group members by one or more taxing authorities, will not materially and adversely affect the future operations and revenues of the Obligated Group members by requiring them to pay income, sales or real estate taxes or to make payments in lieu of such taxes. The loss by the Obligated Group members of federal tax exemption could also result in a challenge to the state tax exemption of these organizations. A loss of state nonprofit status could impose additional costs, possibly material, on the affected affiliates and could result in the loss of real estate and other state tax exemptions for the Obligated Group members. Unrelated Business Income. The IRS sometimes undertakes 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 Obligated Group members 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 the Obligated Group members as well as the exclusion from gross income for federal income tax purposes of the interest payable on the 2016 Bonds. State Tax Exemptions for Nonprofit Corporations Challenges to Real Property Tax Exemptions. The real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the theory that the health care providers were not sufficiently engaged in charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. 55

60 State and Local Tax Exemption. Until recently, states have not been as active as the IRS in scrutinizing the income tax exemption of health care organizations. Legislation that would result in further regulation and supervision of nonprofit corporations generally is introduced from time to time in state legislatures. The loss by the Obligated Group members of federal tax exemption could very well trigger a challenge to its state or local tax exemption. Depending on the circumstances, such a challenge, if successful, could be material and adverse. State and local taxing authorities undertake audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where authorities are dissatisfied with the amount of services provided to the indigent, the real property taxexempt status of the health care providers has been questioned. The majority of the real property of the Obligated Group members is currently treated as exempt from state and local real property taxation. Although the real property tax exemption with respect to its core facilities has not, to the knowledge of management, been under challenge or investigation except as described above, an audit could lead to a challenge that could adversely affect the real property tax exemption of the Obligated Group members. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the consolidated financial condition of the Obligated Group members by requiring payment of income, local property or other taxes. In 2015, the Tax Court of New Jersey ruled that a nonprofit medical center located in Morristown, New Jersey, was not entitled to tax exemption on nearly all of its property in the town after finding that non-profit and for-profit activities were significantly comingled and conferred substantial benefits on the for-profit entities as a result. The medical center that was the subject of the suit entered into a settlement agreement with the local municipality. Following the court s decision, several other nonprofit hospitals and health systems have faced challenges from their host municipalities to their exemptions from local property taxes. The New Jersey legislature is in the process of considering proposals to reform state laws as applied to nonprofits institutions, such as hospitals and medical centers. At this time, it is not possible to predict whether any such proposals will be enacted and if enacted, what effect, if any, they would have on the financial condition of St. Luke s Warren, in particular, and generally on the Obligated Group. Event of Taxability If the Borrowers do not comply with certain of its covenants set forth in the Trust Agreement or in certain other agreements of the Borrowers generally related to restrictions on use of the facilities, arbitrage limitations, rebate of certain excess investment earnings, and restrictions on the amount of issuance costs financed with the proceeds of the 2016 Bonds, or if certain representations or warranties made by the Borrowers in the Trust Agreement, or in certain certificates or agreements of the Borrowers, are false or misleading, the interest payable on the 2016 Bonds may become includable in the gross income of the owners of the 2016 Bonds for purposes of federal income taxation retroactive to the date of issuance of the 2016 Bonds, regardless of the date on which such noncompliance or misrepresentation is ascertained. In the event that interest on the 2016 Bonds should become includable in the gross income of the owners of the 2016 Bonds for purposes of federal income taxation, the Trust Agreement does not provide for the redemption of the 2016 Bonds or the acceleration of the payment of debt service on the 2016 Bonds or for an increase in the rates of interest on the 2016 Bonds, although violation of any such tax covenant may give rise to an Event of Default for which acceleration is a possible remedy. 56

61 Secondary Market There can be no assurance that there will be a secondary market for the purchase or sale of the 2016 Bonds. From time to time there may be no market for them depending upon prevailing market conditions, including the financial condition or market position of firms who may make the secondary market, the evaluation of the Obligated Group s capabilities and the financial condition and results of operations of the Obligated Group. General Economic Factors Market Value of Investments. Earnings on investments have historically provided the Obligated Group an important source of cash flow and capital appreciation to support its programs and services, to finance its capital expenditure investments and to build its cash reserves. As of June 30, 2015, the market value of the Obligated Group s investments, which include cash, short term securities, fixed income securities, mutual funds and other investment assets totaled approximately $470.4 million. Historically, the value of both debt and equity securities has fluctuated and, during some periods, the fluctuations have been quite significant. In FY 2015, the Obligated Group experienced investment gains of approximately $24.1 million on its approximately $470.4 million in investment assets. No assurances can be given that the market value of the Obligated Group s investments will continue to grow, or even remain at its current level and there is risk that it may actually decline. Pension Funding Impact. Changes in market interest rates and debt and equity market fluctuations also potentially could have an impact on the Obligated Group s pension fund liabilities and its requirements for funding its related pension. Like any other entity with pension fund liabilities, the Obligated Group finds that increases or decreases in interest rates have an impact on the assumed earnings rates on pension assets needed to match pension fund liabilities, which accordingly affects the levels of actuarial pension investment assets required to meet future pension obligations. Consequently, any substantial and sustained decline in long-term interest rates could have the effect of increasing the Obligated Group s current pension funding requirements. In addition, the Pension Protection Act of 2006 (the PPA ) has accelerated the minimum funding requirements for many defined benefit pension plans. This change, together with new rules for measuring pension plan assets and liabilities, including new actuarial assumptions and asset valuation rules included in the PPA, has generally increased employers required minimum funding contributions to pension plans. No assurance can be given that the Obligated Group will not be required to make increased pension funding payments in these or other circumstances. Enforceability of Obligations Under the United States Bankruptcy Code and Under Fraudulent Conveyance Laws The rights and remedies of Holders of the 2016 Bonds are subject to various provisions of the United States Bankruptcy Code. A filing under the United States Bankruptcy Code would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Obligated Group, and its property, and as an automatic stay of any act or proceeding to enforce a lien upon its property. The Obligated Group may 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 the court, binds all creditors who had notice or knowledge of the plan and discharges all claims against the debtor provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are that the plan is in the best interests of creditors, is feasible and has been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if at least two-thirds in dollar amount and more than one-half in number of the allowed claims of the class that are voted with respect to the plan are cast in its favor. Even if the plan 57

62 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. Certain Matters Relating to the Enforceability of the Master Trust Indenture The accounts of the Borrowers, St. Luke s Warren, St. Luke s Monroe and any future members of the Obligated Group will continue to be combined for financial reporting purposes and will be used in determining whether various covenants and tests contained in the Master Trust Indenture (including tests relating to the issuance of additional indebtedness) are met. This is the case notwithstanding uncertainties as to the enforceability of the joint and several obligations of the members of the Obligated Group to make payments under the Trust Agreement and on the Notes issued under the Master Trust Indenture, including the 2016 Master Note pledged under the Master Trust Indenture as security for, among other obligations, the 2016 Bonds, which uncertainties bear on the availability of the assets of the Obligated Group for such payments. Counsel to the Obligated Group will give an opinion or opinions concurrently with the delivery of the 2016 Bonds that the Trust Agreement, the Master Trust Indenture and the 2016 Master Note are obligations of the Borrowers or the Obligated Group, as appropriate, enforceable in accordance with their respective terms. Such opinion will be qualified as to enforceability, however, by limitations imposed by bankruptcy, insolvency, fraudulent conveyance, reorganization or moratorium or by other similar laws affecting the enforceability of creditors rights generally and by the exercise of judicial discretion in accordance with principles of equity. Such opinions will be further qualified as to enforceability to the extent payments under the Trust Agreement or on the 2016 Master Note (i) are requested to be made from any moneys or assets which are donor-restricted or which are subject to a direct, express or charitable trust which does not permit the use of such moneys or assets for such payments; (ii) are requested with respect to any obligation under the Trust Agreement which was incurred, or payments on the 2016 Master Note if it is determined that it was issued, for a purpose which is not consistent with the charitable purposes of the member of the Obligated Group from which such payments are requested or which was incurred for the benefit of any entity other than a nonprofit corporation which is exempt from federal income taxes under Sections 501(a) and 501(c)(3) of the Code and is not a private foundation as defined in Section 509(a) of the Code; (iii) would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by the member of the Obligated Group from which such payments are requested; or (iv) if such payments are requested to 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 the assets of any present or future member of the Obligated Group constitute assets which are so restricted or subject to such trusts cannot now be determined. The amount of such assets could be substantial. A member of the Obligated Group may not be required to make a payment or use its assets to make a payment in order to provide for the payment under the Trust Agreement, the 2016 Master Note, or portions thereof, the proceeds of which were not lent or otherwise disbursed to such member, to the extent that such payment or use would render the member insolvent or which would conflict with, not be permitted by or which is subject to recovery for the benefit of other creditors of such member under applicable law. There is no clear precedent in the law as to whether such payments or use of assets by a member of the Obligated Group may be voided by a trustee in bankruptcy in the event of a bankruptcy of such member or by third party creditors in an action brought pursuant to state fraudulent conveyances statutes. Under the United States Bankruptcy Code a trustee in bankruptcy and, under state fraudulent conveyances statutes, a creditor of a related guarantor, may avoid any obligation incurred by a related guarantor if, among other bases therefor, (i) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty and (ii) the guaranty renders the guarantor insolvent, as defined in the United States Bankruptcy Code or state fraudulent conveyances statutes, or the guarantor is undercapitalized. 58

63 Application by courts of the tests of insolvency, reasonably equivalent value and fair consideration has resulted in a conflicting body of case law. It is possible that, in an action to force a member of the Obligated Group to make a payment under the Trust Agreement or on the 2016 Master Note for which it was not a direct beneficiary a court might not enforce such a payment in the event it is determined that the member of the Obligated Group against which payment is sought is analogous to a guarantor of the debt of the member of the Obligated Group who benefited from the borrowing and that sufficient consideration for the member s obligation was not received or that the incurrence of such obligation has rendered or will render the member insolvent. In addition, there exists common law authority and authority under state statutes for the ability of the state courts to terminate the existence of a nonprofit 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 the 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. Enforceability of Lien on Gross Revenues The Trust Agreement provides that the Borrowers make payments to the Authority sufficient to pay the 2016 Bonds and the interest thereon as the same become due. The obligation of the Borrowers to make such payments is secured in part by a lien granted to the Master Trustee by the Obligated Group on the Gross Revenues to secure its obligations under the Master Trust Indenture. Such lien is on a parity with the lien on Gross Revenues securing all of the obligations issued under the Master Trust Indenture. To the extent that Gross Revenues are derived from payments by the federal government under the Medicare or Medicaid program, any right to receive such payments directly may be unenforceable. The Social Security Act and state regulations prohibit anyone other than the individual receiving care or the institution providing service from collecting Medicare and Medicaid payments directly from the federal or state government. In addition, Medicare and Medicaid receivables may be subject to provisions of the Assignment of Claims Act of 1940 which restricts the ability of a secured party to collect accounts directly from government agencies. With respect to receivables and revenues not subject to the lien, or where such lien was unenforceable, the Master Trustee would occupy the position of an unsecured creditor. In the event of bankruptcy of a member of the Obligated Group, transfers of property made by such member of the Obligated Group at a time that it was insolvent in payment of or to secure an antecedent debt, including the payment of debt or the transfer of any collateral, including receivables and Gross Revenues on or after the date which is 90 days (or, in some circumstances, one year) prior to the commencement of the case under the Bankruptcy Code may be subject to avoidance as preferential transfers. The value of the security interest in the Gross Revenues could be diluted by the incurrence of Indebtedness secured equally and ratably with (or in certain cases senior or subordinate to) the 2016 Bonds or the 2016 Master Note as to the security interest in the Gross Revenues. Enforceability of the Mortgage SLH and St. Luke s Anderson have granted the Mortgage to the Master Trustee to secure all Obligations issued under the Master Trust Indenture. The improvements to the mortgaged property are designed specifically for use as an acute care hospital and may not have significant liquidation value in 59

64 the event the Master Trustee seeks to foreclose the lien of the Mortgage. Furthermore, realizing the value of the Mortgage may be subject to certain regulatory approvals. While SLH and St. Luke s Anderson have covenanted in the Mortgage that they have fee simple title to the mortgaged property, no third party has insured the state of title in connection with the issuance of the 2016 Bonds. As a result, a defect in the title to the mortgaged property which impacts the use of the facilities may result in the Master Trustee realizing less than the full value on the mortgaged property upon the sale thereof. Matters Relating to Security The remedies available to the Trustee, the Authority or the registered owners of the 2016 Bonds upon an Event of Default under the Trust Agreement are in many respects dependent upon judicial actions which are often subject to discretion and delay. Under existing constitutional and statutory law and judicial decisions, including, specifically, the United States Bankruptcy Code, the remedies provided in the Trust Agreement may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the 2016 Bonds and the delivery of the Trust Agreement will be qualified as to the enforceability of the various legal instruments by limitations imposed by general principles of equity and by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally. The enforceability of the Trust Agreement and the 2016 Bonds is subject to bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization and other state and federal laws affecting the enforcement of creditors rights and to general principles of equity. A claim for payment of the principal or Redemption Price of and interest on the 2016 Bonds could be made subject to any statutes that may be constitutionally enacted by the United States Congress or the state legislatures affecting the time and manner of payment of debt or imposing other constraints upon enforcement of debt obligations. Certain amendments to the Trust Agreement may be made with the consent of the owners of a majority of the aggregate principal amount of the 2016 Bonds then outstanding. In addition, certain amendments to the Master Trust Indenture may be made with the consent of the owners of a majority of the aggregate principal amount of the debt obligations outstanding thereunder. Such amendments may adversely affect the security for the 2016 Bonds. As the holder of the 2016 Master Note, the Trustee shall be authorized to give directions and consents with respect thereto, provided that (i) the Trustee shall not consent to any amendment of the 2016 Master Note that would change the amount or time as of which payments are required to be paid thereunder in respect of the principal or Redemption Price of or interest on the Bonds without obtaining the written consent thereto of the Holders of all of the Bonds then Outstanding, and (ii) the Trustee shall not consent to any release or subordination of any collateral pledged to the Master Trustee or any waiver or modification of any covenant of the Obligated Group under the Master Indenture without obtaining the written consent thereto of the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding. The enforceability of the obligations of the Borrowers to make payments under the Trust Agreement and the obligations of the Obligated Group to make payments under the 2016 Master Note are subject to certain limitations including (i) state and federal bankruptcy laws relating to fraudulent conveyances if, among other things, the Borrowers are determined not to have received fair consideration or reasonably equivalent value for their obligation to make such payment and are rendered insolvent as a result of such obligation; (ii) restrictions on the use of assets subject to a direct, express or charitable trust; (iii) corporate or related purposes of the Borrowers, which are inconsistent with the corporate or related purposes for the issuance of the 2016 Bonds; (iv) requests for payments from the Borrowers, which would result in the cessation or discontinuance of any material portion of the health care or related services previously provided; and (v) applicable usury laws. 60

65 Factors Relating to Prior Parity Bonds The covenants, warranties and events of default in the Trust Agreement are not identical to the covenants, warranties and events of default in the bond purchase and loan agreements and trust agreements pursuant to which the prior parity bonds were issued. Further, certain holders of certain prior parity bonds have the right to accelerate such bonds, and in turn, the notes issued under the Master Trust Indenture that secure such bonds, upon the occurrence of an event of default under the applicable financing document. In the event that such holder exercises such right, all obligations issued under the Master Trust Indenture would be accelerated, including the 2016 Master Note that secures the 2016 Bonds. Certain Indebtedness Subject to Tender Certain outstanding indebtedness of the Obligated Group permits the holder thereof to tender such indebtedness for purchase by the Obligated Group prior to the stated maturity thereof. See Appendix A Long-Term Indebtedness of the Obligated Group. No financial institution or other entity other than the Obligated Group has committed to provide funds to purchase such indebtedness or to refinance such indebtedness. In the event that the holder of any such indebtedness tenders it for purchase, there can be no assurance that the indebtedness will be remarketed to a new holder or that the Obligated Group will be able to refinance the indebtedness in lieu of remarketing. In any such case, the Obligated Group will be responsible for payment of the full outstanding principal amount and accrued interest to the holder of such indebtedness upon such tender. General Factors Affecting the Obligated Group s Revenues The following factors, among others, may unfavorably affect the operations of health care facilities, including those of the Obligated Group, to an extent and in a manner that cannot be determined at this time: Employee strikes and other adverse actions that could result in a substantial reduction in revenues without corresponding decreases in costs. Hospitals and their employees fall within the scope of, and are subject to, the National Labor Relations Act. Accordingly, labor relationships with hospital and nursing home employees are regulated by the federal government. Employees may bargain collectively and strike. Reduced need for hospitalization or other services arising from future medical and scientific advances. Reduced demand for the services of the Obligated Group that might result from decreases in population of the service area of the Obligated Group. Increased unemployment or other adverse economic conditions in the service area of the Obligated Group, which could increase the proportion of patients who are unable to pay fully for the cost of their care. In addition, increased unemployment caused by a general downturn in the economy of the Obligated Group s service area or the Commonwealth or the State of New Jersey or by the closing of operations of one or more major employers in such service area may result in a loss of health insurance benefits for a portion of the Obligated Group s patients. Cost availability and sufficiency of any insurance such as medical professional liability, directors and officers liability, property, automobile liability, worker s compensation and commercial general liability coverage that health care facilities of a similar size and type generally carry. 61

66 Adoption of a national healthcare program. Cost and availability of energy. Potential depletion of the Medicare trust fund. The occurrence of terrorist activities or natural disasters, including floods and earthquakes, may damage the facilities of the Obligated Group, interrupt utility service to the facilities, or otherwise impair the operation of the Obligated Group and the generation of revenues from the facilities. The facilities of the Obligated Group are covered by general property insurance in an amount which management considers to be sufficient to provide for the replacement of such facilities in the event of a natural disaster. Any increase in the quantity of indigent care provided which is mandated by law or required due to increased need of the community in order to maintain the charitable status of the Obligated Group. Factors such as: (i) uninsured acts of God; and (ii) increased costs and possible liability exposure arising out of potential environmental hazards. Technological advances in recent years have accelerated the trend toward the use of sophisticated diagnostic and treatment equipment in hospitals. The availability of certain equipment may be a significant factor in hospital utilization, but purchase of such equipment may be subject to health planning agency approval and to the ability of the Obligated Group to finance such purchases. Imposition of wage and price controls for the health care industry. Developments adversely affecting the federal or state tax-exemption of municipal bonds. Changes in the governmental requirements concerning how patients are treated. These regulations are embodied in patients bills of rights and similar programs being promulgated with greater frequency, and changes in licensure requirements. All of these programs can increase the cost of doing business and consequently adversely affect the financial condition of the Obligated Group. LITIGATION As of the date hereof, there is not now pending or, to the Authority s knowledge, threatened any litigation seeking to restrain or enjoin the issuance or delivery of the 2016 Bonds or questioning or affecting the validity of the 2016 Bonds or the proceedings or authority under which the 2016 Bonds are to be issued. Neither the creation, organization or existence of the Authority nor the title of any of the present members or other officers of the Authority to their respective offices is being contested. There is no litigation pending or, to the knowledge of the Authority, threatened which in any manner questions the right of the Authority to enter into the Trust Agreement, or to secure the 2016 Bonds in the manner provided in the Trust Agreement and the Act. TAX MATTERS In the opinion of Bond Counsel, under existing law and assuming continuing compliance by the Authority and the Borrowers with the requirements of the Internal Revenue Code of 1986, as amended (the Code ) and the regulations thereunder that relate to the 2016 Bonds, interest on the 2016 Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for 62

67 purposes of the federal alternative minimum tax imposed on individuals and corporations; however, interest on the 2016 Bonds held by a corporation (as defined for federal income tax purposes) may be indirectly subject to federal alternative minimum tax because of its inclusion in the adjusted current earnings of a corporate holder. Such opinion of Bond Counsel is given subject to the condition that the Authority and the Borrowers shall comply with all requirements of the Code that must be satisfied subsequent to the issuance of the 2016 Bonds in order that interest on the 2016 Bonds be (or continue to be) excluded from gross income for federal income tax purposes. Bond Counsel is also of the opinion that, under existing law, interest on the 2016 Bonds is exempt from Pennsylvania personal income tax and from Pennsylvania corporate net income tax, and the 2016 Bonds are exempt from personal property taxes in Pennsylvania. Except as expressly stated above, Bond Counsel will not express any opinion as to any other federal or state tax consequences of acquiring, carrying, owning or disposing of the 2016 Bonds, and prospective purchasers of the 2016 Bonds should consult with their own tax advisors as to the applicability of these and any other collateral tax consequences of ownership of the 2016 Bonds. Certain of the 2016 Bonds may be sold with original issue discount (the OID Bonds ). For each maturity of the OID Bonds, original issue discount is the excess of the stated redemption price at maturity of such OID Bonds over the initial offering price to the public, excluding underwriters and other intermediaries, at which price a substantial amount of such OID Bonds were sold. The appropriate portion of such original issue discount allocable to the original and each subsequent holder will be treated as interest and excluded from gross income for federal income tax purposes and will increase a holder s tax basis in such OID Bonds for purposes of determining gain or loss upon sale, exchange, redemption, or payment at maturity. Owners of such OID Bonds should consult their own tax advisors with respect to the computation and determination of the portion of original issue discount which will be treated as interest and added to a holder s tax basis during the period such OID Bonds are held. Any 2016 Bonds purchased, whether at original issuance or otherwise, for an amount greater than their principal amount payable at maturity (or, in some cases, at their earlier call date) (the Premium Bonds ), will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium on the Premium Bonds. However, a purchaser s basis in a Premium Bond, and under the Treasury Regulations the amount of tax-exempt interest received, will be reduced by the amount of amortizable bond premium properly allocable to such purchaser. Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. Ownership of the 2016 Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, S corporations with excess net passive income and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry the 2016 Bonds. Bond Counsel expresses no opinion as to such collateral federal income tax consequences. The opinion of Bond Counsel on federal tax matters will be based upon and will assume the accuracy of certain representations and certifications, and compliance with certain covenants, of the Borrowers, the Obligated Group and the Authority to be contained in the transcript of proceedings for the issuance of the 2016 Bonds and that are intended to evidence and assure that the 2016 Bonds are and will remain obligations the interest on which is excluded from gross income for federal income tax purposes. Bond Counsel will also rely on the opinion of Saul Ewing LLP as to all matters concerning the status of 63

68 the Borrowers and the Obligated Group as organizations described in Section 501(c)(3) of the Code and exempt from federal income tax under Section 501(a) of the Code. Bond Counsel will not independently verify the accuracy of those certifications and representations or that opinion. The Code prescribes a number of qualifications and conditions for the interest on state and local obligations to be and to remain excluded from gross income for federal income tax purposes, some of which require future or continued compliance after issuance of the obligations in order for the interest to be and to continue to be so excluded from the date of issuance. Noncompliance with these requirements by the Borrowers or the Authority may cause the interest on the 2016 Bonds to be included in gross income for federal income tax purposes and thus to be subject to federal income tax retroactively to their date of issuance. The Borrowers and, subject to certain limitations, the Authority have each covenanted to take the actions required of it for the interest on the 2016 Bonds to be and to remain excluded from gross income for federal income tax purposes, and not to take any actions that would adversely affect that exclusion. Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the 2016 Bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation, or otherwise prevent the owners of the 2016 Bonds from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such legislative proposals, or any such clarification of the Code or any such court decisions, may also affect the market price for or marketability of the 2016 Bonds. Prospective purchasers of the 2016 Bonds should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to which Bond Counsel expresses no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the 2016 Bonds for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority, the Borrowers or the members of the Obligated Group, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. * * * * * * THE FOREGOING IS NOT INTENDED AS AN EXHAUSTIVE DESCRIPTION OF THE PROVISIONS OF FEDERAL OR STATE TAX LAW OR OTHER FACTORS WHICH MAY HAVE AN EFFECT ON INDIVIDUALS AND CORPORATIONS HOLDING THE 2016 BONDS OR RECEIVING INTEREST THEREON. PROSPECTIVE PURCHASERS OF THE 2016 BONDS SHOULD CONSULT WITH THEIR TAX ADVISORS REGARDING THE EFFECT ON THEIR AFFAIRS OF HOLDING THE 2016 BONDS OR RECEIVING INTEREST THEREON, INCLUDING, BUT NOT LIMITED TO, THE EFFECT OF STATE AND LOCAL TAX LAWS. CONTINUING DISCLOSURE The Trustee and the Borrowers will enter into a Continuing Disclosure Agreement (the Disclosure Agreement ) for the benefit of Beneficial Owners of the 2016 Bonds to (i) provide Event Notices, (ii) Annual Reports and (iii) certain other financial information, as required by the Securities and Exchange Commission s Rule 15c2-12 (the Rule ) of the Securities Exchange Act of The Annual Report will be filed with the Electronic Municipal Market Access System ( EMMA ) created by the Municipal Securities Rulemaking Board ( MSRB ). The notices of significant events will be filed by the Borrowers with the MSRB. The specific nature of the information to be contained in the Annual Report 64

69 or the notices of significant events and the other terms of the Disclosure Agreement are set forth in the proposed form of the Disclosure Agreement attached hereto as Appendix E. The obligations of the Borrowers under the Disclosure Agreement shall terminate upon the defeasance, prior redemption or payment in full of all of the 2016 Bonds. The Borrowers shall direct the Trustee to notify the MSRB that the obligations of the Borrowers under the Disclosure Agreement have terminated. If the obligations of the Borrowers under the Trust Agreement are assumed in full by another obligated person, such person shall be responsible for compliance with the Disclosure Agreement in the same manner as if it were the Borrowers, and the Borrowers shall have no further responsibility thereunder. The failure by the Borrowers to comply with their obligations under the Disclosure Agreement will not constitute a default under the Trust Agreement, the Master Trust Indenture or the 2016 Bonds. SLH, St. Luke s Warren and St. Luke s Monroe each have previously undertaken continuing disclosure obligations with respect to its respective previously issued bonds. Both SLH and St. Luke s Warren self reported certain inaccurate statements in offering documents relating to certain late and missing filings required under the prior continuing disclosure obligations to the U.S. Securities and Exchange Commission s Municipalities Continuing Disclosure Cooperation Initiative. SLH filed its audited financial statements for the fiscal year ended June 30, 2012, 54 days after such filings were due. SLH filed its quarterly filing for the fiscal quarter ended September 30, 2012, 25 days after such filings were due. SLH filed its audited financial statements for the fiscal years ended June 30, 2013 and 2014 and its quarterly filings for the fiscal quarter ended June 30, 2011 no more than fifteen days after such filings were due. In addition, in connection with the issuance of the 2010 Bonds, Moody s upgraded the rating on SLH s outstanding indebtedness from Baa1 to A3. This ratings change was reflected in the Official Statement for the 2010 Bonds, but SLH did not file a separate notice to EMMA regarding such ratings change. St. Luke s Warren filed its audited financial statements for the fiscal year ended June 30, 2012, its audited financial statements for the fiscal year ended December 31, 2011, its quarterly filing for the fiscal quarter ended June 30, 2012, its quarterly filing for the fiscal quarter ended March 31, 2012, its monthly filing for the month ended November 30, 2012, its monthly filing for the month ended October 31, 2012, its monthly filing for the month ended July 31, 2012 and its monthly filing for the month ended March 31, 2012, 24, 87, 73, 164, 36, 15, 42 and 41 days, respectively, after such filings were due. St. Luke s Warren inadvertently failed to file monthly filings for the months ended January 31, 2012 and February 29, St. Luke s Warren filed its monthly filings for the months ended April 30, 2012, May 31, 2012, June 30, 2012, August 31, 2012 and September 30, 2012 not more than fifteen days after such filings were due. St. Luke s - Anderson has no prior continuing disclosure obligations. The Members of the Obligated Group have implemented measures, including a dual control process, to ensure that all future required filings will be made in a timely manner. UNDERWRITING The 2016 Bonds are being purchased by the Underwriter at a purchase price equal to $ (which is equal to the aggregate principal amount of the 2016 Bonds in the amount of $ less an Underwriter s discount in the amount of $ and [plus/minus] original issue [premium/discount] in the amount of $ ). 65

70 The Underwriter may offer to sell the 2016 Bonds to certain dealers (including dealers depositing such 2016 Bonds into investment trusts) and others at prices lower than the public offering prices stated on the inside cover page hereof. The Underwriter and its 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 services. The Underwriter and its affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for certain members of the Obligated Group, for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriter and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities, which may include credit default swaps) and financial instruments (including bank loans) 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 the Authority. The Underwriter and its affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments. FINANCIAL ADVISOR In connection with the authorization, sale and issuance of the 2016 Bonds, SLUHN has retained Echo Financial Products, LLC, of King of Prussia, Pennsylvania, as its financial advisor (the Financial Advisor ). The Financial Advisor is not obligated to undertake, and has not undertaken, either to make an independent verification of or to assume responsibility for the accuracy, completeness, or fairness, of the information contained in this Official Statement and the Appendices hereto. The Financial Advisor is an independent financial advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities. VERIFICATION AGENT Robert Thomas CPA, LLC, independent certified public accountants (the Verification Agent ) will deliver a report dated as of the closing date for the 2016 Bonds, verifying the accuracy of the mathematical computations of the adequacy of the maturing principal amount of non-callable Government Obligations and the interest income to be realized thereon and/or uninvested cash, if any, for the principal or mandatory sinking fund redemption requirements of and interest on the Refunded Bonds up to and including the 2008 Redemption Date and the redemption price of and interest on the remaining Refunded Bonds on the 2008 Redemption Date as provided for in the Escrow Agreement. INDEPENDENT ACCOUNTANTS The Consolidated Audited Financial Statements of the St. Luke s Health Network, Inc. and Controlled Entities as of and for the years ended June 30, 2015 and 2014 included as Appendix B to this Official Statement have been audited by PricewaterhouseCoopers LLP, independent accountants, as stated in their report appearing in Appendix B. RATINGS The 2016 Bonds have been assigned ratings of A3 by Moody s Investors Service, Inc. and A- by S&P Global Ratings. Any desired explanation of the significance of such ratings should be obtained 66

71 from the rating agencies. Certain information and materials not included in this Official Statement were furnished to the rating agencies. Generally, rating agencies base their ratings on the information and materials so furnished and on investigations, studies and assumptions by the rating agencies. There is no assurance that a particular rating will be maintained for any given period of time or that it will not be lowered or withdrawn entirely if, in the judgment of the agency originally establishing the rating, circumstances so warrant. The Underwriter has undertaken no responsibility either to bring to the attention of the Holders of the 2016 Bonds any proposed revision or withdrawal of the ratings of the 2016 Bonds or to oppose any such proposed revision or withdrawal. Any such change in or withdrawal of such rating could have an adverse effect on the market price of the 2016 Bonds. LEGAL MATTERS The authorization and issuance of the 2016 Bonds are subject to the approval of legality by Reed Smith LLP, Philadelphia, Pennsylvania, Bond Counsel. Bond Counsel will render its opinion in substantially the form set forth in Appendix D to this Official Statement. Certain legal matters will be passed upon for the Authority by its counsel, Norris McLaughlin & Marcus, P.A., Allentown, Pennsylvania; for the Obligated Group by its counsel, Saul Ewing LLP, Philadelphia, Pennsylvania; and for the Underwriter by its counsel, Ballard Spahr LLP, Philadelphia, Pennsylvania. The various legal opinions to be delivered concurrently with the delivery of the 2016 Bonds express the professional judgment of the attorneys rendering the opinion as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or the future performance of the parties to the transaction. In addition, the rendering of an opinion does not guarantee the outcome of any legal dispute that may arise out of the transaction. MISCELLANEOUS The references herein to the Act, the 2016 Bonds, the Master Trust Indenture, the Mortgage, the Escrow Agreement, the Disclosure Agreement and the Trust Agreement are brief outlines of certain provisions thereof. Such outlines do not purport to be complete, and for full and complete statements of such provisions reference is made to the Act, the Master Trust Indenture, the Mortgage, the Trust Agreement, the Disclosure Agreement and the Escrow Agreement and the form of the 2016 Bonds set forth in the Trust Agreement. Copies of such documents are on file at the office of the Underwriter and following delivery of the 2016 Bonds will be on file at the corporate trust office of the Trustee in Philadelphia, Pennsylvania. The Authority has furnished the information contained herein that relates to the Authority. The Authority makes no representation as to the accuracy or completeness of any information contained herein except with respect to the Authority. The Borrowers have reviewed the information contained herein with respect to themselves and have approved all such information for use within this Official Statement. 67

72 The circulation of this Official Statement has been duly authorized by the Authority and the execution, delivery and circulation of this Official Statement has been approved by the Borrowers. NORTHAMPTON COUNTY GENERAL PURPOSE AUTHORITY By: Chairman APPROVED: SAINT LUKE S HOSPITAL OF BETHLEHEM, PENNSYLVANIA By: Senior Vice President, Finance ST. LUKE S HOSPITAL ANDERSON CAMPUS By: Senior Vice President, Finance 68

73 Appendix A Certain Information Concerning St. Luke s Health Network, Inc. dba St. Luke s University Health Network and Obligated Group

74 [This Page Intentionally Left Blank]

75 APPENDIX A HISTORY AND BACKGROUND Saint Luke s Hospital of Bethlehem, Pennsylvania (as further defined below, St. Luke s or SLH ) was founded in 1872 to care for victims of industrial and railroad accidents in the Lehigh Valley. By 1875, SLH had already become a valued asset in the region as patients who were brought to the hospital received care that previously required a lengthy train ride to Philadelphia a ride that the seriously injured did not survive. Since its founding as the first hospital in Lehigh County, SLH has provided leading-edge technology, well-trained physicians, innovative health care services and first class medical education. In 1884, it became the fourth hospital in the country to open a nursing school which today is the oldest continuously operating, hospital-based diploma nursing school. A nationally recognized, major teaching hospital, SLH has been named one of the top 15 teaching hospitals in the United States four times, and it is one of only approximately 400 members of the Council of Teaching Hospitals and Health Systems. In September 2009, Temple University School of Medicine and SLH announced a partnership to develop the first regional medical school campus in the Lehigh Valley. In February 2010, the campus was approved by the Liaison Committee on Medical Education and in 2011, the first class of students enrolled in The Medical School of Temple University/St. Luke s University Health Network to begin their studies. The initial class graduated in May SLH was among the first community hospitals in its service area to have facilities for radiology and maintained a cutting-edge laboratory nearly 20 years before hospitals were required to have one. SLH introduced modern obstetrics to the Lehigh Valley and became a treatment epicenter during the polio epidemic in eastern Pennsylvania in the 1950s. In 2002, St. Luke s Bethlehem (as defined below) became the first hospital in Pennsylvania to use the davinci robotic surgical system, and SLH surgeons have significant expertise in the area of robotic surgery. In November, 2012, St. Luke s Bethlehem became the first hospital in the United States to install GE Healthcare s Discovery IGS 730 Hybrid Operating Room, an interventional suite that combines advanced, mobile laser-guided imaging equipment with operating room technology. In the early 1980s, SLH performed its first open-heart surgery procedure and began its transformation from a community hospital to a regional, tertiary referral center. Today, SLH operates a Level I Adult Trauma Center, accredited by The Pennsylvania Trauma Systems Foundation; a regional cancer center; a nationally recognized regional heart and vascular center; and is one of only a few international product and training show sites for GE Healthcare. In 1993, SLH took its first step in becoming an integrated health care network by signing an affiliation agreement with the Visiting Nurse Association Health Care Associates. Over the ensuing years, there would be many more affiliations, mergers and acquisitions as SLH and St. Luke s Health Network, Inc. (as further defined below, the Network or SLUHN ), the parent entity to SLH, continued to expand to serve community health needs in the region. St. Luke s University Health Network In 1995, the Network acquired Quakertown Community Hospital. The acquisitions of Allentown Osteopathic Medical Center, Miners Memorial Medical Center and Warren Hospital followed in 1997, 2000 and 2012, respectively. Today, the Network encompasses more than 200 sites and has 1,042 licensed beds, including 48 skilled nursing beds and 31 acute rehabilitation beds in its six acute care hospital sites in nine counties in Pennsylvania and New Jersey. The Network operates primary and A-1

76 specialty care physician practice sites, various outpatient centers and home health, hospice and related healthcare organizations. The Obligated Group Members of the Obligated Group are obligated to pay debt service for all Obligations issued under the Master Trust Indenture. Saint Luke s Hospital of Bethlehem, Pennsylvania ( St. Luke s or SLH ), d/b/a St. Luke s University Hospital, d/b/a St. Luke s Hospital Bethlehem Campus ( St. Luke s Bethlehem ) and d/b/a St. Luke s Hospital Allentown Campus ( St. Luke s Allentown ), St. Luke s Warren Hospital, Inc. ( St. Luke s Warren or SLW ), d/b/a St. Luke s Hospital - Warren Campus, St. Luke s Hospital Anderson Campus ( St. Luke s Anderson or SLA ) and St. Luke s Hospital Monroe Campus ( St. Luke s Monroe or SLM ) are the current members of the Obligated Group under the Master Trust Indenture. This Appendix A contains certain information regarding SLH, St. Luke s Monroe, St. Luke s Warren and St. Luke s Anderson, as well as information about St. Luke s Health Network, Inc. d/b/a St. Luke s University Health Network (the Network or SLUHN ), the parent company of SLH, St. Luke s Monroe, St. Luke s Warren, St. Luke s Anderson and certain other affiliated entities. Neither SLUHN nor any of its affiliates (other than SLH, St. Luke s Warren, St. Luke s Anderson and St. Luke s Monroe) is obligated to pay debt service on any Obligations issued under the Master Trust Indenture. In order for additional entities to become members of the Obligated Group, certain provisions in the Master Trust Indenture must be satisfied. CORPORATE STRUCTURE SLUHN, SLH, St. Luke s Monroe and St. Luke s Anderson are each Pennsylvania not-for-profit corporations exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code ). St. Luke s Warren is a New Jersey not-for-profit corporation exempt from federal income tax under Section 501(c)(3) of the Code. SLUHN, whose Board members and officers are identical to those of SLH, St. Luke s Anderson and St. Luke s Monroe, controls six acute care hospitals in six locations, an organization of physician practices, and other health care related organizations. The organizational chart below shows those hospitals and certain and other significant entities controlled by SLUHN. St. Luke s University Health Network Saint Luke s Hospital of Bethlehem, Pennsylvania d/b/a St. Luke s University Hospital, St. Luke s Hospital - Bethlehem Campus and St. Luke s Hospital Allentown Campus St. Luke s Hospital Monroe Campus St. Luke s Warren Hospital, Inc. St. Luke s Quakertown Hospital St. Luke s Miners Hospital St. Luke s Hospital - Anderson Campus St. Luke s Physician Group St. Luke s Emergency Transport Services Note: SLH, St. Luke s Anderson, St. Luke s Monroe and St. Luke s Warren are the current members of the Obligated Group. A-2

77 SLH SLUHN is the sole member of SLH, which is a member of the Obligated Group. St. Luke s Bethlehem and St. Luke s Allentown are separate business divisions of SLH. St. Luke s Bethlehem St. Luke s Bethlehem is the flagship of the Network and contains 929,891 square feet of building space housed on acres of land. St. Luke s Bethlehem has 452 licensed acute-care beds. Over the past several years, many improvement projects have been completed, including expansion of its operating rooms and renovations to its Critical Care Unit, medical/surgical inpatient bed units, rehabilitation units, main lobby and emergency room. St. Luke s Bethlehem is a Level 1 Trauma Center. It is a respected major teaching hospital and is the Lehigh Valley s first and only regional medical school campus, a partnership with Temple University School of Medicine. St. Luke s Bethlehem is also one of a select group of international training show sites for GE Healthcare. St. Luke s Allentown St. Luke s Allentown has 149 licensed acute-care beds. Since 2003, St. Luke s Allentown has undergone a number of major expansions and renovation projects, resulting in more than $150 million in improvements, including upgrades and additions to operating rooms, recovery units, the intensive care unit, medical/surgical patient rooms, the emergency department, the catheterization/interventional radiology suite and post-partum obstetrical rooms. SLH created an outpatient cancer center in Allentown in August Most recently, SLH purchased a 108,000-squarefoot complex in South Whitehall Township which provides an array of outpatient services. St. Luke s Anderson - St. Luke s Anderson has 108 licensed acute-care beds. SLUHN is the sole member of St. Luke s Anderson, which is a member of the Obligated Group. St. Luke s Anderson opened its doors to patients on November 11, St. Luke s Anderson is located on a 500-acre site the largest single hospital site in Pennsylvania and is easily accessible from Route 33, Interstate 78 and Freemansburg Avenue in Bethlehem Township. An outpatient cancer center and medical office building are adjacent to the 108-bed hospital. St. Luke s Anderson was designed to have visual appeal and, most importantly, provide convenient access to patients and visitors. St. Luke s Warren St. Luke s Warren is a 198-bed community hospital based in Phillipsburg, Warren County, New Jersey. SLUHN is the sole member of St. Luke s Warren, which is a member of the Obligated Group. On February 1, 2012, the Network acquired Warren Hospital and several of its affiliates situated in the most western part of New Jersey, abutting the Delaware River. St. Luke s Warren is the largest employer in the Phillipsburg area and the second largest employer in Warren County. St. Luke s Monroe St. Luke s Monroe is a 108-bed community hospital currently being constructed in Bartonsville, Monroe County, Pennsylvania. St. Luke s Monroe is projected to open in the fall of SLUHN is the sole member of St. Luke s Monroe, which is a member of the Obligated Group. St. Luke s Monroe will provide acute inpatient and outpatient medical and surgical care. The new campus will have initial annual capacity for 10,000 inpatient and observation admissions and will have a 31-bed emergency department with capacity for 62,000 visits annually. St. Luke s Monroe will also have four operating rooms, two procedure rooms and one Interventional Radiology/Cath Lab. St. Luke s Miners Hospital ( St. Luke s Miners ) St. Luke s Miners is a 45-bed acute-care hospital located in Coaldale, Schuylkill County, Pennsylvania. St. Luke s Miners also operates a 48-bed skilled nursing facility and a home health agency. St. Luke s Miners has been a member of SLUHN since 2000 and is not a member of the Obligated Group. A-3

78 St. Luke s Quakertown Hospital ( St. Luke s Quakertown ) St. Luke s Quakertown is a 62-bed acute-care hospital located in Upper Bucks County, Pennsylvania. St. Luke s Quakertown became a member of SLUHN in 1995 and is not a member of the Obligated Group. St. Luke s Physician Group ( SLPG ) SLPG employs more than 400 physicians in over 150 primary care and specialty practices. Offices are primarily located in Lehigh, Bucks, Carbon, Monroe, Montgomery, Northampton and Schuylkill counties. SLPG physicians are on staff at the Network s hospitals. SLPG is not a member of the Obligated Group. Visiting Nurse Association of St. Luke s Inc. ( VNA or VNA of St. Luke s ) The VNA provides home health care, community visitation services for families of at-risk infants and physical, occupational and speech therapy. The VNA has two wholly owned subsidiaries: Visiting Nurse Association of St. Luke s Home Health/Hospice, Inc., which provides home health and inpatient and outpatient hospice services and Visiting Nurse Association of St. Luke s Community Health, Inc., which provides home infusion and durable medical equipment services. VNA has been a member of the Network since 1993, is a wholly owned subsidiary of SLH and is not a member of the Obligated Group. St. Luke s Emergency & Transport Services ( SLETS ) SLETS operates nine advance life support units and two basic life support units which provide state-certified, emergency transport and paratransport services and treatment for residents of Bucks, Lehigh, Northampton and Schuylkill counties in Pennsylvania and in various New Jersey counties. Ambulance service is provided 24 hours a day, 365 days a year. SLETS is not a member of the Obligated Group. GOVERNANCE Pursuant to each of SLH s, St. Luke s Monroe s, St. Luke s Warren s and St. Luke s Anderson s respective bylaws, the Network has and may exercise certain powers and rights reserved to it as the sole member of such entities. In addition, the Board of Trustees of each hospital must obtain the approval of the Network before action on certain specified matters becomes final and effective by the respective hospital board. These matters include, but are not limited to, appointing members to the board, approving the annual budget, incurring any indebtedness outside the ordinary course of business, or merging or consolidating with any other entity. The members of the Board of Trustees of the Network (the Board ) also serve as the members of the respective boards of trustees of SLH, St. Luke s Anderson, St. Luke s Monroe and SLPG. The Board is presently composed of 15 voting Trustees, two of whom are ex-officio. The ex-officio voting Trustees are the President & CEO of the Network and the President of the Medical Staff of SLH. Trustees are elected for staggered 4-year terms. With the exception of certain extensions of terms for serving as an officer, no Trustee may serve more than two consecutive terms. The Officers of the Board consist of the Chairman, Vice Chairman, Secretary and Assistant Secretary. The committees of the Board are the Executive Committee, Executive Compensation Committee, Audit/Compliance Committee, Finance Committee, Development/Public Affairs Committee, Nominating/Bylaws Committee, Quality and Medical Education Committee and Strategic Planning Committee. Special committees may be appointed as needed to facilitate the work of the Board and the Network. St. Luke s Warren and St. Luke s Quakertown are each governed by separate Boards of Trustees. However, the Bylaws of St. Luke s Warren and St. Luke s Quakertown preclude either of those Boards of A-4

79 Trustees from taking action on material matters without the prior approval of the Board of Trustees of the Network. The voting Trustees and the Officers of the Board, their principal occupations or civic affiliations and expiration of their Board terms are as follows: Trustee Richard A. Anderson Faust E. Capobianco Occupation President & CEO St. Luke s University Health Network Consultant GridBox Media Date of Appointment/ Term Expiration Ex-Officio November 2014/ November 2018 Kristina W. Warner St. Luke s Hospital Auxiliary Representative October 2015/ October 2019 John M. Daly, MD Dean Emeritus Temple University School of Medicine November 2014/ November 2018 Samuel R. Giamber, MD Cardiologist October 2015/ October 2019 Robert J. Grey, Esq. K&L Gates October 2013/ October 2017 Kostas Kalogeropoulos Tko Hospitality October 2013/ October 2017 David M. Lobach, Jr. Vice Chairman & CEO Embassy Bank November 2014/ November 2018 David M. Muething Partner Buckley Muething Capital Management November 2014/ November 2018 Robert A. Oster CEO Concannon, Miller & Co., P.C. October 2013/ October 2017 Daniel P. Petrozzo Board Chairman NPower October 2013/ October 2017 Robert Rumfield President Candle Artisans February 2016/ February 2020 A-5

80 Trustee Charles D. Saunders, MD Chairman Occupation Date of Appointment/ Term Expiration Urologist Retired October 2012/ October 2017 Luanne B. Stauffer Executive Director Upper Perkiomen Valley Chamber of Commerce October 2013/ October 2017 David M. Yen, MD Otorhinolaryngologist July 2014/ July 2016* * President of the Medical Staff ex-officio member, two year term as medical staff president. CERTAIN RELATIONSHIPS The member corporations of the Network from time to time do business with firms with which Trustees or Officers of the Boards are affiliated. Such business arrangements are made on an arms-length basis and on terms not less favorable to such members of the Network than other arrangements with unrelated parties. MANAGEMENT The daily operations of the Network and its member corporations are the responsibility of the President & CEO and his staff. The principal members of senior management are listed below with brief descriptions of their background. Richard A. Anderson (age 69), President & CEO. Mr. Anderson has served as President & Chief Executive Officer of the Network since He holds a Bachelor of Science degree from the University of Illinois, and in 2011 was named a Distinguished Alumnus and received the George Huff Certificate of Award for Proficiency in Athletics and Scholarship during his undergraduate days. Mr. Anderson earned a Master of Public Health in Hospital Administration from the University of Pittsburgh, Graduate School of Public Health. During his tenure, Mr. Anderson has overseen the Network s evolution into one of the larger health care networks in Pennsylvania and Western New Jersey and is the second largest employer in the Lehigh Valley. The Network operates six hospitals - soon to be seven - providing outpatient services at more than 200 locations with more than 10,000 employees. Mr. Anderson has been published nationally in Hospitals and Trustee magazines and testified on Medicare reimbursement before the Labor, Health and Human Services and Education Appropriations Subcommittee of United States Senate in He has also lectured to MBA students and alumni at Lehigh University s College of Business and Economics. He has been named by Becker s Hospital Review for the last several years as one of the nation s 100 Non-Profit Hospital, Health Systems CEOs to Know and he is the longest-tenured health care CEO in Pennsylvania. During Mr. Anderson s tenure, the Network has received more than 120 national awards for quality, including the 100 Top Hospitals Awards from Truven Health Analytics in the Major Teaching Hospitals Category in 2015 and 2016, and has been recognized numerous times by Truven among the A-6

81 country s top cardiovascular hospitals, most recently in St. Luke s Quakertown Hospital was also recognized in 2016 as a Top 100 Hospital in the Small Community Hospital Category by Truven. Mr. Anderson is a Fellow in the American College of Healthcare Executives and has served on various committees of state and local health care organizations, including the Board of Directors of the Hospital and Healthsystem Association of Pennsylvania. He has played a major role in the establishment and development of The Bethlehem Partnership for a Healthy Community. He is a member of the Temple University School of Medicine Board of Visitors and the Lehigh Valley Partnership Board of Directors. Joel D. Fagerstrom - (age 53), Executive Vice President/Chief Operating Officer. Mr. Fagerstrom has a Master s in Healthcare Administration and a Master s in Business Administration from the University of Minnesota. He also has a Bachelor of Arts in Hospital Administration and Organizational Communication from Concordia College in Moorhead, Minnesota. Mr. Fagerstrom joined the Network in June Prior to that, he served as the President/CEO of CHRISTUS Health Southeast Texas where he managed three hospitals as well as other business entities in Southeast Texas. He has held a variety of administrative positions in the following organizations: Morristown Memorial Hospital in Morristown, New Jersey; Hahnemann University Hospital in Philadelphia, Pennsylvania; Children s Hospital in Columbus, Ohio; Rhode Island Hospital in Providence, Rhode Island; and Lutheran Health Systems (now Banner Health). Additionally, he is a Fellow in the American College of Healthcare Executives. Patrick J. Bower (age 54), Vice President, Development. Mr. Bower joined the Network in October 2006 and oversees philanthropy for the Network. Prior to his affiliation, he served as Vice President of Development for the Foundation of the University of Medicine & Dentistry of New Jersey; Executive Director for Advancement at Iona College and Finance Director with the Boy Scouts of America. Mr. Bower has 30 years of experience in fundraising and not-for-profit management. He is a member of the Association for Healthcare Philanthropy and holds the CFRE credential from the Association of Fund Raising Professionals. Mr. Bower graduated from West Virginia University with a Bachelor of Arts degree in English. He also earned a Master of Arts degree in Theology from St. Mary s Seminary and University. Robert E. Martin (age 62), Senior Vice President and Chief Strategy Officer. Mr. Martin graduated from Pennsylvania State University, with a Bachelor of Science degree in Hospitality Management in He subsequently earned a Master s degree in Business Administration from Drexel University in Mr. Martin joined the Network in his current capacity in Prior to that time, he served in a similar capacity for Allegheny Health Education and Research Foundation for four years and at Hahnemann University Hospital in Philadelphia, Pennsylvania for two years. He also spent four years in the Lehigh Valley with senior responsibility for planning and marketing for Horizon Health System, and before that spent 10 years as a health care management consultant assisting hospitals across the country with a variety of strategic planning initiatives. Mr. Martin also consulted with the long-term and continuing-care sectors of the industry. Mr. Martin has served as an adjunct faculty member for several universities teaching graduate and undergraduate courses related to health care planning, marketing, and policy. Jeffrey A. Jahre, MD, F.A.C.P. (age 70), Senior Vice President, Medical and Academic Affairs. Dr. Jahre received his Bachelor of Science Degree at Bethany College in 1966 and received his medical degree in 1970 at The Chicago Medical School/University of Health Sciences, Chicago, Illinois. Dr. Jahre completed his internship in 1971 and his Internal Medicine Residency in 1973 at St. Vincent s Hospital and Medical Center, New York City, after which he served as the Chief Medical Resident from 1973 to Dr. Jahre was a Major in the USAF Medical Corps at Minot AFB Regional Hospital in North Dakota from 1974 to Upon returning to civilian life, Dr. Jahre was awarded an Infectious Disease A-7

82 Fellowship in 1978 from Columbia Presbyterian Center, New York City. Dr. Jahre was board certified in Internal Medicine in 1974 by the American Board of Internal Medicine and in 1980 by the Subspecialty Board of Infectious Diseases. Dr. Jahre was named the Senior Vice President of Medical and Academic Affairs at SLUHN in Previously, he held the titles of Chief of the Department of Medicine, Chief of the Section of Infectious Disease and Chairman of the Infection Control Committee at SLH. He served as Director of Clinics for the Network from 1978 to At Lehigh Valley Hospital Muhlenberg, he served as Chief, Section of Infectious Disease from 1981 to 2003 and Chairman, Infection Control Committee from 1982 to Other prior affiliations were with Easton Hospital in Easton, Pennsylvania and Good Shepherd Rehabilitation and Good Shepherd Specialty Hospital in Allentown, Pennsylvania. Dr. Jahre is also a Professor of Medicine (Adjunct) at Temple University School of Medicine. He has authored approximately 50 medical publications and scientific presentations. Rochelle M. Schaller (age 51), Interim Senior Vice President, Human Resources. Ms. Schaller is a graduate of Pennsylvania State University in Health Administration and Business. Since joining the Network at St. Luke s Allentown in 1986, she has held a variety of human resources leadership positions, most recently serving as the Vice President of Human Resources for the Network. Ms. Schaller has been a Certified HR Professional for 20 years. She is a member of the Lehigh Valley Society for Human Resource Management (LVSHRM) and the National Society for Human Resource Management (SHRM). Carol Kuplen, RN, MSN (age 57), President, St. Luke s Bethlehem and Chief Nursing Officer of the Network. Mrs. Kuplen graduated from Pittston Hospital in Pittston, Pennsylvania in 1979 with a Diploma in Nursing and earned her Bachelor of Science in Nursing from Georgetown University in In 1987, she completed her Master of Science in Nursing at the University of Pennsylvania. Mrs. Kuplen joined SLH in 1987 as the Patient Care Manager, Inpatient Oncology Unit, until she was appointed Director of the Cancer Network. She served as Vice President of Patient Care Services for St. Luke s Bethlehem from , and was named Network Chief Nursing Officer in In that role, she provides administrative oversight of nursing services for the Network. In 2011, Mrs. Kuplen was promoted to Chief Operating Officer of St. Luke s Bethlehem. Mrs. Kuplen has participated in the Johnson & Johnson/Wharton Fellows Program for Nurse Executives at the University of Pennsylvania, received the National Scholarship in Cancer Nursing from the American Cancer Society, is a member of Sigma Theta Tau (a nursing professional honor society), and has been named to Who s Who in American Nursing. She is affiliated with the American Nurses Association and the Pennsylvania Nurses Association and serves as graduate preceptor for local colleges and universities. Dean W. Evans (age 59), President, St. Luke s Physician Group. Mr. Evans graduated with a Bachelor of Arts from Wilkes College in He earned his Master s in Public Administration from the Pennsylvania State University in Mr. Evans was named President of SLPG in November Prior to that time, he held various positions within both the hospital and physician group practice entities of the Temple University Health System for approximately 12 years. Mr. Evans is currently a member of the Board of Directors of the Greater Valley YMCA and the Chair of the Advisory Board of the Bethlehem Branch of the YMCA. Frank J. Ford (age 63), President, St. Luke s Allentown. Mr. Ford earned a Bachelor of Arts in Economics from DeSales University in 1974 and a Master of Business Administration from Lehigh University in Prior to his appointment to his present position in 2005, Mr. Ford was President of the VNA of St. Luke s from 2001 to 2005 and served as the Chief Financial Officer at St. Luke s Miners and St. Luke s Quakertown. Mr. Ford also previously served as the Chief Financial Officer of the VNA of Eastern Pennsylvania, which became the VNA of St. Luke s in June Mr. Ford is a trustee at DeSales University and prior to joining the Network in 1997, he was President of Service 145 (PA) in A-8

83 Bath, Pennsylvania, Controller of Crystal Brands Retail in Reading, Pennsylvania, and Manager of Cost and Financial Analysis at Mack Trucks, Inc., Allentown, Pennsylvania. Lisa A. Giovanni, RN, MSN (age 48), President of the Visiting Nurse Association of St. Luke s. Ms. Giovanni graduated from Allentown Hospital School of Nursing in 1988, received her Bachelor of Science Degree in Nursing from Kutztown University in 1999, and received her Master s Degree in Nursing from St. Joseph s College, Standish, Maine, in Ms. Giovanni was appointed to her present position in July She began her VNA career in 1993 as a home health staff nurse and held positions of increasing responsibility over the years including Supervisor of Home Health Aides, Manager of Private Duty, Manager of Internal Network Staffing Agency, and Director of Quality. She is a member of Sigma Theta Tau (Southern Maine Chapter) and a member of the Pennsylvania Home Care Association Board of Directors. William Moyer (age 51), President, St. Luke s Miners Hospital. Mr. Moyer earned his Bachelor of Science Degree in 2003 and Master s in Healthcare Administration in 2008 from DeSales University. He was named President of St. Luke s Miners in He previously served as Vice President of Operations, where he had Network oversight of materials management, construction and various support service departments at St. Luke s Bethlehem. Other prior roles included Assistant Vice President and Director of Biomedical Engineering at St. Luke s Bethlehem. Mr. Moyer serves on the Board of Directors for Schuylkill County Vision, Schuylkill United Way and Tamaqua YMCA. Edward R. Nawrocki (age 50), President, St. Luke s Anderson and St. Luke s Quakertown. Mr. Nawrocki earned a Bachelor of Science in Industrial Engineering from the University of Wisconsin- Madison and a Master of Science in Organizational Dynamics from the University of Pennsylvania. Prior to joining the Network, Mr. Nawrocki worked at the University of Wisconsin Hospital and Clinics, Sentara Health System in Virginia and the University of Pennsylvania Health System where he held various management engineering and business development positions. Prior to becoming President of St. Luke s Anderson in 2011, Mr. Nawrocki served as President at St. Luke s Quakertown since 2004 and also served as Interim President at St. Luke s Miners in Mr. Nawrocki began his career with the Network as a Vice President at St. Luke s Bethlehem with operational and planning responsibilities. He currently serves as a member on the Hospital Association of Pennsylvania (HAP), the Moravian Hall Square Retirement Community and Bucks County Health Improvement Partnership (BCHIP) Boards. Thomas P. Lichtenwalner (age 63), Senior Vice President, Finance. Mr. Lichtenwalner holds a Bachelor of Science degree in Accounting from Shippensburg University and a Master of Business Administration in Health Administration from St. Joseph s University, Philadelphia, Pennsylvania. He has been employed at the Network since Mr. Lichtenwalner previously was Corporate Controller at Quakertown Community Hospital. He is a member of the Healthcare Financial Management Association, serving as Past President of the Appalachian Chapter, and he is also Treasurer of the Nazareth Area Chamber of Commerce and serves on the finance committee of Our Lady of Perpetual Help Church and the Diocese of Allentown. He is also a member of the Nazareth Educational Board Foundation. Robert Wax (Age 43), Senior Vice President & General Counsel. Mr. Wax graduated with distinction from Emory University in 1994 with a Bachelor s Degree in Business Administration and graduated summa cum laude from Temple University School of Law in He joined the Network in July 2004, as Associate General Counsel, after spending seven years as a transactional attorney at Dechert LLP, an international law firm headquartered in Philadelphia, Pennsylvania. Mr. Wax also served from 2002 through 2004 as an Adjunct Professor of Law at the Temple University School of Law, where he taught a course entitled Business Mergers and Acquisitions. In October 2006, he was named Vice President of Administration and Associate General Counsel for the Network and became Senior Vice President & General Counsel in Mr. Wax was selected by Pennsylvania attorneys as a 2005, 2006, 2007 & 2008 A-9

84 Pennsylvania Rising Star (defined as 40-years-old or younger or in practice 10 years or less) by Philadelphia Magazine, Pennsylvania Super Lawyers and Law & Politics. Mr. Wax currently serves in leadership roles with various community organizations. Scott R. Wolfe (age 58), President, St. Luke s Warren. Mr. Wolfe holds a Bachelor s Degree from Albright College. He joined the Network in April 2012 as President of St. Luke s Warren. Prior to joining the Network, Mr. Wolfe served as a health care industry consultant and held a variety of positions with the Reading Hospital Healthcare Delivery System (now known as Reading Health System) serving most recently as the system s President & CEO. Mr. Wolfe is a member of the American College of Healthcare Executives and is a fellow in the Healthcare Financial Management Association. He has served on various health care industry committees and organizations, including as Pennsylvania State Delegate to the AHA Region II Policy Board, Vice Chair of Voluntary Hospitals of America, Pennsylvania Chapter, and Director on the Boards of Albright College, United Way of Berks County, Greater Reading Chamber of Commerce and Industry and the Executive Board of Minsi Trails Boy Scout Council. In 2010, Mr. Wolfe was recognized with the Jacob Albright Award, the highest honor bestowed upon a graduate of Albright College. LEHIGH VALLEY MARKET DEMOGRAPHICS The Lehigh Valley is defined as a 730-square mile region in eastern Pennsylvania comprising 62 municipalities. The area is adjacent to the Delaware River at Interstate 78, within a two-hour drive of both New York City and Philadelphia. The Lehigh Valley offers amenities of a major urban center without the congestion and high cost of living. The Network believes that the relatively low cost of housing and lower property taxes attract many out-of-state residents who seek a less stressful and more affordable way of life. Selected Lehigh Valley Facts 658,000 population, 248,000 households, 336,000 person workforce. [1] The Lehigh Valley is ranked as the fastest growing and third most populated region of the state. [1] $35 billion GDP that has grown 3.14% over the previous year. [1] Home to two Fortune 500 companies: Air Products and PPL, both in Allentown. [3] The Lehigh Valley has the most balanced and diversified economy in the Commonwealth according to statistics from the Department of Commerce. [1] Allentown is ranked #78 in US News and World Report s 2016 Best Places to Live in the US rankings. Allentown is ranked #92 nationally in job growth in Forbes Magazine s Best Places for Business and Careers (July 2015). The Lehigh Valley Industrial Park system is home to more than 470 businesses employing more than 22,000 people in seven parks located in Northampton and Lehigh Counties. [5] 11 institutions of higher learning producing more than 7,000 graduates annually. [1] Population growth in the Lehigh Valley is projected at 17% by the year 2030 while the projection for national growth is 11.5%. [4] [7] A-10

85 Major employers within the Lehigh Valley are as follows: [2] 1. Lehigh Valley Health Network 2. St. Luke s University Health Network 3. Air Products 4. Amazon 5. Lehigh County 6. Allentown School District 7. Giant Food Stores LLC 8. Sands Bethworks Gaming LLC 9. Northampton County 10. Bethlehem Area School District MONROE COUNTY MARKET DEMOGRAPHICS Monroe County, home of the Pocono Mountains, consists of 609 square miles in northeastern Pennsylvania. It is bordered by the Blue Mountains, the Delaware River and the Lehigh River, and it is positioned approximately 75 miles from New York City and 90 miles from Philadelphia. The Network believes that its close proximity to the Lehigh Valley, Scranton, Wilkes-Barre and New Jersey, as well as to resort attractions, and its educational institutions, make it an attractive area to work, live and visit. Monroe County currently has one acute care hospital, Pocono Medical Center (PMC). In May 2015, PMC and Lehigh Valley Health Network announced plans for a merger, expected to occur in Selected Monroe County Facts 169,397 population, 57,661 households, 80,000-person workforce. [6,7] Tourism remains a major industry in the Pocono region with 25.6 million visitors in 2014, resulting in over $3 billion in revenue. [8] Jobs in the Pocono counties region are expected to grow by 20% between 2007 and [10] 2014 median household income of $57,748 well-exceeding Pennsylvania average of $53,115. [6] 63% of the population is between ages 20 and 64 years. [6] East Stroudsburg University and Northampton Community College, Monroe Campus offer 156 higher education degrees to over 6,800 students. [8,9] The area is poised to support a future influx of additional employers with more than 72,000 county residents commuting to work, 15% of which commute 90 miles or more. [8] Major employers within Monroe County are as follows: [8] 1. Tobyhanna Army Depot 2. Sanofi Pasteur 3. Pocono Medical Center 4. Mount Airy Casino Resort 5. Wal-Mart Associates 6. Pocono Mountain School District 7. Kalahari Resort & Conventions 8. Pleasant Valley School District 9. East Stroudsburg School District 10. Stroudsburg School District A-11

86 ST. LUKE S UNIVERSITY HEALTH NETWORK SERVICE AREA The primary service area for SLUHN is the Greater Lehigh Valley Area, which comprises Lehigh and Northampton counties, the majority of Carbon and Monroe counties, as well as sections of Schuylkill, Bucks, and Montgomery counties in Pennsylvania, and Warren County in New Jersey. Residents of these counties accounted for 94% of the Network s acute care admissions in fiscal year PRIMARY SERVICE AREA A-12

87 The Network has over 270 locations in nine counties across two states, Pennsylvania and New Jersey, as depicted on the map below, which includes St. Luke s Monroe, schedule to open in the fall of Legend Hospitals Outpatient Services Owned Practices Support Services Rehabilitation Centers Rural Health Centers A-13

88 Within SLUHN s primary service area, the Network mainly competes for patients with the following institutions: Hospital Ownership Teaching Affiliation Beds* Location Coordinated Health - Allentown Physicians None 20 Allentown Coordinated Health - Bethlehem Physicians None 20 Bethlehem Easton Hospital Community Health Systems Drexel University College of Medicine 196 Easton Pocono Medical Center PMC None 239 East Stroudsburg Lehigh Valley Cedar Crest LVHN University of South Florida, Tampa 858 Allentown Lehigh Valley Muhlenberg LVHN None 168 Bethlehem Sacred Heart Hospital Independent None 109 Allentown * Set up & staffed beds, PA Department of Health, Report 1-A, July 1, 2014 June 30, 2015 Among these seven competitor hospitals, the Network captured approximately 39% of inpatient admissions for fiscal year Despite not having a hospital presence in the southern portion of Monroe County during the time period in question (St. Luke s Monroe is scheduled to open in the fall of 2016), SLUHN captured approximately 10% market share from this area during the same time period. [Remainder of Page Intentionally Left Blank] A-14

89 ADMISSIONS AT AREA HOSPITALS** Individual Hospital Comparison Fiscal Years Ended June 30 Facility FY2013 FY2014 FY2015 Coordinated Health Allentown Coordinated Health Bethlehem Easton Hospital 8,496 7,302 6,966 Lehigh Valley - Cedar Crest 34,712 33,378 33,175 Lehigh Valley Muhlenberg 10,514 9,688 9,316 Pocono Medical Center 7,795 7,254 7,167 Sacred Heart Hospital 4,655 4,533 4,294 St. Luke s Allentown 7,050 6,675 7,491 St. Luke s Anderson 4,917 5,232 5,826 St. Luke s Bethlehem 19,484 18,155 18,730 St. Luke s Warren* 4,545 3,942 4,020 St. Luke s Miners 1,635 1,614 1,667 St. Luke s Quakertown 2,859 2,650 2,624 TOTAL *** 108, , ,733 SLUHN Hospitals TOTAL 40,490 38,268 40,358 Service Area Market Share 37.4% 37.6% 39.3% * Fiscal Year 2015 for St. Luke s Warren annualized based on six months of data **Excludes normal newborns / geography limited to SLUHN primary service area *** Represents approximately 83% of the total admissions from the primary service area approximately 17% of the total admissions from the primary service area are to hospitals other than those identified above. Referenced Sources [1] Lehigh Valley Economic Development Corporation [2] Pennsylvania Career Link [3] Morning Call [4] Lehigh Valley Planning Commission [5] Lehigh Valley Industrial Park, Inc. [6] Fourth Economy Consulting [7] Census [8] Pocono Counties Workforce Investment Area/PA Dept. of Labor and Industry [9] Pocono Mountains Economic Development Corporation [10] East Stroudsburg University [11] Pennsylvania Workforce Development Corporation [12] St. Luke s University Health Network, Analytics & Business Intelligence/Truven/PHC4 A-15

90 SLUHN AWARDS AND RECOGNITION SLUHN and its affiliates have received more than 125 awards since 1997, as well as additional national and state recognition for various achievements. These include: National Awards Named Truven 100 Top Hospital Major Teaching Hospital Category (2016, 2015, 2001, 1997), only hospital in region to receive this award. Named Truven 100 Top Hospital Small Community Hospital Category (2016). Named Truven 50 Top Cardiovascular Hospital (2012 and 2014). Earned highest overall open heart surgery quality rating from Society of Thoracic Surgeons on several occasions based on top decile performance (mortality, length of stay, complications and evidence-based care); only 8% of U. S. hospitals achieve this distinction. Earned top decile for mortality for trauma center (2014). First and only Pennsylvania cancer program to receive American College of Surgeons highest quality recognition for three consecutive terms (2004, 2007 and 2010) and the only Pennsylvania program to receive award in Earned national three year accreditation with commendation as an Integrated Network Cancer Program (INCP) from the Commission on Cancer of the American College of Surgeons (December 2013); one of only two health care networks in Pennsylvania, and one of only 51 health care networks nationwide, to receive this distinction. SLH received Joint Commission s Disease Specific Care Certification for Stroke (2013). Designated Center of Excellence by Metabolic and Bariatric Surgery Accreditation and Quality Improvement Program (MBSAQIP) (2010); Medicare patients are required to use Center of Excellence bariatric programs. Received the American Heart Association/American Stroke Association s Get with the Guidelines Stroke Gold Plus Award (2013, 2014). Received the American Heart Association/American Stroke Association s Target: Stroke Honor Roll Award (2013, 2014). US News & World Report (2014) High Performing Regional Hospital for Diabetes & Endocrinology, Gastroenterology and GI Surgery, Geriatrics, Nephrology, Neurology and Neurosurgery, Orthopaedics, Pulmonary, and Urology. Recognized as a Hospital & Health Networks Most Wired Award winner (2013, 2014). St. Luke s Home Health 2014 HomeCare Elite recognition as top 25 percent of home health agencies in the country based on quality of care (outcomes), best practice (process measure) implementation, quality improvement and consistency, patient experience (HHCAHPS), and financial performance measures. State Awards Received seven Hospital & Healthsystem Association of Pennsylvania (HAP) Achievement Awards (2010), most ever by one health care organization; in addition, received one award in 2004, 2006, 2008 and 2011, two awards in 2012 and 2013 and four awards in St. Luke s Warren received the New Jersey Hospital Association Excellence in Quality Improvement Award (2013, 2014). A-16

91 Participant in Pay-For-Performance (P4P)/Value Based Performance (VBP) Initiatives Premier QUEST Demonstration Project. o Three Network hospitals were top performers in all three measures (evidence-based care, mortality and efficiency). o St. Luke s Bethlehem had the 9 th lowest mortality of 157 hospitals nationwide. Highmark Quality BLUE 2011 and 2012 P4P Programs. o Attained maximum achievement level for Catheter-Associated Urinary Tract Infections (CAUTI), Stroke Care, Emergency Department throughput and Perinatal Care projects. o Received awards for greatest percent improvement and highest overall compliance. St. Luke s Physician Group. o Currently has 49 level III patient centered medical homes with an additional 16 in the recognition phase for an expected total of 65. o Participated in Medicare Physician Quality Reporting Initiative (PQRI). o P4P initiatives with Highmark Blue Cross, Independence Blue Cross and Aetna CMS VBP Program. o All eligible Network hospitals qualified for a payment reward based on performance in HCAHPS and 12 evidence-based care measures. o Only 50% of hospitals nationwide qualified for reward payment. St. Luke s Anderson and St. Luke s Miners were recipients of the 2014 Premier QUEST Awards; St. Luke s Quakertown was a Finalist and St. Luke s Allentown was a Citation of Merit recipient. Other Outstanding Achievements First in the region to perform Transcatheter Aortic Valve Replacement (TAVR) procedures independently (without a proctor) - July 25, St. Luke s Anderson won the 2014 Readers Choice Award for Best Hospital from the Pocono Record. SLH hospitals named The Morning Call Newspapers 2014 Reader s Choice Award recipient for: o Best Place to Have a Baby o Best Emergency Services o Best Urgent Care o Best Nursing Services NETWORK SERVICES SLUHN has evolved over the past 140 years from a single patient care facility to a major, comprehensive, integrated, health care system that provides a full continuum of acute, primary, tertiary and preventive care for the communities it serves. SLUHN provides inpatient and outpatient medical and surgical services and inpatient intensive care services, as well as emergency, inpatient and outpatient hospice and home care services. The Network includes a fully accredited level one adult trauma center, as well as heart and vascular, oncology, robotic surgery, neuroscience, orthopaedics, women s and children s, radiology and community health services. While not all of the services listed below are provided by members of the Obligated Group, the following list highlights some of the services provided by the Network and its affiliates: St. Luke s Adult Level I Trauma Center St. Luke s Adult Level I Trauma Center at St. Luke s Bethlehem is fully accredited by the Pennsylvania Trauma Systems Foundation and annually treats more than 2,400 trauma cases. The Center is supported by eight employed trauma surgeons, one employed emergency medicine traumatologist, six A-17

92 employed trauma neurosurgeons, seven employed orthopaedic trauma surgeons, two emergency/critical care fellows, five advanced practitioner fellows (two of whom are also critical care trained) and two aeromedical helicopters. St. Luke s Heart & Vascular Center St. Luke s Heart & Vascular Center offers a spectrum of cardiac and vascular services, including cardiac catheterization procedures, non-invasive cardiology, electrophysiology studies and various surgical procedures, such as coronary artery bypass surgery, heart valve surgery, transmyocardial revascularization, thoracic aortic aneurysm repair, thoracic aortic valve repair and ablation surgery for atrial fibrillation and ventricular assist devices for advanced heart failure. St. Luke s is one of the region s busiest sites for thoracic stent graft repair of thoracic aortic diseases resulting from trauma or aneurysms. The Center has Pennsylvania offices in Allentown, Bethlehem, Coaldale, Easton, East Stroudsburg, Quakertown and Wind Gap and two offices in New Jersey. St. Luke s Bethlehem was the first hospital in Pennsylvania and fifth in the nation to earn accreditation from the American College of Radiology for Cardiac MRI services (2008) and the first hospital in the region to earn Chest Pain Center accreditation (2009) by the Society of Chest Pain Centers, an international organization focused on improving care for patients with acute coronary syndromes and other related conditions. Also in 2009, SLH heart failure management received special disease-specific certification by the Joint Commission. In 2012, St. Luke s Heart Valve Center, St. Luke s Atrial Fibrillation Center and St. Luke s Women s Heart Center were established. These centers offer multidisciplinary approaches to diagnosis and treatment options. In 2014, St. Luke s began the Heart Failure Program to assist patients in managing advanced heart failure. Also in 2014, the Center for Lipid Disorders was established to aid patients in managing lipid imbalances. These centers offer multidisciplinary approaches to diagnosis and treatment options. St. Luke s Cancer Center The Network has three comprehensive outpatient cancer centers located in Allentown, Bethlehem and Easton, Pennsylvania. The Network also provides cancer services in Quakertown, Coaldale and East Stroudsburg, Pennsylvania and in Warren County, New Jersey. Board-certified, fellowship-trained surgical oncologists, medical oncologists, radiation oncologists, breast surgeons, thoracic surgeons, neurosurgical oncologists and gynecologic oncologists provide neurologic, lung, breast, prostate, gynecologic and gastrointestinal cancer care. The Network now offers the new FDA-approved drug Pembrolizumab and participates in clinical trials with the anti-body PD1 called Nivolumab. Both treatments are intended for patients with advanced melanoma who have received Ipilimumab and have progressed on that treatment. The Network launched the Personalized Breast and Ovarian Health Program in 2009 to help women evaluate their risks of developing breast and ovarian cancer and to provide certain options that are available to reduce these risks. SLUHN also offers a potentially life-saving and minimally-invasive surgical procedure to remove high-grade dysplasia, or pre-cancerous tissue, and early-stage cancers of the esophagus. Tertiary care at the St. Luke s Cancer Center includes robotically-assisted surgery for the treatment of prostate cancer and gynecologic cancers. The St. Luke s Regional Breast Center in Center Valley, Pennsylvania opened in May 2008, becoming the first in the region to exclusively provide diagnostic mammograms and higherlevel breast imaging. Same-day diagnostic follow-up and biopsy are provided to streamline the process for anxious patients. A-18

93 St. Luke s Center for Neuroscience The Network has organized various disciplines and clinical specialties that comprise the neurosciences, as well as all the providers and programs involved in the delivery of neurological and neurosurgical care, into an interdisciplinary and collaborative center. SLUHN strives to provide coordinated care for neurology, neurosurgery, neuro rehabilitation, stroke, pain management, psychology and sleep services. The St. Luke s Center for Neuroscience also provides services related to specific conditions and diseases through a centers of excellence model. Those centers include the St. Luke s Stroke Center (Allentown/Bethlehem), the St. Luke s Movement Disorder Center, the St. Luke s Multiple Sclerosis Center, the St. Luke s Memory Disorder Center, the St. Luke s Headache Center, the St. Luke s Sleep Disorders Centers, the St. Luke s Epilepsy Center, the St. Luke s Normal Pressure Hydrocephalus Center, the St. Luke s Brain and Spine Tumor Center and the St. Luke s Balance Center. Department of Orthopaedics The Network offers a team of highly trained surgeons that perform a wide range of advanced orthopaedic procedures. St. Luke s Orthopedic Specialists, a division of SLPG, consists of 15 employed orthopaedic surgeons, two employed board certified traumatologists, and three employed primary care sports medicine physicians. The group provides 24 hour per day/seven day per week coverage for orthopaedic trauma cases. U.S. News & World Report s 2012 Best Hospitals Guide recognized St. Luke s Orthopedic Specialists ongoing excellence as part of the Own the Bone Program, a national post-fracture, systems-based fragility fracture initiative created by the American Orthopedic Association. St. Luke s Orthopaedic Specialists offer additional special expertise in sports-related conditions and injuries, complex pelvic and knee reconstructions, joint replacements, shoulder problems, hand and wrist injuries, computer-assisted minimally invasive surgery and spinal injuries, diseases and degenerative conditions and primary care sports medicine. Minimally Invasive/Robotic Surgery The Minimally Invasive/Robotic Surgery program was launched in 2002 when St. Luke s Bethlehem became the first hospital in Pennsylvania to acquire the davinci robotic surgical system. At SLH, surgeons regularly perform prostate cancer surgery using the techniques available through this leading-edge system. Three St. Luke s surgeons were the first women s health physicians from Pennsylvania accredited by the American Institute of Minimally Invasive Surgeons. St. Luke s Bariatric Surgery Program The St. Luke s Bariatric Services Program at St. Luke s Allentown offers patients three bariatric surgery options: the Roux-En-Y Gastric Bypass, the Laparoscopic Adjustable Gastric Band Procedure and the Laparoscopic Sleeve Gastrectomy. St. Luke s Allentown offers a comprehensive program of care, from the initial consult to ongoing follow-up and support, for people considering weight-loss surgery. The program has treated more than 2,400 patients in the past five years. A medical weight loss program, including a board-certified bariatrician (medical weight loss physician) launched in January Radiology The Network has entered into an enterprise agreement with GE Healthcare, making SLUHN one of only a few health care networks in the country which is partnering with GE to develop new imaging technology through the use of all-digital systems. In addition, St. Luke s Bethlehem and St. Luke s Anderson are international show sites for GE. SLUHN radiologists and staff train other physicians, staff and technologists in the use of various GE radiology equipment. As a result of this relationship, St. A-19

94 Luke s Bethlehem was the first hospital in the United States to install a GE Discovery IGS 730 Hybrid Operating Room, an interventional suite that combines advanced imaging and surgical technology in one operating room. Women s and Children s Services, High-Risk Pregnancy, Neonatal Intensive Care St. Luke s Perinatal Center, with four locations in Allentown, Bethlehem, and Wind Gap, specializes in the diagnosis and treatment of complicated and high-risk pregnancies. The Neonatal Intensive Care Units (each, a NICU ) at St. Luke s Bethlehem and St. Luke s Allentown are designed to provide highly specialized care for multiple birth babies, premature babies and full-term babies with medical problems. SLH is one of the region s busiest obstetrical programs with 3,462 births in fiscal year Obstetrical services are provided at St. Luke s Allentown and St. Luke s Bethlehem. SLH has repeatedly been voted Leading Birth Center by readers of Lehigh Valley Style Magazine and Readers Choice Best Place to Have a Baby by The Morning Call daily newspaper. SLH obstetrical services were also awarded the Blue Distinction Center+ for Maternity Care designation by Capital Blue Cross and Highmark, and St. Luke s Bethlehem s NICU was selected by March of Dimes as its first National NICU Family Site of the Year. BIRTHS AT AREA HOSPITALS FOR FISCAL YEAR ENDED 6/30/15 St. Luke s (Bethlehem and 3,462 Allentown Campuses combined) LVH (Cedar Crest) 4,278 Easton Hospital 418 Sacred Heart Hospital 297 Total 8,158 Source: Truven Data Analytics Through its affiliation with St. Christopher s Hospital for Children in Philadelphia, SLUHN offers a range of pediatric subspecialties, including pediatric cardiology, neurology, orthopaedics, pulmonary, rheumatology, cystic fibrosis, endocrinology, and pediatric surgery. SLUHN also provides pediatric subspecialists in gastroenterology, cardiology and genetics/endocrinology, and nephrology. Ambulatory Services In addition to the tertiary care services described above, the Network provides various other ambulatory, diagnostic and therapeutic services, including ambulatory surgery, audiology, behavioral health, cardiac rehabilitation, clinical vascular laboratory, continence management, diabetes education, durable medical equipment, electroencephalography, endoscopy/gi laboratory, histopathology, intravenous therapy, laboratory, health and fitness, lithotripsy, nutrition counseling, occupational medicine, occupational therapy, physical therapy, renal dialysis, respiratory therapy, sleep medicine, speech therapy and wound care management services, as well as a wide range of adult and pediatric outpatient medical and specialty clinics. The Network provides services in various major outpatient satellite facilities such as St. Luke s North Outpatient Center, St. Luke s Upper Perkiomen Outpatient Center, St. Luke s Wind Gap Medical Center, St. Luke s West End Medical Center in Allentown and St. Luke s Care Now Jim Thorpe, as well as three rural health clinics located in Schuylkill and Carbon counties. A-20

95 Community Health Services St. Luke s Community Health Department s mission is to improve the health status and quality of life of the community, especially for individuals with limited resources. SLUHN provides the administrative leadership, staff and financial support for the Bethlehem Partnership for a Healthy Community, which includes local business, government, educational and community organizations. Services are provided primarily to at-risk and underserved children and adults through the Network s four mobile health/dental vans, at the Network s outpatient clinics and through collaborations with various community agencies. Residencies/Fellowships/Medical Schools TEACHING PROGRAMS SLUHN has a long history of involvement in medical education and serves as a member of the Council of Teaching Hospitals. More than 200 members of the Network s medical staff currently serve as faculty at the Lewis Katz School of Medicine of Temple University and other medical schools. Graduate Medical Education at the doctoral level (physicians, dentists, podiatrists, pharmacists, physical therapists) occurs primarily at St. Luke s Bethlehem, St. Luke s Allentown and St. Luke s Warren through 24 accredited programs, including 17 residency programs and 7 fellowship programs. The Network presently offers 186 resident/fellowship positions and all positions are filled. St. Luke s Bethlehem is a regional campus for 30 Temple University School of Medicine students per year. There are four enrolled classes and 120 enrolled students. The students spend the first year at the Temple University School of Medicine in Philadelphia and the second, third and fourth years at St. Luke s Bethlehem. There are also 16 third-year and 16 fourth-year Temple University School of Medicine students who rotate through St. Luke s Bethlehem each year. The Network is also affiliated with the Philadelphia College of Osteopathic Medicine and hosts approximately 64 rotating students per year. Students from other medical and podiatric schools rotate through SLUHN. SLUHN is accredited by the Pennsylvania Commission for Continuing Medical Education to sponsor CME programs. The institution sponsors more than 500 CME programs each year. Nursing Education St. Luke s School of Nursing offers a 20-month diploma track program. The school is the oldest, continuously operating, hospital-based diploma program in the country. More than 300 applications are typically received for each incoming class of 60 to 70 students. There are currently 169 enrolled students, and 77% of the graduates of the Class of December 2015 were hired by the Network. Advanced Practitioner Education SLUHN provides clinical experiences for the Certified Registered Nurse Anesthetist Program from La Salle University and the Certified Registered Nurse Practitioner Programs from DeSales University, Moravian College, Drexel University and the University of Pennsylvania. The Network also offers advanced practitioner fellowships in Emergency Medicine and Trauma/Surgical Critical Care, hosts Physician Assistant Programs from DeSales University, King s College, Drexel University, Arcadia University and Penn State University and offers a Physician Assistant Observer Program. A-21

96 Allied Health Education SLUHN serves as a major training site for allied health professions. Each year approximately 200 allied health students spend more than 55,000 hours at SLUHN, an average of 275 hours per student. Allied health professionals work in teams to facilitate functionality of the healthcare system through provision of a range of diagnostic, technical, therapeutic and direct patient care and support services. Allied health professionals train in many disciplines, including lab, medical assistants, MRI, nuclear medicine, phlebotomy, physical/occupational therapy, athletic trainers, radiology and respiratory care. Students from 22 colleges, universities and technical institutes are enrolled in the Network s programs. SLUHN also trains students in surgical technology in its own School of Surgical Technology. Pastoral Care Education St. Luke s Bethlehem maintains an accredited Association of Clinical Pastoral Education, Inc. Chaplaincy Residency and Intern Program. Pharmacy Education Programs The Network maintains a Pharmacy Residency, which is a one-year training program for pharmacy graduates to gain additional clinical skills and knowledge in a health system setting. The residents complete rotations in a variety of inpatient and outpatient care areas, including internal medicine, critical care, pediatrics and oncology. Additionally the pharmacy continues to provide introductory and advance practice pharmacy experiences to students from Wilkes University, University of the Sciences Philadelphia College of Pharmacy, and University of Pittsburgh. These experiences are offered at St. Luke s Allentown, St. Luke s Anderson and St. Luke s Bethlehem. Hospital Administration Education Internships The Network hosts interns from various colleges and universities who receive training in hospital management and administration in ambulatory care and inpatient settings. Clinical Trials and Research SLUHN s physicians are involved with approximately 200 clinical research trials and studies a majority focused on cancer, cardiac, neurosurgery, orthopaedic surgery and trauma. RELATIONSHIPS AND AFFILIATIONS SLUHN has a variety of relationships and arrangements with various health care organizations. The following is a summary of the most significant relationships: Philadelphia College of Osteopathic Medicine SLUHN belongs to the Philadelphia College of Osteopathic Medicine Osteopathic Postdoctoral Training Institution ( OPTI ). OPTI membership is a requirement of the American Osteopathic Association for hospitals that sponsor osteopathic residency programs. The goal is to provide a continuum of medical education from medical school through post-graduate training and into faculty development. Approximately 10 PCOM students per month rotate in different clinical departments at both St. Luke s Allentown and St. Luke s Bethlehem. University of Pennsylvania Health System ( UPHS ) SLUHN and UPHS have enjoyed a collaborative relationship in the specialty of trauma care since St. Luke s surgical residents complete a rotation at UPHS Department of Traumatology. A-22

97 Podiatry Affiliations Podiatry students from Temple University, University of Iowa and Ohio Podiatry Schools receive training at SLUHN. St. Christopher s Hospital for Children SLUHN and St. Christopher s Hospital for Children in Philadelphia formed a strategic partnership in 1995 to offer specialized pediatric care to families in the Lehigh Valley area. Pediatric specialties provided at an outpatient location of St. Luke s Bethlehem include neurology, orthopaedics, pulmonary, rheumatology, nephrology, and surgery. Care also is available for children and adults with cystic fibrosis. The School of Medicine of Temple University/St. Luke s University Health Network SLUHN and Temple University School of Medicine ( Temple ) have enjoyed an affiliation involving the training of Temple Medical School students at SLUHN affiliated locations for more than 50 years. On October 7, 2009, SLH and Temple entered into an agreement governing the creation and operation of a medical school campus at St. Luke s Bethlehem. Known as The Medical School of Temple University/St. Luke s University Health Network, it is the first and only regional medical school campus in the greater Lehigh Valley. Enrolled students complete their first year courses at Temple, followed by years two, three and four at St. Luke s Bethlehem. The inaugural class began August 2011 and full enrollment (four classes) of 120 medical students was achieved in August The courses and competencies of the program are identical to the requirements for students training the full four years at Temple s Main Campus in Philadelphia. Students applying to the program are interviewed at St. Luke s Bethlehem by SLUHN physicians who are faculty members at Temple. Introduction to clinical medicine, interpersonal and communication skills, professionalism, multiculturalism, socioeconomic and social and ethical issues are taught throughout the four years as part of the doctoring course. SLUHN s physicians who serve as Temple faculty teach the first year doctoring course in Philadelphia. The first class graduated in May St. Luke s Bethlehem is also a comprehensive clinical teaching campus for Temple. Third and fourth year medical students enrolled at Temple s Philadelphia Main campus may complete their clinical rotations at St. Luke s Bethlehem. Medical Staff MEDICAL AND PROFESSIONAL STAFF SLUHN s medical staff is organized to support the five licensed hospitals in six locations. There are currently 1,348 licensed practitioners appointed to the medical staff, of which 982 are active staff. Approximately 90% of the medical staff is board certified. Of the 10% who are not certified, more than half are eligible for board certification in their specialty. The average age of the active members of the medical staff is 49.6, and 55.6% are age 50 or younger. The active teaching staff members hold faculty appointments at the University of Pennsylvania, Temple University and the Philadelphia College of Osteopathic Medicine. The Network maintains an ongoing recruitment program, and since 2012, an additional 361 active medical staff members have been recruited. Initial credentialing occurs monthly and reappointment to the medical staff occurs on a biennial basis. The following chart depicts the growth by year of the total licensed medical staff: A-23

98 Year Total Number of Licensed Medical Staff 1,007 1, ,000 1,219 1,135 1,323 1,348 The officers of the Medical Staff are elected annually and include a President, Vice President, and Treasurer. The President of the Medical Staff of SLH serves on the Board of Trustees for the Network. The following table summarizes the Top 20 Admitting Practices for St. Luke s Bethlehem, St. Luke s Allentown, St. Luke s Anderson, St. Luke s Miners and St. Luke s Quakertown. A-24

99 FISCAL YEAR 2015 TOP 20 ADMITTING GROUP PRACTICES ST. LUKE S UNIVERSITY HEALTH NETWORK Specialty Admissions % of Total Group/Solo Admissions Practice Primary Care * 11, % Group Primary Care * 1, % Group Specialty * 1, % Group Primary Care * 1, % Group Primary Care * 1, % Group Primary Care * 1, % Group Primary Care * 1, % Group Specialty * 1, % Group Specialty * 1, % Group Primary Care * % Group Specialty * % Group Primary Care % Group Primary Care % Group Primary Care * % Group Specialty % Group Specialty * % Group Specialty * % Group Primary Care % Group Specialty % Group Primary Care * % Group * Employed Practice Inpatient only, 5 PA hospitals, FY2015, no MS-DRG exclusions. Source: Network Decision Support 05/2016 The following table summarizes by medical specialty the number of physicians and average age of the active members of the medical staffs as of June 30, FISCAL YEAR 2015 ACTIVE MEDICAL STAFF ST. LUKE S UNIVERSITY HEALTH NETWORK Specialty Active Staff Average Age Allergy & Immunology 2 53 Anesthesiology Bariatric Surgery 2 42 Cardiology Cardiology Electrophysiology 3 41 Cardiothoracic Surgery 3 40 Cardiothoracic Surgery - Pediatric 2 63 Clinical Neurophysiology 1 56 Colon & Rectal Surgery Critical Care Medicine 8 46 Critical Care, Surgical 5 46 Dentistry General Dentistry Pediatric 1 69 A-25

100 Specialty Active Staff Average Age Dermatology 4 53 Emergency Medicine Endocrinology 4 48 Epilepsy 1 39 Family Medicine Foot and Ankle Surgery 1 43 Gastroenterology General Surgery Geriatric Medicine 4 51 Gynecologic Oncology 2 42 Gynecology 2 59 Hand Surgery 6 47 Hematology 1 58 Hematology/Oncology Hospitalist Infectious Diseases 8 50 Internal Medicine Interventional Cardiology 1 53 Neonatology Nephrology Neurology Neurosurgery 7 46 OB Maternal & Fetal Medicine 4 48 Obstetrics & Gynecology Oncology 1 58 Ophthalmology Oral & Maxillofacial Surgery Orthopaedic Surgery Otolaryngology Pain Management Palliative Medicine 3 52 Pathology - Anatomic 2 65 Pathology - Anatomic/Clin 7 51 Pathology - Clinical 1 50 Pathology - Cytopathology 3 49 Pathology - Dermatopathology 1 55 Pathology Hematology 1 48 Pediatric Anesthesiology 2 55 Pediatric Cardiology Pediatric Cardiothoracic Surgery 2 45 Pediatric Endocrinology 2 47 Pediatric Gastroenterology 1 64 Pediatric Nephrology 1 33 Pediatric Neurology 3 43 Pediatric Orthopaedic Surgery 6 51 Pediatric Pulmonology 1 56 Pediatric Rehabilitation Medicine 1 39 Pediatric Rheumatology 1 44 Pediatric Surgery 2 57 Pediatric Urology 4 57 Pediatrics Pediatrics Developmental 1 63 A-26

101 Specialty Active Staff Average Age Physical Medicine & Rehabilitation Plastic Surgery Podiatry Surgical Psychiatry Psychiatry Child 2 50 Pulmonary Disease Pulmonary Medicine 1 53 Radiation Oncology 6 50 Radiology Radiology Diagnostic 1 49 Radiology Interventional 6 42 Radiology Neuroradiology 4 47 Reproductive Endocrinology 8 53 Rheumatic Diseases 5 51 Sleep Medicine 2 59 Spine Surgery 1 43 Sports Medicine Orthopaedic 2 39 Sports Medicine Primary Care 2 41 Surgical Oncology 3 50 Thoracic Surgery 2 47 Trauma Surgery 3 45 Urogynecology 5 52 Urology Vascular Surgery 5 56 Grand Total Source: Network Medical Staff Credentialing Department Network Human Resources During Fiscal Year 2015, SLUHN maintained a personnel complement of approximately 10,200 employees, with approximately 7,000 full-time equivalent employees. SLUHN is subject to one bargaining agreement at St. Luke s Miners. Approximately 0.6% of the Network s total full-time equivalent employee base is represented by a union. Over the years, SLUHN has experienced an excellent relationship with its employees as demonstrated by positive employee satisfaction survey scores, high retention rates and longevity throughout the organization. Volunteer Support For the Network s third quarter ending March 30, 2016, 1,551 volunteers across SLUHN donated 188,644 hours of their time to provide important services to SLUHN in support of the paid staff, patients, families and visitors across the Network. A-27

102 UTILIZATION Below is a chart that details historical trending of combined hospital utilization statistics for the Network hospitals. SUMMARY OF UTILIZATION OF HOSPITAL SERVICES ST. LUKE'S UNIVERSITY HEALTH NETWORK Combined Utilization 1 Fiscal Year Ended June 30, Eleven months Ended May 31, Licensed Beds: Acute Care Inpatient Rehabilitation TOTAL Total In Service Acute Beds Inpatient Data Acute Admissions 41,915 40,145 41,943 38,484 38,530 Acute Patient Days 182, , , , ,276 Acute Length of Stay Acute Percentage Occupancy 54.72% 55.31% 61.61% 61.74% 65.66% Observation Cases 9,372 10,143 9,461 8,682 8,894 Outpatient Data Ambulatory Surgical Procedures 19,161 19,644 20,005 18,209 19,278 Emergency Room OP and Observation Visits 164, , , , ,280 Other Ambulatory Registrations/Visits 858, , , , ,661 1 Statistical data excludes Nursery and Inpatient Rehabilitation Source: Hospital Records A-28

103 Below is a chart that details historical trending of hospital utilization statistics for the Obligated Group, which includes St. Luke s Bethlehem, St. Luke s Allentown, St. Luke s Anderson and St. Luke s Warren. The chart excludes Obligated Group member St. Luke s Monroe, which is expected to open in fall of SUMMARY OF UTILIZATION OF HOSPITAL SERVICES ST. LUKE'S UNIVERSITY HEALTH NETWORK (OBLIGATED GROUP) Combined Utilization 1,2 Fiscal Year Ended June 30, Eleven months Ended May 31, Licensed Beds: Acute Care Inpatient Rehabilitation TOTAL Total In Service Acute Beds Inpatient Data Acute Admissions 36,720 35,166 36,876 33,809 33,982 Acute Patient Days 161, , , , ,571 Acute Length of Stay Acute Percentage Occupancy 57.63% 59.09% 66.64% 66.72% 72.23% Observation Cases 8,787 9,206 8,587 7,883 7,993 Outpatient Data Ambulatory Surgical Procedures 16,432 16,940 17,216 15,700 16,601 Emergency Room OP and Observation Visits 138, , , , ,196 Other Ambulatory Registrations/Visits 712, , , , ,749 1 Statistical data excludes Nursery and Inpatient Rehabilitation 2 Data does not include operating performance for St. Luke s Monroe which is expected to commence operations in fall of Source: Hospital Records A-29

104 ACCREDITATION AND MEMBERSHIP The Joint Commission awarded three-year accreditations to SLH on December 18, 2013, to St. Luke s Warren on June 22, 2013, to St. Luke s Quakertown on January 30, 2016, to St. Luke s Miners on August 22, 2015 and to St. Luke s Anderson on December 20, The Joint Commission completed an unannounced survey at SLH on May 27, 2016 and an unannounced survey at St. Luke s Warren on June 10, Survey results are expected in the coming months. The Network is a member of Premier, Inc. and related companies for group purchasing and other services and is a member of The Hospital and Health System Association of Pennsylvania, which represents hospitals in the Commonwealth of Pennsylvania. MANAGEMENT DISCUSSION Management of SLUHN is integrated from organizational, financial and clinical aspects. The President s Council led by the CEO includes senior administrative and physician leadership. The Council typically meets twice a month to oversee the Network s management objectives, develop strategy and monitor and improve the Network s clinical and financial effectiveness. As of May 31, 2016, SLUHN and controlled entities total cash and investments has increased by $101,433,000 since June Net long term debt has increased by $122,925,000 for the same time period. ST. LUKE S UNIVERSITY HEALTH NETWORK AND CONTROLLED ENTITIES CASH POSITION AND LONG TERM DEBT (in 000 s) Fiscal Year Ended June 30, Eleven Months Ended May 31, Cash & Investments 1 $89,504 $116,489 $138,399 $162,376 $89,211 Board Designated Funds 245, , , , ,296 Temporarily Restricted Endowment 23,247 29,112 29,023 28,598 28,487 Total Cash & Investments $358,560 $425,891 $475,519 $503,905 $459,993 Long Term Debt, Net of Current Portion $509,838 $502,918 $598,324 $599,331 $606,386 Less: Debt Service Reserve Fund & Trustee Held Funds 91,697 62, , ,244 $65,320 Net Long-Term Debt $418,141 $440,358 $491,230 $489,086 $541,066 Cash & Investments in Excess of Long Term Debt ($59,581) ($14,467) ($15,711) $14,818 ($81,073) Donor Restricted Endowments $27,565 $30,814 $32,765 $34,190 $34,876 (Not Included in Above Cash Total) 1 Cash and investments do not include St. Luke's Health Network Insurance Company, a Reciprocal Risk Retention Group, cash and investments. 2 Unaudited Source: Derived from audited consolidated financial statements for fiscal year 2013 through The summary should be read in conjunction with the financial statements and related notes thereto which are included in Appendix B for the years ended June 30, 2015 and The data for the eleven-months ended May 31, 2016 and 2015 is unaudited, and include, in the opinion of management, all adjustments necessary to summarize fairly the results for such periods. A-30

105 ST. LUKE S UNIVERSITY HEALTH NETWO RK OBLIGATED GROUP CASH POSITION AND LO NG TERM DEBT (in 000 s) Fiscal Year Ended June 30, Eleven Months Ended May 31, Cash & Investments 1 $86,980 $113,981 $135, ,664 $85,386 Board Designated Funds 244, , , , ,409 Temporarily Restricted Endowment 21,904 27,326 28,321 27,897 28,465 Total Cash & Investments $353,153 $419,767 $470,364 $497,579 $454,260 Long Term Debt, Net of Current Portion $509,826 $502,912 $598,324 $599,331 $606,386 Less: Debt Service Reserve Fund & Trustee Held Funds 91,697 62, , ,244 65,320 Net Long-Term Debt $418,129 $440,352 $491,230 $489,086 $541,066 Cash & Investments in Excess of Long Term Debt ($64,976) ($20,585) ($20,867) $8,493 ($86,806) Donor Restricted Endowments $24,556 $27,692 $29,531 $30,847 $31,627 (Not Included in Above Cash Total) 1 Cash and investments do not include St. Luke's Health Network Insurance Company, a Reciprocal Risk Retention Group, cash and investments. 2 Unaudited Source: Derived from audited consolidated financial statements for fiscal year 2013 through The summary should be read in conjunction with the financial statements and related notes thereto which are included in Appendix B for the years ended June 30, 2015 and The data for the eleven-months ended May 31, 2016 and 2015 is unaudited, and include, in the opinion of management, all adjustments necessary to summarize fairly the results for such periods. FINANCIAL INFORMATION Summary of Consolidated Statements of Revenue and Expenses The following Summary of Consolidated Statements of Revenue and Expenses of SLUHN and its controlled entities for fiscal years 2013 through 2015 and the Statements of Revenue and Expenses of the SLUHN Obligated Group for fiscal years 2013 through 2015 have been derived from the consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants. Consolidated balance sheets at June 30, 2015 and 2014 and the related consolidated statements of operations and changes in net assets, and cash flows for the years then ended and notes thereto appear in Appendix B. Data for the eleven-month period ended May 31, 2016 has been derived from unaudited consolidated financial statements including adjustments of a normal recurring nature management believes is necessary to present a fair picture of the financial position and operating results for these periods. The following data should be read in conjunction with the consolidated audited financial statements and notes thereto presented in Appendix B. The sources of revenue as shown in the following tables include net patient service revenue less provision for bad debts (described in the tables as net revenue from patients ), other operating revenue and net assets released from restrictions used for A-31

106 operations. Other operating revenue includes revenue generated from employed physician services, cafeteria sales, nursing school tuition and grants and clinical trial payments. Net assets released from restrictions used for operations include gifts and donations released from the donor restrictions. In the opinion of management, there have been no material adverse changes in SLUHN and its controlled entities financial condition since June 30, 2015, the date the last year s consolidated audited financial statements are available. ST. LUKE S UNIVERSITY HEALTH NETWORK, INC. SUMMARY OF CONSOLIDATED STATEMENTS OF REVENUE AND EXPENSES ($ In Thousands) Fiscal Year Ended June 30, Eleven months Ended May 31, Operating Revenues: Net revenue from patients $ 1,082,569 $ 1,112,101 $ 1,205,412 $ 1,101,695 $ 1,193,867 Other operating revenue 39,712 37,068 32,667 30,159 28,922 Net assets released from restrictions used for operations 1,439 2,473 1,528 1,336 1,779 Other Operating Revenue Allocated to Affiliates (1,670) (1,961) (1,349) (1,249) (1,565) Total revenue 1,122,049 1,149,681 1,238,258 1,131,941 1,223,003 Total operating expenses 1,093,709 1,124,398 1,209,909 1,099,934 1,197,325 Income from operations 28,340 25,282 28,350 32,008 25,679 Total nonoperating gains (losses) 13,208 27,934 2,064 11,929 12,685 Excess of revenue and gains over expenses $ 41,548 $ 53,217 $ 30,413 $ 43,937 $ 38,364 1 Unaudited. Source: Derived from audited consolidated financial statements for fiscal year 2013 through The summary should be read in conjunction with the financial statements and related notes thereto which are included in Appendix B for the years ended June 30, 2015 and The date for the eleven months ended May 31, 2016 and 2015 is unaudited and include, in the opinion of management, all adjustments necessary to summarize fairly the results for such periods. A-32

107 ST. LUKE'S UNIVERSITY HEALTH NETWORK (OBLIGATED GROUP) STATEMENTS OF REVENUE AND EXPENSES ($ In Thousands) Fiscal Year Ended June 30, Eleven months Ended May 31, Operating Revenues: Net revenue from patients $ 836,803 $ 848,564 $ 912,823 $ 834,996 $ 890,201 Other operating revenue 30,625 27,726 24,792 22,602 23,675 Net assets released from restrictions used for operations 1,236 2,358 1,436 1,255 1,627 Other Operating Revenue Allocated to Affiliates (1,670) (1,961) (1,349) (1,249) (1,565) Total revenue 866, , , , ,938 Total operating expenses 787, , , , ,174 Income from operations 79,692 91, , , ,764 Total nonoperating gains (losses) (34,529) (28,162) (56,505) (43,627) (50,066) Excess of revenue and gains over expenses $ 45,163 $ 63,049 $ 55,327 $ 65,445 $ 70,698 1 Unaudited. Source: Derived from audited consolidated financial statements for fiscal year 2013 through The summary should be read in conjunction with the financial statements and related notes thereto which are included in Appendix B for the years ended June 30, 2015 and The date for the eleven months ended May 31, 2016 and 2015 is unaudited and include, in the opinion of management, all adjustments necessary to summarize fairly the results for such periods. INVESTMENTS The Investment Committee, a subcommittee of the Finance Committee of the Board, maintains oversight of the investment portfolios of the members of the Network. The Investment Committee approves the asset allocation of the investment portfolio and reviews the performance of the funds. The Endowment Funds are managed by Vanguard and allocated to maintain a target asset mix of approximately 65% equities and 35% fixed income securities. This allocation can be modified at the discretion of the Board. The Board directs the use of unrestricted investments. Donor restricted funds are maintained in compliance with the expectations of the donor. As of June 30, 2015, total investments (Board-designated, investments restricted by donors and other investments including cash and cash equivalents) based on market value equaled approximately $475.5 million. PENSION The Network has a noncontributory defined benefit pension plan (the Plan ) covering substantially all employees of the Network who were hired prior to January 1, Employees hired after January 1, 2009 are provided with a 401(a) defined contribution plan, pursuant to which SLUHN contributes a percentage of the employee s salary based on the employee s years of service. As of June A-33

108 30, 2015, SLUHN s estimated unfunded liability balance pursuant to the Plan was $63.2 million compared to an unfunded liability of $75.6 million as of June 30, See footnote 15 in the fiscal year 2015 financial statements in Appendix B hereto for a description of the fair value of plan assets and funded status of the pension plan. In January and February 2014, lump sums were offered to vested terminated Plan participants whose annual defined benefit was under $30,000, which resulted in total distributions of $24.9 million. Effective January 1, 2015, the defined benefit pension plan was frozen and employees are provided with the 401(a) defined contribution plan described above. Effective January 1, 2014 the St. Luke s Warren Retirement Plan, which had been frozen since June 2007, was merged into the Plan. Additionally, the St. Luke s Warren 401(k) Plan was frozen December 31, 2013, and all Warren employees became eligible for the Network s 401(a) defined contribution plan effective January 1, The Plan s investments are managed by Vanguard and are broadly diversified in assets which over time provide the opportunity for appreciation and rising levels of income. The precise mix of assets is determined jointly by the Finance Committee and the Investment Committee. The Finance Committee has discretion over the selection of individual securities and the weighting of the investments. See footnote 15 in the fiscal year 2015 financial statements in Appendix B hereto for a description of the investment guidelines established by the Investment and Finance Committees and approved by the Board. Payor Mix SOURCES OF HOSPITAL REVENUES The following table summarizes gross patient service revenues by payor for fiscal year 2015 and for the eleven month period ended May 31, HOSPITAL SERVICE REVENUES BY PAYOR SAINT LUKE S UNIVERSITY HEALTH NETWORK ($ IN THOUSANDS) Combined: Allentown, Bethlehem, Anderson, Quakertown, Miners, Warren FY2015 Percent 11m FY2016 Percent Medicare 3,013, % 3,069, % Medical Assistance 149, % 139, % Blue Shield 297, % 179, % Blue Cross 776, % 782, % Aetna - HMO 236, % 227, % Other Commercial 258, % 928, % Other 630, % 22, % Self-Pay 139, % 132, % Medical Assistance Managed Care 596, % 661, % Workers Compensation 76, % 65, % Auto 84, % 84, % Total $6,261, % $6,295, % A-34

109 HOSPITAL SERVICE REVENUES BY PAYOR SAINT LUKE S UNIVERSITY HEALTH NETWORK OBLIGATED GROUP ($ IN THOUSANDS) Combined: Allentown, Bethlehem, Anderson, Warren FY2015 Percent 11m FY2016 Percent Medicare 2,703, % 2,747, % Medical Assistance 134, % 124, % Blue Shield 276, % 159, % Blue Cross 704, % 716, % Aetna - HMO 210, % 201, % Other Commercial 237, % 826, % Other 559, % 20, % Self -Pay 122, % 117, % Medical Assistance Managed Care 537, % 590, % Workers Compensation 63, % 52, % Auto 78, % 79, % Total $5,626, % $5,636, % Medicare Medicare is a federal reimbursement program and the dominant payor in the market. Payments to St. Luke s Bethlehem, St. Luke s Anderson, St. Luke s Miners, St. Luke s Quakertown and St. Luke s Warren for Medicare inpatient acute care services are made on a prospective basis. Under this program, payments are made at a predetermined specific rate for each discharge based on the patient s diagnosis. The hospitals are reimbursed for capital costs under a fully prospective methodology. Outpatient services are generally reimbursed under the Ambulatory Payment Classification System (APC), a prospective payment system for outpatient services. Excluded from the APC payment methodology is laboratory and some types of therapy. Hospitals are reimbursed for end stage renal disease at a bundled prospective rate. Blue Cross The Network receives reimbursement from various Blue Cross plans in accordance with current agreements between the providers within the Network and the respective Blue Cross plan. Inpatient services rendered to Capital Blue Cross, Highmark Blue Shield and Independence Blue Cross subscribers are generally reimbursed at prospectively determined per case rates. Outpatient payments for Capital Blue Cross, Highmark Blue Shield and Independence Blue Cross are generally based on a predetermined fee schedule. St. Luke s Quakertown is subject to a retroactive adjustment under the current Capital Blue Cross contract. Upon submission of an annual Capital Blue Cross Cost Report, final settlement is based on the relationship of prospective payments in comparison to minimum and maximum payment corridors. A-35

110 St. Luke s Warren has a contractual relationship for all services with Horizon Blue Cross Blue Shield of New Jersey. Medicaid The Pennsylvania Medical Assistance Program generally reimburses acute care hospitals on a prospective payment basis. Pennsylvania s Act 49 of 2010 modernized Pennsylvania s inpatient fee forservice hospital payment system, established enhanced hospital payments through the state s Medical Assistance Managed Care Program and secured additional matching Medicaid funds through the establishment of the Quality Care Assessment. Outpatient services are generally reimbursed on an established fee schedule. The Network also has contractual relationships with Pennsylvania medical assistance managed care plans. In 1995, New Jersey Medicaid began moving Medicaid clients from a traditional fee-for-service health insurance program to a managed care product. In 2011, New Jersey was awarded an 1115 Demonstration Waiver from CMS, which moved all Medicaid beneficiaries except for behavioral healthcare services into a managed care product. Other The Network has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Network under these agreements generally includes prospectively determined rates per discharge, discounts from established charges, prospectively determined daily rates and capitated payment arrangements. FUNDRAISING The Network has a coordinated Development Department for all fundraising activities. In the past 10 years, the Vice President, Development and members of the Network s Development staff have led several major fundraising initiatives, including a comprehensive Network-wide capital campaign and numerous entity-specific campaigns. Recent fundraising highlights include: Total donations and grants during Fiscal Year 2015 of $9.2 million ($8.2 million in new gifts and $1 million in pledge payments). The Warren Campus Building for our Future Campaign has exceeded its original goal by $300,000, with total commitments of $2.3 million. This is the first capital fundraising effort at St. Luke s Warren in decades. Commitments to the Temple/St. Luke s Medical School now exceed $13 million; a total of $4.2 million in scholarships have been awarded since the inaugural class was admitted in The Network s rolling three-year average for new charitable gifts is $14 million per year (Fiscal Year ); over the past 10 years (Fiscal Year 2007 to present), the Network has received $133.4 million in total donations and grants. In Fiscal Year 2015, SLUHN received $1.7 million in new endowment gifts; the current market value of the Network s charitable endowment is $130.5 million (as of December 31, 2015). A-36

111 Interest income from this endowment supports a wide-range of projects and initiatives, including a robust community health and wellness initiative. The development staff continues to implement best practices recommended by the Advisory Board s Council on Philanthropy, the Association of Healthcare Philanthropy, the Association of Fundraising Professionals and the American Association of Medical College s Group on Institutional Advancement. The following table reflects contributions, both restricted and unrestricted, received by campus/entity for Fiscal Year 2015: Fiscal Year 2015 (07/01/14 06/30/15) Total Philanthropy = $9,172,006 Entity Cash Pledge Balances St. Luke s Allentown St. Luke s Anderson St. Luke s Bethlehem Medical School St. Luke s Miners St. Luke s Monroe St. Luke s Quakertown St. Luke s VNA St. Luke s Warren $309,959 $493,130 $3,070,788 $988,744 $150,400 $5,000 $84,795 $1,663,532 $508,421 $9,408 $21,233 $678,498 $167,538 $723,565 $ 0 $21,187 $141,876 $133,932 Total Philanthropy $7,274,769 $1,897,237 LONG-TERM INDEBTEDNESS OF THE OBLIGATED GROUP Under the Master Trust Indenture, all of the Bonds previously issued by the Northampton County General Purpose Authority (the Northampton Authority ), the Lehigh County General Purpose Authority (the Lehigh Authority ), the Quakertown General Authority (the Quakertown Authority ), the New Jersey Health Care Facilities Financing Authority (the New Jersey Authority ) and the Pocono Mountains Industrial Park Authority on behalf of the Obligated Group or a Member thereof, are secured by notes issued by the Obligated Group and are set forth below: The Quakertown Authority issued its approximately $22,000,000 original aggregate principal amount 1996A Pooled Financing Loan for SLH (the Quakertown Bonds or Series 1996 Bonds ). The remaining outstanding Quakertown Bonds, in the approximate principal amount of $1,815,000, are scheduled to be redeemed in full on July 1, 2016, pursuant to an optional redemption directed by SLH. A-37

112 The Lehigh Authority issued $266,310,000 original aggregate principal amount of its Hospital Revenue Bonds, Series 2007 (Saint Luke s Hospital at Bethlehem, Pennsylvania Project) (the Series 2007 Bonds ) for SLH. The Northampton Authority issued $175,000,000 original aggregate principal amount of its Hospital Revenue Bonds, Series A of 2008 (Saint Luke s Hospital Project) (the Series 2008 Bonds ) for SLH and St. Luke s Anderson. It is anticipated that the Series 2008 Bonds will be advance refunded by the Series 2016 Bonds. The Northampton Authority issued $24,415,000 original aggregate principal amount of its Hospital Revenue Bonds, Series A of 2010 (Saint Luke s Hospital Project) (the Series 2010A Bonds ), $10,390,000 original aggregate principal amount of its Hospital Revenue Bonds, Series B of 2010 (Saint Luke s Hospital Project) (the Series 2010B Bonds ) and $34,925,000 original aggregate principal amount of its Hospital Revenue Bonds, Series C of 2010 (Saint Luke s Hospital Project) (the Series 2010C Bonds and, together with the Series 2010A Bonds and the Series 2010B Bonds, the Series 2010 Bonds ) for SLH and St. Luke s Anderson. The Northampton Authority issued $29,300,000 original aggregate principal amount of its revenue bonds (the Series 2010D Private Placement Bonds ), for SLH, which were privately placed with TD Bank, N.A. The Northampton Authority issued $25,000,000 original aggregate principal amount of its Hospital Revenue Bonds, Series 2013A (Saint Luke s Hospital Project) (the Series 2013A Bonds ) and $40,000,000 original aggregate principal amount of its Variable Rate Hospital Revenue Bonds, Series 2013B (Saint Luke s Hospital Project) (the Series 2013B Bonds and, together with the Series 2008 Bonds, the Series 2010 Bonds, the Series 2013A Bonds and the Series 2010D Private Placement Bonds, the Northampton Bonds ) for SLH and St. Luke s Anderson. The New Jersey Authority issued $37,410,000 original aggregate principal amount of its Refunding Bonds, St. Luke s Warren Hospital Obligated Group Issue, Series 2013 (the New Jersey Bonds or the Series 2013 Bonds ) for St. Luke s Warren. The Pocono Mountains Industrial Park Authority issued $80,000,000 original aggregate principal amount of its Hospital Revenue Bonds, Series 2015A (Saint Luke s Hospital - Monroe Project) (the Pocono Bonds ) for St. Luke s Monroe. The Lehigh Authority issued $12,500,000 original aggregate principal amount of its Hospital Revenue Bonds, Series 2015A (Saint Luke s Hospital Project) (the Series 2015A Bonds ) and $12,500,000 original aggregate principal amount of its Hospital Revenue Bonds, Series 2015B (Saint Luke s Hospital Project) (the Series 2015B Bonds and, together with the Series 2007 Bonds and the Series 2015A Bonds, the Lehigh Bonds ). Upon issuance of the 2016 Bonds, the Obligated Group will have approximately $599 million in aggregate principal amount of parity obligations outstanding under the Master Trust Indenture, consisting of the notes securing the 2016 Bonds, the Northampton Bonds, the Lehigh Bonds, the New Jersey Bonds and the Pocono Bonds. A-38

113 Principal Balance Outstanding (1) Balloon Payment or Purchase Obligations (3) Final Maturity MTI Parity Obligation Long-Term Debt Variable Rate Series 2007 Bonds $123,365,000 No 2042 Y Series 2013B Bonds 40,000,000 Series 2015A Bonds 12,500,000 Series 2015B Bonds 12,500,000 Subtotal Variable Rate $188,365,000 Yes mandatory tender on August 15, 2020 Yes mandatory tender on August 15, 2024 Yes mandatory tender on August 15, Y 2032 Y 2032 Y Long-Term Debt Fixed Rate Series 2010A Bonds $11,260,000 No 2022 Y Series 2010B Bonds 10,390,000 No 2033 Y Series 2010C Bonds 9,925,000 Yes mandatory tender on August 15, Y Series 2010D Private Placement Bonds 20,765,654 Yes mandatory tender on May 5, Y Series 2013 Bonds 37,410,000 No 2043 Y Series 2013A Bonds 25,000,000 No 2033 Y Series 2015A Pocono Bonds 80,000,000 No 2045 Y Series 2016 Bonds 215,600,000 (2) No 2046 Y Wells Fargo Equipment Finance, Inc. - December ,612,540 No 2018 N Bank of America, N.A. Note Payable - November ,497,894 No 2021 N Bank of America, N.A. Note Payable - October ,617,699 No 2022 N Subtotal Fixed Rate $473,078,787 Total Debt $661,443,787 (1) As of May 31, Excludes Quakertown Bonds scheduled for redemption in full on July 1, Excludes Series 2008 Bonds anticipated to be advance refunded in whole by the Series 2016 Bonds. (2) Preliminary, subject to change. (3) Mandatory tender options described may be at the option of the holder, which may or may not be exercised by the holder on the date described. A-39

114 Management of SLUHN regularly evaluates market conditions with respect to potential opportunities for debt service savings, including possible restructuring of its existing bond debt and its interest rate swap agreements. Management has retained a financial advisor, Echo Financial Products, LLC, to advise it in connection with the outstanding bonds and hedges. INTEREST RATE SWAP AGREEMENTS SLH is party with Merrill Lynch Capital Services, Inc. ( Merrill ) to two floating to fixed interest rate swaps with notional amounts totaling $260.5 million and maturity dates ranging from August 2033 to August The swaps were entered into by SLH in order to eliminate unpredictable variability of interest rate payments, limit exposure to increases in short-term interest rates and significantly decrease borrowing costs (relative to a traditional fixed rate issuance). The fair market value of the floating to fixed interest rate swaps as of May 31, 2016, based on information from Merrill, is negative $84,056,708. In December 2007, SLH executed a total return swap with Merrill on a $76 million portion of the outstanding Series 2007 Bonds term bond maturing in In September 2009, SLH executed a total return swap with Merrill on a $24 million portion of the outstanding Series 2007 Bonds term bond maturing in The fair market value of the total return swaps as of May 31, 2016, based on information from Merrill, is negative $17,694,906. INSURANCE Professional Liability. The Network holds a majority ownership interest in St. Luke s Health Network Insurance Company, a Reciprocal Risk Retention Group (the RRRG ), which is organized as a Vermont corporation. On January 1, 2005, the RRRG converted from a nonprofit risk retention group to a taxable reciprocal risk retention group. As a reciprocal risk retention group, the RRRG is permitted to provide primary medical professional liability coverage on an occurrence basis to non-employed physicians and unaffiliated physician practices. Under this structure, only members of the Network have been issued Class A subscriber units. The Class A members of the reciprocal retention group maintain control over the RRRG. Class B subscriber interests are issued only to qualified non-employed physicians and unaffiliated physician practices. The Network is covered by the RRRG for claims-made primary medical professional liability insurance with limits of $500,000 for each medical incident and $2,500,000 in the aggregate for the Network s hospitals; primary limits of $1,000,000 for each medical incident and $4,500,000 in the aggregate for non-mcare Fund eligible entities; $1,000,000 for each medical incident and $3,000,000 in the aggregate for non-mcare eligible professional employees statutorily required to maintain professional liability insurance; and limits of $500,000 for each medical incident and $1,500,000 in the aggregate for the Network s insured Mcare Fund eligible practitioners. The Network participates in the Pennsylvania statutory Medical Care Availability and Reduction of Error Fund (Mcare) which provides coverage in excess of the RRRG s primary coverage with limits of $500,000 each medical incident and $1,500,000 aggregate. This coverage applies to Mcare-eligible entities and practitioners. The Network s non-mcare Fund eligible Pennsylvania facilities and employed practitioners and New Jersey hospital facility and employed practitioners are covered by the RRRG for claims-made professional liability, with limits of $1,000,000 each medical incident and $4,500,000 in the aggregate. A-40

115 General Liability. The Network is covered by an occurrence-based primary commercial general liability policy issued by the RRRG with the following limits: $1,000,000 each claim; $3,000,000 aggregate (including Products/Completed Operations and Personal and Advertising Injury); $1,000,000 Fire Damage (per occurrence). In each case, coverage is subject to the applicable policy terms, conditions and exclusions Workers Compensation and Employers Liability. The Network self-insures its primary Pennsylvania and New Jersey Workers Compensation and Employers Liability exposures with selfinsured retention levels of $750,000 and $500,000 per occurrence, respectively. Excess workers compensation coverage is provided to the Network by a commercial excess workers compensation carrier at statutory limits, subject to the applicable policy terms, conditions and exclusions. Property. The Network maintains an all-risk property policy that covers all of its buildings and contents, subject to the applicable policy terms, conditions and exclusions. The policy also provides business interruption coverage for covered losses. Other Coverage. The Network maintains directors and officers liability (including employment practices liability), fiduciary liability, crime, special crime, inland marine, automobile liability, nonowned aircraft liability and heliport liability coverages, and network security, cyber liability, and privacy coverages, subject to the applicable policy terms, conditions and exclusions. Excess Liability Coverage. The RRRG also provides Network entities with excess medical professional liability coverage on a claims-made basis, above the applicable RRRG primary coverage layer. The RRRG excess professional liability coverage layer is $4,000,000 for each medical incident and $4,000,000 in the aggregate (in excess of the primary and Mcare limits, as applicable). Physicians and other practitioners statutorily required to have separate coverage limits are excluded from the excess professional liability coverage. The Network also purchases the following additional layers of umbrella/excess coverage: first layer umbrella/excess professional liability insurance from Berkley Med with limits of $10,000,000 for each medical incident and $20,000,000 in the aggregate above the underlying RRRG excess medical professional coverage; second layer umbrella/excess liability coverage from Allied World Assurance Company with limits of $10,000,000 per occurrence and $10,000,000 aggregate; and third layer umbrella/excess liability coverage from National Fire & Marine Ins. Co. with limits of $25,000,000 per occurrence and $25,000,000 aggregate, above the underlying coverages for general liability, automobile liability, non-owned aircraft liability and heliport liability and employers liability coverages. In each case, coverage is subject to the applicable policy terms, conditions and exclusions. ELECTRONIC HEALTH RECORDS The Network has committed to implementing an electronic health record system that includes a fully integrated revenue cycle component. The project went live in January 2016 and will take another three years to complete and fully optimize. The project has a total budget of $100 million, of which a $60 million portion was financed through a $30,000,000 private bank loan in November 2014 and a $30,000,000 private bank loan in October 2015, each with Bank of America, N.A. LITIGATION SLUHN is subject to medical malpractice lawsuits, contractual lawsuits and other legal actions in the ordinary course of business. Some of these actions may involve large demands, as well as substantial defense costs. SLUHN s professional and general liability insurance does not cover all claims against SLUHN and its affiliates, and it may not continue to be available at a reasonable cost to maintain at A-41

116 adequate levels. Management of the Network cannot predict the outcome of current or future legal actions against SLUHN and its affiliates or the effect that judgments or settlements in such matters may have on SLUHN or on SLUHN s insurance costs. Additionally, all professional and general liability insurance SLUHN purchases is subject to policy limitations. If the aggregate limit of any of SLUHN s professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period. Any losses not covered by or in excess of the amounts maintained under insurance policies will be funded from SLUHN s working capital. Furthermore, one or more of SLUHN s insurance carriers could become insolvent and unable or unwilling to fulfill its or their obligations to defend, pay or reimburse SLUHN when those obligations become due. In that case or if payments of claims exceed SLUHN s estimates or are not covered by SLUHN s insurance, it could have a material adverse effect on SLUHN s business, financial condition, results of operations or cash flows. Except as described in this paragraph, although the results of these claims and lawsuits cannot be predicted with certainty, management of the Network believes that the ultimate resolution of these claims and lawsuits will not have a material effect on SLUHN s business, financial condition or results of operations. REGULATORY ISSUES The health care industry is subject to numerous laws and regulations of federal, state and local governments. Compliance with these laws and regulations can be subject to future government review and interpretation, as well as regulatory actions. Recently, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations, which could result in the imposition of significant fines and penalties as well as significant repayments for patient services previously billed. SLUHN believes that it has an effective compliance program that is responsive to the changing needs of its Network given the complexity of various regulatory requirements. The Network s compliance program is designed to support a culture of compliance and ethical behavior throughout the organization. The Network is subject to certain reviews initiated by governmental agencies in the ordinary course of business. Although the results of these reviews cannot be predicted with certainty, management of the Network believes that the ultimate resolution of these ordinary course reviews will not have a material effect on its business, financial condition or results of operations. A-42

117 Appendix B Consolidated Audited Financial Statements of the St. Luke s Health Network, Inc., and Controlled Entities for Fiscal Years ended June 30, 2015 and 2014

118 [This Page Intentionally Left Blank]

119 St. Luke s Health Network, Inc. and Controlled Entities Consolidated Financial Statements and Supplemental Information June 30, 2015 and 2014

120 St. Luke s Health Network, Inc. and Controlled Entities Index June 30, 2015 and 2014 Page(s) Report of Independent Auditors Consolidated Financial Statements Balance Sheets...3 Statements of Operations...4 Statements of Changes in Net Assets...5 Statements of Cash Flows...6 Notes to Financial Statements Consolidating Supplemental Information Balance Sheets Statements of Operations

121 Independent Auditor's Report To The Board of Trustees St. Luke s Health Network, Inc. We have audited the accompanying consolidated financial statements of St. Luke s Health Network, Inc. and it s controlled entities (collectively, the Network ), which comprise the consolidated balance sheets as of June 30, 2015 and 2014, and the related consolidated statement of operations, changes in net assets and their cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the 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 our 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, we consider internal control relevant to the Network'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 Network's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above are presented fairly, in all material respects, the financial position of St. Luke s Health Network, Inc. and it s controlled entities at June 30, 2015 and 2014, and the results of their operations, changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA T: (267) , F: (267) ,

122 Other Matters Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves and other additional procedures, in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated, in all material respects, in relation to the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual companies and is not a required part of the consolidated financial statements. Accordingly, we do not express an opinion on the financial position, results of operations and cash flows of the individual companies. October 28,

123 St. Luke s Health Network, Inc. and Controlled Entities Consolidated Balance Sheet June 30, 2015 and Assets Current Cash and cash equivalents $ 60,422,285 $ 79,281,175 Patient accounts receivable, net of allow ance for uncollectible accounts of $49,788,712 and $45,097,227, respectively 176,643, ,064,314 Other accounts receivable 7,726,199 12,555,169 Investments 133,288,959 88,431,526 Inventories 17,095,875 16,104,632 Prepaid expenses 22,692,785 21,107,295 Estimated third-party payor settlements 3,576,029 - Total current assets 421,445, ,544,111 Assets limited as to use, net of current portion Funds held by trustee 75,327,819 30,694,585 Under bond indenture 31,766,103 31,865,328 Board designated funds 308,097, ,290, ,190, ,850,206 Property and equipment, net 652,718, ,387,369 Goodw ill, net 35,146,319 34,886,729 Investments temporarily restricted as to use 29,023,294 29,112,021 Investments permanently restricted as to use 32,764,530 30,813,985 Deferred financing costs 7,877,302 6,772,124 Annuity contracts 18,044,259 15,347,341 Other assets 44,173,185 39,786,428 Total assets $ 1,656,383,776 $ 1,547,500,314 Liabilities and Net Assets Current Accounts payable $ 74,397,259 $ 61,182,819 Accrued salaries, w ages and taxes 36,175,181 29,446,719 Accrued vacation and bonus 42,011,374 35,520,445 Current portion of self insurance reserves 21,011,481 19,404,786 Deferred income 4,310,200 4,441,143 Advance from third-party payors 2,398,101 2,398,101 Patient credit balances 4,658,982 10,935,159 Current portion of long-term debt 16,624,267 11,758,905 Current portion of accrued compensation payable 3,705,184 3,812,853 Accrued interest on long-term debt 11,569,796 10,093,300 Other current liabilities 11,018,197 14,808,683 Estimated third-party payor settlements - 5,431,319 Total current liabilities 227,880, ,234,232 Long-term debt, net of current portion 598,324, ,918,395 Asset retirement obligation 3,561,936 3,561,211 Accrued compensation payable 88,924,423 91,508,461 Self insurance reserves 42,659,674 39,397,596 Other noncurrent liabilities 14,617,591 13,637,798 Sw ap contracts 80,196,539 67,932,360 Total liabilities 1,056,164, ,190,053 Net assets Unrestricted net assets 527,615, ,604,391 Temporarily restricted net assets 39,838,984 37,891,885 Permanently restricted net assets 32,764,529 30,813,985 Total net assets 600,219, ,310,261 Total liabilities and net assets $ 1,656,383,776 $ 1,547,500,314 The accompanying notes are an integral part of these consolidated financial statements. 3

124 St. Luke s Health Network, Inc. and Controlled Entities Consolidated Statement of Operations Years Ended June 30, 2015 and Revenues and gains Patient service revenue (net of contractual allowances and discounts) $ 1,298,083,000 $ 1,235,483,095 Provision for bad debts (92,670,825) (123,382,063) Net patient service revenue less provision for bad debts 1,205,412,175 1,112,101,032 Other operating revenue and gains 31,318,732 35,106,782 Net assets released from restrictions used for operations 1,527,519 2,472,852 Total revenue and gains 1,238,258,426 1,149,680,666 Operating expenses Salaries and employee benefits 671,070, ,842,716 Supplies and other 438,201, ,429,721 Depreciation and amortization 74,529,394 73,569,540 Interest 26,107,631 24,556,392 Total expenses 1,209,908,891 1,124,398,369 Income from operations 28,349,535 25,282,297 Nonoperating gains (losses) Unrestricted investment income from assets limited as to use 7,441,517 6,971,040 Realized gains on unrestricted investment 9,752,491 1,969,155 Gifts, grants and bequests 237, ,321 Unrestricted investment income from restricted net assets 255, ,059 Income from equity method investments 2,094,866 17,677,259 (Loss)/Gain on disposal of property and equipment (713,277) 1,991,700 Restructuring costs (661,179) (2,317,206) Donations to other organizations (9,695,804) (606,785) Change in fair value of derivative instruments (4,756,192) 1,888,763 Goodwill impairment (1,891,654) (15,031) Nonoperating gains 2,063,563 27,934,275 Excess of revenue and gains over expenses 30,413,098 53,216,572 Net assets released from restrictions used for purchase of property and equipment 1,573,513 9,322,002 Contribution of building 31,809 - Other changes in unrestricted assets (6,512,096) (2,387,937) Loss on sale of joint venture (1,353) (19,312) Pension adjustment (34,249,808) (23,621,237) Change in unrealized gains on investments (8,181,605) 31,831,993 Change in fair market value of interest rate swaps (6,062,092) (2,879,088) (Decrease) Increase in unrestricted net assets $ (22,988,534) $ 65,462,993 The accompanying notes are an integral part of these consolidated financial statements. 4

125 St. Luke s Health Network, Inc. and Controlled Entities Consolidated Statements of Changes in Net Assets Years Ended June 30, 2015 and Unrestricted net assets Excess of revenue and gains over expenses $ 30,413,098 $ 53,216,572 Net assets contributed and released from restrictions used for purchase of property and equipment 1,573,513 9,322,002 Contribution of building 31,809 - Loss on sale of joint venture (1,353) (19,312) Pension adjustment (34,249,808) (23,621,237) Other changes in unrestricted assets (6,512,096) (2,387,937) Change in unrealized gains on investments (8,181,605) 31,831,993 Change in fair market value of derivatives (6,062,092) (2,879,088) (Decrease) Increase in unrestricted net assets (22,988,534) 65,462,993 Temporarily restricted net assets Contributions received 3,452,380 5,569,615 Net realized/unrealized gains on investments 868,062 7,265,417 Net assets released from restrictions (2,373,343) (9,388,545) Increase in temporarily restricted net assets 1,947,099 3,446,487 Permanently restricted net assets Contributions received 1,417,664 2,836,308 Net realized/unrealized gains on investments 532, ,008 Increase in permanently restricted net assets 1,950,544 3,249,316 (Decrease) Increase in net assets (19,090,891) 72,158,796 Net assets Beginning of year 619,310, ,151,465 End of year $ 600,219,370 $ 619,310,261 The accompanying notes are an integral part of these consolidated financial statements. 5

126 St. Luke s Health Network, Inc. and Controlled Entities Consolidated Statements of Cash Flows Years Ended June 30, 2015 and Cash flows provided by operating activities Change in net assets $ (19,090,891) $ 72,158,796 Adjustments to reconcile change in net assets to net cash from operating activities Loss (Gain) on disposal of equipment 713,277 (1,991,700) Depreciation and amortization 74,529,394 73,569,540 Equity gains from joint ventures and partnerships (2,094,866) (17,766,404) Change in unrealized gains on unrestricted investments 8,181,605 (31,831,993) Net realized gain on restricted investments (4,139,604) (152,502) Net unrealized loss (gain) on restricted investments 2,738,662 (7,525,923) Net realized gain on unrestricted investments (9,752,491) (1,969,155) Goodwill impairment 1,891,654 15,031 Pension adjustments 34,249,808 23,621,237 Swap contracts 12,264, ,324 Other changes in unrestricted assets 6,183,217 2,224,120 Restricted contributions received (4,870,044) (3,405,923) Provision for bad debts 92,670, ,382,063 Change in cash due to changes in operating assets and liabilities Patient accounts receivable (68,350,519) (124,094,286) Other receivables 4,828,970 (4,632,240) Inventories (991,243) 1,915,587 Prepaid expenses (1,585,490) (3,167,875) Other assets (10,091,367) (13,672,298) Accounts payable and accrued liabilities (14,926,498) (2,285,532) Patient credit balances (6,276,177) (7,376,948) Net estimated third-party payor settlements (9,007,348) (7,588,604) Deferred income (130,943) 696,488 Net cash provided by operating activities 86,944,110 71,111,803 Cash flows used by investing activities Purchases of property, plant and equipment (95,786,466) (76,138,800) Distributions from equity method investments - 7,154,733 Proceeds from sale of equipment 930,439 36,635 Increase in assets whose use is limited (62,687,516) (32,513,059) Decrease in assets whose use is limited 99,225 29,137,513 (Purchases) sales of investments, net (53,499,914) 6,304,595 Net cash used in investing activities (210,944,232) (66,018,383) Cash flows provided by (used in) financing activities Proceeds from issuance of long-term debt 114,966,649 5,851,288 Repayments of long-term debt (14,695,461) (11,955,431) Proceeds from restricted contributions 4,870,044 3,405,923 Net cash provided by financing activities 105,141,232 (2,698,220) (Decrease) Increase in cash and cash equivalents (18,858,890) 2,395,200 Cash and cash equivalents Beginning of year 79,281,175 76,885,975 End of year $ 60,422,285 $ 79,281,175 Construction in progress included in accounts payable $ 7,953,390 $ 2,734,720 Cash paid for interest $ 24,898,736 $ 23,868,761 The accompanying notes are an integral part of these consolidated financial statements. 6

127 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and Organization, Mission and Basis of Presentation St. Luke s Health Network, Inc. ( Parent ) is a not-for-profit, tax-exempt corporation which controls the following acute care hospitals, organization of physician practices, and other health care related organizations serving the western New Jersey and Eastern Pennsylvania regions. St. Luke s Hospital of Bethlehem, Pennsylvania ( St. Luke s Hospital ), which includes the following entities: St. Luke s Health Network Insurance Company ( SLRRG ) St. Luke s Hospital of Bethlehem, Pennsylvania Ambulatory Surgery, Ltd. Cancer Immunotherapies, LLC St. Luke s Eighth & Eaton Holding s, Inc. Eighth & Eaton Professional Building, L.P. St. Luke s HomeStar Services, LLC St. Luke s AirMed, LLC Pocono MRI Imaging & Diagnostic Center, LLC St. Luke s VNA ( VNA ), which includes the following two entities: VNA Home Health and Hospice HomeStar Medical Equipment and Infusion Services St. Luke s Quakertown Hospital St. Luke s Physician Group, Inc. St. Luke s Emergency and Transport Services Quakertown Rehabilitation Center DBA St. Luke s Rehabilitation Center New Valley Rehab, LLC Carbon-Schuylkill Community Hospital, Inc. DBA St. Luke s Miners Memorial Medical Center ( MMMC ) St. Luke s Hospital - Anderson Campus St. Luke s Warren Hospital Inc. Warren PA Professional Alliance, Inc. St. Luke s Warren Hospital Foundation, Inc. 7

128 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 St. Luke s Warren Physician Group. Hillcrest Emergency Services, Inc Two Rivers Enterprises, Inc. Hillcrest Management Services Organization, Inc. The Parent and controlled entities are referred to collectively as the St. Luke s Health Network, Inc. (the Network ). The Network also participates in various joint ventures and partnerships. These arrangements enable the Network to provide healthcare services to the broader community through involvement in other healthcare organizations. See Note 8 for additional information on investments in joint ventures and partnerships. 2. Summary of Significant Accounting Policies Basis of Accounting The consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America and in accordance with the American Institute of Certified Public Accountants Audit and Accounting Guide, Health Care Organizations, and other pronouncements applicable to not-for-profit healthcare organizations. Basis of Consolidation The consolidated financial statements include the accounts of the Parent and its controlled entities. The Parent exercises control over its controlled entities through the appointment of members to the controlled entities Board of Trustees ( Board ). The accounts of the controlled entities have been included in the consolidated financial statements to reflect the results of operations of entities under common control. All significant intercompany balances and transactions have been eliminated. The consolidating supplemental schedules have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. This is the same basis of presentation as the Network Consolidated Financial Statements Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash management funds with original maturities of three months or less, excluding amounts whose use is limited by Board designation or other arrangements under trust agreements. The carrying value of cash and cash equivalents approximates market value. Investments and Investment Income Investments are measured at fair value in the balance sheet. Investment income or loss (including interest, dividends and realized gains and losses on unrestricted investments), is included in the excess of revenues over expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses on unrestricted investments are reported below the excess of revenues over expenses within net 8

129 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 asset changes. Realized and unrealized gains and losses on donor restricted investments are reported as changes in temporarily and permanently restricted net assets as stipulated by the donor. The Network conducted an analysis and evaluation of securities for any potential other than temporary impairment of investments. If the decline in the market value of an investment below cost was deemed to be other than temporary, an adjustment would be made to reduce the cost basis of the investment(s) and a realized loss would be recorded in the excess of revenue over expenses. The Network had an other than temporary impairment adjustment of $300,000 for the year ended June 30, 2015 and had no adjustments for the year ended June 30, Investment income and the change in unrealized gains (losses) on investments was comprised of the following for the years ended June 30: Interest and dividend income are included within unrestricted investment income from assets limited as to use, other operating revenue and gains and unrestricted net income from restricted net assets. Realized gain on sale of investments is included within realized gains on unrestricted investments, income from equity method investments, investments temporarily restricted to use and investments permanently restricted to use. Net unrealized (losses) gains on investments are included within the changes in unrestricted net assets Interest and dividend income $ 9,674,749 $ 8,590,878 Realized gains on sales of investments $ 14,417,766 $ 3,600,296 Net unrealized (losses) gains on investments $ (8,181,605) $ 31,831,993 Assets Limited as to Use Assets limited as to use primarily include assets held by trustees under indenture agreements and designated assets set aside by the board of trustees for future capital improvements, over which the Board retains control and may at its discretion subsequently use for other purposes. Inventories Inventory is valued at average cost, net of reserves for obsolescence. Nonstock or non-storeroom inventory is valued at the last purchase price or last in first out (LIFO). Property and Equipment Property and equipment acquisitions are recorded at cost for purchased items and fair value at the date of contribution for contributed items. Depreciation is expensed over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the consolidated statements of operations. Interest costs incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of constructing those assets. Upon sale or retirement, the cost and related accumulated depreciation of such assets are removed from the accounts and any resulting gain or loss realized is credited or charged to income for the period. Expenditures for maintenance and repairs are expensed as incurred. Significant renewals, improvements and betterments are capitalized. 9

130 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 Long Lived Assets The Network evaluates the carrying value of its long lived assets for impairment when impairment indicators are identified. In the event that the carrying value of a long-lived asset is not supported by the fair value, the Network will recognize an impairment loss for the difference. Fair value is based on available market prices or discounted cash flows. Gifts of long-lived assets such as land, building, or equipment are reported as unrestricted support, and are excluded from the excess of revenue and gains 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 longlived assets are reported as restricted support. Absent explicit donor stipulations about how long these long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Goodwill Goodwill recorded in the accompanying consolidated balance sheets represents the excess of the fair market value of assets acquired over the purchase price. Management reviews goodwill for impairment annually or when events and circumstances indicate that the carrying amount may not be recoverable. Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of bonds and are amortized over the life of the related debt using the effective interest method. Annuity Contracts and Accrued Compensation Payable The Network maintains a deferred compensation plan which provides supplemental retirement benefits for former officers and key management personnel. The Network has purchased annuity contracts to fund these benefits. These annuity contracts are included in the consolidated balance sheets at their current surrender value. Self-Insurance Reserves Accrued insurance costs consist of discounted reserves for reported and incurred-but-not-reported (IBNR) claims related to medical malpractice incidents and the Network's self-insured retention for workers' compensation and employee health insurance incidents. For the years ended June 30, malpractice reserves and workers compensation reserves are discounted using a discount rate of 4.69% and 4.69%, respectively, in 2015 and 4.69% and 4.69%, respectively, in Gift Annuities The Hospital receives assets from donors in exchange for the promise to make fixed payments, over a specified period of time, to a recipient as designated by the donor. The Hospital discounts (this past year the discount rate averaged 1.25%) the liability for annuity contracts based on the annuitant s estimated life expectancy. These amounts are included in other noncurrent liabilities on the balance sheets. Any restricted assets remaining at the end of the annuity contract are placed into an endowment fund and the earnings on those funds are available for the general operations of the Network. Any unrestricted assets remaining at the end of the annuity contract are available for the general operations of the Network. The Network revalues the liability for annuity contracts quarterly and the related change is included as a change in net assets. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets include assets whose use by the Network has been limited by donors to a specific time period or purpose. Also included in temporarily restricted net assets are unrecognized gains and losses on permanently restricted net assets. Permanently restricted net assets have been restricted by donors to be maintained by the Network in perpetuity. 10

131 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 Donor Restricted Gifts Unconditional promises to give cash and other assets to the Network 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 and conditions have been met. 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 the purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted gifts, grants and bequests in the accompanying consolidated financial statements. Net Patient Service Revenue The Network has agreements with third-party payors who provide payments to the Network at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted from established charges and per diem payments. 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. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined or as years are no longer subject to such audits, reviews and investigations. Included in net patient service revenue are changes in liability adjustments from third party payors with an overall net favorable adjustment of $5,384,337 for 2015 as compared to a favorable adjustment of $8,172,948 for In July 2010 the Pennsylvania General Assembly passed the Public Welfare Code amendment (Act 49) which was signed into law by the Governor, establishing a new program referred to as Medicaid Modernization. The program was subsequently approved by the federal Centers for Medicare and Medicaid Services. The program is designed to provide additional funding to Pennsylvania hospitals for the purpose of enhancing access to quality healthcare for qualifying Medicaid beneficiaries, helping to partially mitigate the losses incurred by hospitals resulting from low reimbursement rates. To accomplish this objective, for fiscal years 2011 through 2015, the program provides participating hospitals with improved inpatient fee-for-service hospital payments, establishes enhanced hospital payments through Medicaid managed care organizations (MCOs), and secures additional federal matching Medicaid funds through a Quality Care Assessment, under which hospitals pay the state a percentage of their net inpatient revenue for fiscal year The cost of the assessment due to the state was $12,421,533 for years ended June 30, 2015 and The Network recognized additional net patient service revenue of $4,729,827 and $6,503,909 for the years ended June 30, 2015 and 2014, respectively, from the Pennsylvania Medicaid Modernization program. 11

132 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 Patient service revenue, net of contractual allowances, discounts, and provisions for bad debts recognized was as follows at June 30: Medicare $ 346,266, % $ 326,104, % Medical Assistance 93,697, % 92,720, % Blue Cross/Highmark Blue Shield 368,696, % 327,543, % Commercial/HMO/Other (includes Medicare HMO) 376,760, % 340,682, % Self pay 19,990, % 25,050, % $ 1,205,412, % $ 1,112,101, % Allowance for Doubtful Accounts The Network records an allowance for doubtful accounts for estimated losses resulting from the unwillingness of patients to make payments for services. The allowance is determined by analyzing historical data and trends. Accounts receivable are written off against the allowance for doubtful accounts when management determines that recovery is unlikely and collection efforts cease. Charity Care The Network provides care to all patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Charges for services to patients who meet the Network's guidelines for charity care are not reflected in the accompanying consolidated financial statements. The charges associated with these services for charity care provided by the Network approximate $78,761,201 and $105,413,099 in 2015 and 2014, respectively. The costs incurred to provide such care is determined using a cost to charge ratio and were approximately $10,900,000 and $16,334,000 for 2015 and 2014, respectively. Excess of Revenue and Gains over Expenses The consolidated statements of operations include the excess of revenue and gains over expenses. Changes in unrestricted net assets which are excluded from the excess of revenue and gains over expenses, consistent with industry practice, include assets released from donor restrictions to be used for purchases of property and equipment, donations of long-lived assets, net unrealized gains and losses on available for sale investments, pension adjustments, and change in fair market value of interest rate swaps meeting hedging criteria. Income Taxes The Parent and its controlled hospital entities, are Pennsylvania and New Jersey not-for-profit corporations and have been recognized as tax-exempt pursuant to Section 501(c)(3) of the Internal Revenue Code. On such basis, the Parent and its controlled hospital entities will not incur any liability for federal income taxes, except for possible unrelated business income. St. Luke's Health Network Insurance Company is a taxable reciprocal insurer. St. Luke s HomeStar Services, LLC is a taxable distributor of pharmacy services. St. Luke s Warren Physician Group, P.C., PA Alliance, Hillcrest Emergency Services, P.C. and Two Rivers are for profit entities providing outpatient health care services in Pennsylvania and New Jersey. Prior to January 1, 2009, St. Luke s Warren Physician Group, P.C. and Hillcrest Emergency Services, P.C. elected, under the applicable provisions of the Internal Revenue Code and applicable state codes, to have the physician owner recognize their respective share of net income or loss on their individual tax 12

133 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 returns. Accordingly, St. Luke s Warren Physician Group, P.C. and Hillcrest Emergency Services, P.C. did not record a liability for federal and state income taxes. Effective January 1, 2009, St. Luke s Warren Physician Group, P.C. and Hillcrest Emergency Services, P.C. commenced operating as a for profit "C" corporation. The deferred tax assets arising from net operating losses and other temporary items generated by for profit entities, approximately $5.6 million at June 30, 2015, are subject to a full valuation allowance as the realization of such deferred tax assets cannot be considered more likely than not at June 30, Interest Rate Swaps The Network recognizes all derivative financial instruments in the balance sheet at fair value. The change in the fair value of derivatives that do not qualify for hedge accounting is recognized as a component of excess of revenues over expenses for the years ended June 30, 2015 and The change in the fair value of derivatives that qualify for hedge accounting are recognized through changes in unrestricted net assets on the statement of operations for the years ended June 30, 2015 and Risks and Uncertainties The health care industry is subject to numerous laws and regulations of federal, state and local governments. Compliance with these laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at the time. Recently, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations, which could result in the imposition of significant fines and penalties as well as significant repayments for patient services previously billed. Compliance with such laws and regulations are subject to future government review and interpretations as well as regulatory actions unknown or unasserted at this time. 4. Concentrations of Credit Risk Financial instruments which subject the Network to concentrations of credit risk consist primarily of cash and cash equivalents, investments, assets limited as to use, and patient accounts receivable. The Network maintains cash, investments and assets limited as to use in banks, which include cash equivalents consisting of overnight repurchase agreements. Amounts are invested in a variety of financial instruments. The related values, as presented in the consolidated financial statements, are subject to various market fluctuations which include changes in the equity markets, interest rate environment and the general economic conditions. The FDIC insures funds up to $250,000 per depositor. The Network s patient accounts receivable consist of unsecured amounts due for patient services billed to patients and other third-party payors such as Medicare, Medical Assistance, Blue Cross and various commercial insurance companies and managed care companies. The primary service area of the Network is located in Lehigh, Northampton, Carbon, Schuylkill and Bucks Counties, Pennsylvania and Warren County, New Jersey. The ability of these patients to pay is subject to changes in general economic conditions of the Network s service area. The Network performs ongoing credit evaluations and maintains reserves for potential credit losses. 13

134 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 The mix of receivables from patients and third-party payors at June 30, 2015 and 2014 was as follows: 5. Charity Care and Community Service The Network maintains records to identify and monitor the level of charity care and community service it provides. These records include the amount of charges foregone based on established rates for services and the estimated cost of those services furnished under its charity care policy. Additionally, the Network sponsors certain other service programs and charity services which provide substantial benefit to the broader community. Such programs include services to needy populations and support including: HIV treatments, medical and dental mobile vans, health fairs, community-based medical clinics, and teen pregnancy counseling. The Network also participates in the Medical Assistance program which makes payment for services provided to financially needy patients at rates which are less than the cost of such services. Additionally, the Network provides services through the emergency room and clinics at a substantial loss. 6. Third-Party Agreements Medicare 20.2% 20.9% Medical Assistance 9.1% 10.4% Blue Cross/Highmark Blue Shield 22.3% 23.1% Commercial/HMO/Other (includes Medicare HMO) 34.6% 33.1% Self pay (includes balances of patients filing for Medicaid but not yet approved) 13.8% 12.5% 100% 100% For the years ended June 30, 2015 and 2014, payment arrangements with the Network and third-party payors were as follows: Medicare Payments to St. Luke's Hospital, St. Luke's Quakertown Hospital, MMMC and St. Luke s Warren from the Medicare program for inpatient acute care services are made on a prospective basis. Under this program, payments are made at a predetermined specific rate for each discharge based on the patient's diagnosis. Outpatient services are reimbursed under the Ambulatory Payment Classification System except for clinical lab which is paid on a fee schedule and a prospective predetermined rate for renal. Capital Blue Cross/Highmark Blue Shield Inpatient services rendered to Capital Blue Cross/Highmark Blue Shield subscribers are reimbursed at prospectively determined per case rates. St. Luke s Quakertown Hospital is subject to a retroactive adjustment under the current Capital Blue Cross contract. Outpatient services for Capital Blue Cross are reimbursed on an interim basis on a percentage of charges for St. Luke s Quakertown Hospital, MMMC s and payments are later reconciled using a cost report device. There is no final settlement process for St. Luke s Hospital. Inpatient services rendered to Blue Cross/Highmark Blue Shield subscribers are reimbursed at a per case basis. Outpatient services are reimbursed based upon established fee schedules. 14

135 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 Medicaid The Pennsylvania Medical Assistance program ("PMA") reimburses St. Luke's Hospital, St. Luke's Quakertown Hospital, MMMC and St. Luke s Warren for inpatient services and capital costs on a prospective basis. Payments for inpatient services are made at a predetermined specific rate for each discharge based on the patient's diagnosis. Outpatient services are reimbursed on the basis of an established fee schedule. Other The Network has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Network under these agreements includes prospectively determined rates per discharge, discounts from established charges, prospectively determined daily rates and capitated payment arrangements. 7. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. 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. Financial instruments measured at fair value are based on valuation techniques noted below consistent with fair value guidance. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Network for financial instruments measured at fair value on a recurring basis. The three levels of inputs are as follows: Level 1 Quoted prices in active markets for identical assets or liabilities. Market price data is generally obtained from exchange or dealer markets. The Network does not adjust the quoted price for such assets and liabilities. Level 2 Inputs other than level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Inputs are obtained from various sources including market participants, dealers, and brokers. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Interest rate swaps are valued using both observable and unobservable inputs, such as quotations received from the counterparty, dealers or brokers, whenever available and considered reliable. In instances where models are used, the value of the interest rate swap depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability and reliability of observable inputs. Such inputs include market prices for reference securities, yield curves, credit curves, measures of volatility, prepayment rates, assumptions for nonperformance risk, and correlations of such inputs. Certain interest rate swap arrangements have inputs which can generally be corroborated by market data and are therefore classified within level 2. The total return swaps are less liquid and inputs are unobservable and as such are classified within level 3. While the valuation of these lessliquid derivatives may utilize some level 1 and/or level 2 inputs, 15

136 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 they also include other unobservable inputs which are considered significant to the fair value determination. At each measurement date, the Network updates the level 1 and level 2 inputs to reflect observable inputs, though the resulting gains and losses are reflected within level 3 due to the significance of the unobservable inputs. The significant unobservable inputs used in the fair value measurement of the Network s total return swaps are discounted cash flow rates, underlying bond prices with little to no trading history and credit risk assumptions used to record any discount on the liability. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Network believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Financial instruments carried at fair value as of June 30, 2015, and 2014 are as follows: June 30, 2015 Significant Other Significant Quoted Prices in Observable Unobservable Active Markets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Fair Value Investments Cash,Cash Equivalents & Money Market Funds $ 106,642,151 $ - $ - $ 106,642,151 Government Securities 196,860, ,860,697 Corporate Bonds 18,495, ,495,387 Common & Preferred Stock 194,162, ,162,574 Mutual Funds 154,529, ,529,247 Total Investments $ 670,690,056 $ - $ - $ 670,690,056 Derivative Financial Instruments Cost of Funds Hedge - Floating to Fixed Rate $ - $ 63,475,549 $ - $ 63,475,549 Total Return Swap ,720,990 16,720,990 Interest Rate Swaps-liability $ - $ 63,475,549 $ 16,720,990 $ 80,196,539 16

137 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 June 30, 2014 Significant Other Significant Quoted Prices in Observable Unobservable Active Markets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Fair Value Investments Cash,Cash Equivalents & Money Market Funds $ 102,482,142 $ - $ - $ 102,482,142 Government Securities 132,650, ,650,140 Corporate Bonds 21,441, ,441,647 Common & Preferred Stock 58,881, ,881,611 Mutual Funds 255,033, ,033,373 Total Investments $ 570,488,913 $ - $ - $ 570,488,913 Derivative Financial Instruments Cost of Funds Hedge - Floating to Fixed Rate $ - $ 57,413,456 $ - $ 57,413,456 Total Return Swap ,518,904 10,518,904 Interest Rate Swaps-liability $ - $ 57,413,456 $ 10,518,904 $ 67,932,360 The following table is a roll-forward for those financial instruments classified by the Network as level 3 within the fair value hierarchy defined above: Interest Rate Swaps Fair Value, June 30, 2013 $ 12,407,667 Change in fair value of derivative instruments (1,888,763) Fair Value, June 30, 2014 $ 10,518,904 Change in fair value of derivative instruments 6,202,086 Fair Value, June 30, 2015 $ 16,720,990 All unrealized gains in the table above are reflected in the accompanying statement of operations. 8. Investments in Joint Ventures and Partnerships St. Luke's Hospital is a Class B member of the St. Luke's Physician Hospital Organization, Inc. ("PHO"). The PHO has two classes of members: Class A members consist of primary care and specialist physicians and Class B members consist of member hospitals, St. Luke's being the only Class B member hospital. St. Luke s Health Network holds a 50% equity interest in the Center for Oral and Maxillofacial Surgery and Implantology at St. Luke s, LLC, which was organized on May 12, 2005 and provides oral surgery services which enables the joint venture to respond to community needs. St. Luke s Health Network holds a 40% equity interest in Royal HomeStar, LLC, which was organized on March 1, 2013 and provides durable medical equipment services. 17

138 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 St. Luke s Health Network holds a 40% equity interest in Etowah Dialysis, Inc., which was organized on September 1, 2013 and provides outpatient dialysis services. The Network also maintains other investments in partnerships that provide various clinical and nonclinical services. The Network s investments in the partnerships are accounted for under the equity method. The total investments in joint ventures and partnerships of approximately $11,371,115 and $13,051,819 for the years ended June 30, 2015 and 2014, respectively, are included in other assets on the consolidated balance sheets. 9. Property and Equipment Property and equipment and related accumulated depreciation at June 30, 2015 and 2014 consisted of the following: Land $ 93,090,110 $ 92,164,232 Buildings and improvements 676,659, ,631,764 Equipment 654,423, ,111,811 Parking garage 26,668,787 26,591,467 Total Property, Plant, & Equipment, gross 1,450,841,999 1,392,499,274 Less: Accumulated depreciation 879,090, ,961,577 Total Property, Plant & Equipment, net 571,751, ,537,697 Construction-in-progress (CIP) 80,967,159 42,849,672 Total Property, Plant & Equipment, net and CIP $ 652,718,438 $ 629,387,369 Depreciation expense was approximately $72,257,623 and $71,201,994 for the years ended June 30, 2015 and 2014, respectively. Interest that was capitalized was approximately $455,949 and $1,309,956 for the years ended June 30, 2015 and 2014, respectively. Capital Leases Included in fixed and movable equipment as of June 30, 2015 is approximately $9,403,238 of assets purchased under capital lease agreements. Accumulated amortization of such assets approximates $9,088,261 as of June 30,

139 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and Long-Term Debt Long-term debt at June 30, 2015 and 2014 consisted of the following: Quakertown General Authority A Pooled Financing Loan issued by the Quakertown General Authority at a variable rate $ 1,834,972 $ 3,626,097 Hospital Revenue Bonds, Series 2007, issued by the Lehigh County General Purpose Authority 125,520, ,240,000 Hospital Revenue Bonds, Series 2008A, issued by Northampton County General Purpose Authority, net of unamortized discount 172,802, ,714,061 Hospital Revenue Bonds, Series 2010A, 2010B, 2010C, issued by Northampton County General Purpose Authority, net of unamortized premium 58,062,381 59,331,752 Hospital Revenue Bonds, Series 2013A & 2013B, issued by Northampton County General Purpose Authority, net of unamortized premium 65,464,290 65,480,306 Hospital Refunding Bonds, Series 2013, issued by New Jersey Health Care Facilities Financing Authority, net of unamortized premium 39,196,652 39,258,409 Hospital Revenue Bonds - Series 2015A, issued by Pocono Mountains Industrial Park Authority, net of unamortized premium 84,900,778 - TD Bank, N.A. Note Payable 22,445,445 24,205,137 Wells Fargo Equipment Finance, Inc 16,173,764 21,067,530 Bank of America Loan 27,281,820 - Various notes and mortgage notes payable at various interest rates 1,266,233 1,754, ,948, ,677,300 Less: Current portion 16,624,267 11,758,905 $ 598,324,221 $ 502,918,395 19

140 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 Scheduled maturities, assuming no amounts are tendered that cannot be remarketed, for the years ending June 30 are as follows: Long-Term Fiscal Year Debt ,624, ,071, ,271, ,789, ,047, ,572,682 Thereafter 511,424, ,802,233 Less: Amount of unamortized bond discount/premium/imputed interest (5,146,255) $ 614,948,488 The fair market value of outstanding debt as of June 30, 2015 is as follows: Fair Par Market Amount Value Quakertown General Authority 1996A Pooled Financing Loan 1,834,972 1,834,972 Series ,520, ,292,645 Series ,000, ,953,861 Series ,870,000 61,695,758 Series 2013 (St. Luke's Warren) 37,410,000 38,112,662 Series ,000,000 66,358,550 Series ,000,000 79,963,593 $ 542,634,972 $ 543,212,042 The fair value of the Network s bonds at June 30, 2015 is approximately $543 million versus the outstanding principal at June 30, 2015 of $543 million. The fair value of the bonds is estimated using market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The Network reported long-term debt of $598,324,221 and $502,918,395 for years ended June 30, 2015 and 2014, respectively. The Network s long term debt would be classified as level 2. Quakertown General Authority 1996A Pooled Financing Loan On March 1, 1997, St. Luke s Hospital borrowed approximately $21,700,000 from the Quakertown General Authority. St. Luke s represents one of many borrowers who participated in the $77,900,000 Quakertown General Authority Variable Demand Revenue Bonds (Pooled Financing Program) Series of 1996A. For security of the bondholders of the 1996A Bonds, the Quakertown General Authority entered into a Letter of Credit with PNC Bank National Association. The Bonds were offered on the basis of the financial strength of PNC Bank National Association, not the individual borrowers of the 1996A Pooled Financing Program. The Bonds are seven day variable rate demand bonds that are remarketed by the 20

141 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 remarketing agent (PNC Capital Markets) and if for some reason the Bonds could not be remarketed, then the Bonds would become Bank Bonds and held by the Bank until they were remarketed. During the time the Bonds are held by the Bank, St Luke s would continue with the loan according to the Loan agreement between St. Luke s and the Quakertown General Authority. The proceeds from the borrowings on the 1996A Bond Pool were used to refinance previous borrowings from the Quakertown Variable Rate Demand Bond Pool Series 1995 and to finance certain capital improvement projects. The term of the Loan is 238 months, payable in full by January 1, 2017 and will bear interest at a variable rate. At June 30, 2015 and 2014, the rate (including bond and obligated group expense) was 2.0% and 2.0%, respectively. The obligation of St. Luke s to repay the Loan is evidenced by a note issued under and pursuant to the term of the amended 1987 Master Trust Indenture. The original trust indenture, lease agreement and all subsequent supplemental agreements contain certain covenants of the Obligated Group and the Quakertown Obligated Group including, but not limited to, covenants requiring that the Obligated Group and the Quakertown Obligated Group will generate net revenues, as defined, equal to at least 150% of annual debt service. Hospital Revenue Bonds, Series 2007 On February 21, 2007, the Lehigh County General Purpose Authority issued $266,310,000 of its Hospital Revenue Bonds, Series 2007 (the 2007 Bonds ). The proceeds of the 2007 Bonds were used by the Hospital to undertake various construction projects (primarily the expansion of St. Luke s Hospital in Allentown), purchase of capital equipment, refunding of previous bond offerings and to pay for certain costs and expenses related to the issuance of the bonds. The Hospital entered into the Master Trust Indenture with the Master Trustee and is currently the sole member of the Obligated Group. Under the Master Trust Indenture, all of the Bonds previously issued by the Authority under the indenture are collateralized by notes issued by the Hospital. The 2007 Bonds are collateralized by a note issued by the Hospital under the Master Trust Indenture. The 2007 Bonds were issued in a quarterly reset variable rate mode. Each maturity will bear interest from the date of their delivery (February 21, 2007) or from the most recent Interest Payment Date to the next succeeding Interest Payment Date, at a per annum rate equal to (a) 67% of the Three-Month LIBOR Rate for such period plus (b) the per annum spread specified in the following table, except that the 2007 Bonds may not bear interest in any interest period at more than a maximum rate of 15% per annum: Term Bonds Spread above 67% of the Three-Month LIBOR Rate $110,420,000 Variable, due 8/15/2033 original $49,600,000 due 8/15/2027 after redemption 92 basis points $155,890,000 Variable, due 8/15/2042 original $78,900,000 due 8/15/2038 after redemption 102 basis points Interest is computed on the basis of a 365-day or 366-day year, as applicable, for the actual number of days elapsed. The 2007 Bonds bear interest at the Index Rate until maturity or the earlier redemption thereof, and are not subject to conversion to another interest rate. 21

142 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 Hospital Revenue Bonds, Series 2008 On June 11, 2008, the Northampton County General Purpose Authority issued $175,000,000 of its Hospital Revenue Bonds, Series A of 2008 (the 2008 Bonds ) under a Loan and Trust Agreement by and among the Northampton County General Purpose Authority, Saint Luke s Hospital and Wells Fargo Bank, National Association, as trustee. The 2008 Bonds were issued to provide funds for various construction projects (primarily the construction of the St. Luke s Anderson Campus), purchase of capital equipment, purchase of land in Bethlehem Township and to pay for certain costs and expenses related to the issuance of the bonds. The Hospital entered into the Master Trust Indenture with the Master Trustee and is currently the sole member of the Obligated Group. Under the Master Trust Indenture all of the Bonds previously issued by the Lehigh County General Authority and the Quakertown General Authority are secured by notes issued by the Hospital. The 2008 Bonds will also be secured by a note issued by the Hospital under the Master Trust Indenture. The 2008 Bonds of each maturity will bear interest from the date of their initial delivery or from the most recent Interest Payment Date to which interest thereon has been paid or duly provided for to the next succeeding Interest Payment Date, at a fixed rate: Interest Year (August 15) Amount Rate Yield 2019 $ 4,260, % % ,480, % % ,715, % % ,965, % % ,235, % % ,520, % % ,270, % % ,960, % % ,595, % % Interest on the 2008 Bonds will be payable on each August 15 and February 15, commencing on August 15, Interest on the 2008 Bonds will be computed on the basis of 360-day year of twelve 30 day months. Hospital Revenue Bonds, Series 2010 On May 13, 2010, the Northampton County General Purpose Authority issued $69,730,000 of its Hospital Revenue Bonds. The $69,730,000 Northampton County General Purpose Authority Hospital Revenue Bonds, consisting of $24,415,000 aggregate principal amount of Hospital Revenue Bonds Series 2010A (Saint Luke s Hospital Project), $10,390,000 aggregate principal amount of Hospital Revenue Bonds Series 2010B (Saint Luke s Hospital Project) and $34,925,000 aggregate principal amount of Hospital Revenue Bonds Series 2010C (Saint Luke s Hospital Project). The 2010 Bonds are issued under that certain Loan and Trust Agreement, dated as of June 1, 2008 by and among the Northampton County General Purpose Authority, Saint Luke s Hospital of Bethlehem, Pennsylvania and Wells Fargo Bank, National Association, as trustee, as amended and supplemented by a First Supplemental Loan and Trust Agreement, dated as of May 1,

143 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 The 2010 Bonds were issued to provide funds for the refunding of previous bond offerings, the construction and equipping of a medical office building on the Anderson Campus, and to pay for certain costs and expenses related to the issuance of the bonds. The Hospital requested that the Authority issue approximately $29,300,000 of its bonds (the Private Placement Bonds ) to TD Bank, N.A. in a private placement (the Private Placement ) to finance capital projects and reimburse the Hospital for expenditures previously made. The Private Placement Bonds are secured by a master note on a parity basis with the 2010 Bonds under the Master Trust Indenture. Hospital Revenue Bonds, Series 2013 On June 27, 2013 the Northampton County General Purpose Authority issued $65,000,000 of its Hospital Revenue Bonds. Which consists of $25,000,000 in Series A aggregate principal and $40,000,000 in Series B aggregate principal with a variable rate. Issued pursuant to a Loan and Trust Agreement by the Authority, SLH and the Bank of New York Mellon Trust, under the Trust Agreement SLH is obligated to make payments to the trustee as assignee of the Authority. The Series 2013 Bonds were issued to provide a portion of the funds for a project the 2013 project consisting of 200 bed expansion of the hospital located at the Anderson Campus, the construction of an administration building at the Anderson Campus, the funding of various capital projects for general SLH purpose, including without limitations, renovations, repairs and acquisitions of related outpatient facilities in Northampton County and Lehigh County, Pennsylvania. Also reimbursement of any cost referred to in clauses, the payment of certain cost and expense in connection with the issuance of the 2013 Bonds. Hospital Refunding Bonds, Series 2013 On June 6, 2013 the New Jersey Health Care Facilities Financing Authority issued $37,410,000 of Refunding Bonds, St Luke s Warren Hospital Obligated group. The proceeds of the 2013 Bonds to St. Luke`s Warren Hospital is for the purpose of paying a portion of the cost of a project consisting generally of the current refunding of all the Authority`s Revenue Bonds: St Luke s Warren Hospital Issue Series 2012 and the payment of certain cost incidental to the issuance and sale of the Series 2013 Bonds. Hospital Revenue Bonds, Series 2015 On February 1, 2015 Pocono Mountains Industrial Park Authority issued $80,000,000 of its Hospital Revenue Bonds. Issued pursuant to a Loan and Trust Agreement by the Authority, St Luke`s Hospital- Monroe Project and the Bank of New York Mellon Trust, under the Trust Agreement SLH is obligated to make payments to the trustee as assignee of the Authority. The net proceeds received upon the sale of the 2015 Bonds will be deposited in the 2015 Project Construction Fund and disbursed from the 2015 Project Construction Fund to finance various costs incurred by St Luke s Monroe in connection with the 2015 Project. 11. Derivative Financial Instruments At June 30, 2015, two floating to fixed interest rate swaps were outstanding with notional amounts totaling $262.6 million and maturity dates ranging from August, 2033 to August, The bonds, issued in a quarterly reset LIBOR-based variable rate mode, will be swapped to a 4.60% fixed rate. The nature of the risk is to eliminate unpredictable variability of interest rate payments due to changes in the 3 month LIBOR rate as well as limit exposure to increases in short-term interest rates as well as significantly decrease borrowing costs (relative to a traditional fixed rate issuance). Based on the identical characteristics of the payment based index of the hedged item and the receipt based index on the 23

144 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 interest rate swap, the hedge will exactly offset the variability of interest rates on the underlying bonds over the term of the swap transaction. At June 30, 2015, two total return swaps were outstanding. In December 2007, St. Luke s executed a total return swap on a $76 million portion of the outstanding Series 2007, 2042 term bond. In September 2009, St. Luke s executed a total return swap on a $24 million portion of the outstanding Series 2007, 2033 term bond. Pursuant to these agreements, St. Luke s has guaranteed a price of 95.5% and 99.5%, respectively, on the underlying Bonds. St. Luke s has the right to call and redeem these bonds at any time as fully described in the Series 2007 Fifth Supplemental Trust Indenture. The swaps are recorded at the fair market value on the balance sheet and changes in value are posted through the excess of revenues and gains over expenses. 12. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets were available for the following purposes at June 30, 2015 and 2014: Permanently restricted net assets at June 30, 2015 and 2014 were restricted to: Purchase of property and equipment $ 3,250,782 $ 2,814,641 Health education 16,441,420 14,242,262 Research and development 206, ,666 Unrealized gains on restricted net assets for health care services 19,940,224 20,648,316 $ 39,838,984 $ 37,891, Investments to be held in perpetuity, the income from which is expendable to support health care services (reported as other operating and nonoperating income) $ 32,764,529 $ 30,813,985 Endowments The Network s endowment consists of approximately $32,764,529 individual donor restricted endowment funds and $79,912,992 board-designated endowment funds for a variety of purposes plus the following where the assets have been designated for endowment: split interest agreements, and other net assets. The endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. The net assets associated with endowment funds including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor imposed restrictions. The Board of Trustees of the Network has interpreted the relevant PA state law as requiring the preservation 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 Network 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 funds remain in the donor-restricted endowment fund until those amounts are appropriated for expenditure of the Network in a manner consistent with the standard of 24

145 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 prudence prescribed by relevant PA state law. In accordance with relevant PA state law, the Network considers the following factors in making a determination to appropriate or accumulate endowment funds: (1) The duration and preservation of the fund (2) The purposes of the Network and the donor restricted endowment fund (3) General economic conditions (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 Network (7) The investment policies of the Network. The Network had the following endowment activities during the year ended June 30, 2015 delineated by net asset class and donor-restricted versus Board-designated funds: Endowment net asset composition by type of fund as of June 30, 2015: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ 24,986,580 $ 32,764,529 $ 57,751,109 Board-designated endowment funds $ 79,912,992 79,912,992 $ 79,912,992 $ 24,986,580 $ 32,764,529 $ 137,664,101 Endowment net asset composition by type of fund as of June 30, 2014: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ 24,485,762 $ 30,813,985 $ 55,299,747 Board-designated endowment funds $ 77,333,043 77,333,043 $ 77,333,043 $ 24,485,762 $ 30,813,985 $ 132,632,790 25

146 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 Changes in endowment net assets for the year ended June 30, 2015: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 77,333,043 $ 24,485,762 $ 30,813,985 $ 132,632,790 Investment return: Investment income 1,940,376-1,345,378 3,285,754 Gain (Loss) on Sale of Investments 5,125, ,125,671 Net depreciation (realized and unrealized) (4,590,595) (35,473) 233,762 (4,392,306) Total Investment return 2,475,452 (35,473) 1,579,140 4,019,119 Gifts 104,497-1,417,664 1,522,161 Income released to General Fund for operations - - (509,969) (509,969) Income released to Specific Purpose Fund - 302,730 (302,730) - Transfer balance of net depreciation - 233,561 (233,561) - Endowment net assets, end of year $ 79,912,992 $ 24,986,580 $ 32,764,529 $ 137,664,101 Changes in endowment net assets for the year ended June 30, 2014: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 64,749,913 $ 17,220,344 $ 27,564,669 $ 126,759,980 Investment return: Investment income 1,731,392-1,247,360 2,978,752 Gain (Loss) on Sale of Investments 24, ,632 Net depreciation (realized and unrealized) 10,790,755 9,019 7,011,069 17,810,843 Total Investment return 12,546,779 9,019 8,258,429 20,814,227 Gifts 36,351-2,836,308 2,872,659 Income released to General Fund for operations - - (589,022) (589,022) Income released to Specific Purpose Fund - 245,330 (245,330) - Transfer balance of net depreciation - 7,011,069 (7,011,069) - Other Miscellaneous Transfers Endowment net assets, end of year $ 77,333,043 $ 24,485,762 $ 30,813,985 $ 149,857,844 Description of Amounts Classified as Permanently Restricted Net Assets and Temporarily Restricted Net Assets (Endowments Only) Permanently restricted net assets The portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by relevant PA State law: Permanent Endowment $ 32,563,565 Mortgage Endowment 200,964 Total endowment assets classified as permanently restricted net assets $ 32,764,529 26

147 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 Endowment Funds with Deficits From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts (deficit). When donor endowment deficits exist, they are classified as a reduction of unrestricted net assets. Deficits of this nature reported in unrestricted net assets were $0 as of June 30, 2015 and Return Objectives and Risk Parameters The Network has adopted endowment investment and spending policies that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of endowment assets. Under this policy, the return objective for the endowment assets, measured over a full market cycle, shall be to maximize the return against a blended index, based on the endowment s target allocation applied to the appropriate individual benchmarks. The Network expects its endowment funds over time, to provide an average rate of return approximating the S&P 500 Stock Index (domestic portion), MSCI EAFE Index (international portion) and Lehman Brothers Intermediate Government/Corporate Index (bond portion). Actual returns in any given year may vary from the index return amounts. Strategies Employed for Achieving Investment Objectives To achieve its long-term rate of return objectives, the Network relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized gains) and current yield (interest and dividends). The Network targets a diversified asset allocation that places greater emphasis on equity-based investments to achieve its long-term objectives within prudent risk constraints. Endowment Spending Allocation and Relationship of Spending Policy to Investment Objectives The Board of Trustees of the Network determines the method to be used to appropriate endowment funds for expenditure. Calculations are performed for individual endowment funds at a rate of 4.5 percent of a three-year moving average market value with a minimum increase of 0% and a maximum increase of 10% per year over the previous year s spending amount. The total is reduced by the income distributed from the endowment fund in accordance with the preferences/restrictions made by the donors. The corresponding calculated spending allocations are distributed annually by June 30. In establishing this policy, the Board considered the expected long term rate of return on its endowment. Accordingly, over the long term, the Network expects the current spending policy to allow it s endowment to grow at an average of 8% percent annually, consistent with its intention to maintain the purchasing power of the endowment assets as well as to provide additional real growth through new gifts. 13. Contingencies Operating Leases The Network leases certain medical, office and information technology equipment used in its operations. Total rental expense for all operating leases for the years ended June 30, 2015 and 2014 was approximately $16,073,118 and $17,235,751, respectively. 27

148 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 At June 30, 2015, the annual and total future minimum lease payments under noncancelable operating leases were as follows: Litigation The Network and its controlled entities are involved in certain litigation which involves professional and general liability. In the opinion of management and in-house counsel, the ultimate liability, if any, will not have a material effect on the consolidated financial condition of the Network and its controlled entities. 14. Functional Expenses Operating ,787, ,634, ,085, ,002, ,087,352 Later Years 30,704,016 Total minimum payments 79,301,293 The Network provides general health care services to residents within its geographic location. Expenses related to providing these services for the years ended June 30, 2015 and 2014 are approximately as follows: Health care services $ 1,088,986,387 $ 1,012,264,850 General and administrative 120,922, ,133,519 $ 1,209,908,891 $ 1,124,398, Pension Plan Defined Benefit Plan The Network entities have a noncontributory defined benefit pension plan ( Plan ) covering substantially all employees of the Network who were hired prior to January 1, 2009 (see New Pension Plan 401(a) note below). Plan benefits are based on years of service and the employee s average annual earned income during the highest 60 consecutive months in the last ten years of credited service prior to retirement or termination. The Network s policy is to fund annually at least the minimum amount required by the Employee Retirement Income Security Act of In connection with a redesign of the network's retirement plans, the Finance Committee of the Board approved amendments to end benefit accruals in the qualified defined benefit pension plan after December 31, Benefits earned by participants under this plan prior to January 1, 2015 were not affected. Savings Plan In 2007, St. Luke s Warren established a 401(k) plan for qualified employees. Contributions to this plan are based on a defined formula of 3% of an employee's contribution. The St. Luke s Warren 401(k) plan was merged with the Network 401(a) plan as of January 1,

149 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and (a) Plan All employees hired before January 1, 2009 remain participants in the noncontributory defined benefit pension plan (see Pension Plan, above) through December 31, At that time, all employees will be moved to the 401(a) Plan. All employees hired after January 1, 2009, are provided with a defined contribution plan 401(a) of which St. Luke s will contribute a percentage of the employee s salary based on the employee s years of service as follows: Years of Service % of Annual Salary 1 through 5 2.5% 6 through % 11 through % 16+ years 7.0% The Network has recorded a reserve of $11,371,265 for the year ended June 30, This liability is included in accrued compensation payable on the 2015 consolidated balance sheet. Retirement Plan 401(k) As of January 1, 2009, a 401(k) retirement savings plan replaced the 403(b) retirement savings plan for employees of St. Luke s HomeStar Services, LLC, a for-profit organization. Pension Plan Financial Components The net pension cost for all Plans and Plan participants, during the years ended June 30, 2015 and 2014, includes the following components: Change in benefit obligation Benefit obligation at beginning of year $ 512,211,212 $ 440,994,994 Service cost 9,287,931 16,114,927 Interest cost 22,750,325 23,321,318 Benefits paid (13,402,815) (34,894,864) Actuarial loss (gain) 16,826,447 66,674,837 Plan amendment - - Benefit obligation at end of year $ 547,673,100 $ 512,211,212 Change in plan assets Fair value of plan assets at beginning of year $ 436,657,318 $ 361,707,895 Actual return on plan assets 11,084,837 70,678,754 Employer contributions 50,119,677 39,165,533 Benefits paid (13,402,815) (34,894,864) Fair value of plan assets at end of year $ 484,459,017 $ 436,657,318 Funded status at end of year $ (63,214,083) $ (75,553,894) Amounts recognized in the statement of financial position consist of: 29

150 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and Noncurrent assets $ - $ - Current liabilities (630,844) (726,328) Noncurrent liabilities (62,583,239) (74,827,566) Net amount recognized in statement of financial position $ (63,214,083) $ (75,553,894) Amounts recognized in unrestricted net assets consist of: Unrecognized Net loss (gain) $ 129,944,581 $ 95,694,773 Transition obligation (asset) - - Prior service cost (credit) - - Accumulated other comprehensive income $ 129,944,581 $ 95,694,773 Information for pension plans with an accumulated benefit obligation in excess of plan assets: Projected benefit obligation $ 547,673,100 $ 512,211,212 Accumulated benefit obligation 547,673, ,593,961 Fair value of plan assets 484,459, ,657,318 Components of net periodic benefit cost and other amounts recognized in unrestricted net assets: Total pension benefit cost Service cost $ 9,287,931 $ 16,114,927 Interest cost 22,750,325 23,321,318 Expected return on plan assets (33,325,443) (29,361,558) Amortization of net (gain) loss 4,638,400 1,584,376 Amortization of transition obligation (asset) - - Amortization of prior service cost (credit) - - Net periodic benefit cost $ 3,351,213 $ 11,659,063 Curtailment loss - - Settlement loss 178, ,028 Total pension cost $ 3,530,058 $ 11,811,091 Other changes in plan assets and benefit obligations recognized in unrestricted net assets: Net loss (gain) $ 39,067,053 $ 25,357,641 Amortization of loss (gain) (4,817,245) (1,736,404) Amortization of transition obligation - - Amortization of prior service cost - - Total recognized in unrestricted net assets $ 34,249,808 $ 23,621,237 Total recognized in net periodic benefit cost and unrestricted net assets $ 37,779,866 $ 35,432,328 30

151 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 The estimated net loss, transition obligation and prior service cost for the defined benefit pension plans that will be amortized from unrestricted net assets into net periodic benefit cost over the next fiscal year are $2,334,230, $0 and $0, respectively. Weighted-average assumptions used to determine benefit obligations at June 30, 2015: Discount rate 4.65% Rate of compensation increase 3.50% Weighted-average assumptions used to determine net periodic benefit cost for years ended June 30, 2015: Expected long-term return on plan assets 7.50% Rate of compensation increase 3.50% Discount rate 4.50% Plan Assets The St. Luke s Pension Plans weighted-average asset allocations at June 30, 2015 and 2014, by asset category, are as follows: Plan Assets at June Asset category Equity securities 49 % 70 % Debt securities 51 % 30 % 100 % 100 % The Investments are broadly diversified in assets which over time provide the opportunity for appreciation and rising levels of income. The precise mix of assets is determined jointly by the Investment Committee and recommended to the Board of Trustees. The Investment Committee has discretion over the selection of individual securities and the weighting of the investments. Cash Flows Contributions The Network expects to contribute $630,844 to its pension plans in the 2016 fiscal year. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: ,446, ,975, ,980, ,692, ,071, ,948,436 Total $ 237,114,387 31

152 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 The following table presents the Plan s financial instruments as of June 30, 2015, measured at fair value on a recurring basis using the fair value hierarchy defined in Note 7: Quoted Prices in Active Markets Total Fair (Level 1) Value June 30, 2015 Investments Money Market Funds $ 1,339,192 $ 1,339,192 Government Securities 246,000, ,000,018 Common & Preferred Stock 237,119, ,119,807 Total Investments $ 484,459,017 $ 484,459, Insurance Coverage Effective December 13, 2001, the Parent, established St. Luke s Health Network Insurance Company; a wholly-owned captive insurance company licensed by the State of Vermont providing claims-made coverage for professional and general liability coverages for the Network. St. Luke s converted its fronted captive to a risk retention group ( RRG ) effective July 1, On January 1, 2005, the RRG was converted from a nonprofit risk retention group to a reciprocal risk retention group. As a reciprocal risk retention group, the St. Luke s Health Network Insurance Company is also permitted to provide primary medical professional liability coverage on an occurrence basis to independent physicians and physician s practices. Under this structure, each insured is a subscriber of the St. Luke s Health Network Insurance Company, a Reciprocal Risk Retention Group ( SLHNIC ). Only subscribers of the St. Luke s Health Network will be issued Class A subscriber units. Class A Subscribers of SLHNIC maintain control over SLHNIC. At June 30, 2015 and June 30, 2014, the Network was covered through the SLHNIC by a Hospital Professional Liability policy, with primary limits of $500,000 for each medical incident and $2,500,000 in the aggregate for Pennsylvania Mcare Fund eligible institutions and with Physicians Professional Liability coverage with primary limits of $500,000 for each medical incident, and $1,500,000 in the aggregate for Pennsylvania Mcare Fund eligible practitioners. The subscriber A program is claimsmade coverage. The Subscriber B program is occurrence-based coverage. SLHNIC provides Non-Mcare Fund eligible Subscriber A insureds with primary coverage of $1 million for each medical incident and $4.5 million in the aggregate. SLHNIC also provides Subscriber A institutional subscribers with an excess layer professional liability coverage on a claims-made basis; this coverage layer is $4 million for each medical incident in excess of $1 million with an annual aggregate of $4 million. The reserve for malpractice claims maintained at June 30, 2015 and 2014 was approximately $42,437,513 and $39,990,875, and was estimated using a discount rate of 4.25% and 4.25%, respectively. The discount for Class A and Class B subscribers was $6,510,447 and $5,680,795 for June 30, 2015 and 2014, respectively. St. Luke s Health Network has recorded a receivable as of June 30, 2015 of $14,101,789 for expected insurance indemnifications and a related liability for the accrued claims in the individual financial statements of the hospitals. As of June 30, 2014, St. Luke s Health Network recorded a receivable and related liability of $13,104,347. The Network participates in the Medical Care Availability and Reduction of Error ( Mcare ) Fund, which is a Pennsylvania governmentally authorized entity that for fiscal year 2015 covers claims above $500,000 32

153 St. Luke s Health Network, Inc. and Controlled Entities Notes to Consolidated Financial Statements June 30, 2015 and 2014 per medical incident up to $1,500,000 aggregate per hospital/insured physician subject to Mcare Fund coverage, as applicable. The assessment for the Mcare Fund payable by the Network is based on the schedule of occurrence rates approved by the Insurance Commissioner of Pennsylvania for the Pennsylvania Professional Liability Joint Underwriting Association ( JUA ) multiplied by the annual assessment percentage. The Network recognizes its assessment as expense in the period incurred. The Network maintains accrued insurance reserves for its self-insured portion of expected workers' compensation claims of approximately $8,313,730 and $7,557,243 for the years ended June 30, 2015 and 2014, respectively. The impact of the discount was $1,929,340 and $1,833,058 for the years ended June 30, 2015 and 2014, respectively. 17. Asset Retirement Obligations In the year ended June 30, 2006, the Network adopted accounting guidance on Accounting for Conditional Asset Retirement Obligations. If a legal obligation to perform an asset retirement obligation exists but performance is conditional upon a future event, and the obligation can be reasonably estimated, then a liability should be recognized. Upon initial application of accounting regulatory guidance, the Network recognized $3,486,249 of conditional asset retirement obligation included within our liabilities in the consolidated balance sheet. For the year ended June 30, 2015, the Network recognized $7,805 in accretion and depreciation expense. 18. Subsequent Events The Network has performed an evaluation of subsequent events through October 28, 2015, which is the date the financial statements were available to be issued. There were no subsequent events. 33

154 St. Luke s Health Network, Inc. and Controlled Entities Consolidating Balance Sheet June 30, 2015 St. Luke s Emergency Miners St. Luke s St. Luke s St. Luke s Hospital of St. Luke s St. Luke s and Quakertown Memorial Hospital St. Luke s Hospital New University Health Bethlehem, Physician Quakertow n Transport Rehabilitation Medical Anderson Warren Monroe Valley Rehab Network, Inc. Pennsylvania Group Hospital Services Center Center Campus Hospital Campus LLC Assets Current Cash and cash equivalents $ - $ 56,271,126 $ 113,741 $ 353,303 $ 2,448 $ - $ 41,914 $ 23,841 $ 1,866,438 $ - $ 42,978 Investment in controlled entities 596,798, Patient accounts receivable, net - 104,239,474 14,904,876 11,343, ,042-6,334,978 27,251,834 10,662,062-3,394 Other accounts receivable - 5,930,146 1,029,366 31,035 41, ,081 23, , Investments - 132,896, , Inventories - 11,762, , ,805 2,114,343 1,696, Prepaid expenses - 17,763,367 2,885, ,707 31, , , ,473 44,924 - Due From Third Parties 3,232,899 2,239,954 Total current assets 596,798, ,096,130 18,933,078 12,758, ,495-7,422,730 32,018,435 15,556,457 44,924 46,372 Assets limited as to use Funds held by trustee - 3,443, ,054 71,314,891 - Under bond indenture - 31,766, Board designated funds - 306,170,076-1,875, , ,380,053-1,875, , ,054 71,314,891 - Property and equipment, net - 369,409,536 28,309,134 18,392, ,299-17,315, ,986,482 71,460,426 (195,343) - Goodw ill, net - 14,652,774 5,962, ,000-13,156, Due from affiliates - 219,153, ,958,591 3,578,431-5,513,828 12,292,724 99,488 Investments temporarily restricted as to use - 26,565,087-1,105,928 18, , ,039 1,199, Investments permanently restricted as to use - 29,167,245-3,223, , , Deferred financing costs - 6,005, ,935 1,300,517 - Annuity contracts - 18,044, Other assets - 39,914, , ,530, ,944 1,190,303 30,943 - Total assets $ 596,798,192 $ 1,396,388,918 $ 53,204,521 $ 37,465,706 $ 1,279,193 $ 2,958,591 $ 32,458,597 $ 176,803,388 $ 109,581,576 $ 84,788,656 $ 145,860 34

155 St. Luke s Health Network, Inc. and Controlled Entities Consolidating Balance Sheet June 30, 2015 Schedule I St. Luke s St. Luke s Warren Hillcrest Warren PA Tw o Physician Hospital Em ergency Professional Hillcrest Rivers Consolidated Group NJ Foundation Services PC Alliance PC MSO, Inc Enterprises Inc Eliminations Totals Assets Current Cash and cash equivalents $ 422,166 $ 1,277,847 $ 700 $ - $ - $ 5,783 $ - $ 60,422,285 Investment in controlled entities (596,798,192) - Patient accounts receivable, net 578, , ,643,329 Other accounts receivable 242, ,726,199 Investments - 316, ,288,959 Inventories ,095,875 Prepaid expenses 221, ,692,785 Due From Third Parties (1,896,824) 3,576,029 Total current assets 1,465,062 1,593, , ,783 (598,695,016) 421,445,461 Assets limited as to use Funds held by trustee ,327,819 Under bond indenture ,766,103 Board designated funds ,097, ,190,988 Property and equipment, net 2,011, ,512, ,718,438 Goodw ill, net 550, ,146,319 Due from affiliates - 67, ,474,835 (245,138,621) - Investments temporarily restricted as to use (1,199,734) 29,023,294 Investments permanently restricted as to use ,764,530 Deferred financing costs ,877,302 Annuity contracts ,044,259 Other assets - 206, ,173,185 Total assets $ 4,026,993 $ 1,800,363 $ 722,978 $ 305 $ - $ 2,993,310 $ (845,033,371) $ 1,656,383,776 35

156 St.Luke shealthnetwork,inc.andcontrolledentities Consolidating Balance Sheet June 30, 2015 Emergency Miners St. Luke s St. Luke s St. Luke s Hospital of St. Luke s St. Luke s and Quakertown Memorial Hospital St. Luke s Hospital New University Health Bethlehem, Physician Quakertown Transport Rehabilitation Medical Anderson Warren Monroe Valley Rehab Network, Inc. Pennsylvania Group Hospital Services Center Center Campus Hospital Campus LLC Liabilities and Net Assets Current Accounts payable $ - $ 69,905,641 $ 1,104,724 $ 394,331 $ 52,143 $ - $ 474,321 $ 798,246 $ 1,005,283 $ - $ - Accrued salaries, w ages and taxes - 14,339,336 18,061, , , ,409 1,232, Accrued vacation - 23,968,314 10,608,293 1,230, ,897-1,150,639 1,704,713 3,117, Current portion of self insurance reserves - 20,808, ,750 Deferred income - 4,307, , Advance from third-party payors - 2,099,500-38, , Patient credit balances - 3,026, , , , Current portion of long-term debt - 16,585, ,894-33, Current portion of pension costs - 3,705, Accrued interest on long-term debt - 10,925, , Other Current Liabilities - 5,108, , ,087 60,097 1,022,507 5,000 Estimated third-party payor settlements , ,890-1,207,560 Total current liabilities - 174,779,536 29,774,032 3,254, ,841-3,266,943 3,253,654 8,452,791 5,000 - Due to affiliates ,210,179 1,328,209 6,084, ,049, Long-term debt, net of current portion - 474,226, ,196,652 84,900,778 - Asset retirement obligation - 3,247,932-65, , Accrued compensation payable - 88,924, Self insurance reserves - 42,248, ,250 Other noncurrent liabilities - 13,355,838-41, ,358-1,190, Sw ap Contracts - 80,196, Total liabilities - 876,979, ,984,211 4,688,622 6,261,747-3,546, ,302,977 49,224,996 84,905,778 - Net assets Unrestricted net assets (liabilities) 522,994, ,474,859 (109,779,690) 28,363,607 (5,000,953) 2,958,591 25,624,722 42,753,428 58,792,784 (117,122) 145,860 Less: Amounts due from affiliates - (33,682,373) Net unrestricted net assets (liabilities) 522,994, ,792,486 (109,779,690) 28,363,607 (5,000,953) 2,958,591 25,624,722 42,753,428 58,792,784 (117,122) 145,860 Temporarily restricted net assets 41,038,718 33,449,850-1,190,260 18,399-3,277, ,983 1,199,734 Permanently restricted net assets 32,764,529 29,167,245-3,223, , ,062 Total net assets (liabilities) 596,798, ,409,581 (109,779,690) 32,777,084 (4,982,554) 2,958,591 28,912,306 43,500,411 60,356,580 (117,122) 145,860 Total liabilities and net assets $ 596,798,192 $ 1,396,388,918 $ 53,204,521 $ 37,465,706 $ 1,279,193 $ 2,958,591 $ 32,458,597 $ 176,803,388 $ 109,581,576 $ 84,788,656 $ 145,860 36

157 St. Luke s Health Network, Inc. and Controlled Entities Consolidating Balance Sheet June 30, 2015 Schedule I St. Luke s St. Luke s Warren Hillcrest Warren PA Tw o Physician Hospital Em ergency Professional Hillcrest Rivers Consolidated Group NJ Foundation Services PC Alliance PC MSO, Inc Enterprises Inc Eliminations Totals Liabilities and Net Assets Current Accounts payable $ 302,607 $ 354,219 $ 5,741 $ - $ - $ 3 $ 74,397,259 Accrued salaries, w ages and taxes 1,001, ,759-36,175,181 Accrued vacation 109, ,011,374 Current portion of self insurance reserves 12, ,011,481 Deferred income ,310,200 Advance from third-party payors ,398,101 Patient credit balances ,658,982 Current portion of long-term debt ,624,267 Current portion of pension costs ,705,184 Accrued interest on long-term debt ,569,796 Other Current Liabilities - 4,620,912-4,658,023 (4,620,911) 11,018,197 Estimated third-party payor settlements (1,896,824) - Total current liabilities 1,427, ,978 4,626,653-4,658,023 (6,517,732) 227,880,022 Due to affiliates 6,390, ,241-1,363,292 (278,820,998) - Long-term debt, net of current portion ,324,221 Asset retirement obligation ,561,936 Accrued compensation payable ,924,423 Self insurance reserves 26, ,659,674 Other noncurrent liabilities ,617,591 Sw ap Contracts ,196,539 Total liabilities 7,843, , ,978 5,989,945-4,658,023 (285,338,730) 1,056,164,406 Net assets Unrestricted net assets (liabilities) (3,816,997) 250,209 (5,989,640) - (1,664,713) (518,374,033) 527,615,857 Less: Amounts due from affiliates ,682,373 - Net unrestricted net assets (liabilities) (3,816,997) 250,209 - (5,989,640) - (1,664,713) (484,691,660) 527,615,857 Temporarily restricted net assets 1,155,913 (42,238,452) 39,838,984 Permanently restricted net assets (32,764,529) 32,764,529 Total net assets (liabilities) (3,816,997) 1,406,122 - (5,989,640) - (1,664,713) (559,694,641) 600,219,370 Total liabilities and net assets $ 4,026,993 $ 1,800,363 $ 722,978 $ 305 $ - $ 2,993,310 $ (845,033,371) $ 1,656,383,776 37

158 St.Luke shealthnetwork,inc.andcontrolledentities Consolidating Balance Sheet June 30, 2014 St. Luke s Emergency Miners St. Luke s St. Luke s St. Luke s Hospital of St. Luke s St. Luke s and Quakertown Memorial Hospital St. Luke s Hospital New University Health Bethlehem, Physician Quakertown Transport Rehabilitation Medical Anderson Warren Monroe Valley Rehab Network, Inc. Pennsylvania Group Hospital Services Center Center Campus Hospital Campus LLC Assets Current Cash and cash equivalents $ - $ 74,684,261 $ 38,153 $ 131,428 $ 426 $ - $ 80,812 $ 658,940 $ 1,755,854 $ - $ 315,112 Investment in controlled entities 614,060, Patient accounts receivable, net - 122,199,956 11,464,083 15,985, ,802-10,074,082 28,281,133 10,696, ,664 Other accounts receivable - 6,486, ,456 81,617 19, ,942 2,074,096 2,324,724-35,821 Investments - 88,030,498-24, , Inventories - 11,196, , ,656 1,669,498 1,789, Prepaid expenses - 15,834,454 3,137, ,346 23, , ,661 1,110, Total current assets 614,060, ,432,320 15,339,021 17,222, ,595-11,435,558 33,074,328 17,752, ,597 Assets limited as to use Funds held by trustee - 29,970, , Under bond indenture - 31,865, Board designated funds - 278,415,478-1,830, , ,251,679-1,830, , , Property and equipment, net - 337,576,904 27,517,017 19,456, ,983-18,127, ,851,253 64,714, ,274 Goodw ill, net - 7,007,524 6,954, ,156,777-7,652,419 Due from affiliates - 239,055, ,958, ,207, Investments temporarily restricted as to use - 26,064,700-1,055,894 17, , , , Investments permanently restricted as to use - 27,334,449-3,112, , , Deferred financing costs - 6,179, , Annuity contracts - 15,347, Other assets - 35,934,592-93, ,833, ,926 1,432, Total assets $ 614,060,470 $ 1,353,185,229 $ 49,810,430 $ 42,771,497 $ 1,577,327 $ 2,958,591 $ 32,118,914 $ 192,693,894 $ 103,845,942 $ - $ 8,688,290 38

159 St. Luke s Health Network, Inc. and Controlled Entities Consolidating Balance Sheet June 30, 2014 Schedule I St. Luke s St. Luke s Warren Hillcrest Warren PA Two Physician Hospital Emergency Professional Hillcrest Rivers Consolidated Group NJ Foundation Services PC Alliance PC MSO, Inc Enterprises Inc Eliminations Totals Assets Current Cash and cash equivalents $ 361,124 $ 822,827 $ 376,521 $ - $ - $ 55,717 $ - $ 79,281,175 Investment in controlled entities (614,060,470) - Patient accounts receivable, net 512, , ,064,314 Other accounts receivable 494,936 13, ,770-2,119,781 (2,286,898) 12,555,169 Investments - 301,807-88,431,526 Inventories ,104,632 Prepaid expenses 153,663-12, ,107,295 Total current assets 1,522,555 1,137,634 1,152, ,075-2,175,498 (616,347,368) 418,544,111 Assets limited as to use Funds held by trustee ,694,585 Under bond indenture ,865,328 Board designated funds ,290, ,850,206 Property and equipment, net 466, ,563, ,387,369 Goodw ill, net 115, ,886,729 Due from affiliates ,679 (246,784,218) - Investments temporarily restricted as to use ,112,021 Investments permanently restricted as to use ,813,985 Deferred financing costs ,772,124 Annuity contracts ,347,341 Other assets - 120, ,786,428 Total assets $ 2,105,168 $ 1,257,696 $ 1,152,129 $ 106,075 $ - $ 4,300,246 $ (863,131,584) $ 1,547,500,314 39

160 St.Luke shealthnetwork,inc.andcontrolledentities Consolidating Balance Sheet June 30, 2014 Emergency Miners St. Luke s St. Luke s St. Luke s Hospital of St. Luke s St. Luke s and Quakertown Memorial Hospital St. Luke s Hospital New University Health Bethlehem, Physician Quakertown Transport Rehabilitation Medical Anderson Warren Monroe Valley Rehab Network, Inc. Pennsylvania Group Hospital Services Center Center Campus Hospital Campus LLC Liabilities and Net Assets Current Accounts payable $ - $ 55,322,968 $ 1,959,439 $ 450,759 $ 24,251 $ - $ 460,321 $ 1,442,449 $ 909,180 $ - $ 2,670 Accrued salaries, w ages and taxes - 12,100,249 13,550, , , ,087 1,118, ,346 Accrued vacation - 20,386,522 8,546,284 1,075, ,658-1,145,928 1,490,914 2,761, Current portion of self insurance reserves - 19,305, ,130 Deferred income - 4,390, ,801-48, Advance from third-party payors - 2,099,500-38, , Patient credit balances - 7,445,736-1,415, ,538 1,320, Current portion of long-term debt - 11,622, , , Current portion of pension costs - 3,273, ,394 87, ,524 46, ,789-1,674 Accrued interest on long-term debt - 9,448, , Other Current Liabilities - 6,197,726 33, , ,356 47, ,493 Estimated third-party payor settlements - (1,120,395) - 2,329, ,172, ,836 1,090,480 Total current liabilities - 150,473,271 24,216,835 5,974, ,816-5,397,791 5,416,433 7,473, ,690 Due to affiliates ,045,308 38,420 5,932, , ,796, ,192,898 Long-term debt, net of current portion - 463,620, ,030-39,291, Asset retirement obligation - 3,247,932-65, , Accrued compensation payable - 78,574,099 3,057,460 2,088,966 2, ,582 1,113,712 5,946,935-40,165 Self insurance reserves - 39,196, ,870 Other noncurrent liabilities - 12,129,098-43, ,255-1,432, Sw ap Contracts - 67,932, Total liabilities - 815,174, ,319,603 8,210,470 6,075,465-7,168, ,326,198 54,319,053-8,438,753 Net assets Unrestricted net assets (liabilities) 544,445, ,585,982 (89,509,173) 30,325,914 (4,515,887) 2,958,591 22,426,101 35,643,856 48,260, ,537 Less: Amounts due from affiliates - (33,682,373) Net unrestricted net assets (liabilities) 544,445, ,903,609 (89,509,173) 30,325,914 (4,515,887) 2,958,591 22,426,101 35,643,856 48,260, ,537 Temporarily restricted net assets 38,801,133 32,772,969-1,122,645 17,749-2,513, , ,248 Permanently restricted net assets 30,813,985 27,334,449-3,112, , ,063 Total net assets (liabilities) 614,060, ,011,027 (89,509,173) 34,561,027 (4,498,138) 2,958,591 24,950,082 36,367,696 49,526, ,537 Total liabilities and net assets $ 614,060,470 $ 1,353,185,229 $ 49,810,430 $ 42,771,497 $ 1,577,327 $ 2,958,591 $ 32,118,914 $ 192,693,894 $ 103,845,942 $ - $ 8,688,290 40

161 St. Luke s Health Network, Inc. and Controlled Entities Consolidating Balance Sheet June 30, 2014 Schedule I St. Luke s St. Luke s Warren Hillcrest Warren PA Tw o Physician Hospital Em ergency Professional Hillcrest Rivers Consolidated Group NJ Foundation Services PC Alliance PC MSO, Inc Enterprises Inc Eliminations Totals Liabilities and Net Assets Current Accounts payable $ 2,465,763 $ 388,333 $ 5,741 $ - $ - $ (2,249,055) $ 61,182,819 Accrued salaries, w ages and taxes 863, ,724-29,446,719 Accrued vacation ,520,445 Current portion of self insurance reserves 12, ,404,786 Deferred income ,441,143 Advance from third-party payors ,398,101 Patient credit balances ,935,159 Current portion of long-term debt ,758,905 Current portion of pension costs ,812,853 Accrued interest on long-term debt ,093,300 Other Current Liabilities - 4,614,219-8,578,962 (5,287,632) 14,808,683 Estimated third-party payor settlements ,431,319 Total current liabilities 3,341, ,057 4,619,960-8,578,962 (7,536,687) 209,234,232 Due to affiliates 1,943, , ,072 1,270,397 (280,466,591) - Long-term debt, net of current portion ,918,395 Asset retirement obligation ,561,211 Accrued compensation payable ,508,461 Self insurance reserves 26, ,397,596 Other noncurrent liabilities ,637,798 Sw ap Contracts ,932,360 Total liabilities 5,310, ,386 1,152,129 5,890,357-8,578,962 (288,003,278) 928,190,053 Net assets Unrestricted net assets (liabilities) (3,205,753) 288,604 (5,784,282) - (4,278,716) (538,286,313) 550,604,391 Less: Amounts due from affiliates ,682,373 - Net unrestricted net assets (liabilities) (3,205,753) 288,604 - (5,784,282) - (4,278,716) (504,603,940) 550,604,391 Temporarily restricted net assets 740,706 (39,710,381) 37,891,885 Permanently restricted net assets (30,813,985) 30,813,985 Total net assets (liabilities) (3,205,753) 1,029,310 - (5,784,282) - (4,278,716) (575,128,306) 619,310,261 Total liabilities and net assets $ 2,105,168 $ 1,257,696 $ 1,152,129 $ 106,075 $ - $ 4,300,246 $ (863,131,584) $ 1,547,500,314 41

162 St.Luke shealthnetwork,inc.andcontrolledentities Consolidating Statement of Operations Year Ended June 30, 2015 St. Luke s Emergency Miners St. Luke s St. Luke s St. Luke s Hospital of St. Luke s St. Luke s and Quakertown Memorial Hospital St. Luke s Hospital New University Health Bethlehem, Physician Quakertown Transport Rehabilitation Medical Anderson Warren Monroe Valley Rehab Network, Inc. Pennsylvania Group Hospital Services Center Center Campus Hospital Campus LLC Patient service revenue (net of contractual - allow ances and discounts) $ - $ 681,789,385 $ 188,810,380 $ 60,497,834 $ 3,974,220 $ - $ 56,918,523 $ 164,455,024 $ 123,878,730 $ - $ 225,858 Provision for bad debts - (35,722,402) (22,828,143) (4,831,295) (587,002) - (4,392,631) (8,548,550) (13,029,560) - - Net patient service revenue less provision for bad debts - 646,066, ,982,237 55,666,539 3,387,218-52,525, ,906, ,849, ,858 Other operating revenue and gains - 19,495,055 4,489,906 1,706,341 89,768-1,066,016 2,670,113 1,352, Net assets released from restrictions used for operations - 1,254,112 39,831 99, , ,198 1, Equity in net income fromcontrolled entities (21,450,407) Total revenue (21,450,407) 666,816, ,511,974 57,472,649 3,476,986-53,617, ,682, ,202, ,265 Operating expenses Salaries and employee benefits - 302,794, ,070,516 27,209,748 3,005,887-25,556,938 48,179,262 50,036, ,433 Supplies and other - 249,075,160 51,507,200 23,777, ,790-17,175,608 52,872,217 36,588, ,122 47,206 Depreciation and amortization - 36,951,046 5,466,233 3,749, ,304-3,017,375 17,386,393 7,473,768-26,526 Interest - 15,490,440 14,929 1,177,714 6, ,459 7,195,691 1,709, Total expenses - 604,311, ,058,878 55,914,068 3,968,202-46,263, ,633,563 95,807, , ,165 Income (loss) from operations (21,450,407) 62,504,842 (86,546,904) 1,558,581 (491,216) - 7,354,469 33,049,222 16,395,255 (117,122) (23,900) Nonoperating gains (losses) Support of Physician Practices - (49,742,421) 68,195,521 (3,458,041) - - (4,052,725) (10,942,335) Unrestricted investment income fromassets limited as to use - 7,396,069-45, Realized gain (loss) on unrestricted investment - 9,632, , Unrestricted gifts, grants and bequests - 92,973-4,510 6,150-3,307 7, ,772 Unrestricted investment income from restricted net assets - 262,078 - (3,082) - - (3,928) Income from Equity method investments - 2,089, (2,948) Gain (loss) on disposal of property and - equipment - (612,412) (13,500) 74, (156,494) (1,827) (3,380) - - Restructuring Costs - (237,378) (13,980) (132,731) - - (87,402) (73,388) (116,300) Pre-Acquisition/Merger Costs Donations to Other Organizations - (264,042) - (65,207) - - (9,966) (9,356,589) Unrealized gain (loss) on derivative - (4,756,192) Goodw ill Impairment - - (1,891,654) Gain on Retirement/Purchase of Bonds Nonoperating gains - (36,139,612) 66,276,387 (3,415,072) 6,150 - (4,307,208) (20,367,124) 1, Excess (deficiency) of revenue and gains in excess of expenses (21,450,407) 26,365,230 (20,270,517) (1,856,491) (485,066) - 3,047,261 12,682,098 16,396,840 (117,122) (23,900) Net assets released from restrictions used for purchase of property and equipment - 943, , ,012 - Contribution of building/land , Other Changes in Unrestricted Assets - (20,902) (6,082,538) - - (79,777) Net Asset Transfer To/From Affiliate (527,160) Change in additional pension liability - (34,249,808) Warren Physician Practice Support (5,337,474) Change in fair market value of total return SWAP - (6,062,092) Net unrealized gains on investments - (8,086,148) - (105,816) Extraordinary Gains/(Losses) - (1,353) (21,450,407) (21,111,123) (20,270,517) (1,962,307) (485,066) - 3,198,621 7,109,572 10,532,206 (117,122) (103,677) Increase (decrease) in unrestricted net assets $ (21,450,407) $ (21,111,123) $ (20,270,517) $ (1,962,307) $ (485,066) $ - $ 3,198,621 $ 7,109,572 $ 10,532,206 $ (117,122) $ (103,677) 42

163 St. Luke s Health Network, Inc. and Controlled Entities Consolidating Statement of Operations Year Ended June 30, 2015 Schedule II St. Luke s St. Luke s Warren Hillcrest Warren PA Tw o Physician Hospital Emergency Professional Hillcrest Rivers Consolidated Group NJ Foundation Services PC Alliance PC MSO, Inc Enterprises Inc Eliminations Totals Patient service revenue (net of contractual allow ances and discounts) $ 10,724,151 $ - $ 7,560,740 $ - $ - $ - $ (751,845) $ 1,298,083,000 Provision for bad debts (439,889) - (2,291,353) (92,670,825) Net patient service revenue less provision for bad debts 10,284,262-5,269, (751,845) 1,205,412,175 Other operating revenue and gains 4, , ,013,599 (1,013,599) 31,318,732 Net assets released from restrictions used for operations ,527,519 Equity in net income from controlled entities ,450,407 - Total revenue 10,289, ,961 5,269, ,013,599 19,684,963 1,238,258,426 Operating expenses Salaries and employee benefits 10,195,838 79,539 3,764, ,070,471 Supplies and other 6,111,147 89,806 1,504, , ,451 (1,766,054) 438,201,395 Depreciation and amortization 180, ,378-74,529,394 Interest ,107,631 Total expenses 16,487, ,345 5,269, , ,829 (1,765,445) 1,209,908,891 Income (loss) from operations (6,198,721) 274,616 - (205,358) - 795,770 21,450,408 28,349,535 Nonoperating gains (losses) Support of Physician Practices Unrestricted investment income fromassets (1) limited as to use ,441,518 Realized gain (loss) on unrestricted investment ,752,491 Unrestricted gifts, grants and bequests ,727 Unrestricted investment income from restricted net assets ,068 Income from Equity method investments 5, ,948 2,094,866 Gain (loss) on disposal of property and equipment (713,277) Restructuring Costs (661,179) Pre-Acquisition/Merger Costs Donations to Other Organizations (9,695,804) Unrealized gain (loss) on derivative (4,756,192) Goodw ill Impairment (1,891,654) Gain on Retirement/Purchase of Bonds Nonoperating gains - 5, ,948 2,063,563 Excess (deficiency) of revenue and gains in excess of expenses (6,198,721) 280,125 - (205,358) - 795,770 21,453,356 30,413,098 Net assets released from restrictions used for purchase of property and equipment ,573,513 Contribution of building/land ,809 Other Changes in Unrestricted Assets - (328,879) (6,512,096) Net Asset Transfer To/From Affiliate ,068,233 (1,541,073) - Change in additional pension liability (34,249,808) Warren Physician Practice Support 5,587, (250,000) (3) - Change in fair market value of total return SWAP (6,062,092) Net unrealized gains on investments 10, (8,181,605) Extraordinary Gains/(Losses) (1,353) (611,244) (38,395) - (205,358) - 2,614,003 19,912,280 (22,988,534) Increase (decrease) in unrestricted net assets $ (611,244) $ (38,395) $ - $ (205,358) $ - $ 2,614,003 $ 19,912,280 $ (22,988,534) 43

164 St.Luke shealthnetwork,inc.andcontrolledentities Consolidating Statement of Operations Year Ended June 30, 2014 St. Luke s Emergency Miners St. Luke s St. Luke s St. Luke s Hospital of St. Luke s St. Luke s and Quakertown Memorial Hospital St. Luke s Hospital New University Health Bethlehem, Physician Quakertown Transport Rehabilitation Medical Anderson Warren Monroe Valley Rehab Network, Inc. Pennsylvania Group Hospital Services Center Center Campus Hospital Campus LLC Patient service revenue (net of contractual - allow ances and discounts) $ - $ 657,665,628 $ 164,030,013 $ 64,693,934 $ 3,404,032 $ - $ 52,922,484 $ 152,198,666 $ 123,385,322 $ - $ 457,228 Provision for bad debts - (56,147,587) (22,390,158) (8,341,444) (293,648) - (4,669,376) (11,675,488) (16,862,455) - - Net patient service revenue less provision for bad debts - 601,518, ,639,855 56,352,490 3,110,384-48,253, ,523, ,522, ,228 Other operating revenue and gains - 21,905,165 3,996,026 2,840, ,794-1,959,175 2,321,711 1,611, Net assets released from restrictions used for operations - 2,116,456 38,263 77,166 12,086-60,156 91,731 76, Equity in net income fromcontrolled entities 67,428, Total revenue 67,428, ,539, ,674,144 59,270,390 3,226,264-50,272, ,936, ,211, ,402 Operating expenses Salaries and employee benefits - 295,915, ,913,516 28,728,302 2,754,942-25,138,263 43,630,374 52,052, ,792 Supplies and other - 225,641,539 42,247,341 21,954, ,999-15,033,771 44,283,819 37,649,294-89,111 Depreciation and amortization - 37,143,426 3,969,149 3,789, ,174-3,058,241 18,138,971 6,924,015-72,449 Interest - 16,839,342 6, ,405 2, ,417 5,502,085 1,755, Total expenses - 575,539, ,136,337 54,799,178 3,589,391-43,354, ,555,249 98,381, ,352 Income (loss) from operations 67,428,111 50,000,201 (74,462,193) 4,471,212 (363,127) - 6,917,747 31,381,371 9,829,423-68,050 Nonoperating gains (losses) Support of Physician Practices - (45,566,315) 61,004,863 (2,585,722) - - (2,428,693) (10,424,133) Unrestricted investment income fromassets limited as to use - 6,928,755-41, Realized gain (loss) on unrestricted investment - 1,968, Unrestricted gifts, grants and bequests - 104,171-10,272 7,177-2,085 (78,092) 66,708 Unrestricted investment income from restricted net assets - 271,554 - (4,653) - - (3,842) Income from Equity method investments - 15,112,969-2,558, (515) (22,864) Gain (loss) on disposal of property and - equipment - 2,086,859 (40,236) 7,348 (11,771) - (256,261) 46, ,860-1,134 Restructuring Costs - (99,968) (2,125,000) (35,054) - - (1,223) (12,160) (43,801) Pre-Acquisition/Merger Costs Donations to Other Organizations - (556,976) - (29,830) - - (17,500) (2,479) Unrealized gain (loss) on derivative - 1,888, Goodw ill Impairment - - (15,031) Gain on Retirement/Purchase of Bonds Nonoperating gains - (17,861,497) 58,824,596 (36,457) (4,594) - (2,705,434) (10,470,430) 170,280-1,134 Excess (deficiency) of revenue and gains in excess of expenses 67,428,111 32,138,704 (15,637,597) 4,434,755 (367,721) - 4,212,313 20,910,941 9,999,703-69,184 Net assets released from restrictions used for purchase of property and equipment - 8,735,137-32, , ,589 37,200 Contribution of building Other Changes in Unrestricted Assets (2,224,120) Net Asset Transfer To/From Affiliate - (15,069,060) ,069,060 - Change in additional pension liability - (22,592,401) (1,139,950) (773,904) (937) - (253,034) (412,614) 1,551,603 Warren Physician Practice Support (2,512,762) Change in fair market value of total return SWAP - (2,879,088) Net unrealized gains on investments - 31,530, , Extraordinary Gains/(Losses) - (19,312) ,428,111 31,844,042 (16,777,547) 3,951,575 (368,658) - 4,175,368 35,643,856 9,075,972-69,184 Increase (decrease) in unrestricted net assets $ 67,428,111 $ 31,844,042 $ (16,777,547) $ 3,951,575 $ (368,658) $ - $ 4,175,368 $ 35,643,856 $ 9,075,972 $ - $ 69,184 44

165 St. Luke s Health Network, Inc. and Controlled Entities Consolidating Statement of Operations Year Ended June 30, 2014 Schedule II St. Luke s St. Luke s Warren Hillcrest Warren PA Two Physician Hospital Emergency Professional Hillcrest Rivers Consolidated Group NJ Foundation Services PC Alliance PC MSO, Inc Enterprises Inc Eliminations Totals Patient service revenue (net of contractual allow ances and discounts) $ 9,038,725 $ - $ 8,302,396 $ - $ - $ - $ (615,333) $ 1,235,483,095 Provision for bad debts (456,042) - (2,545,865) (123,382,063) Net patient service revenue less provision for bad debts 8,582,683-5,756, (615,333) 1,112,101,032 Other operating revenue and gains 8, ,628-5,012-1,391,265 (1,391,267) 35,106,782 Net assets released fromrestrictions used for operations ,472,852 Equity in net income fromcontrolled entities (67,428,111) - Total revenue 8,590, ,628 5,756,531 5,012-1,391,265 (69,434,711) 1,149,680,666 Operating expenses Salaries and employee benefits 7,690,353 74,390 3,716, ,842,716 Supplies and other 4,616, ,181 2,039, ,786 - (73,554) (2,006,602) 392,429,721 Depreciation and amortization 225, ,103 73,569,540 Interest ,556,392 Total expenses 12,532, ,571 5,756, ,786 - (14,451) (2,006,600) 1,124,398,369 Income (loss) from operations (3,941,386) 142,057 - (166,774) - 1,405,716 (67,428,111) 25,282,297 Nonoperating gains (losses) Support of Physician Practices Unrestricted investment income from assets limited as to use ,971,040 Realized gain (loss) on unrestricted investment ,969,155 Unrestricted gifts, grants and bequests ,321 Unrestricted investment income from restricted net assets ,059 Income from Equity method investments 5, ,862 17,677,259 Gain (loss) on disposal of property and equipment (12,182) - 1,991,700 Restructuring Costs (2,317,206) Pre-Acquisition/Merger Costs Donations to Other Organizations (606,785) Unrealized gain (loss) on derivative ,888,763 Goodw ill Impairment (15,031) Gain on Retirement/Purchase of Bonds Nonoperating gains - 5, (12,182) 22,862 27,934,275 Excess (deficiency) of revenue and gains in excess of expenses (3,941,386) 148,054 - (166,774) - 1,393,534 (67,405,249) 53,216,572 Net assets released fromrestrictions used for purchase of property and equipment ,322,002 Contribution of building Other Changes in Unrestricted Assets - (163,817) (2,387,937) Net Asset Transfer To/From Affiliate (306,938) 306,938 (2,000,000) - Change in additional pension liability (23,621,237) Warren Physician Practice Support 2,750, (250,000) 12,020 - Change in fair market value of total return SWAP (2,879,088) Net unrealized gains on investments 43, ,831,993 Extraordinary Gains/(Losses) (19,312) (1,190,644) 28,203 - (166,774) (306,938) 1,450,472 (69,393,229) 65,462,993 Increase (decrease) in unrestricted net assets $ (1,190,644) $ 28,203 $ - $ (166,774) $ (306,938) $ 1,450,472 $ (69,393,229) $ 65,462,993 45

166 [This Page Intentionally Left Blank]

167 Appendix C Definitions of Certain Terms and Summary of Certain Provisions of the Loan and Trust Agreement and the Mortgage

168 [This Page Intentionally Left Blank]

169 APPENDIX C DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AND TRUST AGREEMENT AND THE MORTGAGE The following are definitions of certain terms used in the Trust Agreement and summaries of certain provisions of the Trust Agreement and the Mortgage. These summaries should not be regarded as full statements of the documents themselves, or of the portions summarized. Certain portions of the Trust Agreement are also summarized in the section captioned THE TRUST AGREEMENT in the forepart of this Official Statement. Reference is made to the documents in their entireties for the complete statements of the provisions thereof. A copy of the Trust Agreement shall be on file at the designated corporate trust office of the Trustee. A copy of the Mortgage shall be on file at the designated corporate trust office of the Master Trustee. Any capitalized terms used in this Appendix C and not defined below have the same meaning given to such terms in the forepart of this Official Statement. DEFINITIONS OF CERTAIN TERMS The following are definitions of certain terms used in the Trust Agreement: Account means any account established within any of the Funds existing under the Trust Agreement from time to time. Accountant means a firm of independent certified public accountants (which may be the external auditing firm of the Obligated Group or of any Obligated Group Member). Additional Payments means payments required to be made by the Hospitals under Section 4.6 of the Trust Agreement [primarily in respect of certain fees and expenses of the Authority and the Trustee]. Administrative Expenses means all expenses of the Authority which are properly chargeable as administrative expenses in respect of the Trust Agreement and any project financed with 2016 Bonds, including all fees and expenses of the Authority s professional advisors reasonably necessary and fairly attributable to the Trust Agreement or any such project, including, without limiting the generality of the foregoing, fees and expenses of any Accountant, Consultant or Counsel. Affiliate of any entity means any other entity directly or indirectly controlling or controlled by or under direct or indirect common control with such specified entity. For purposes of this definition, control when used with respect to any specified entity means the power to direct the management and policies of such entity, directly or indirectly, whether through ownership of voting securities, by contract, membership or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing. Anderson means St. Luke s Hospital Anderson Campus. Authority means the Northampton County General Purpose Authority. C-1

170 Authorized Denomination means the authorized denominations of the 2016 Bonds, which shall be $5,000 and integral multiples $5,000 in excess of the Trust Agreement. Authorized Officer means (a) in the case of the Authority, the Chairman or Vice- Chairman of the Authority, and when used with reference to an act or document of the Authority also means any other Person authorized to perform the act or execute the document, and (b) in the case of either of the Hospitals or any other Obligated Group Member, the Chairman or the Vice-Chairman of the Board of Trustees, the President, any Vice President or any other officer of such Hospital or Obligated Group Member authorized by a resolution of its Governing Body, and when used with reference to an act or document of either Hospital or any other Obligated Group Member, also means any other Person or Persons authorized to perform the act or execute the document. Bankruptcy Code means Title 11 of the United States Code, as amended, and any successor statute. Bond Counsel means Reed Smith LLP or any other firm of nationally recognized bond counsel familiar with the transactions contemplated under the Master Indenture and not unacceptable to the Trustee, the Hospitals and the Authority. Bond Payments means payments required to be made by the Hospitals under Section 4.5 of the Trust Agreement [primarily in respect of the principal or Redemption Price of and interest on the 2016 Bonds].. Bond Purchase Contract means, with respect to the 2016 Bonds, the Bond Purchase Agreement, dated July [ ], 2016, by and among the Hospitals, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as underwriter, and the Authority. Business Day means a day which is not (a) a Saturday, Sunday or legal holiday on which banking institutions in the Commonwealth are authorized or required by law to close or (b) a day on which the New York Stock Exchange is closed. Code means the Internal Revenue Code of 1986, as amended from time to time. Each reference to a section of the Code shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations, relating to such section which are applicable to the 2016 Bonds or the use of the proceeds thereof. Commonwealth means the Commonwealth of Pennsylvania. Construction Fund means the fund by that name established pursuant to Section 4.3 of the Trust Agreement. Consultant means a Person which is not, and no member, stockholder, director, officer or employee of which is, an officer or employee of any Obligated Group Member, and which is a recognized professional management consultant of favorable reputation or an Accountant, and having the skill and experience necessary to render the particular report. C-2

171 Costs of Issuance means any underwriter s discount or fees, counsel fees (including, without limitation, fees of any Bond Counsel, Counsel, Authority s counsel, counsel to the Hospitals, Trustee s counsel or other specialized counsel) incurred in connection with the issuance of any 2016 Bonds, any bond insurance premium, financial advisor fees, rating agency fees, Trustee s fee incurred in connection with the issuance of any 2016 Bonds and the Trustee s acceptance fee and first year administration fee, Accountant fees related to the issuance of any 2016 Bonds, printing costs, costs incurred in connection with the public approval process for any 2016 Bonds, costs of engineering and feasibility studies necessary to the issuance of any 2016 Bonds and any other fees or costs which, in the opinion of Bond Counsel, are deemed costs of issuance for purposes of Section 147(g) of the Code. Counsel means an attorney duly admitted to practice law before the highest court of any state and, without limitation, may include legal counsel for a Hospital, any other Obligated Group Member or the Trustee. Date of Issuance means, with respect to the 2016 Bonds, the date that the 2016 Bonds are initially issued and authenticated. Debt Service Fund means the fund by that name established pursuant to Section 4.2 of the Trust Agreement. Default has the meaning set forth in Subsection 6.1(a) of the Trust Agreement. DTC means The Depository Trust Company, New York, New York and its successors and assigns. DTC Bonds means 2016 Bonds held by DTC or by any other Securities Depository in a book-entry system. Eligible Investments means the following investments, to the extent permitted by Pennsylvania law, and as directed in writing by the Authority or the Hospitals as provided in the Trust Agreement: (a) Government Obligations; (b) Debt obligations (i) which are issued by any state or political subdivision thereof or any agency or instrumentality of such a state or political subdivision, and (ii) which are, or the obligor on which is, at the time of purchase, rated by a Rating Agency and, as to any such Rating Agency, in any of its four (4) highest Rating Categories; (c) any bond, debenture, note, participation certificate or other similar obligation which is either (i) issued by the Federal National Mortgage Association, the Federal Home Loan Bank System, the Federal Home Loan Mortgage Corporation or the Student Loan Marketing Association, or (ii) backed by the full faith and credit of the United States of America; (d) deposit, money market or demand accounts, and certificates of deposit, whether negotiable or nonnegotiable, issued by any bank, trust company or national banking association (including the Trustee and any Affiliate of the Trustee), provided that, unless issued by a C-3

172 Qualified Financial Institution, such certificates of deposit must be (i) continuously and fully insured by the Federal Deposit Insurance Corporation and (ii) continuously and fully secured, to the extent not insured by the Federal Deposit Insurance Corporation, by Government Obligations having a market value (exclusive of accrued interest, other than accrued interest paid in connection with the purchase of such securities) at all times at least equal to the principal amount of such certificates of deposit (or portion thereof not insured as aforesaid), which securities shall be lodged with the Trustee, or any Federal Reserve Bank, as custodian, by the issuer of such certificates of deposit; (e) bonds, notes, debentures, investment agreements or other evidences of indebtedness issued or guaranteed by a corporation or other financial institution which are, or the obligor on which is, at the time of purchase, rated by a Rating Agency and, as to any such Rating Agency, in any of its four (4) highest Rating Categories; (f) investments in money market funds (including money market funds for which the Trustee or an Affiliate performs a service and receives a fee) which are registered under the Investment Company Act of 1940, as amended, whose shares are registered under the Securities Act of 1933, as amended, and which, at the time of purchase, are rated by a Rating Agency and, as to any such Rating Agency in any of its three (3) highest Rating Categories, provided that sums not in excess of $1,000,000 may be invested in money market instruments which do not satisfy the foregoing requirements for periods of up to six (6) months; and (g) repurchase agreements with respect to and secured by Government Obligations, which agreements may be entered into with any Qualified Financial Institution or with primary government securities dealers which report to, trade with and are recognized as primary dealers by a Federal Reserve Bank and are members of the Securities Investors Protection Corporation, provided the Trustee has a perfected first security interest in the collateral, that the Trustee has possession of the collateral, or an agent of the Trustee has possession of the collateral in an account for the Trustee, and that the collateral is, to the knowledge of the Trustee, free and clear of third party claims. Event of Bankruptcy means: (a) any Obligated Group Member shall commence a voluntary case under the Bankruptcy Code, or shall become insolvent or unable to pay its debts as they become due, or shall make an assignment for the benefit of creditors, or shall apply for, consent to or acquiesce in the appointment of, or taking possession by, a trustee, receiver, custodian or similar official or agent for itself or any substantial part of its property; (b) a trustee, receiver, custodian or similar official or agent shall be appointed for any Obligated Group Member, or for any substantial part of any such Person s property and such trustee or receiver shall not be discharged within ninety (90) days; or (c) any Obligated Group Member shall have an order or decree for relief in an involuntary case under the Bankruptcy Code entered against it as debtor, or a petition seeking reorganization, readjustment, arrangement, composition, or other similar relief as to it under the Bankruptcy Code or any similar law for the relief of debtors shall be brought against it and either such order or decree for relief is not discharged or vacated within ninety (90) days. Event of Default has the meaning set forth in Subsection 6.1(a) of the Trust Agreement. C-4

173 Existing Master Indenture means the Master Trust Indenture, dated as of June 1, 1987, as previously amended and supplemented, among the Hospitals, St. Luke s Warren Hospital, Inc., St. Luke s Hospital Monroe Campus, and The Bank of New York Mellon Trust Company, N.A., as master trustee. Favorable Opinion of Bond Counsel means an opinion of Bond Counsel to the Authority, addressed to the Authority, the Hospitals and the Trustee, to the effect that the action proposed to be taken is authorized or permitted by the laws of the Commonwealth and the Trust Agreement, will not adversely affect the validity of the 2016 Bonds and will not, in and of itself, result in the inclusion of interest on any of the 2016 Bonds in gross income for federal income tax purposes. First Supplement to Amended and Restated Master Indenture means that certain First Supplement to the Amended and Restated Master Indenture, dated as of July 1, 2016, between the Obligated Group Agent and the Master Trustee, as it may be amended, restated, supplemented or modified from time to time. Fitch means Fitch, Inc., d/b/a Fitch Ratings, a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Fitch shall be deemed to refer to any other nationally recognized securities rating agency designated by the Hospitals, by notice to the Authority and the Trustee, and not objected to by the Authority. Funds means any of the funds existing under the Trust Agreement from time to time. Governing Body means, with respect to any Obligated Group Member, its board of directors, board of trustees, or other board or group of individuals in which the power to direct the management and policies of the Obligated Group Member are vested. Government Obligations means direct obligations (including obligations issued or held in book-entry form on the books of the Department of the Treasury) of the United States of America. Holder means the registered owner of any of the 2016 Bonds from time to time as shown in the books kept by the Trustee as registrar and transfer agent. Hospitals shall mean SLH and Anderson. Interest Payment Date means each February 15 and August 15, commencing February 15, Lien means any mortgage, pledge, security interest, lien, judgment lien, easement, or other encumbrance on title. Master Indenture means that certain Amended and Restated Master Trust Indenture, dated as of July 1, 2016, among the Obligated Group and the Master Trustee, as supplemented and as may be amended, restated, supplemented, modified or replaced from time to time. C-5

174 Master Trustee means The Bank of New York Mellon Trust Company, N.A., in its capacity as master trustee under the Master Indenture, and any successor thereto. Moody s means Moody s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Moody s shall be deemed to refer to any other nationally recognized securities rating agency designated by the Hospitals, by notice to the Authority and the Trustee, and not objected to by the Authority. New Money Project means and includes various capital projects of the Hospitals consisting of the construction of a 75,000 square foot ambulatory surgery center that will house six operating rooms and four procedure rooms and various other capital projects for general purposes of the Hospitals, including, without limitation, renovations, repairs, acquisitions of capital equipment and information technology acquisition and improvements, at various locations of the Hospitals in Northampton County, Pennsylvania and Lehigh County, Pennsylvania. Obligated Group means the Hospitals and all other members of the Obligated Group under the Master Indenture. Obligated Group Agent means SL-Bethlehem or such other Person acting in the capacity as Obligated Group Agent under the Master Indenture. Obligated Group Member means, at any time, a Person that is a member of the Obligated Group at such time. Officer s Certificate means a certificate signed by an Authorized Officer of the Authority or an Authorized Officer of one of the Hospitals, as appropriate. Opinion of Counsel means a written opinion of Counsel. Outstanding when used to modify any 2016 Bonds, refers to any such 2016 Bonds, other than those: (a) which have been exchanged or replaced, or delivered to the Trustee for credit against a sinking fund installment; (b) which have been paid; (c) which have become due and for the payment of which moneys have been duly provided to the Trustee; and (d) for which there have been irrevocably set aside with the Trustee sufficient funds, or obligations described in Section 2.3 of the Trust Agreement bearing interest at such rates and with such maturities as will provide, in the determination of the Trustee based solely upon the written verification of an Accountant, sufficient funds to pay the principal or Redemption Price of and interest, on such 2016 Bonds; provided, however, that if any such 2016 Bonds are to be redeemed and not purchased in lieu of cancellation prior to maturity, the Authority shall have taken all action necessary to redeem such 2016 Bonds and notice of such redemption shall have been duly mailed in accordance with the Trust Agreement or irrevocable instructions so to mail shall have been given to the Trustee. C-6

175 Participant means a direct participant in the Securities Depository and such securities brokers and dealers, banks, and trust companies that, either directly or indirectly, clear through or maintain a custodial relationship with such direct participant. Paying Agent means, initially, the Person acting as Trustee hereunder, and any successor Paying Agent designated from time to time pursuant to Section 4.8 of the Trust Agreement. Person means any natural person, firm, joint venture, joint operating agreement, association, partnership, business trust, corporation, limited liability company, public body, agency or political subdivision thereof or any other similar entity. Project means and includes the New Money Project and the Refunding Project. Project Costs means costs paid to acquire, construct and equip the New Money Project, including: (a) costs of architectural and engineering services related to the New Money Project, including, without limitation, the costs of preparation of studies, surveys, reports, tests, plans and specifications; (b) costs of legal, accounting, marketing, feasibility and other special services related to the New Money Project; (c) Costs of Issuance (provided that, Costs of Issuance characterized as such under the Code may not exceed two percent (2%) of the proceeds of the 2016 Bonds if paid with such proceeds); (d) costs incurred in connection with the acquisition, construction, improvement, rehabilitation or extension of the Project Facilities, including costs incurred by or charged through to the New Money Project by either Hospital s personnel or management units responsible for portions of the New Money Project; (e) fees and charges incurred in connection with applications to federal, state and local governmental agencies for any requisite approvals or permits regarding the acquisition, construction, installation, and expected operation of the Project Facilities; (f) costs incurred in connection with the acquisition and installation of any machines, equipment, applications, fixtures, appurtenances or personal property of any kind or nature constituting part of the New Money Project; (g) premiums for any necessary title, casualty and other insurance purchased in connection with the construction and installation of the Project Facilities; (h) the principal amount of, including any capitalized interest and other costs incurred in connection with, and any accrued interest on, any interim financing of any of the foregoing; and C-7

176 (i) interest expense on the 2016 Bonds, and Trustee, paying agent and registrar fees and expenses (including, without limitation, legal fees and expenses) accruing during the period Project Facilities are being constructed. Project Facilities means the buildings, improvements and equipment which are financed or refinanced as part of the Project. Qualified Financial Institution means a bank, trust company, national banking association, insurance company or other financial services company whose unsecured long term debt obligations or insurance claims paying abilities (as applicable) are rated by a Rating Agency and, as to any such Rating Agency, in any of its four (4) highest Rating Categories. Rating Agency means severally and collectively, S&P, Moody s and Fitch, as applicable. Rating Category means, with respect to a particular investment or credit facility or to the provider thereof, any of the principal rating categories which are assigned by a Rating Agency to investments, credit facilities or providers of the type in question; provided that distinctions within any such principal rating category (including distinctions identified by numerical symbols or symbols such as + or - ) shall be disregarded for purposes of any specific Rating Category or minimum Rating Category required hereunder. Rebate Fund means the Fund by that name established pursuant to Section 4.4 of the Trust Agreement. Record Date the first day of the calendar month (or the immediately preceding Business Day if such first day is not a Business Day) in which the scheduled Interest Payment Date in question for the 2016 Bonds occurs. Redemption Price means the principal amount of any 2016 Bond to be redeemed pursuant hereto, plus the applicable premium, if any, payable upon redemption. Refunding Project means the refunding of the entire outstanding aggregate principal amount of the Authority s Hospital Revenue 2016 Bonds, Series A of 2008 (Saint Luke s Hospital Project). Register means the books and records in which the Trustee shall maintain information concerning the record owners of the 2016 Bonds. Related Bond Documents means the Bond Purchase Contract, the Tax Certificate and any other documents relating to the 2016 Bonds, the security therefor or the federal tax-exempt status thereof. Representation Letter means the blanket issuer letter of representations delivered by the Authority to DTC. S&P means Standard & Poor s Ratings Services, its successors and their assigns, and, if such entity shall be dissolved or liquidated or shall no longer perform the functions of a C-8

177 securities rating agency, S&P shall be deemed to refer to any other nationally recognized securities rating agency designated by the Hospitals, by notice to the Authority and the Trustee, and not objected to by the Authority. Securities Depository means DTC or any successor securities depository appointed in accordance with the provisions of the Trust Agreement. Settlement Fund means the fund by that name established pursuant to Section 3.1(c) of the Trust Agreement. SLH means Saint Luke s Hospital of Bethlehem Pennsylvania. Special Record Date means, with respect to any 2016 Bond, the date established by the Trustee in connection with the payment of Defaulted Interest on such 2016 Bond pursuant to Section 3.4 of the Trust Agreement. Supplemental Agreement means any agreement amending and supplementing the Trust Agreement entered into in accordance with the requirements of the Trust Agreement. Tax Certificate means the Tax Compliance Agreement executed and delivered by the Hospitals and the Authority on the date of the original issuance and delivery of the 2016 Bonds. Trust Estate has the meaning set forth in Section 2.1 of the Trust Agreement Master Note means that certain Master Indenture Promissory Note, Series 2016A issued under that certain Master Trust Indenture dated as of June 1, 1987 (as previously supplemented and amended, the Original Master Trust Indenture ) by and among the Obligated Group and the Master Trustee, as amended and restated by the Amended and Restated Master Trust Indenture, dated as of July 1, 2016, by and among the Obligated Group and the Master Trustee. SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT The following are summaries of certain provisions of the Trust Agreement. These summaries should not be regarded as full statements of the document itself, or of the portions summarized. Reference is made to the document in its entirety, copies of which are on file at the principal corporate trust office of the Trustee, for the complete statements of the provisions thereof. Assignment and Pledge Under the Trust Agreement, the Authority assigns and pledges to the Trustee in trust upon the terms thereof and grants to the Trustee a continuing security interest in (a) the rights, title and interest of the Authority under the Trust Agreement, (b) all of the Authority s rights, whether currently existing or hereafter acquired, to enforce the loan of proceeds of Bonds made by the Authority to the Hospitals pursuant to the terms of the Trust Agreement, and (c) all Bond Payments and Additional Payments and other revenues to be received from the Hospitals and all funds and investments held from time to time in the Funds established under the Trust C-9

178 Agreement; but not including funds received by the Authority for its own use, whether as administrative fees, reimbursement or indemnification, and the rights thereto (the Trust Estate ). The Hospitals join in the pledge of, and grant of a security interest in, such funds and investments to the extent of their interest therein. The assignment, pledge and security interest described above is for the benefit of the Holders and the Trustee; provided, however, that funds and investments held in the Rebate Fund are not pledged to secure any Bonds and shall be applied solely as provided in the Trust Agreement. Deposit of Funds for Payment of Bonds; Defeasance When the Bonds have been paid or redeemed in full as provided in the Trust Agreement, or after there have been deposited with the Trustee sufficient cash, or cash invested in Government Obligations in such principal amounts, bearing interest at such rates and with such maturities as will provide, in the determination of the Trustee solely in reliance on an Accountant s verification, sufficient funds to pay the principal or Redemption Price of whether at maturity or upon earlier redemption, and interest on the Bonds as the same shall become due and payable, and when all the rights under the Trust Agreement of the Authority, the Holders and Trustee have been provided for, and all other obligations secured by the Trust Agreement have been paid in full, upon written notice from the Hospitals to the Authority, the Holders and the Trustee, the Holders shall cease to be entitled to any benefit or security under the Trust Agreement except the right to receive payment of the cash deposited and held for payment and other rights which by their nature cannot be satisfied prior to or simultaneously with termination of the Lien of the Trust Agreement, the security interests created by the Trust Agreement (except in such funds and investment) shall terminate, and the Authority shall prepare and the Authority and the Trustee, as applicable, shall execute and deliver such instruments as may be necessary to discharge the lien and security interests created by the Trust Agreement; provided, however, that if any Bonds are to be redeemed prior to the maturity thereof, the Hospitals shall have taken all action necessary to redeem such Bonds and notice of such redemption shall have been duly given in accordance with the Trust Agreement or irrevocable written instructions shall have been given to the Trustee. Upon such defeasance, the cash and Government Obligations required to pay or redeem the Bonds in full shall be irrevocably set aside for such purpose and moneys held for defeasance shall be invested only as provided above, provided that other Government Obligations may be substituted for Government Obligations deposited with the Trustee if the Trustee receives (i) verification from an Accountant in a form satisfactory to the Trustee that the principal and interest becoming due on investments held by the Trustee after such transaction and any other moneys available therefor will provide the Trustee with moneys which at all times will be sufficient to pay the principal or Redemption Price of and interest on the Bonds as the same shall become due and payable and all other amounts due under the Trust Agreement, and (ii) a Favorable Opinion of Bond Counsel. Any funds or property held by the Trustee and not required for payment or redemption of the Bonds in full or for payment of rebate obligations pursuant to this provision shall, subject to the provisions for the Rebate Fund, after satisfaction of all the rights of the Authority, the Holders and the Trustee, be distributed pursuant to the written instructions of the Hospitals upon such notification, if any, as the Trustee or the Authority may reasonably require and upon receipt by the Trustee of a Favorable Opinion of Bond Counsel that such distribution will not adversely affect the exclusion from gross income under Section 103 of the Code of interest paid on any Bonds. C-10

179 If the Authority or the Hospitals deposit with the Trustee money or Government Obligations sufficient to pay the principal or Redemption Price of any particular Bond or Bonds becoming due, either at maturity or by call for redemption or otherwise, together with all interest accruing thereon to the due date, interest on such Bond or Bonds shall cease to accrue on the due date and all liability of the Authority or the Hospitals, as the case may be, shall cease to accrue on the due date and all liability of the Authority or the Hospitals, as the case may be, with respect to such Bond or Bonds shall likewise cease. Thereafter, such Bond or Bonds shall be deemed not to be Outstanding hereunder and the Holder or Holders of such Bonds shall be restricted exclusively to the money or Government Obligations so deposited for any claim of whatsoever nature with respect to such Bond or Bonds, and the Trustee shall hold such funds in trust for such Holder or Holders. Debt Service Fund There is established with the Trustee a Debt Service Fund. There shall be deposited into the Debt Service Fund all loan payments by the Hospitals pursuant to the Trust Agreement and all other moneys received by the Trustee accompanied by directions to deposit such moneys in the Debt Service Fund. Moneys in the Debt Service Fund shall be applied as follows: (i) Moneys in the Debt Service Fund shall be applied to the payment when due of principal or Redemption Price of and interest on the Bonds. (ii) If moneys in the Debt Service Fund are not sufficient on any day to pay the principal or Redemption Price of and interest on the Outstanding Bonds then due or overdue, such moneys (other than any sum irrevocably set aside for the redemption of particular Bonds and amounts required to be paid to the Rebate Fund) shall, after payment of all charges and disbursements of the Authority and the Trustee in accordance with the Trust Agreement, including, without limitation, reasonable attorneys fees and expenses, be applied first to the payment of interest, including interest on overdue principal, in the order in which the same became due (pro rata with respect to interest which became due at the same time) and second to the payment of principal (including sinking fund installments) of and premium if any, in the order in which the same became due (pro rata with respect to principal which became due at the same time). Whenever moneys are to be applied pursuant to this section, the Trustee shall fix the date (which shall be the first of a month 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 paid on such date shall cease to accrue. The Trustee shall give or cause to be given notice of such date at least ten (10) days before such date. The Trustee shall not be required to make payment to the Holder of any Bonds until such Bonds shall be presented to the Trustee for appropriate endorsement or for cancellation if fully paid. (iii) If at any time the amounts held for the Bonds in the Debt Service Fund are sufficient to pay the principal or Redemption Price of all Outstanding Bonds and the interest accruing to such Bonds to maturity or the next date of redemption when such Bonds are redeemable pursuant to the Trust AgreementError! Reference source not found., the Trustee shall so notify the Authority and the Hospitals. Upon receipt of such notice, the Hospitals may direct the Trustee in writing to apply such amounts to pay or redeem all such Outstanding Bonds, C-11

180 as the case may be, on the next date when such Bonds are redeemable pursuant to the Trust Agreement. Construction Fund There is established with the Trustee a Construction Fund. Proceeds of the Bonds in the amounts set forth in the closing statement dated the Date of Issuance and signed by the Authority and Hospitals shall be deposited by the Trustee into the Construction Fund. The Trustee shall disburse moneys in the Construction Fund to or upon the order of the Hospitals, from time to time, to pay the Projects Costs and upon receipt by it of a written, consecutively numbered requisition executed by an Authorized Officer of SLH in the form attached to the Trust Agreement. The Trustee shall cause to be kept and maintained records consistent with the Trustee s procedures pertaining to the Construction Fund and all disbursements therefrom. The Trustee shall make such records available for inspection during normal business hours by, or shall provide copies thereof to, the Authority and the Hospitals upon written request and at the expense of the requesting party. The completion of the New Money Project and payment of all Project Costs payable out of the Construction Fund (except for amounts, if any, to be retained by the Trustee for the payment of Project Costs not then due and payable) shall be evidenced by the filing with the Trustee of a Certificate of SLH certifying that the New Money Project has been completed. As soon as practicable after the filing with the Trustee of such certificate, any balance remaining in the Construction Fund (other than the amounts retained by the Trustee as described in the preceding sentence) shall be deposited or applied in accordance with the written direction of SLH to pay the principal or Redemption Price of Bonds or the interest thereon or such other use with respect to which the Hospitals have obtained a Favorable Opinion of Bond Counsel. Moneys held in the Construction Fund shall be held solely to pay the Project Costs and to pay the principal or Redemption Price of Bonds and interest thereon or such other use with respect to which the Hospitals have obtained a Favorable Opinion of Bond Counsel. Rebate Fund A Rebate Fund shall be maintained under the Agreement for the payment of all amounts required to be rebated to the United States Government pursuant to the Code. Payments by Hospitals The Hospitals shall repay the loan of the proceeds of the Bonds by making payments to the Trustee as follows: (a) The Hospitals shall pay to the Trustee for deposit in the Rebate Fund the amounts and times required by the Trust Agreement. (b) The Hospitals shall pay or cause to be paid in immediately available funds to the Trustee for deposit into the Debt Service Fund, on or before each Interest Payment Date, maturity date or redemption date for the Bonds, the amount which, together with other available funds in the Debt Service Fund, is necessary to provide for the payment of (i) the principal or C-12

181 Redemption Price of the Bonds becoming due at maturity or by redemption on such date and (ii) the interest on the Bonds becoming due on such date. (c) At any time when any principal of any Bonds is overdue, the Hospitals shall also have a continuing obligation to pay to the Trustee for deposit in the Debt Service Fund an amount equal to interest on the overdue principal (including sinking fund installments) at a per annum rate equal to the actual rate or rates of interest payable on such Bonds. Redemption premiums shall not bear interest. (d) Payments by the Hospitals to the Trustee for deposit in the Debt Service Fund or the Rebate Fund under the Trust Agreement shall discharge the obligation of the Hospitals with respect to such payments to the extent thereof; provided, that if any moneys are invested in accordance with the Trust Agreement and a loss results therefrom so that there are insufficient funds to pay principal of (including sinking fund installments), premium, if any, and interest on the Bonds when due, the Hospitals shall immediately supply the deficiency. Additional Payments by Hospitals The Hospitals shall make the following payments on demand: (a) To the Authority, payment of all Administrative Expenses; (b) To the Authority, payment of, or reimbursement for, any and all costs, expenses and liabilities paid or incurred by the Authority, including reasonable fees of counsel and disbursements thereof, in satisfaction of any obligations of the Hospitals to the Authority under the Trust Agreement which are not performed in accordance with the terms of the Trust Agreement by the Hospitals; (c) To the Authority, reimbursement for or prepayment of any and all costs, expenses, and liabilities paid or incurred or to be paid or incurred by the Authority or any of its directors, officers, employees and agents, including reasonable fees of counsel and disbursements thereof, and requested by the Hospitals or required by the Trust Agreement or the Act; (d) To the Trustee and the Paying Agent, the reasonable fees, charges and expenses of the Trustee and Paying Agent under the Trust Agreement, as well as reimbursement for any and all costs, expenses (including, without limitation, reasonable attorneys fees and expenses) and liabilities paid or incurred by the Trustee or Paying Agent in satisfaction of any obligations of the Hospitals hereunder which are not performed in accordance with the terms of the Trust Agreement by the Hospitals; and () To the Trustee and the Paying Agent, all reasonable costs and expenses (including, without limitation, reasonable attorneys fees and expenses) incurred in the preparation, negotiation, execution, interpretation and administration of the Trust Agreement, any amendments to any of the foregoing, as well as all costs and expenses (including, without limitation, reasonable attorneys fees and expenses) related to or in respect of the Trustee s efforts to collect and/or enforce any of the Trustee s rights and remedies (whether or not legal action is instituted in connection with such efforts). C-13

182 Investment of Funds Pending their use under the Trust Agreement, moneys in all Funds held by the Trustee shall be invested by the Trustee at the written direction of the Hospitals in Eligible Investments maturing or redeemable at the option of the holder at or before the time when such moneys are expected to be needed and shall be so invested pursuant to the written directions of the Hospitals if there is not then an Event of Default known to the Trustee. Moneys in all Funds held by the Trustee shall be held in trust solely for Holders and the Trustee (or the federal government in the case of the Rebate Fund) and may not be attached or subject to lien upon the occurrence of an Event of Bankruptcy. Any investments pursuant to this subsection shall be held by the Trustee as a part of the applicable Fund and shall be sold or redeemed to the extent necessary to make payments or transfers or anticipated payments or transfers from such Fund. Except as set forth below, any interest realized on investments in any Fund and any profit realized upon the sale or other disposition thereof shall be credited to the Fund with respect to which they were earned and any loss shall be charged thereto. Earnings (which for such purposes include net profit and are after deduction of net loss) on moneys deposited in the Debt Service Fund shall be retained in the Debt Service Fund. The Trustee may hold undivided interests in Eligible Investments for more than one Fund (for which they are eligible) and may make interfund transfers in kind. The Trustee shall value the investments in all Funds at market value in accordance with standard corporate trust practice. If at any time the Trustee holds any uninvested cash (other than de minimis amounts which may be retained uninvested), the Hospitals shall promptly direct the investment thereof in writing. The Trustee shall not be liable for any interest in the event the Hospitals fails to provide any such instruction. To the extent that the Trust Agreement permits any funds held thereunder to be invested in money market or mutual funds as an Eligible Investment thereunder, such funds may include money market or mutual funds administered by the Trustee, including, without limitation, any money market or mutual fund for which the Trustee or an Affiliate of the Trustee serves as investment manager, administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (i) the Trustee or an Affiliate of the Trustee receives fees from such funds for services rendered, (ii) the Trustee charges and collects fees for services rendered pursuant to this Agreement, which fees are separate from the fees received from such funds, and (iii) services performed for such funds and pursuant to this Agreement may at times duplicate those provided to such funds by the Trustee or its Affiliates. The foregoing shall be subject to any rating requirements for any such funds otherwise required by this Agreement Master Note and Master Indenture. The obligations and liabilities of the Hospitals under the Trust Agreement shall be secured by the 2016 Master Note, which the Trustee is authorized and directed to receive and enforce. As the holder of the 2016 Master Note, the Trustee shall be authorized to give directions and consents with respect thereto, provided that (i) the Trustee shall not consent to any C-14

183 amendment of the 2016 Master Note that would change the amount or time as of which payments are required to be paid thereunder in respect of the principal or Redemption Price of or interest on the Bonds without obtaining the written consent thereto of the Holders of all of the Bonds then Outstanding, and (ii) the Trustee shall not consent to any release or subordination of any collateral pledged to the Master Trustee or any waiver or modification of any covenant of the Obligated Group under the Master Indenture without obtaining the written consent thereto of the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding. Covenants of the Hospitals The Hospitals agree to certain covenants in the Trust Agreement as described in the section of this Official Statement captioned THE TRUST AGREEMENT Covenants of the Borrowers Corporate Reorganization Each Hospital may establish separate divisions and may cause such divisions to be separately incorporated or otherwise organized or reorganized, but all such divisions, whether separately incorporated or not, shall remain bound by the Trust Agreement and shall be jointly and severally liable with respect hereto; provided, however, that prior to affecting any such reorganization, such Hospital shall deliver to the Authority and the Trustee an Opinion of Counsel to the effect that, after such reorganization, all separately incorporated divisions will be jointly and severally liable under the Trust Agreement and a Favorable Opinion of Bond Counsel with respect to such reorganization. Each Hospital shall preserve all its rights and licenses to the extent necessary or desirable in the operation of its business affairs, provided that such Hospital shall not be obligated hereby to retain or preserve any rights or licenses no longer used or, in the judgment of its Governing Body, useful in the conduct of its business. Events of Default Event of Default in the Trust Agreement means the occurrence or existence of any one of the events set forth below and Default means any Event of Default without regard to any lapse of time or notice: (i) Debt Service on Bonds. Any principal or Redemption Price of, or interest on, any Bond shall not be paid when due, whether at maturity, by acceleration, upon mandatory sinking fund redemption, or otherwise. (ii) Bond Payments and Additional Payments. The Hospitals shall fail to make (a) any Bond Payment when due and payable or (b) any Additional Payment within fifteen (15) days following any applicable date upon which the same becomes due and payable. (iii) Other Obligations. The Hospitals shall fail to make any other required payment (other than those payments described above) to the Trustee or the Authority under the Trust Agreement, and such failure is not remedied within thirty (30) days after written notice thereof is given by the Authority or the Trustee to the Hospitals; or the Hospitals shall fail to observe or perform any of its other agreements, covenants or obligations under this Agreement or any Related Bond Document and such failure is not remedied within sixty (60) days after C-15

184 written notice thereof is given by the Authority or the Trustee; provided, however, that if such observance or performance requires work to be done, actions to be taken or conditions to be remedied, which by their nature cannot reasonably be done, taken or remedied, as the case may be, within such sixty (60) day period, no Event of Default shall be deemed to have occurred or to exist if and so long as the Hospitals shall commence such observance or performance within such sixty (60) day period and shall diligently and continuously prosecute the same to completion. (iv) Warranties. There shall be a material breach of warranty made in the Trust Agreement by the Hospitals as of the date it was intended to be effective and the breach is not cured within sixty (60) days after written notice thereof is given by the Authority or the Trustee to the Hospitals, unless the breach is not curable within sixty (60) days and the Hospitals notify the Authority and the Trustee in writing within such sixty (60) days that they are proceeding diligently in their efforts to cure said breach, in which event it shall be an Event of Default if said breach is not cured within ninety (90) days after such notice is given by the Hospitals to the Authority and the Trustee. shall exist. (v) Bankruptcy. An Event of Bankruptcy shall occur and be continuing or (vi) Master Indenture Event of Default. An Event of Default under and as defined in the Master Indenture shall occur and be continuing or shall exist. (vii) 2016 Master Note. The 2016 Master Note shall cease to be a Debt Obligation as such term is defined in the Master Indenture. The Trustee shall notify the Hospitals of any non-payment which would cause an Event of Default under clause (ii) above not later than the tenth (10th) day following the date on which any payment referenced therein becomes due and payable. If the Trustee determines that an Event of Default, other than an Event of Default described in clause (i) above, has been cured before the entry of any final judgment or decree with respect to it, the Trustee may waive the Event of Default and its consequences, including any acceleration, by written notice to the Hospitals and shall do so upon written instruction of the Holders of at least a majority in principal amount of the Outstanding Bonds. Remedies upon Events of Default. If an Event of Default occurs and is continuing, the Trustee may, and upon receipt of written direction from the Holders of at least 25% in principal amount of the Outstanding Bonds shall, by written notice to the Hospital, the Authority and the Holders, declare immediately due and payable the principal amount of the Outstanding Bonds and the payments to be made by the Hospitals therefor, and accrued interest on the foregoing, whereupon the same shall become immediately due and payable without any further action or notice. Notwithstanding the foregoing, such acceleration shall be automatic upon the occurrence of the Event of Default described in clause (v) above. C-16

185 If an Event of Default occurs and is continuing, the Trustee may notify the Master Trustee of such Event of Default and seek enforcement of its rights under the Master Indenture as the holder of the 2016 Master Note. The Trustee may enforce the provisions of the Trust Agreement by legal proceedings for the specific performance of any covenant, obligation or agreement contained herein, whether or not an Event of Default exists, or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Hospitals or the Authority of the provisions of this Agreement, including (to the extent the Trust Agreement may lawfully provide) court costs, reasonable attorneys fees and other costs and expenses incurred in enforcing the obligations of the Authority and the Hospitals hereunder. Proceedings by Holders No Holder shall have any right to institute any legal proceedings for the enforcement of the obligations of the Hospitals under the Agreement or any applicable remedy thereunder, unless the Holders of the percentage of principal amount of the Bonds specified in the Agreement have directed the Authority and the Bond Trustee to act and furnished the Authority and the Bond Trustee indemnity as provided in the Agreement and have afforded the Authority and the Bond Trustee reasonable opportunity to proceed, and the Authority and the Bond Trustee shall thereafter fail or refuse to take such action. Subject to the above paragraph, any Holder may by any available legal proceedings enforce and protect its rights under the Agreement and under the laws of the Commonwealth of Pennsylvania. The Trustee shall not be required to monitor the financial condition of the Hospitals or any member of the Obligated Group, notwithstanding that it may receive financial statements and reports of the Hospitals, or to maintain insurance on any property and, unless otherwise expressly provided, shall not have any responsibility with respect to reports, notices, certificates or other documents filed with it hereunder, except to make them available for inspection by Holders upon prior written notice and during normal business hours. Upon a failure by the Hospitals to make a payment required of it under the Trust Agreement as the same becomes due and payable, the Trustee shall, not later tenth (10th) day following such failure, give written notice to the Authority and the Hospitals. The Trustee shall not be required to take, and shall not be deemed to have, notice of any other breach or default by the Hospitals or the Authority except when given written notice thereof by the Holders of at least ten percent (10%) in principal amount of the Outstanding Bonds, by the Authority or the Hospitals; provided, however, that the Trustee shall, in all cases where it knows of any Default or any Event of Default which is then continuing, not later tenth (10th) day following such Default or Event of Default, give written notice to the Authority, the Hospitals, and each Holder of the occurrence and continuance thereof. The Trustee shall give default notices under the section of the Trust Agreement defining Events of Default and proceed under the acceleration provisions of the Trust Agreement when instructed to do so by the written direction of the Holders of at least twenty-five percent (25%) in principal amount of the Outstanding Bonds. The Trustee shall not be required, however, to take any remedial action, other than the giving of notice, or follow any written directions, unless C-17

186 indemnity to its satisfaction is furnished by the Holders for any expenses or liability to be incurred therein. Upon receipt of written notice, direction or instruction and indemnity, the Trustee shall promptly pursue the remedies provided by this Agreement or any of such remedies (not contrary to any such direction) as it deems appropriate for the protection of the Holders, and in its actions under this sentence, the Trustee shall act for the protection of the Holders with the same promptness and prudence as would be expected of a prudent person in the conduct of such person s own affairs. Amendments The Trust Agreement may be amended and supplemented without Holder consent for any of the following purposes: (a) to add to the covenants and agreements of the Hospitals or to surrender or limit any right or power of the Hospitals; (b) to cure any ambiguity or defect, or to add provisions which are not inconsistent therewith and which do not impair the security for the Bonds; (c) to provide for the sharing of control of, or notices with respect to, the exercise of remedies with the Holders; (d) to amend the provisions of the Trust Agreement regarding the Rebate Fund as permitted therein; or (e) to maintain the exclusion from gross income of interest payable with respect to any Bonds. Except as provided in the foregoing paragraph, the Trust Agreement may be amended only with the written consent of the Holders of a majority in principal amount of the Outstanding Bonds; provided, however, that no amendment of this Agreement may be made without the unanimous written consent of the affected Holders for any of the following purposes: (1) to extend the maturity date of any Bond; (2) to reduce the principal amount or interest rate of any Bond; (3) to make any Bond redeemable other than in accordance with its terms; (4) to create a preference or priority of any Bond over any other Bond; or (5) to reduce the percentage of the Bonds required to be represented by the Holders giving their consent to any amendment. C-18

187 SUMMARY OF THE MORTGAGES The following is a brief summary of certain provisions of the mortgages issued by certain members of the Obligated Group to the Master Trustee to secure the payment and performance of all Obligations issued under the Master Indenture. SLH and Anderson have executed and delivered to the Master Trustee mortgages granting to the Master Trustee the following: (a) With respect to SLH s hospital campuses located in the City of Allentown, Leigh County, Pennsylvania (the Allentown Facility ) and the Borough of Fountain Hill, Lehigh County, Pennsylvania (the Bethlehem Facility ) a lien upon all of right, title and interest of SLH in and to the following: (i) The real property on which the Bethlehem Facility and Allentown Facility are located, excluding a certain acre tract of land at the Bethlehem Facility subject to a 75 year lease (the Bethlehem and Allentown Land ); (ii) All buildings and improvements now or hereafter erected on the Bethlehem and Allentown Land, other than machinery and equipment used in the operations of SLH, including, without limitation, any x-ray equipment, MRI equipment, office equipment, and computers, to the extent subject to an ownership interest or lien in favor of a seller or third-party financier; (iii) All fixtures, machinery, equipment and other articles of real, personal or mixed property attached to, situated or installed in or upon, or used in the operation or maintenance of, the Bethlehem and Allentown Land or any buildings or improvements situated thereon, whether or not such real, personal or mixed property is or shall be affixed to the Bethlehem and Allentown Land; (iv) All building materials, building machinery and building equipment delivered on site to the Bethlehem and Allentown Land during the course of, or in connection with, any construction, repair or renovation of the buildings and improvements situated or to be situated thereon; (v) All leases, licenses or occupancy agreements of all or any part of the Bethlehem and Allentown Land and all extensions, renewals, and modifications thereof, and any options, rights of first refusal or guarantees relating thereto; (vi) All rents, income, revenues, security deposits, issues, profits, awards and payments of any kind payable under the leases or otherwise arising from the Bethlehem and Allentown Land; (vii) All contract rights, accounts receivable and general intangibles relating to the Bethlehem and Allentown Land or the use, occupancy, maintenance, construction, repair or operation thereof; (viii) All management agreements, franchise agreements, utility agreements and deposits; C-19

188 (ix) All maps, plans, surveys and specifications; all warranties and guaranties; all permits, licenses and approvals; (x) All insurance policies; (xi) All estates, rights, tenements, hereditaments, privileges, easements, and appurtenances of any kind benefiting the Bethlehem and Allentown Land; all means of access to and from the Bethlehem and Allentown Land, whether public or private; and all water and mineral rights; and (xii) All Proceeds of any of the above-described property, which term shall have the meaning given to it in the Uniform Commercial Code of the Commonwealth of Pennsylvania, whether cash or non-cash, and including insurance proceeds and condemnation awards; and all replacements, substitutions and accessions thereof. (b) With respect to Anderson s hospital campus located in Bethlehem Township, Northampton County, Pennsylvania (the Anderson Facility ), a lien upon all of right, title and interest of Anderson in and to the following: Anderson Land ); Anderson Land; (i) (ii) The real property on which the Anderson Facility is located (the All buildings and improvements now or hereafter erected on the (iii) All fixtures, machinery, equipment and other articles of real, personal or mixed property attached to, situated or installed in or upon, or used in the operation or maintenance of, the Anderson Land or any buildings or improvements situated thereon, whether or not such real, personal or mixed property is or shall be affixed to the Anderson Land, other than machinery and equipment used in the operations of Anderson; (iv) All building materials, building machinery and building equipment delivered on site to the Anderson Land during the course of, or in connection with, any construction, repair or renovation of the buildings and improvements situated or to be situated thereon; (v) All leases, licenses or occupancy agreements of all or any part of the Anderson Land and all extensions, renewals, and modifications thereof, and any options, rights of first refusal or guarantees relating thereto; (vi) All rents, income, revenues, security deposits, issues, profits, awards and payments of any kind payable under the leases or otherwise arising from the Anderson Land; (vii) All contract rights, accounts receivable and general intangibles relating to the Anderson Land or the use, occupancy, maintenance, construction, repair or operation thereof; C-20

189 (viii) All management agreements, franchise agreements, utility agreements and deposits; approvals; (ix) (x) (xi) All maps, plans, surveys and specifications; All warranties and guaranties; all permits, and licenses and All insurance policies; (xii) All estates, rights, tenements, hereditaments, privileges, easements, and appurtenances of any kind benefiting the Anderson Land; all means of access to and from the Anderson Land, whether public or private; and all water and mineral rights; (xiii) All interests running with the Anderson Land in any planned community association including all rights to any common elements deeded to such association; and (xiv) All Proceeds of any of the above-described property, which term shall have the meaning given to it in the Uniform Commercial Code of the Commonwealth of Pennsylvania, whether cash or non-cash, and including insurance proceeds and condemnation awards; and all replacements, substitutions and accessions thereof. The mortgage on the Anderson Land is intended to be secured only by the portion of the Anderson Land on which a hospital and/or a cancer center are located (as of the date of the mortgage) or are subsequently developed pursuant to plans prepared by Anderson consistent with the terms of the mortgage. Accordingly, Anderson and the Master Trustee have agreed in the mortgage that the Master Trustee, upon the request of Anderson, will release the lien, operation and effect of the mortgage from such portion of the property on which neither a hospital nor a cancer center is constructed, or, if that land has not yet been subdivided, subordinate the lien of the mortgage. Any part of the Anderson Land or property so released shall no longer be subject to the provisions of the mortgage. C-21

190 [This Page Intentionally Left Blank]

191 Appendix D Form of Bond Counsel Opinion

192 [This Page Intentionally Left Blank]

193 APPENDIX D Form of Bond Counsel Opinion Northampton County General Purpose Authority Easton, Pennsylvania [Date of Issuance of 2016 Bonds] Re: $ Northampton County General Purpose Authority Hospital Revenue Bonds, Series 2016A (St. Luke s University Health Network Project) Ladies and Gentlemen: We have acted as Bond Counsel in connection with the issuance by the Northampton County General Purpose Authority (the Authority ) of $ aggregate principal amount of its Hospital Revenue Bonds, Series 2016A (St. Luke s University Health Network Project) (the Bonds ). The Bonds are being issued pursuant to the Pennsylvania Municipality Authorities Act, as amended (the Act ), and under a Loan and Trust Agreement, dated as of July 1, 2016 (the Agreement ), by and among the Authority, Saint Luke s Hospital of Bethlehem, Pennsylvania ( SL- Bethlehem ), St. Luke s Hospital-Anderson Campus (together with SL-Bethlehem, the Hospitals ), and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ), to accomplish the public purposes of the Act by aiding in the financing and refinancing of certain projects for the benefit of the Hospital as described in the Agreement. In the course of our duties as Bond Counsel and in connection with the preparation of this opinion, we have examined the law and such certified proceedings and other papers as we deemed relevant, including an executed counterpart of the Agreement. We have also examined a photocopy of an executed Bond authenticated by the Trustee and assume that all other Bonds have been similarly executed and authenticated. As to questions of fact material to our opinion, we have relied upon representations of the Authority and the Hospitals contained in the financing documents, the certified proceedings and other certifications of public officials furnished to us, and other certifications furnished to us by or on behalf of the Authority and the Hospitals, without undertaking to verify the same by independent investigation. Additionally, in rendering this opinion we have reviewed and relied upon the opinion of Saul Ewing LLP, counsel to the Hospitals, with respect to, among other things, the status of the Hospitals and the other members of the Obligated Group (as defined in the Agreement) as organizations described in Section 501(c)(3) of Internal Revenue Code of 1986, as amended (the Code ). Based upon the foregoing, we are of the opinion that: 1. The Authority is validly existing as a public body and a body corporate and politic with the corporate power and authority to issue and sell the Bonds and to enter into and perform its obligations under the Agreement. 2. The Agreement has been duly authorized, executed and delivered by the Authority and, assuming it has been duly authorized, executed and delivered by the other parties thereto, is a valid and binding obligation of the Authority and enforceable against the Authority. D-1

194 3. The Bonds have been duly authorized, executed and delivered by the Authority and are valid and binding limited obligations of the Authority, payable solely from the loan payments required to be made by or on behalf of the Hospitals under the Agreement and any other moneys pledged or available for such purpose under or pursuant to the Agreement. The Bonds do not constitute a pledge of the general credit of the Authority or a pledge of the credit or taxing power of the County of Northampton or of the Commonwealth of Pennsylvania or any political subdivision thereof. The Authority has no taxing power. 4. Under existing law, interest on the Bonds is exempt from Pennsylvania personal income tax and from Pennsylvania corporate net income tax, and the Bonds are exempt from personal property taxes in Pennsylvania. 5. Under existing law, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, interest on the Bonds held by a corporation (as defined for federal income tax purposes) may be indirectly subject to federal alternative minimum tax because of its inclusion in the adjusted current earnings of a corporate holder. The opinion set forth in the preceding sentence is subject to the condition that the Authority and the Hospitals comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Bonds in order that the interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Authority and the Hospitals have covenanted to comply with all such requirements. Failure to comply with certain of such requirements may cause interest on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. In rendering our opinion above with respect to the treatment of the interest on the Bonds under the federal tax laws, we have assumed the correctness of, and relied upon the accuracy of, representations of the Hospitals concerning the use of the facilities financed with the Bonds in activities that are considered unrelated trade or business activities of the Hospitals, as defined in Section 513(a) of the Code. Failure of either of the Hospitals or any other member of the Obligated Group to maintain its qualification as an organization described in Section 501(c)(3) of the Code, or failure of either of the Hospitals to use the facilities financed by the Bonds in a manner that is substantially related to the such Hospital s charitable purpose under Section 513(a) of the Code, may cause interest on the Bonds to be included in gross income retroactively to the date of the issuance of the Bonds. Ownership of tax-exempt obligations, including the Bonds, may result in collateral federal income tax consequences to certain taxpayers, including financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, S corporations with excess net passive income and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry such obligations. We express no opinion as to such collateral federal income tax consequences. We have not been engaged and have not undertaken to review the accuracy, completeness or sufficiency of any offering material of the Authority or the Hospitals relating to the Bonds and we express no opinion relating thereto. It is to be understood that the rights of the holders of the Bonds and the enforceability of the Bonds and the Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights and that their enforcement may also be subject to the exercise of judicial discretion in appropriate cases. D-2

195 The opinions herein are expressed as of the date hereof only and not as of some future date. We have not undertaken and will not undertake any responsibility to supplement or update our opinions to consider, or inform any person of, any events or actions occurring or taken (or not occurring or not taken) subsequent to the date hereof, including, but not limited to, any events or actions which may affect the tax status of interest on the Bonds. Very truly yours, D-3

196 [This Page Intentionally Left Blank]

197 Appendix E Form of Continuing Disclosure Agreement

198 [This Page Intentionally Left Blank]

199 CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement (this Agreement ), dated as of July, 2016 by and among Saint Luke s Hospital of Bethlehem, Pennsylvania ( SLH ) and St. Luke s Hospital Anderson Campus ( Anderson and, together with SLH, the Hospitals ) and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ), is executed and delivered in connection with the issuance of $ aggregate principal amount of Hospital Revenue Bonds Series 2016A (St. Luke s University Health Network Project) ( the 2016 Bonds ). The 2016 Bonds will be issued under that certain Loan and Trust Agreement, dated as of July, 2016 (the Trust Agreement ) by and among the Northampton County General Purpose Authority (the Authority ), the Hospitals and the Trustee. The Hospitals covenant and agree as follows for the benefit of the Bondholders (as defined below): SECTION 1. Purpose of Agreement. This Agreement is being executed and delivered by the Hospitals for the benefit of the Bondholders and in order to assist the Underwriter (defined below) in complying with the Rule (defined below). The Hospitals acknowledge that the Trustee has undertaken no responsibility with respect to any reports, notices or disclosures provided or required under this Agreement, including their accuracy and completeness, and have no liability to any Person, including any Bondholder and the Underwriter, with respect to any such reports, notices or disclosures. SECTION 2. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Agreement unless otherwise defined in this Section, the following capitalized terms shall have the meanings indicated below: Annual Report shall mean any Annual Report provided by the Hospitals pursuant to Section 4(a) of this Agreement. Bondholder or Holder of the 2016 Bonds shall mean any Registered Owner of the 2016 Bonds or any Person which (i) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any of the 2016 Bonds (including Persons holding through any nominee, securities depository or other intermediary, including any Beneficial Owner, or (ii) is treated as the holder of any of the 2016 Bonds for federal income tax purposes. EMMA shall mean the Electronic Municipal Market Access system of the MSRB as provided at or any similar system that is acceptable to or as may be prescribed by the MSRB for purposes of the Rule and approved by the SEC from time to time. Listed Events shall mean any of the events listed in Section 4(c) of this Agreement. Master Trust Indenture shall mean the Master Trust Indenture dated as of June 1, 1987, as supplemented and amended by and among the Hospitals, St. Luke s Warren Hospital, Inc. d/b/a St. Luke s Warren Hospital ( Warren ) and St. Luke s Hospital Monroe Campus ( Monroe and, together with the Hospitals and Warren, the Obligated Group ) and The Bank of New York Mellon Trust Company, N.A., as successor master trustee (the Master Trustee ), and as will be amended and restated by the Amended and Restated Master Trust Indenture by and among the Obligated Group and the Master Trustee. MSRB shall mean the Municipal Securities Rulemaking Board. Network shall mean St. Luke s Health Network, Inc., the parent company of the Hospitals. Official Statement shall mean the Official Statement dated, 2016 used in connection with the sale of the 2016 Bonds. E-1

200 Quarterly Report shall mean any Quarterly Report provided by the Hospitals pursuant to Section 4(b) of this Agreement. Rule shall mean Rule 15c2-12(b)(5) adopted by the SEC under the Securities Exchange Act of 1934, as the same may be amended from time to time. SEC means the United States Securities and Exchange Commission. Underwriter shall mean Merrill Lynch, Pierce, Fenner & Smith Incorporated. SECTION 3. Content of Annual Reports and Quarterly Reports. (a) Each Annual Report shall each contain: (i) a copy of the audited annual consolidated financial statements of the Network, prepared in accordance with generally accepted accounting principles and audited by certified independent public accountants; and (ii) an update of the information of the type set forth in the tables entitled SUMMARY OF UTILIZATION OF HOSPITAL SERVICES ST. LUKE S UNIVERSITY HEALTH NETWORK, SUMMARY OF UTILIZATION OF HOSPITAL SERVICES ST. LUKE S UNIVERSITY HEALTH NETWORK OBLIGATED GROUP, ST. LUKE S UNIVERSITY HEALTH NETWORK, INC. CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES and ST. LUKE S UNIVERSITY HEALTH NETWORK, INC. (OBLIGATED GROUP) - STATEMENTS OF REVENUES AND EXPENSES each in Appendix A to the Official Statement. (b) Each Quarterly Report shall contain: (i) for the applicable quarterly fiscal period of each Fiscal Year, unaudited financial statements, including balance sheet and statement of operations of the Network, as of the end of each such quarterly fiscal period, shown in each case in comparative form with the same period of the preceding Fiscal Year in reasonable detail; and (ii) for the applicable quarterly fiscal period of each Fiscal Year, an update of the information of the type set forth in the tables entitled SUMMARY OF UTILIZATION OF HOSPITAL SERVICES ST. LUKE S UNIVERSITY HEALTH NETWORK, SUMMARY OF UTILIZATION OF HOSPITAL SERVICES ST. LUKE S UNIVERSITY HEALTH NETWORK OBLIGATED GROUP, ST. LUKE S UNIVERSITY HEALTH NETWORK, INC. CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES and ST. LUKE S UNIVERSITY HEALTH NETWORK, INC. (OBLIGATED GROUP) - STATEMENTS OF REVENUES AND EXPENSES each in Appendix A to the Official Statement, as of the end of each such quarterly fiscal period, shown in each case in comparative form with the same period of the preceding Fiscal Year, in reasonable detail. SECTION 4. Provision of Annual Reports, Quarterly Reports and Notices of Listed Events. (a) Within 150 days after the end of each Fiscal Year, commencing with the Fiscal Year ending June 30, 2016, the Hospitals shall provide to the Trustee and directly to any Bondholder at their request, copies of the Annual Report and the Hospitals shall file with the MSRB through EMMA or such other program required by the Rule an Annual Report. In each case, the Annual Report may be submitted by the Hospitals as a single document or as separate documents comprising a package, and may cross-reference other information to the extent permitted by the Rule. Notwithstanding the foregoing, the E-2

201 audited financial statements of the Network may be submitted separately from the balance of the Annual Report when such audited financial statements are available. (b) Within 60 days after the end of each quarterly fiscal period of each Fiscal Year, commencing with the fiscal quarter ending September 30, 2016, the Hospitals shall provide to the Trustee and directly to any Bondholder at their request, copies of the Quarterly Report and the Hospitals shall file with the MSRB through EMMA or such other program required by the Rule a Quarterly Report. In each case, the Quarterly Report may be submitted by the Hospitals as a single document or as separate documents comprising a package, and may cross-reference other information to the extent permitted by the Rule. (c) In a timely manner not in excess of ten Business Days after the occurrence of the event, the Hospitals shall file directly with the MSRB notice, by electronic transfer through EMMA (the form of which accompany such written direction), of any of the following events with respect to the 2016 Bonds: (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) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701 TEB) or other material notices or determinations with respect to the tax status of the 2016 Bonds, or other material events affecting the tax status of the 2016 Bonds; (7) Modifications to rights of the Holders of the 2016 Bonds, if material; (8) Bond calls (except for mandatory sinking fund redemptions), if material, and tender offers; (9) Defeasances of the 2016 Bonds; (10) Release, substitution or sale of property securing repayment of the 2016 Bonds, if material; (11) Rating changes on the 2016 Bonds; (12) Bankruptcy, insolvency, receivership or similar event of an Obligated Group Member; (13) The consummation of a merger, consolidation, or acquisition involving an Obligated Group Member or the sale of all or substantially all of the assets of an Obligated Group Member, 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; and E-3

202 (14) Appointment of a successor or additional trustee or the change of name of a trustee, if material. (d) Whenever a Hospital obtains knowledge of the occurrence of a Listed Event, it shall promptly report the occurrence to the MSRB, by electronic transmissions through EMMA, in a timely manner not in excess of ten Business Days after the occurrence of the event with a copy to the Trustee. (e) The Hospitals agree that they shall provide, in a timely manner, to the MSRB, by electronic transmissions through EMMA, notice of any failure by the Hospitals to provide any information required pursuant to this Section 4 on or before the dates specified herein. SECTION 5. Report by Trustee. Concurrently with the delivery to the MSRB, by electronic transmissions through EMMA, of any information required pursuant to Section 4(a), 4(b) or 4(c) above, the Trustee shall confirm to the Hospitals that it has filed such information with the MSRB unless such information was posted directly to EMMA by the Hospitals. SECTION 6. Termination of Agreement. The obligations of the Hospitals under this Agreement shall terminate upon the defeasance, prior redemption or payment in full of all of the 2016 Bonds. The Hospitals shall directly or shall direct the Trustee in writing to notify the MSRB, by electronic transmissions through EMMA, that the obligations of the Hospitals under this Agreement have terminated. If the obligations of the Hospitals under the Trust Agreement are assumed in full by another obligated Person, such Person shall be responsible for compliance with this Agreement in the same manner as if it were the Hospitals, and the Hospitals shall have no further responsibility hereunder. SECTION 7. Amendment. The obligations of the Hospitals under this Agreement may be amended, without notice to or consent of the Holders of the 2016 Bonds, to the extent required or permitted as a result of a change in the legal requirements, or in connection with a change in the identity, nature, corporate organization, or status of the Hospitals, or the type of business conducted by it, or in connection with a corporate reorganization of the Hospitals and any of their affiliates; provided that any such modification shall be done in a manner consistent with the Rule and shall not materially impair the interest of the Holders of the 2016 Bonds. If any of the provisions of Section 3 hereof relating to the Annual Report that must be provided to the MSRB, by electronic transmissions through EMMA, in accordance with the Rule is amended or waived, the Annual Report for the first Fiscal Year the Annual Report for which reflects such amendment or waiver shall include an explanation, in narrative form, of the reasons for the amendment or waiver and the impact of the change in the type of operating data or financial information being provided. If any provisions of this Agreement specifying the accounting principles to be followed in preparing the Hospitals audited financial statements are amended or waived, the Annual Report for the Fiscal Year in which the change is made shall present a comparison between the audited financial statements or annual financial information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison must include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to the Bondholders to enable them to evaluate the ability of the Hospitals to meet their obligations. To the extent reasonably feasible, the comparison must be quantitative. The Hospitals shall file a notice of the change in accounting principles with the MSRB, by electronic transmissions through EMMA, on or before the effective date of any such amendment or waiver. E-4

203 SECTION 8. Additional Information. Nothing in this Agreement shall be deemed to prevent the Hospitals from disseminating any other information, using the means of dissemination set forth in this Agreement or any other means of communication, or including any other information in any Annual Report or Quarterly Report or notice of occurrence of a Listed Event, in addition to that which is required by this Agreement. If the Hospitals chooses to include any information in any Annual Report or Quarterly Report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Agreement, the Hospitals shall have no obligation under this Agreement to update such information or include it in any future Annual Report or Quarterly Report or notice of occurrence of a Listed Event. SECTION 9. Default. Any Bondholder may enforce the obligations of the Hospitals and the Trustee under this Agreement; provided however that (i) any breach of such obligations shall not constitute or give rise to a default or an Event of Default under the Master Trust Indenture, the Trust Agreement or the 2016 Bonds, and (ii) the sole remedy for any such breach shall be to compel specific performance of the obligations of the Hospitals under this Agreement. SECTION 10. Beneficiaries. This Agreement shall inure solely to the benefit of the Trustee, the Underwriter, and Bondholders, and shall create no rights in any other Person. SECTION 11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. SECTION 12. Severability. In case any one or more of the provisions of this Agreement shall for any reason be held to be illegal or invalid, such illegality or invalidity shall not affect any other provision of this Agreement, but this Agreement shall be construed and enforced as if such illegal or invalid provision had not been contained herein. SECTION 13. Trustee s Rights and Duties. The Trustee shall have only such duties as are specifically set forth herein. The Trustee (i) shall not be liable for any error in judgment or for any act done or step taken or omitted by it in good faith, or for any mistake of fact or law, or for anything which it may do or refrain from doing in connection therewith, except for its own gross negligence or willful misconduct, (ii) shall not be obligated to take any legal action or other action hereunder, which might in its judgment involve any expense or liability unless it has been furnished with indemnification satisfactory to it, and (iii) shall be entitled to consult with counsel satisfactory to it, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion of such counsel. The duties and responsibilities of the Trustee hereunder shall be determined solely by the express provisions of this Agreement, and no further duties or responsibilities shall be implied. The Trustee shall not have any liability under, or duty to inquire into the terms and provisions of any agreement or instructions, other than as outlined in the Agreement. The Trustee may rely and shall be protected in acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee shall be under no duty to inquire into or investigate the validity, accuracy or content of any such document. The Trustee shall not incur any liability for following the instructions herein contained or expressly provided for, or written instructions given by the other parties hereto. The Trustee shall not be under any obligation to spend or risk its own funds or otherwise incur any financial liability in the performance of its duties hereunder. The obligated party agrees to provide or cause to be provided the information as required by the Rule. The Trustee shall not have any obligation under this Agreement to investigate or determine whether any filing made under this Agreement complies with federal securities laws or rules. E-5

204 Annual Report and the Quarterly Reports and notices of the occurrence of any Listed Events related to the Hospitals shall be in a format which conforms to the requirements of the Rule. No provision of this Agreement shall require the Trustee to expend any of its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. In the administration of this Agreement, the Trustee may execute any of its powers and perform its duties hereunder directly or through agents or attorneys and may, consult with counsel, accountants and other skilled persons to be selected and retained by it. The Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of any such counsel, accountants or other skilled persons. The Trustee may resign and be discharged of its duties and obligations hereunder by giving notice in writing of such resignation specifying a date when such resignation shall take effect. Any corporation or association into which the Trustee in its individual capacity may be merged or converted or with which it may be consolidated, or any corporation or association resulting from any merger, conversion or consolidation to which the Trustee in its individual capacity shall be a party, or any corporation or association to which all or substantially all the corporate trust business of the Trustee in its individual capacity may be sold or otherwise transferred, shall be the Trustee under this Agreement without further act. The Hospitals covenant and agree to indemnify and hold the Trustee and its directors, officers, agents and employees (collectively, the Indemnitees ) harmless from and against any and all liabilities, losses, damages, fines, suits, actions, demands, penalties, costs and expenses, including out-of-pocket, incidental expenses, reasonable legal fees and expenses, including the allocated costs and expenses of in-house counsel and legal staff, and the costs and expenses of defending or preparing to defend against any claim ( Losses ) that may be imposed on, incurred by, or asserted against, the Indemnitees or any of them for following any instruction or other direction upon which the Trustee is authorized to rely pursuant to the terms of this Agreement. In addition to and not in limitation of the immediately preceding sentence, the Hospitals covenant and agree to indemnify and hold the Indemnitees and each of them harmless from and against any and all Losses that may be imposed on, incurred by, or asserted against the Indemnitees or any of them in connection with or arising out of the Trustee s performance under this Agreement provided the Trustee has not acted with gross negligence or engaged in willful misconduct. Anything in this Agreement to the contrary notwithstanding, in no event shall the Trustee be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been advised of such loss or damage and regardless of the form of action. This Section 13 shall survive termination of this Agreement and the resignation or removal of the Trustee for any reason. SECTION 14. Execution. This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. SECTION 15. Notices. Unless otherwise provided herein, all notices, certificates, requests or other communications hereunder shall be given by telephone and promptly confirmed in writing and shall be deemed given when given by telephone or addressed as follows: Hospitals: Trustee: Saint Luke s Hospital of Bethlehem, Pennsylvania St. Luke s Hospital Anderson Campus 1110 St. Luke s Way Allentown, PA Attn: Senior Vice President Finance The Bank of New York Mellon Trust Company, N.A Market Street, 9th Floor AIM No: Philadelphia PA E-6

205 Each of the above parties may, by written notice given hereunder to the others, designate any further or different addresses to which subsequent notices, certificates, requests, or other communications shall be sent. In addition, the parties hereto may agree to any other means by which subsequent notices, certificates, requests or other communications may be sent. SECTION 16. Filing with EMMA; Other Filings. All filings with the MSRB shall be done through EMMA in an electronic format prescribed by the MSRB and accompanied by identifying data prescribed by the MSRB, or as otherwise specified by the MSRB. In addition to filings through EMMA, the Hospitals may file any of the information necessary to be filed hereunder with such other electronic filing systems and entities as are approved by the SEC by interpretative letter or no action letter for receipt of such information in compliance with the requirements of paragraph (b)(5) of the Rule. E-7

206 IN WITNESS WHEREOF, the parties hereto have each caused this Continuing Disclosure Agreement to be executed in its name and in its behalf, all as of the date and year first above written. SAINT LUKE S HOSPITAL OF BETHLEHEM, PENNSYLVANIA By: Senior Vice President - Finance ST. LUKE S HOSPITAL ANDERSON CAMPUS By: Senior Vice President - Finance THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee By: Authorized Representative E-8

207 Appendix F Form of Master Trust Indenture

208 [This Page Intentionally Left Blank]

209 AMENDED AND RESTATED MASTER TRUST INDENTURE (Security Agreement) Among SAINT LUKE S HOSPITAL OF BETHLEHEM, PENNSYLVANIA, ST. LUKE S WARREN HOSPITAL, INC. D/B/A ST. LUKE S WARREN HOSPITAL, ST. LUKE S HOSPITAL ANDERSON CAMPUS, ST. LUKE S HOSPITAL MONROE CAMPUS, and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as MASTER TRUSTEE Dated as of July 1, 2016

210 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS...2 Section 101. Definitions...2 Section 102. Interpretation ARTICLE II THE OBLIGATIONS...20 Section 201. Series, Designation and Amount of Obligations; Existing Obligations Section 202. Payment of Obligations Section 203. Execution Section 204. Authentication Section 205. Form of Obligations Section 206. Mutilated, Lost, Stolen or Destroyed Obligations Section 207. Registration; Negotiability; Cancellation Upon Surrender; Exchange of Section 208. Obligations Security for Obligations; Grant of Mortgages; Pledge of Gross Revenues; Collateral Assignment Section 209. Issuance of Obligations in Forms Other than Notes Section 210. Substitute Obligations upon Withdrawal of a Member Section 211. Appointment of Obligated Group Agent ARTICLE III PREPAYMENT OR REDEMPTION OF OBLIGATIONS...28 Section 301. Prepayment or Redemption Dates and Prices ARTICLE IV GENERAL COVENANTS...28 Section 401. Payment of Principal, Premium, if any, and Interest and Other Amounts Section 402. Performance of Covenants Section 403. Entrance into the Obligated Group Section 404. Cessation of Status as a Member of the Obligated Group Section 405. General Covenants; Right of Contest Section 406. Insurance; Proceeds; Awards Section 407. Long-Term Debt Service Coverage Ratio Section 408. Permitted Reorganizations Section 409. Financial Statements, Etc Section 410. Permitted Indebtedness Section 411. Permitted Dispositions Section 412. Permitted Encumbrances Section 413. Right to Consent, Etc i

211 Section 414. Indemnity Section 415. Debt Service on Balloon Indebtedness Section 416. Debt Service on Variable Rate Indebtedness Section 417. Debt Service on Discount Indebtedness Section 418. Security for Indebtedness Section 419. Certain Covenants...45 ARTICLE V DEFAULTS AND REMEDIES...45 Section 501. Events of Default Section 502. Acceleration Section 503. Remedies; Rights of Obligation Holders Section 504. Direction of Proceedings by Holders Section 505. Appointment of Receivers Section 506. Application of Moneys Section 507. Remedies Vested in Master Trustee Section 508. Rights and Remedies of Obligation Holders Section 509. Termination of Proceedings Section 510. Waiver of Events of Default Section 511. Members Rights of Possession and Use of Property Section 512. Related Bond Trustee or Bondholders Deemed To Be Obligation Holders ARTICLE VI THE MASTER TRUSTEE...53 Section 601. Acceptance of the Trusts Section 602. Fees, Charges and Expenses of Master Trustee Section 603. Notice to Obligation Holders if Default Occurs Section 604. Intervention by Master Trustee Section 605. Successor Master Trustee Section 606. Corporate Master Trustee Required; Eligibility Section 607. Resignation by the Master Trustee Section 608. Removal of the Master Trustee Section 609. Appointment of Successor Master Trustee by the Obligation Holders; Temporary Master Trustee Section 610. Concerning Any Successor Master Trustee Section 611. Master Trustee Protected in Relying Upon Resolutions, Etc Section 612. Successor Master Trustee as Trustee of Funds and Obligation Registrar Section 613. Maintenance of Records Section 614. List of Obligation Holders Section 615. Master Trustee as Registrar ii

212 ARTICLE VII SUPPLEMENTAL MASTER INDENTURES...59 Section 701. Supplemental Master Indentures Not Requiring Consent of Obligation Holders Section 702. Supplemental Master Indentures Requiring Consent of Obligation Holders Section 703. Execution of Supplemental Master Indentures Section 704. Substitution of Obligations with Replacement Notes ARTICLE VIII SATISFACTION OF THE MASTER INDENTURE...64 Section 801. Defeasance Section 802. Provision for Payment of a Particular Series of Obligations or Portion Thereof Section 803. Satisfaction of Related Bonds ARTICLE IX MANNER OF EVIDENCING OWNERSHIP OF OBLIGATIONS...67 Section 901. Proof of Ownership ARTICLE X MISCELLANEOUS...68 Section Limitation of Rights Section Unclaimed Moneys Section Severability Section Notices Section Counterparts Section Applicable Law Section Immunity of Officers, Employees and Members of Members Section Holidays Exhibit A List of Members of the Obligated Group... A-1 Exhibit B Outstanding Obligations...B-1 iii

213 This AMENDED AND RESTATED MASTER TRUST INDENTURE dated as of July 1, 2016 (as may be amended, modified or supplemented, the Master Indenture ), is among SAINT LUKE S HOSPITAL OF BETHLEHEM, PENNSYLVANIA (together with its successors and permitted assigns, the Hospital ), a nonprofit corporation duly incorporated and existing under the laws of the Commonwealth of Pennsylvania, ST. LUKE S WARREN HOSPITAL, INC. d/b/a ST. LUKE S WARREN HOSPITAL, a nonprofit corporation duly incorporated and existing under the laws of the State of New Jersey (together with its successors and permitted assigns, Warren ), ST. LUKE S HOSPITAL ANDERSON CAMPUS, a nonprofit corporation duly incorporated and existing under the laws of the Commonwealth of Pennsylvania (together with its successors and permitted assigns, Anderson ), ST. LUKE S HOSPITAL MONROE CAMPUS, a nonprofit corporation duly incorporated and existing under the laws of the Commonwealth of Pennsylvania (together with its successors and permitted assigns, Monroe ) and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., a national banking association duly established, existing and authorized to accept and execute trusts of the character herein set out under and by virtue of the laws of the United States of America, as master trustee (together with its successors, the Master Trustee ). RECITALS: A. The Hospital, Warren, Anderson and Monroe (each an Existing Member and collectively all of the Members of the Obligated Group under the Original Master Trust Indenture, as defined herein) are parties with the Master Trustee to a Master Trust Indenture, dated as of June 1, 1987, as previously amended and supplemented (as so amended and supplemented, the Original Master Trust Indenture ). B. Section 10.2 of the Original Master Trust Indenture provides that the Members of the Obligated Group may enter into a supplemental indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Original Master Trust Indenture with the consent of the holders of not less than 51% in aggregate principal amount of Obligations then Outstanding (in each case as such capitalized terms not defined herein are defined in the Original Master Trust Indenture). C. The Existing Members and the Master Trustee seek to amend and restate the Original Master Trust Indenture pursuant to this Master Indenture and have obtained the consent of not less than 51% in aggregate principal amount of Obligations then Outstanding and thus, the Original Master Trust Indenture shall be amended and restated by this Master Indenture in its entirety and shall be applicable to all Obligations outstanding under the Original Master Trust Indenture and all Obligations to be issued under this Master Indenture. D. All acts and things necessary to constitute these presents a valid indenture and agreement according to its terms, and deliver one or more Obligations of various series pursuant to the terms hereof, have been done and performed, and the execution of this Master Indenture has in all respects been duly authorized, and the Existing Members and the Master Trustee, in the exercise of the legal right and power vested in them, execute this Master Indenture.

214 In order to declare the terms and conditions upon which Obligations of each series are authenticated, issued and delivered, and in consideration of the premises, of the purchase and acceptance of Obligations of each series by the holders thereof and of the sum of One Dollar to it duly paid by the Master Trustee at the execution of these presents, the receipt whereof is hereby acknowledged, the Original Master Trust Indenture is hereby amended and restated in its entirety to read as this Master Indenture, and each Existing Member and future Member covenants and agrees with the Master Trustee, for the equal and proportionate benefit of the respective holders from time to time of Obligations of each series, as follows: Section 101. Definitions. ARTICLE I DEFINITIONS In addition to the words and terms elsewhere defined in this Master Indenture, the following words and terms as used in this Master Indenture shall have the following meanings unless the context or use indicates another or different meaning or intent: Adjusted Expenses means, for any period, the aggregate of all expenses calculated under generally accepted accounting principles, incurred by the Person or group of Persons involved during such period, including without limitation any taxes, minus or before (or adding back) interest on Long-Term Indebtedness, depreciation, amortization, and payments on Obligations to the extent such payments are treated as an expense; provided that no calculation of Adjusted Expenses shall take into account: (a) any unrealized loss resulting from the disposition of, or changes in the value of, investment securities, including, but not limited to, any unrealized other-than-temporary impairment loss that is recognized in accordance with generally accepted accounting principles, (b) extraordinary or nonrecurring expenses or losses (including without limitation any losses on the sale or other disposition of assets or facilities not in the ordinary course of business), (c) any losses on the extinguishment of Indebtedness, (d) any termination payments made on Hedging Obligations or other hedges or derivatives, (e) any expenses resulting from a forgiveness of, or the establishment of reserves against, Indebtedness of an Affiliate which does not constitute an extraordinary expense, (f) any losses resulting from discontinued operations or any reappraisal, revaluation or write-down of any asset, facility or good-will, and any loss or expense resulting from adjustments to prior periods, (g) any unrealized losses on or related to any Hedging Obligations or other hedges or derivatives, (h) any losses or expenses or other items that would be considered by the Obligated Group Agent to be non-cash items of the Person or group of Persons involved, (i) pension settlement losses and any changes in the funded status of a defined benefit plan, and (j) any losses or expenses attributable to transactions between any Member of the Obligated Group and any other Member of the Obligated Group. 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: (i) a corporation having stock, the ownership, directly or indirectly, of more than 50% of the 2

215 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 directors of such corporation; (ii) 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 (iii) 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. Ancillary Obligation means an Obligation, (a) expressly identified as an Ancillary Obligation in (i) such Obligation, (ii) a Supplemental Master Indenture or (iii) an Officer s Certificate delivered to the Master Trustee, and (b) entered into in order to evidence or secure financial obligations of a Member in an agreement that is ancillary to any direct Indebtedness (other than an Obligation expressly identified as a Debt Obligation), such as a reimbursement agreement, liquidity agreement, standby bond purchase agreement, bond insurance or credit enhancement agreement, rate maintenance agreement or similar agreement, unless and until and to the extent any such agreement constitutes a direct obligation of a Member to repay money borrowed, credit extended or the equivalent thereof, at which time such Obligation shall be deemed a Debt Obligation. Balloon Indebtedness means (a) Indebtedness, twenty-five percent (25%) or more of the initial principal amount of which Indebtedness matures (or is payable at the option of the holder) in any twelve month period, if such twenty-five percent (25%) or more is not to be amortized to below twenty-five percent (25%) by mandatory redemption prior to such twelve month period, or (b) any portion of an issue of Indebtedness which, (i) if treated as a separate issue of Indebtedness, would meet the test set forth in clause (a) of this definition and (ii) is designated as Balloon Indebtedness in an Officer s Certificate stating that such portion shall be deemed to constitute a separate issue of Balloon Indebtedness. Bondholder, holder or owner means, as to any Related Bond, the registered owner of such Related Bond. Bond Index means, at the option of the Obligated Group Agent (as directed in an Officer s Certificate issued by it) (a) the 30-year Revenue Bond Index published most recently by The Bond Buyer, or a comparable index if such Revenue Bond Index is not so published, (b) the SIFMA Index, (c) the weighted average coupon of all then Outstanding Indebtedness secured 3

216 by Obligations, as such average is certified by the Obligated Group Agent in such Officer s Certificate, or (d) such other interest rate or interest index as may be certified in writing to the Master Trustee as appropriate to the situation. Book Value when used with respect to any 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 Obligated Group, 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 Member 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 Commonwealth of Pennsylvania are authorized or required by law to close or (b) a day on which the New York Stock Exchange is closed. Unless otherwise expressly provided herein, references to any time of day in this Master Indenture shall refer to Eastern standard time or Eastern daylight saving time, as in effect in the Commonwealth on such day. Capitalized Interest means amounts irrevocably deposited in escrow to pay interest on Long-Term Indebtedness or Related Bonds and interest earned on amounts irrevocably deposited in escrow to the extent such interest earned is required to be applied to pay interest on Long- Term Indebtedness or Related Bonds. Capitalized Lease means any lease of real or personal property which, in accordance with generally accepted accounting principles in effect as of July 1, 2015, is required to be capitalized on the balance sheet of the lessee. Capitalized Rentals means, as of the date of determination, the amount for any Person at which the aggregate Net Rentals due and to become due under a Capitalized Lease under which such Person is a lessee would be reflected as a liability on a balance sheet of such Person in accordance with generally accepted accounting principles in effect as of July 1, 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. Completion Indebtedness shall mean any Indebtedness incurred for the purpose of financing the completion of constructing or equipping facilities for the construction or equipping of which Permitted Indebtedness has theretofore been incurred, to the extent necessary to provide a completed and equipped facility of the type and scope contemplated at the time, and in accordance with the general plans and specifications for such facility as originally prepared with only such changes as have been made in conformity with the documents pursuant to which such Indebtedness was originally incurred, including funding debt service reserve funds related thereto. 4

217 Consultant means a professional consulting, financial advisory, accounting, investment banking or commercial banking firm, selected by the Obligated Group Agent and 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. Counsel means an attorney duly admitted to practice law before the highest court of any state and, without limitation, may include legal counsel for the Hospital, any other Member or the Master Trustee. Credit Enhancer means any credit enhancer, insurer, letter of credit provider or liquidity provider with respect to an Obligation or a Related Bond. 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. Current Value means, as to any Property, the estimated fair market value of such Property, which fair market value shall be evidenced by an Officer s Certificate delivered to the Master Trustee. Debt Amortization Requirements means the amount of principal and interest required each Fiscal Year to amortize the total amount of Long-Term Indebtedness and Guaranties of the Members of the Obligated Group over a term of 30 years, projected in accordance with the following assumptions: (a) In the case of any Long-Term Indebtedness, the amount of principal and interest payable during each Fiscal Year on such Long-Term Indebtedness after the date of determination shall be projected assuming (i) that the principal balance of such Long-Term Indebtedness (after adjustment of Guaranties as provided in paragraph (b) of this definition) on the date of determination will be refinanced, (ii) that such principal balance will be payable over a term of 30 years, (iii) that such principal balance will bear interest at the Bond Index, and (iv) that debt service on such Long-Term Indebtedness will be payable in equal annual installments sufficient to pay both principal and interest over such term of 30 years; and (b) In the case of any Guaranty, the principal of (and premium, if any) and interest and other debt service charges on the debt that is guaranteed for the period of time for which Debt Amortization Requirements are calculated shall be weighted in the calculation of Debt Amortization Requirements as provided in Section 410(b)(ix) hereof with respect to any Permitted Guaranty; Provided that, if any cash or Escrow Securities have been deposited in escrow or trust in an amount that, together with earnings thereon (but without reinvestment), is sufficient to pay the principal of such Long-Term Indebtedness or Guaranties (or any portion thereof) and the interest thereon as it comes due, such principal (or portion thereof), as the case may be, shall not be included in such projection. 5

218 Debt Obligation means an Obligation issued to secure or evidence any Indebtedness, including, but not limited to, a Guaranty or an Obligation (other than an Obligation expressly identified as an Ancillary Obligation or a Hedging Obligation) issued to secure obligations to a provider or providers of any irrevocable letters of credit issued to secure obligations of a Member or Members to provide funds to a third-party, which has been authorized to be issued by a Member pursuant to this Master Indenture that has been authenticated by the Master Trustee pursuant to Section 204 hereof. Debt Service Requirements means, with respect to the period of time for which calculated, 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: (a) interest on Long-Term Indebtedness shall be excluded from the determination of the Debt Service Requirements to the extent that Capitalized Interest is available to pay such interest; (b) principal amounts of Long- Term 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; (c) in the case of any Guaranty, the principal of (and premium, if any) and interest and other debt service charges on the debt that is so guaranteed for the period of time for which Debt Service Requirements are calculated shall be weighted in the calculation of Debt Service Requirements as provided in Section 410(b)(ix) hereof with respect to any Permitted Guaranty; (d) to the extent that interest on any such Indebtedness is the subject of or related to any Hedging Obligation, the Obligated Group at its option may determine from time to time whether or not to treat such interest payments due on Indebtedness as being equal to the net amounts paid and received by the Obligated Group pursuant to such Hedging Obligation; and (e) to the extent that interest on any such Indebtedness is the subject of or related to any hedge, derivative, rate maintenance agreement or other similar agreement, the Obligated Group at its option may determine from time to time whether or not to treat such interest payments due on Indebtedness as being equal to the net amounts paid and received by the Obligated Group pursuant to such hedge, derivative, rate maintenance agreement or other similar agreement. Discount Indebtedness means Indebtedness sold to the original purchaser thereof (other than any underwriter or other similar intermediary) at a discount from the par amount of such Indebtedness. Escrow Securities means, (a) with respect to any Obligation which secures a series of Related Bonds, the securities permitted to be used to defease or provide for the payment of such series of Related Bonds under the Related Bond Indenture, or (b) with respect to any other Obligation, those securities identified as Escrow Securities 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. 6

219 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 Obligated Group 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 this 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. Whenever this Master Indenture refers to a Fiscal Year of a specific entity, such reference shall be to the actual fiscal year adopted by such entity. Future Test Period means the two full Fiscal Years immediately following the computation then being made, or, if such computation is then being made in connection with the provision of funds for capital improvements, following the anticipated completion of the capital improvements then being financed. Governing Body means, as to any Person, its 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. Gross Revenues means, without duplication, all operating and nonoperating revenues, receipts and income of each Member and all rights to receive the same, whether in the form of accounts receivable, contract rights, chattel paper, instruments, general intangibles or other rights and all proceeds thereof, including insurance proceeds and condemnation awards, whether now existing or hereafter coming into existence and whether now owned or hereafter acquired; provided however, that there shall be excluded from Gross Revenues: (a) any restricted gifts, grants, bequests, donations or contributions and any income from the foregoing, but only to the extent that such sums may not be pledged or applied to the payment of Debt Service Requirements on Indebtedness or operating expenses generally as a result of restrictions or designations imposed by the donor or maker of the gift, grant, bequest, donation or contribution in question at the time of the making thereof; and (b) any revenues, receipts and income received in respect of the ownership or operation of properties which secure Non-Recourse Indebtedness, any rights to receive the same and any proceeds thereof. Gross Revenues Account means the account of that name established pursuant to Section 208 of this Master Indenture. Guaranty means all obligations of a Person guaranteeing, or in effect guaranteeing, any Indebtedness 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: (a) to purchase such Indebtedness or obligation or any Property constituting security therefor; (b) 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; (c) 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 7

220 make payment of the Indebtedness or obligation; or (d) otherwise to assure the owner of such Indebtedness or obligation against loss in respect thereof. Hedging Obligation means an Obligation, expressly identified as such in (a) a Supplemental Master Indenture or (b) an Officer s Certificate delivered to the Master Trustee, as being entered into in order to hedge the interest payable on all or a portion of any Indebtedness, which agreement may include, without limitation, an interest rate swap, a basis swap, a yield curve swap, a currency swap, a forward or futures contract or an option (e.g., a call, put, cap, floor or collar) or similar instrument and which arrangement does not constitute an obligation to repay money borrowed, credit extended or the equivalent thereof. Historic Test Period means, at the option of the Obligated Group Agent, any of (a) any twelve (12) consecutive calendar months out of the most recent period of eighteen (18) full calendar months, (b) the most recent period of twelve (12) full consecutive calendar months for which audited financial statements of the Obligated Group are available, or (c) the most recent Fiscal Year of the Obligated Group. Income Available for Debt Service means, for any period, the excess of Revenues over Adjusted Expenses of the Person or group of Persons involved; provided, that the term Income Available for Debt Service shall also include all Income Available for Debt Service of any Person that has outstanding Indebtedness (such terms being applicable as if such Person were a Member of the Obligated Group) that is guaranteed by the Obligated Group or any Member of the Obligated Group pursuant to any Permitted Guaranty, but only to the extent, by percentage of such Person s Income Available for Debt Service, that such Permitted Guaranty is counted toward Debt Service Requirements pursuant to Section 410(b)(ix) hereof (i.e., either zero percent (0%), twenty percent (20%) or one hundred percent (100%) of such Person s Income Available for Debt Service). Indebtedness means, for any Person, without duplication, (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 (weighted, with respect to any Permitted Guaranty, as provided in Section 410(b)(ix) hereof), and shall include Non-Recourse Indebtedness; provided that Indebtedness shall not include Indebtedness of one Member to another Member, any Guaranty by any Member of Indebtedness of any other Member, the joint and several liability of any Member on Indebtedness issued by another Member, any Hedging Obligation, any Ancillary Obligation, or any obligation to repay moneys deposited by patients or others with a Member as security for or as prepayment of the cost of patient care. Insurance Consultant means a Person appointed by the Obligated Group Agent and not reasonably objected to by the Master Trustee, qualified to survey risks and to recommend insurance coverage for health care facilities and organizations engaged in like operations, who may be a broker or agent with whom a Member of the Obligated Group transacts business, but who shall have no interest, direct or indirect, in any Member of the Obligated Group and shall not be a member, director or employee of any Member of the Obligated Group. 8

221 Lien means any mortgage, lease, pledge, security interest, lien, judgement lien, easement, or other encumbrance on title. Long-Term Debt Service Coverage Ratio means, for any period of time, the ratio determined by dividing (a) Income Available for Debt Service of the Obligated Group for that period by (b) the Debt Amortization Requirements of the Obligated Group for that period; provided Income Available for Debt Service and Debt Amortization Requirements shall be determined only with respect to those Persons who are Members of the Obligated Group, as the case may be, at the close of such period. Notwithstanding anything in this Master Indenture to the contrary requiring a Consultant s opinion, report or certificate, projections of the Long-Term Debt Service Coverage Ratio may be made by an Officer s Certificate if the Long-Term Debt Service Coverage Ratio for the Future Test Period, as shown by an Officer s Certificate, is projected to exceed 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 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 this Master Indenture. Master Indenture means the Original Master Trust Indenture as amended and restated by this Master Indenture, as it may from time to time be further amended, modified or supplemented in accordance with the terms hereof. Master Trustee means The Bank of New York Mellon Trust Company, N.A., or any successor trustee under this Master Indenture. Material Obligated Group Member means any Obligated Group Member whose total revenues as set forth on its financial statements for the most recently completed Fiscal Year for such Member exceed 5% of the combined total revenues of the Obligated Group as set forth on the combined financial statements for the most recently completed Fiscal Year of the Obligated Group. Maximum Annual Debt Service means, at the time of computation, the greatest Debt Service Requirements of the Obligated Group for the then current or any future Fiscal Year. Member or Member of the Obligated Group means the Hospital, Warren, Anderson, Monroe and any Person who is listed on Exhibit A hereto after designation as a Member of the Obligated Group pursuant to the terms of this 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. Mortgages means (a) the Open-End Mortgage, Assignment of Rents and Security Agreement made as of April 22, 2010, by the Hospital to the Master Trustee, and (b) the Open- 9

222 End Mortgage, Assignment of Rents and Security Agreement dated June 30, 2003 and effective as of July 1, 2003, by the Hospital to the Master Trustee, each as heretofore and hereafter amended, restated, modified and supplemented. Net Assets means (a) for a Person that is a Tax-Exempt Organization, the aggregate net assets of such Person, and (b) for a Person that is not a Tax-Exempt Organization, the excess of assets over liabilities of such Person. 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 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, including, but not limited to, Capitalized Leases, the liability for which is effectively limited to Property, Plant and Equipment and the income 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 Member or to the general credit of any Member. Obligated Group means the current Members of the Obligated Group and any other Person which has fulfilled the requirements for entry into the Obligated Group set forth in Section 403 hereof and which has not ceased such status pursuant to Section 404 hereof. Obligated Group Agent means the Hospital 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 Hospital or, if the Hospital is no longer a Member of the Obligated Group, of each Member of the Obligated Group. Obligations means any Debt Obligation, Hedging Obligation, Ancillary Obligation or other evidence of an obligation authorized to be issued by a Member pursuant to this Master Indenture which has been authenticated by the Master Trustee pursuant to Section 204 hereof. Obligation holder, holder or owner means, as to an Obligation, the registered owner of any fully registered or book entry Obligation unless alternative provision is made in the 10

223 Supplemental Master Indenture pursuant to which such Obligation is issued for establishing ownership of such Obligation, in which case such alternative provision shall control. Officer s Certificate means a certificate signed by the President, authorized Vice- President or any other authorized officer of the applicable Member or, in the case of a certificate delivered by or on behalf of the Obligated Group, by the President, any authorized Vice- President or any other authorized officer of the Obligated Group Agent. Operating Expenses means the total operating expenses of the Obligated Group, as determined in accordance with generally accepted accounting principles consistently applied. Operating Revenues means the total operating revenues of Obligated Group, less applicable deductions from operating revenues, as determined in accordance with generally accepted accounting principles consistently applied. 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 or Outstanding, when used with respect to Obligations, means all Obligations which have been duly authenticated and delivered by the Master Trustee under this Master Indenture, except: (a) Obligations canceled after purchase in the open market or because of payment at or prepayment or redemption prior to maturity; (b) Obligations (i) for the payment or redemption of which cash or Escrow Securities 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) securing Related Bonds for the payment or redemption of which cash or Escrow Securities shall have been theretofore deposited with the Related Bond Trustee (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 such notice satisfactory in form to the Related Bond Trustee shall have been filed with the Related Bond Trustee; 11

224 (c) Obligations in lieu of which others have been authenticated hereunder; and (d) For the purpose of all consents, approvals, waivers and notices required to be obtained or given under this Master Indenture, Obligations held or owned by a Member of the Obligated Group. 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 Securities 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; 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 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 of the Obligated Group. Permitted Dispositions means dispositions of Property permitted by Section 411 of this Master Indenture. Permitted Encumbrances means, as of any particular time: (a) any Lien on Property at the time acquired, if at the time of such acquisition, the aggregate amount remaining unpaid on the Indebtedness secured by such lien (whether or not assumed by a Member of the Obligated Group) does not exceed the fair market value or (if such Property has been purchased) the lesser of the acquisition price or the fair market value of the Property subject to such Lien, as determined in good faith by the Obligated Group Agent; 12

225 (b) Member; any Lien on any Property granted in favor of or securing Indebtedness to any (c) (i) 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 or obligation of any Member of the Obligated Group; (ii) the Lien on Gross Revenues pledged pursuant to Section 208 hereof; and (iii) the Lien created by the Mortgages; (d) any Lien on or in Property given, granted, bequeathed or devised by the owner thereof existing at the time of such gift, grant, bequest or devise, provided that such Lien secures Indebtedness which is not assumed by a Member of the Obligated Group and such Lien attaches solely to such Property (including the income therefrom) which is the subject of such gift, grant, bequest or devise; (e) any Lien on proceeds of Indebtedness (or on income from the investment of such proceeds) pending application to the purposes for which such Indebtedness was incurred, or that secures payment of such Indebtedness, and any security interest in any rebate fund established pursuant to the Code, any depreciation reserve, debt service reserve 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) any Lien on Escrow Securities; (g) any Lien on any Related Bond or any evidence of Indebtedness of any Member of the Obligated Group acquired by or on behalf of any Member of the Obligated Group by the provider of liquidity or credit support for such Related Bond or Indebtedness; (h) any Lien on accounts receivable (i) arising as a result of the sale of such accounts receivable with or without recourse, provided that the principal amount of Indebtedness secured by any such Lien does not exceed the aggregate sales price of such accounts receivable received by the Member selling the same by more than twenty percent (20%), or (ii) granted to secure Indebtedness incurred pursuant to Section 410(b)(xvi) hereof; (i) any Lien on any Property in effect on the effective date of this Master Indenture or existing at the time any Person becomes a Member of the Obligated Group; 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 Member of the Obligated Group not subject to such Lien on such date unless such Lien as so increased, extended, renewed or modified is otherwise permitted under this Master Indenture; (j) any Lien on Property of a Person existing at the time such Person is merged into or consolidated with a Member of the Obligated Group, 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 Member of the Obligated Group which becomes part of a Property that secures Indebtedness that is 13

226 assumed by a Member of the Obligated Group as a result of any such merger, consolidation or acquisition; provided, that no such Lien may be increased, extended, renewed, or modified after such date to apply to any Property of a Member of the Obligated Group not subject to such Lien on such date unless such Lien as so increased, extended, renewed or modified is otherwise permitted under this Master Indenture; (k) any Lien which secure Non-Recourse Indebtedness incurred pursuant to Section 410(b)(vi) hereof; (l) any Lien arising out of Capitalized Leases; (m) any Lien on any Property, in addition to those Liens permitted 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 all such Property subject to any such Lien of the type described in this subsection (m) does not exceed twenty percent (20%) of the combined value of the Property of the Obligated Group; (n) any Lien on any Property given (by mortgage, security interest, conveyance in trust, deed, sale, or lease) in order to satisfy the customary legal or policy requirements of any Related Issuer with respect to their issuance of any Related Bonds; (o) any Lien that may be required from time to time to satisfy any collateralization requirements relating to any Hedging Obligation; (p) any Lien on Property or Gross Revenues required by, or resulting from, any lease agreement whereby a Member of the Obligated Group leases a hospital or health care facility or facilities from a governmental unit or units; (q) any Lien in the nature of a purchase money mortgage if, after giving effect to such Lien, such purchase money mortgage secures an amount not in excess of the cost of the particular asset to which such Lien relates and any related financing charges, where such purchase money mortgage constitutes a Lien on fixed assets acquired or constructed by a Member and granted contemporaneously with such acquisition or construction, and which Lien secures all or a portion of the related purchase price or construction cost of such assets; (r) any Lien arising by reason of good faith deposits by any Member in connection with tenders, leases of real estate or tangible personal property, bids or contracts (other than contracts for the payment of money), deposits by any Member to secure public or statutory obligations, or to secure or in lieu of, surety, performance, labor, materials, bid, stay, appeal or other similar bonds, and deposits as security for the payment of taxes or assessments or other similar charges; (s) any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or 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 Member to maintain self-insurance or to participate in any funds established to cover any insurance risks 14

227 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; (t) any judgment Lien against any Member so long as (i) the finality of such judgment is being contested in good faith and execution thereon is stayed, or (ii) in the absence of such a contest and stay, neither the pledge and security interest of this Master Indenture nor any material Property of any Member will be materially impaired or subject to material loss or forfeiture; (u) 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 without cause, provided that the exercise of such right would not materially impair the use of such Property for its intended purpose or materially and adversely affect the value thereof, or (ii) purchase, condemn, appropriate or recapture, or designate a purchaser of such Property; (v) any Lien on any Property for taxes, assessments, levies, fees, water and sewer rents, and other governmental or similar charges, and any Lien of mechanics, material men and laborers for work or services performed or materials furnished in connection with such Property, and any landlord s Lien (i) which is not due and payable or is not delinquent, (ii) the amount or validity of which is being contested in good faith and on which execution is stayed, or (iii) the exercise of which will not materially impair the pledge and security interest of this Master Indenture or subject any Property of a Member to material loss or forfeiture; (w) any easement, right-of-way, restriction, servitude, license, covenant running with the land and other minor defect, encumbrance or irregularity in the title to any Property which does not materially impair the use of such Property for its intended purpose or materially and adversely affect the value thereof; (x) any right reserved to or vested in any municipality or public authority to control or regulate any Property or the use thereof, or to use such Property in any manner, which right does not materially impair the use of such Property for its intended purpose or materially and adversely affect the value thereof; (y) any Lien on or security interest in moneys deposited by patients or others with a Member as security for or as prepayment for the cost of patient care; and (z) any Lien on or security interest granted to another Member to secure the payment of money to such other Member. Notwithstanding the Permitted Encumbrances listed herein, to the extent of any conflict between this definition of Permitted Encumbrances and the restrictions of Section 418 of this Master Indenture, Section 418 of this Master Indenture shall control while it is in effect. Permitted Guaranty means any Guaranty by any Member of the Obligated Group permitted under Section 410(b)(ix) of this Master Indenture. 15

228 Permitted Indebtedness means Indebtedness of any Member of the Obligated Group permitted under Section 410 of this Master Indenture. Permitted Investments shall mean (a) with respect to any Obligation which secures a series of Related Bonds, the obligations in which the Related Bond Trustee may invest funds under the Related Bond Indenture, (b) with respect to any Obligation for which a Supplemental Master Indenture specifies certain permitted investments, the investments so specified and (c) in all other cases such legal and prudent investments as are designated by the Obligated Group Agent. Permitted Reorganizations means any consolidation, merger or reorganization of any of the Members of the Obligated Group permitted by Section 408 of this Master Indenture. Person means any natural person, firm, joint venture, joint operating agreement, association, partnership, business trust, corporation, limited liability company, public body, agency or political subdivision thereof or any other similar entity. 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, including but not limited to Gross Revenues and Property, Plant and Equipment. Property, Plant and Equipment means all Property of each Member of the Obligated Group, which is classified as property, plant and equipment under generally accepted accounting principles. Qualified Escrow shall mean a segregated escrow fund or other similar fund or account which (a) is irrevocably established as security for Long Term Indebtedness previously incurred and then outstanding (herein referred to as Prior Indebtedness ) or for Long Term Indebtedness, if any, then to be incurred to refund outstanding Prior Indebtedness (herein referred to as Refunding Indebtedness ), is held by the holder of the Prior Indebtedness or Refunding Indebtedness secured thereby or by a trustee or agent acting on behalf of such holder and is subject to a perfected security interest in favor of such holder, trustee or agent, (b) is held in cash or invested in obligations described in the definition of Permitted Investments, and (c) is required by the documents establishing such fund or account to be applied toward a Member s payment obligations in respect of the Prior Indebtedness, provided that, if the fund or account is funded in whole or in part with the proceeds of the Refunding Indebtedness, the documents establishing the same may require specified payments of principal or interest (or both) in respect of the Refunding Indebtedness to be made from the fund or account prior to the date on which the Prior Indebtedness is repaid in full. 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 16

229 of any of the foregoing empowered to issue obligations on behalf thereof, the proceeds of which are loaned or otherwise made available to any Member 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, notes or other forms of indebtedness issued by any Member 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, notes or other forms of indebtedness 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 any 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 any 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 any Property financed or refinanced with such proceeds is leased, sublet or sold to a Member). 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; provided that no calculation of Revenues shall take into account any (i) unrealized gain resulting from the disposition of, or changes in the value of, investment securities; (ii) extraordinary or nonrecurring gains or revenues (including without limitation any gains on the sale or other disposition of assets or facilities not in the ordinary course of business); (iii) gains on the extinguishment of Indebtedness (including any termination payments received on Hedging Obligations or other hedges or derivatives related to or integrated with the Indebtedness being extinguished); (iv) gains resulting from discontinued operations or any reappraisal, revaluation or write-up of any asset, facility or good-will, and any gain or revenue resulting from adjustments to prior periods; (v) unrealized gains on or related to any Hedging Obligations or other hedges or derivatives; (vi) revenue or income or other items that would be considered by the Obligated Group Agent to be non-cash items of the Person or group of Persons involved; (vii) gains or revenues attributable to transactions between any Member of the Obligated Group and any other Member of the Obligated Group; (viii) proceeds of insurance policies (excluding business interruption insurance) or condemnation awards; and (ix) gifts, donations, grants, pledges, devises, legacies, 17

230 bequests and contributions to the extent that they may be restricted as to their use by their terms and such amounts are not available for payment of debt service or operating expenses. 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 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. Subordinated Indebtedness means all obligations incurred or assumed, the payment of which is by its terms specifically subordinated to payments on all Obligations, or the principal of and interest on which would not be paid (whether by the terms of such obligation or by agreement of the obligee) when the Obligations are in default or while bankruptcy, insolvency, receivership or other similar proceedings are instituted and implemented. Supplemental Master Indenture means an indenture amending or supplementing this Master Indenture entered into pursuant to Article VII hereof after the date hereof. Tax-Exempt Organization means a Person organized under the laws of the United States of America or any state thereof which is (a) an organization described in Section 501(c)(3) of the Code, (b) exempt from federal income taxation under Section 501(a) of the Code, and (c) 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. Transaction Test means the test described below, for which the Master Trustee shall have received the related certificate described under paragraph (a), (b) or (c) set forth below: (a) an Officer s Certificate demonstrating and concluding that, for the most recent Fiscal Year preceding the incurrence of the Long-Term Indebtedness for which audited financial statements are available, the Long-Term Debt Service Coverage Ratio was at least equal to 1.10 to 1, taking into account the proposed Long-Term Indebtedness as if the Long-Term Indebtedness had been incurred at the beginning of that prior Fiscal Year; or (b) an Officer s Certificate demonstrating and concluding that, for the most recent Fiscal Year preceding the incurrence of the Long-Term Indebtedness for which audited financial statements are available, the sum of the proposed additional Long-Term Indebtedness and the total Long-Term Indebtedness of the Obligated Group outstanding on the last day of that Fiscal Year, as adjusted by any other Long-Term Indebtedness incurred since that date, would not exceed 66-2/3% of the aggregate Net Assets of the Members of the Obligated Group; or (c) (i) an Officer s Certificate demonstrating and concluding that, for the most recent Fiscal Year preceding the incurrence of the Long-Term Indebtedness for which audited financial statements are available, the Long-Term Debt Service Coverage Ratio was at least equal to 1.10 to 1 and (ii) either an Officer s Certificate or a written report of a Consultant, demonstrating and concluding that the forecasted average Long-Term Debt Service Coverage Ratio for the two Fiscal Years commencing after the incurrence of the proposed Long-Term Indebtedness would 18

231 not be less than 1.25 to 1 (if addressed by an Officer s Certificate) or 1.10 to 1 (if addressed by the written report of a Consultant). Variable Rate Indebtedness means Indebtedness that bears interest at a variable, adjustable or floating rate. Section 102. Interpretation. Words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders. Unless the context shall otherwise indicate, words importing the singular number shall include the plural and vice versa. Headings of articles and sections herein and the table of contents hereof are solely for the convenience of reference, do not constitute a part hereof and shall not affect the meaning, construction or effect hereof. Any reference herein to any officer of a Member of the Obligated Group shall include those succeeding to their functions, duties or responsibilities pursuant to or by operation of law or who are lawfully performing their functions. If any Debt Obligations are issued hereunder to secure Related Bonds, which Related Bonds are valued, in accordance with the provisions of a Related Bond Indenture, at other than their principal amount for purposes of the provisions of such Related Bond Indenture relating to redemption, acceleration, defeasance, computation of Related Bonds Outstanding, application of moneys in payment of the Related Bonds and actions by holders of such Related Bonds, then, for purposes of this Master Indenture, references in this Master Indenture to the principal amount of the Debt Obligations issued to evidence or secure such Related Bonds contained herein shall be deemed to refer to an amount equal, at any time of calculation, to the valuation of such Related Bonds, at such time of calculation, as set forth in such Related Bond Indenture. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistently applied, except as otherwise stated herein. If any change in accounting principles from those used in the preparation of the financial statements of the Obligated Group as of June 30, 2015 results from the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board, American Institute of Certified Public Accountants or other authoritative bodies that determine generally accepted accounting principles (or successors thereto or agencies with similar functions) and such change results in a change in the accounting terms used in this Master Indenture, the accounting terms used herein shall be modified to reflect such change in accounting principles so that the criteria for evaluating the Obligated Group s financial condition shall be the same after such change as if such change had not been made. Any such modification shall be described in an Officer s Certificate filed with the Master Trustee, which shall contain a certification to the effect that (i) such modifications are occasioned by such a change in accounting principles and (ii) such modifications will not have a materially adverse effect on the Obligation holders or result in materially different criteria for evaluating the Obligated Group s financial condition. 19

232 ARTICLE II THE OBLIGATIONS Section 201. Series, Designation and Amount of Obligations; Existing Obligations. No Obligations may be issued under the provisions of this Master Indenture except in accordance with this Article. Other than the Obligated Group Agent, no authorization or approval of any Member of the Obligated Group is required under this Master Indenture for the issuance of Obligations. No Obligations may be issued under this Master Indenture unless (a) such Obligation is executed by the Obligated Group Agent; or (b) with the written consent of the Obligated Group Agent, such Obligation is executed by any other Member of the Obligated Group. The total amount of Obligations, the number of Obligations and the series of Obligations that may be created under this Master Indenture is not limited 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. Specimen versions of the Obligations Outstanding as of the date hereof are set forth in Exhibit B attached hereto and made a part hereof. All such Obligations shall be considered issued under this Master Indenture and the terms and provisions of this Master Indenture shall be applicable to all such Obligations. All such Obligations are exempt from any requirements of this Article II to the extent the terms thereof are inconsistent with any requirements of this Article II. Section 202. Payment of Obligations. The principal of, premium, if any, and interest on the Obligations, and any other amounts due under any Obligation, 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 amounts shall be payable at the designated corporate trust office of the Master Trustee or at the office of any Related Bond Trustee named in any such Obligation or in a Related Bond Indenture or to the registered owner of such Obligation, as may be provided in such Obligation. 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, payments on the Obligations shall be made to the Person appearing on the registration books of the Obligated Group (kept in the corporate trust office of the Master Trustee or its agent 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 amounts due under 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, or if an Obligation so provides, payments on such Obligation shall be made directly by such Member, by check or draft delivered to the holder thereof or its designee or shall be made by such Member by 20

233 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, or as otherwise may be provided in a Supplemental Master Indenture, 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 hereof. 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. Section 203. Execution. Obligations shall be executed on behalf of a Member by the manual or, if permitted by law, facsimile signature of the Chairman or any Vice-Chairman of its Governing Body, its President or any Vice President or any other authorized officer of the Member (or on their behalf by a similar authorized officer of the Obligated Group Agent) and shall have impressed or printed by facsimile thereon the corporate seal of such Member or of the Obligated Group Agent, if required by law, which shall be attested by the manual or, to the extent permitted by law, facsimile signature of its Secretary or any Assistant Secretary or any other authorized officer of the Member (or on their behalf by a similar authorized officer of the Obligated Group Agent). In case any officer whose signature or facsimile of whose signature shall appear on the Obligations shall cease to be such officer before the delivery of such Obligations, such signature or such facsimile shall nevertheless be valid and sufficient for all purposes, the same as if he had remained in office until delivery. Section 204. Authentication. No Obligation shall be valid or obligatory for any purpose or entitled to any security or benefit under this Master Indenture unless and until a certificate of authentication on such Obligation substantially in the form set forth below shall have been duly executed by the Master Trustee, and such executed certificate of the Master Trustee upon any such Obligation shall be conclusive evidence that such Obligation has been authenticated and delivered under this Master Indenture. The Master Trustee s certificate of authentication on any Obligation shall be deemed to have been executed by it if signed by an authorized officer or signer of the Master Trustee, but it shall not be necessary that the same officer or signer sign the certificate of authentication on all of the Obligations issued hereunder. 21

234 form: The Master Trustee s authentication certificate shall be in substantially the following Master Trustee s Authentication Certificate This Obligation is one of the Obligations described in the within-mentioned Master Indenture. THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Master Trustee By: Authorized Officer or Signer Section 205. Form of Obligations. All Obligations issued under this Master Indenture shall be substantially in the form set forth or referred to in the Supplemental Master Indenture pursuant to which such Obligations are issued, to reflect the terms and conditions thereof as established hereby and by such Supplemental Master Indenture. Unless Obligations of a series have been registered under the Securities Act of 1933, as amended, each Obligation of such series shall be endorsed with a legend which shall read substantially as follows: This [Obligation/Note/Guarantee] has not been registered under the Securities Act of 1933, as amended. Section 206. Mutilated, Lost, Stolen or Destroyed Obligations. In the event any temporary or definitive Obligation is mutilated, lost, stolen or destroyed, the Member issuing such Obligation may execute and the Master Trustee may authenticate a new Obligation of like form (with any updated references to this Master indenture or as otherwise may be necessary or advisable), date, maturity and denomination as that mutilated, lost, stolen or destroyed; provided that, in the case of any mutilated Obligation, such mutilated Obligation shall first be surrendered to the Master Trustee, and in the case of any lost, stolen or destroyed Obligation, there shall be first furnished to the Obligated Group Agent, such Member and the Master Trustee evidence of such loss, theft or destruction satisfactory to the Obligated Group Agent, such Member and the Master Trustee, together with indemnity satisfactory to them. In the event any such Obligation shall have matured, instead of issuing a duplicate Obligation the Obligated Group may pay the same without surrender thereof. The Obligated Group and the Master Trustee may charge the holder or owner of such Obligation with their reasonable fees and expenses in this connection. 22

235 Section 207. Registration; Negotiability; Cancellation Upon Surrender; Exchange of Obligations. Upon surrender for transfer of any Obligation at the designated corporate trust office of the Master Trustee, the Member issuing such Obligation shall execute and the Master Trustee shall authenticate and deliver in the name of the transferee or transferees a new fully registered Obligation or Obligations of the same series, designation and maturity without coupons for a like aggregate amount. The execution by a Member of any Obligation of any denomination shall constitute full and due authorization of such denomination and the Master Trustee shall thereby be authorized to authenticate and deliver such Obligation. The Master Trustee shall not be required to transfer or exchange any Obligation (a) during the period of 15 days next preceding any payment date of such Obligation, (b) after the notice calling such Obligation or portion thereof for redemption has been given as herein provided, or (c) during the period of 15 days next preceding the mailing of such notice of redemption with respect to any Obligation of the same series and maturity. As to any Obligation, the Person in whose name the same shall be registered shall be deemed and regarded as the absolute owner thereof for all purposes, and payment of or on account of the amounts due under any such Obligation shall be made only to or upon the order of the registered owner thereof or his legal representative, but such registration may be changed as herein provided. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Obligation to the extent of the sum or sums so paid. Any Obligation surrendered for the purpose of payment or retirement or for replacement pursuant to Section 206 hereof shall be canceled upon surrender thereof to the Master Trustee. Certification of Obligations canceled by the Master Trustee shall be made to the Obligated Group Agent. Canceled Obligations may be destroyed by the Master Trustee unless instructions to the contrary are received from the Obligated Group Agent. The Obligated Group and the Master Trustee may charge each Obligation holder requesting an exchange, registration, change in registration or transfer of an Obligation any tax, fee or other governmental charge required to be paid with respect to such exchange, registration or transfer. Section 208. Security for Obligations; Grant of Mortgages; Pledge of Gross Revenues; Collateral Assignment. (a) Security. All Obligations issued and outstanding under this Master Indenture are and shall be equally and ratably secured by this Master Indenture except to the extent specifically provided otherwise as permitted hereby. All Obligations issued and outstanding under this Master Indenture are and shall be equally and ratably secured by the pledge of Gross Revenues described below. All Obligations issued and outstanding under this Master Indenture are and shall be equally and ratably secured by the Mortgages described below, 23

236 except as otherwise provided in a Supplemental Master Indenture. Any one or more series of Obligations issued hereunder may be secured by additional security, in addition to the pledge of Gross Revenues (including without limitation letters or lines of credit, insurance or Liens on Property, including Facilities or Property of the Obligated Group, or security interests in a depreciation reserve, debt service reserve or interest reserve or debt service or similar funds), so long as any Liens created in connection therewith or securing such Obligations constitute Permitted Encumbrances and are not in violation of Section 418 of this Master Indenture (so long as such section is applicable). 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 are issued may provide for such supplements or amendments to the provisions hereof, including without limitation Articles II and V hereof, as are necessary to provide for such security and to permit realization upon such security solely for the benefit of the Obligations entitled thereto. The Members of the Obligated Group hereby further covenant and agree that, except for Permitted Encumbrances, they will not pledge, suffer to exist, or grant a security interest in or allow any Lien on the Gross Revenues or the real property subject to the Mortgages. (b) Grant of Mortgages. In order to secure the prompt payment of all amounts due on all Obligations issued under this Master Indenture (except as otherwise provided in a Supplemental Master Indenture) and the performance by the Members of the Obligated Group of their obligations under this Master Indenture and the Obligations, the Hospital, pursuant to the Mortgages, has granted to the Master Trustee, for the equal and ratable benefit of the holders from time to time of all of the Obligations (except as otherwise provided in a Supplemental Master Indenture), the Mortgages. (c) Pledge of Gross Revenues. In order to secure the prompt payment of all amounts due on all Obligations issued under this Master Indenture and the performance by the Members of the Obligated Group of their obligations under this Master Indenture and the Obligations, the Members of the Obligated Group have pledged and assigned to the Master Trustee and hereby pledge and assign to the Master Trustee, and have granted and hereby grant a security interest in, for the equal and ratable benefit of the holders from time to time of all of the Obligations, all of their Gross Revenues, but the existence of such pledge, assignment and security interest shall not prevent the expenditure, deposit or commingling of Gross Revenues by the Members of the Obligated Group for any purpose so long as no event of default under Section 501(a), (g), (h) or (i) hereof has occurred and is continuing and all required payments with respect to the Obligations are made when due. Without limiting the generality of the foregoing, this security interest shall apply to all rights to receive Gross Revenues whether in the form of accounts, accounts receivable, contract rights or other rights, and to the proceeds of such rights. This security interest shall apply to all of the foregoing, whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by the Members of the Obligated Group. The Members of the Obligated Group hereby represent that as of the date of the delivery hereof they have granted no security interest in Gross Revenues prior to the security interest granted by this Section, except the security interest granted to the Master Trustee in connection with the Original Master Trust Indenture. The Members of the Obligated Group hereby further covenant and agree that, except for Permitted Encumbrances, they will not 24

237 pledge, suffer to exist, or grant a security interest or Lien in the Gross Revenues. This Master Indenture is intended to be a security agreement pursuant to the Uniform Commercial Code. The Members of the Obligated Group agree to execute and deliver to the Master Trustee, if and to the extent required by law, such financing statements and continuation statements covering the Gross Revenues from time to time and in such form as may be required to perfect and continue a security interest in the Gross Revenues. The Master Trustee shall file all of such statements provided to it by any Member of the Obligated Group in a timely and appropriate manner as may be required to perfect and continue such security interest in Gross Revenues. The Members of the Obligated Group shall pay all costs of filing such financing statements and continuation statements and any renewals thereof and shall pay all reasonable costs and expenses of any record searches and preparation fees for financing statements and continuation statements that may be required. The pledge of Gross Revenues, except as set forth herein, does not extend to, or constitute a pledge of or lien upon, any funds, cash or investments held by any Member of the Obligated Group (except to the extent such funds, cash or investments constitute proceeds of Gross Revenues held by the Master Trustee). Upon the breach of any covenant or agreement of the Members of the Obligated Group contained in this Master Indenture, the Master Trustee will have the remedies of a secured party under the Uniform Commercial Code and, at its option, may also pursue the remedies permitted in applicable law as to such Gross Revenues. The Members of the Obligated Group hereby further covenant that if an event of default of the type described in Section 501(a) hereof shall occur and be continuing, and any grace period applicable thereto shall have expired, any Gross Revenues then received and any Gross Revenues thereafter received, shall not be commingled or deposited but shall immediately, or upon receipt, be transferred by the Members of the Obligated Group on a daily basis to the Master Trustee and deposited into the Gross Revenues Account as provided below. Such daily deposits shall continue until such event of default described in the preceding sentence shall have been cured. Any such proceeds on deposit with the Master Trustee shall be disbursed by the Master Trustee pursuant to the provisions of Section 506 of this Master Indenture and as provided below. The Master Trustee is hereby authorized and directed to establish a Gross Revenues Account, or Accounts, into which there shall be deposited upon the occurrence of any event of default under Section 501(a) of this Master Indenture, upon receipt by the Master Trustee, any and all Gross Revenues of the Obligated Group. Upon the occurrence of an event that requires the funding of the Gross Revenues Account the Obligated Group and the Master Trustee hereby covenant to take all action necessary to insure that all such Gross Revenues are deposited into the Gross Revenues Account including, but not limited to, depositing directly all payments received and, in the case of the Members of the Obligated Group, directing all debtors and payors of the Obligated Group to make all payments due to the Obligated Group Members into the Gross Revenues Account. The Gross Revenues Account shall become subject to the lien of this Master Indenture in favor of the holders of all Obligations. Amounts on deposit in such Account shall at all times be available first for the payment of current Operating Expenses of the Members of the Obligated Group as may be directed by the Obligated Group Agent and second to the payment of debt service on all Obligations due and past due and thereafter shall otherwise be transferred as may be directed by the Obligated Group Agent to and applied by the Obligated Group for its 25

238 corporate purposes. If the Master Trustee gives written notice to the Obligated Group of the exercise of remedies under this Master Indenture as a secured party and the Master Trustee enforces its rights and interests in and to the Gross Revenues Account and the amounts on deposit therein, such amounts shall first be applied to the payment of current Operating Expenses of the Members of the Obligated Group as may be directed by the Obligated Group Agent, and second as provided for in Section 506 hereof. The Master Trustee is hereby authorized to take such self-help and other measures that a secured party is entitled to take under the Uniform Commercial Code. Upon a cure or waiver of the event of default that requires the funding of the Gross Revenues Account, the Master Trustee shall transfer the amounts on deposit in the Gross Revenues Account to or at the direction of the Obligated Group Agent. Each Member of the Obligated Group represents, warrants and covenants for and on behalf of itself (except as specified below) that the following shall apply to the pledge of such Member s Gross Revenues created by this Master Indenture: (a) Creation: This Master Indenture creates a valid and binding pledge of, assignment of, lien on and security interest in its Gross Revenues in favor of the Master Trustee, as security for payment of the Obligations, enforceable by the Master Trustee in accordance with the terms hereof. (b) Perfection: Under the laws of the Commonwealth of Pennsylvania and the state of organization of such Member, such pledge, assignment, lien and security interest is and shall be prior to any judicial lien hereafter imposed on such collateral to enforce a judgment against the Obligated Group or any Member thereof on a simple contract. The Obligated Group Agent represents, warrants and covenants that by the date of the effectiveness of this Master Indenture, the Obligated Group Agent will have filed or caused to be filed all financing statements describing, and transferred such possession or control over, such collateral (and for so long as any Obligation is outstanding under this Master Indenture the Obligated Group will file, continue, and amend or cause to be amended all such financing statements and transfer or cause to be transferred such possession and control) as may be necessary to establish and maintain such priority in each jurisdiction in which the Obligated Group or any Member thereof is organized or such collateral may be located or that may otherwise be applicable pursuant to Uniform Commercial Code of such jurisdiction. (c) Priority: Each Member of the Obligated Group represents, warrants and covenants that it has not heretofore made a pledge of, granted a lien on or security interest in, or made an assignment or sale of its Gross Revenues that ranks on a parity with or prior to the pledge, assignment, lien and security interest in its Gross Revenues granted hereby, except to the Master Trustee in connection with the Original Master Trust Indenture. Each Member of the Obligated Group represents, warrants and covenants that it has not described such collateral in a Uniform Commercial Code financing statement that will remain effective after the date of the effectiveness of this Master Indenture, except to the Master Trustee in connection with the Original Master Trust Indenture. Each Member of the Obligated Group represents, warrants and covenants that it shall not hereafter make or suffer to exist any pledge or assignment of, 26

239 lien on, or security interest in such collateral that ranks prior to or on a parity with the pledge, assignment, lien and security interest in its Gross Revenues granted hereby, or file any financing statement describing any such pledge, assignment, lien, or security interest, except as expressly permitted under this Master Indenture. Section 209. Issuance of Obligations in Forms Other than Notes. To the extent that any Debt Obligation, any Hedging Obligation or any Ancillary Obligation is not in the form of a promissory note, an Obligation in the form of a promissory note may be issued hereunder and pledged as security for the payment of the amounts due under any such Obligation. Nevertheless, the parties hereto agree that Obligations may be issued hereunder to evidence any type of obligation, including but not limited to, Indebtedness in a form other than a promissory note. In addition, any Hedging Obligation or Ancillary Obligation may be authenticated as an Obligation hereunder. Consequently, the Supplemental Master Indenture pursuant to which any Obligation is issued may provide for such supplements or amendments to the provisions hereof, including, without limitation, Articles II and V hereof, as are necessary to permit the issuance of such Obligation hereunder and as are not inconsistent with the intent hereof that, except as otherwise expressly provided herein, all Obligations issued hereunder be equally and ratably secured hereunder, including by the pledge of Gross Revenues created under Section 208 hereof. Any Hedging Obligation or Ancillary Obligation which is authenticated as an Obligation hereunder shall be equally and ratably secured hereunder with all other Obligations issued hereunder, except as otherwise expressly provided herein; provided, however, that any such Hedging Obligation or Ancillary Obligation shall be deemed to be Outstanding hereunder solely for the purpose of receiving payment hereunder and shall not be entitled to exercise any rights hereunder, including but not limited to any rights to direct the exercise of remedies, to vote or to grant consents. Anything in this Master Indenture to the contrary notwithstanding, the Obligated Group may issue Hedging Obligations pursuant to this Master Indenture, without designating in such Hedging Obligation or in the Supplemental Master Indenture pursuant to which such Hedging Obligation is issued, and without regard to, a notional or principal amount, to any provider of one or more interest rate swaps, forward or futures contracts, options, or similar contracts, in order to evidence and secure one or more of such swaps, contracts or options issued by or with the same provider during a single Fiscal Year or calendar year, as designated by the Obligated Group Agent. Section 210. Substitute Obligations upon Withdrawal of a Member. In the event any Member ceases to be a Member of the Obligated Group in accordance with Section 404 and, in compliance with Section 404(a), another Member issues an Obligation hereunder 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 holder of Related Bonds, provided that such substitute Obligation provides for payments of principal, interest, 27

240 premium and other amounts due under such Obligation identical to the surrendered Obligation and sufficient to provide all payments on any Related Bonds. Section 211. 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 any and all Obligations and any and all 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 hereunder, or Related Bonds associated therewith, and to execute and deliver such items to the appropriate parties in connection therewith. ARTICLE III PREPAYMENT OR REDEMPTION OF OBLIGATIONS Section 301. Prepayment or Redemption Dates and Prices. Obligations shall be subject to optional, extraordinary and/or mandatory prepayment or redemption in whole or in part and may be prepaid or redeemed prior to maturity as provided in the Supplemental Master Indenture or the Related Bond Indenture or Related Loan Document pertaining to the series of Obligations to be prepaid or redeemed, but not otherwise. ARTICLE IV GENERAL COVENANTS Section 401. Payment of Principal, Premium, if any, and Interest and Other Amounts. 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 terms and conditions of Section 404 hereof), jointly and severally covenants that it will promptly pay the principal of, premium, if any, and interest on, and all other amounts due under, every Obligation issued under this Master Indenture and any other payments, including 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 herein and in said Obligations according to the true intent and meaning thereof. Notwithstanding any schedule of payments upon the Obligations set forth herein or in the Obligations, 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 terms and conditions of Section 404 hereof), jointly and severally agrees to make payments upon each Obligation and be liable therefor at the times and in the amounts (including principal, interest, purchase price upon tender and premium, if any, and all other amounts due thereunder) equal to the amounts to be paid as interest, principal at maturity or by mandatory sinking fund 28

241 redemption, or premium, if any, upon any Related Bonds from time to time outstanding and upon any other financial obligations evidenced or secured by an Obligation. If any Member does not tender payment of any installment of principal, premium or interest on, or any other amounts due under, 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. Section 402. Performance of Covenants. Each Member covenants that it will faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in this Master Indenture and in each and every Obligation executed, authenticated and delivered hereunder and will perform all covenants and requirements imposed on the Obligated Group Agent or any Member under the terms of any Related Bond Indenture or Related Loan Agreement. Section 403. Entrance into the Obligated Group. Any Person may become a Member of the Obligated Group if: (a) Such Person is a corporation or other legal 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 this Master Indenture, including, but not limited to, agreeing to pledge, and pledging, its Gross Revenues in accordance with Section 208 hereof, and (ii) unconditionally and irrevocably (subject to the right of such Person to cease its status as a Member of the Obligated Group pursuant to the terms and conditions of Section 404 hereof) 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 (i) an Officer s Certificate 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 hereunder, (ii) 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 to such other exceptions as are not reasonably objected to by the Master Trustee 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 which otherwise has such status, and (iii) if all amounts due or to become due on all Related Bonds have not been 29

242 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) The Obligated Group shall have delivered an Officer s Certificate to the Master Trustee demonstrating that the Transaction Test will be met, assuming the incurrence of $1.00 of additional Indebtedness, after giving effect to the proposed transaction; and (f) Exhibit A to this Master Indenture shall be amended or replaced to add such Person as a Member. Each successor, assignee, surviving, resulting or transferee corporation or other legal entity 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. Section 404. 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 under the terms of this Master Indenture, to cease to be a Member of the Obligated Group 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 hereunder 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 Related Bond would otherwise be entitled; (c) immediately after such cessation, no event of default exists hereunder 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; 30

243 (e) the Obligated Group shall have delivered an Officer s Certificate to the Master Trustee demonstrating that the Transaction Test will be met, assuming the incurrence of $1.00 of additional Indebtedness, after giving effect to the proposed transaction; (f) prior to the cessation of such status, the Obligated Group Agent consents in writing to the withdrawal of such Member; and (g) Exhibit A to this Master Indenture shall be amended or replaced to delete such Person as a Member. Section 405. General Covenants; Right of Contest. Each Member hereby covenants to: (a) Except as otherwise expressly provided herein (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; provided, however, that nothing contained in this Master Indenture shall be construed to obligate such Member 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 any Person that is a Tax-Exempt Organization at the time it becomes a Member, so long as this 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) 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 effect on the operations or financial affairs of the Obligated Group, taken as a whole. The foregoing notwithstanding, any Member 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 31

244 interest payable on any Related Bond otherwise entitled to such exemption or adversely affect the enforceability in accordance with its terms of this Master Indenture against any Person. No Member shall be required to remove any Lien required to be removed under Section 412, 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 Section 412, so long as such Member shall contest, 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 shall not be required to pay, remove or cause to be discharged the obligation, Indebtedness, demand, claim or Lien being contested unless such Member agrees to settle such contest. Each such contest shall be promptly prosecuted to final conclusion (subject to the right of such Member engaging in such a contest to settle such contest), and in any event the Member will save all Obligation holders and the Master Trustee harmless from and 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 thereon or incurred in connection therewith. Section 406. Insurance; Proceeds; Awards. (a) Each Member shall maintain or cause to be maintained at its sole cost and expense, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of the Obligated Group as may customarily be carried or maintained under similar circumstances by healthcare service providers of established reputation engaged in similar businesses, in each case in such amounts (giving effect to selfinsurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for corporations similarly situated in the industry. (b) Insurance proceeds (including title insurance proceeds) or condemnation awards paid or payable to the Obligated Group, or to the Master Trustee pursuant to, or in connection with, the Mortgages, any Related Bond Indenture or any Related Loan Agreement, shall be applied, at the direction of the Obligated Group Agent (so long as no event of default under this Master Indenture is then continuing), either to (i) repair, reconstruct, restore or replace the damaged or condemned Property, or (ii) prepay all Outstanding Obligations pro-rata among all such Outstanding Obligations. Any such insurance proceeds or condemnation awards remaining after application as provided in the preceding sentence shall be paid or applied as directed by the Obligated Group Agent for any purpose as may be determined by the Obligated Group. Notwithstanding the foregoing, the Obligated Group agrees that it shall not permit or direct the application of any insurance proceeds or condemnation awards received with respect to 32

245 any Property financed with the proceeds of Related Bonds in any manner that would adversely affect the tax-exempt status of any Related Bonds. Upon the direction of the Obligated Group Agent, the Master Trustee shall deposit or cause to be deposited into an account or accounts, as may be required by the Mortgages, any Related Bond Indenture or Related Loan Agreement, any insurance proceeds or condemnation awards (or allocable portion thereof) to be applied to the restoration, reconstruction or repair of any Property or the prepayment of Related Bonds; provided that, if an event of default under this Master Indenture is continuing, such insurance proceeds or condemnation awards shall be paid to Master Trustee and applied in accordance with Section 506. Section 407. Long-Term Debt Service Coverage Ratio. Each Member covenants and agrees to conduct its business on a revenue producing basis and 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 hereunder to the extent permitted by law. Each Member further covenants and agrees that it will, 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 this Section. The Obligated Group Agent shall calculate the Income Available for Debt Service of the Obligated Group for each Fiscal Year and the Long-Term Debt Service Coverage Ratio of the Obligated Group for such Fiscal Year and deliver a copy of such calculations to the Persons to whom financial statements are required to be delivered under Section 409 hereof. If in any Fiscal Year the Long-Term Debt Service Coverage Ratio of the Obligated Group is less than 1.10 to 1, the Obligated Group Agent shall at its expense retain a Consultant, in a timely manner but in no event later than one hundred thirty five (135) days after the date on which the Obligated Group Agent determines that such Long-Term Debt Service Coverage Ratio is less than 1.10 to 1, to prepare a report and make recommendations with respect to the rates, fees and charges of the Obligated Group and the Obligated Group s methods of operation and other factors affecting their financial condition in order to increase such Long-Term Debt Service Coverage Ratio to at least 1.10 to 1. 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 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 without charge or at reduced rates so long as such service does not prevent the Obligated Group, as the case may be, from satisfying the other requirements of this Section. 33

246 The foregoing provisions notwithstanding, if in any Fiscal Year the Long-Term Debt Service Coverage Ratio of the Obligated Group or the Obligated Group, as the case may be, is less than 1.10 to 1, the Obligated Group Agent shall not be required to retain a Consultant to make such recommendations if: (a) there is filed with the Master Trustee a written report of a Consultant which contains an opinion of such Consultant to the effect that applicable laws or regulations have prevented the Obligated Group from generating Income Available for Debt Service during such Fiscal Year in an amount sufficient to produce a Long-Term Debt Service Coverage Ratio of the Obligated Group of 1.10 to 1 or higher; (b) the report of such Consultant indicates that the fees and rates charged by the Members of the Obligated Group are such that, in the opinion of the Consultant, the Members of the Obligated Group have generated the maximum amount of Revenues reasonably practicable given such laws or regulations; and (c) the Long-Term Debt Service Coverage Ratio of the Obligated Group 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. Notwithstanding anything else in this Section to the contrary, it shall be an event of default under Section 501 hereof if for any two consecutive Fiscal Years the Long-Term Debt Service Coverage Ratio of the Obligated Group is less than 1.00 to 1. Section 408. Permitted Reorganizations. (a) Each Member agrees that it will not merge into, or consolidate with, one or more corporations that 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: (i) In the event that the successor corporation or other legal entity is not the Member, then any successor corporation or other legal entity to such Member (including without limitation any purchaser of all or substantially all the Property of such Member) is a corporation or other legal entity 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 or other legal entity to assume, jointly and severally, the due and punctual payment of the principal of, premium, if any, and interest on, and any other amounts due under, all Obligations according to their tenor and the due and punctual performance and observance of all the covenants and conditions of this Master Indenture to be kept and performed by such Member; (ii) Immediately after such merger or consolidation, or such sale or conveyance, no Member would be in default in the performance or observance of 34

247 any covenant or condition of any Related Loan Document or this Master Indenture; (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 (x) an opinion of Counsel to the effect that the consummation of such merger, consolidation, sale or conveyance will not adversely affect the status as a Tax-Exempt Organization of any Member which otherwise has such status; and (y) 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; and (iv) The Obligated Group shall have delivered an Officer s Certificate to the Master Trustee demonstrating that the Transaction Test will be met, assuming the incurrence of $1.00 of additional Indebtedness after giving effect to the proposed Permitted Reorganization. (b) In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation or other legal entity, such successor corporation or other legal entity shall succeed to and be substituted for its predecessor, with the same effect as if it had been named herein 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 hereunder or upon the Obligations and such Member as the predecessor or nonsurviving corporation or other legal entity may thereupon or at any time thereafter be dissolved, wound up or liquidated. Any successor corporation or other legal entity to such Member thereupon may cause to be signed and may issue in its own name Obligations hereunder and the predecessor corporation or other legal entity shall be released from its obligations hereunder and under any Obligations, if such predecessor corporation or other legal entity shall have conveyed all or substantially all Property owned by it (or all such Property shall be deemed conveyed by operation of law) to such successor corporation or other legal entity. All Obligations so issued by such successor corporation or other legal entity hereunder shall in all respects have the same legal rank and benefit under this Master Indenture as Obligations theretofore or thereafter issued in accordance with the terms of this Master Indenture as though all of such Obligations had been issued hereunder 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 this Section and that it is proper for the Master Trustee under the 35

248 provisions of Article VII and of this Section to join in the execution of any instrument required to be executed and delivered by this Section. Section 409. Financial Statements, Etc. The Hospital and each Member covenant that they will 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 Hospital and the Members of the Obligated Group 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 the Obligated Group will furnish to the Master Trustee: (a) As soon as practicable after they are available, but in no event more than 150 days after the last day of each Fiscal Year, a financial report of St. Luke s University Health Network, Inc. & Controlled Entities 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 St. Luke s University Health Network, Inc. & Controlled Entities for such Fiscal Year and containing an audited consolidated statement of financial position, consolidated statement of cashflows and consolidated statement of changes in net assets as of the end of such Fiscal Year and audited consolidated and an unaudited consolidating statement of financial position and statement of operations for such Fiscal Year, showing in each case in comparative form the financial figures for the preceding Fiscal Year. (b) At the time of delivery of the financial report referred to in subsection (a) above, an Officer s Certificate, stating that the Obligated Group Agent has made a review of the activities of each Member during the preceding Fiscal Year for the purpose of determining whether or not the Members have complied with all of the terms, provisions and conditions of this Master Indenture and that each Member has kept, observed, performed and fulfilled each and every covenant, provision and condition of this 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 hereof, or if any such Person shall be in default such certificate shall specify all such defaults and the nature thereof. Section 410. Permitted Indebtedness. (a) The Members of the Obligated Group covenant that, except for Permitted Indebtedness described in paragraph (b) of this Section 410, the Members of the Obligated Group shall not incur additional Indebtedness, directly, indirectly or contingently. (b) Permitted Indebtedness shall include only the following: (i) Long-Term Indebtedness, if prior to the incurrence of such Long- Term Indebtedness there is delivered to the Master Trustee an Officer s 36

249 Certificate demonstrating that the Transaction Test shall have been met for, and giving effect to, the incurrence of such Indebtedness; (ii) Long-Term Indebtedness, if prior to the incurrence of such Long- Term Indebtedness there is delivered to the Master Trustee an Officer s Certificate to the effect that the total principal amount of Long-Term Indebtedness to be incurred at such time, when added to the aggregate principal amount of all other Long-Term Indebtedness theretofore issued pursuant to this paragraph (b)(ii) and then Outstanding, will not exceed fifteen percent (15%) of the Operating Revenues of the Obligated Group for the Historic Test Period. Any Long-Term Indebtedness or portion thereof incurred under this paragraph (b)(ii) which is Outstanding at any time shall be deemed to have been incurred under paragraph (a) or (b) of the definition of Transaction Test if at any time subsequent to the incurrence thereof there shall be filed with the Master Trustee an Officer s Certificate to the effect that such Outstanding Indebtedness or portion thereof would satisfy such other provision, specifying such other provision, and thereupon the amount deemed to have been incurred and to be Outstanding under this paragraph (b)(ii) shall be deemed to have been reduced by such amount and to have been incurred under such other provision; (iii) Completion Indebtedness, if prior to the incurrence of such Completion Indebtedness there is delivered to the Master Trustee an Officer s Certificate (A) to the effect that the net proceeds of such proposed Completion Indebtedness is needed for the completion of the construction or equipping of the Facilities in question; (B) to the effect that the original Indebtedness for the Facilities in question when incurred was assumed to be sufficient for the projected costs; (C) describing the reasons why such Completion Indebtedness is necessary; and (D) certifying as to the amount needed for the completion of the Facilities in question; (iv) Long-Term Indebtedness incurred for the purpose of refunding, including advance refunding, any Outstanding Long-Term Indebtedness, if prior to the incurrence of such Long-Term Indebtedness there is delivered to the Master Trustee an Officer s Certificate to the effect that either (A) such refunding will not increase Maximum Annual Debt Service (calculated for the period during which the Indebtedness to be refunded would have been Outstanding but for such proposed refunding) by more than fifteen percent (15%) or (B) such refunding will result in a net present value savings in the Long-Term Debt Service Requirement; (v) Short-Term Indebtedness, provided that immediately after the incurrence of such Indebtedness the aggregate Outstanding principal amount of all Short-Term Indebtedness does not exceed twenty percent (20%) of the aggregate Operating Revenues of the Obligated Group for the Historic Test Period and provided further that, for a period of not less than thirty (30) days each Fiscal 37

250 Year, Short-Term Indebtedness will be reduced to a level at or below ten percent (10%) of Operating Revenues of the Obligated Group for the Historic Test Period; (vi) Non-Recourse Indebtedness, which Non-Recourse Indebtedness is: (i) secured by a Lien on Property which is part of the Property, Plant and Equipment; or (ii) secured by a Lien on Property which is inventory or pledges of gifts or grants to be received in the future without limit; provided that such gifts or grants shall be excluded from the calculation of Income Available for Debt Service so long as such Non-Recourse Indebtedness is Outstanding, provided that, the security granted to secure Non-Recourse Indebtedness shall be subject to the limitations of Section 418 of this Master Indenture while such Section is in effect. (vii) Subordinated Indebtedness, without limitation; (viii) Balloon Indebtedness, provided that, after giving effect to the provisions of Section 415 hereof, such Balloon Indebtedness can be incurred under the provisions of Section 410(b)(i) or (ii) hereof; (ix) Any Guaranty: (A) if such Guaranty could then be incurred by the Obligated Group as Long-Term Indebtedness under Section 410(b)(i) or (ii) hereof, as Short-Term Indebtedness under Section 410(b)(v) hereof, or as Balloon Indebtedness under Section 410(b)(viii) hereof, provided that in each case for purposes of any computations provided for in this paragraph (b)(ix)(a), and also for purposes of calculating the Debt Service Requirements with respect to such Guaranty: (1) the aggregate annual principal and interest payments on, and the principal amount of, any indebtedness of a Person which is the subject of any such Guaranty hereunder and which would, if such obligation were incurred by the Obligated Group, constitute Indebtedness, shall be deemed to be equivalent to twenty percent (20%) of the actual Debt Service Requirements on, and principal amount of, such indebtedness (assuming the Debt Service Requirements of such indebtedness are calculated according to the provisions of this Master Indenture) so long as such Guaranty constitutes a contingent liability under generally accepted accounting principles; (2) the Debt Service Requirements on, and principal amount of, any Long-Term Indebtedness represented by any such Guaranty shall be deemed to be equivalent to one hundred percent (100%) of the actual Debt Service Requirements on, and principal amount of, such guaranteed indebtedness, if a payment has been made by any Member on such Guaranty within one (1) year of the date of any computation to be made under this paragraph (b)(ix)(a) (assuming the Debt Service Requirements of such guaranteed indebtedness are calculated according to the provisions of this Master Indenture); and (3) if the Primary Obligor on the indebtedness that is subject to the Guaranty can demonstrate a Long-Term Debt Service Coverage Ratio for the Historic Test Period of not less than 2.00 to 1 (assuming the Debt Service Requirements of such guaranteed indebtedness are calculated according to the provisions of this Master Indenture), then the aggregate principal and interest payments on, and the principal amount of, any such indebtedness of the Primary 38

251 Obligor that is the subject of any such Guaranty shall be deemed equivalent to zero percent (0%) of the actual Debt Service Requirements on, and principal amount of, such guaranteed indebtedness; or (B) if such Guaranty is of Indebtedness of another Member, which Indebtedness has been or could be incurred as Permitted Indebtedness hereunder; (x) Indebtedness represented by a letter of credit reimbursement agreement or other similar reimbursement agreement entered into by any Member of the Obligated Group and a financial institution providing either a liquidity or credit support with respect to any other Indebtedness incurred in accordance with any other provision of this Section 410(b); (xi) Indebtedness in the form of a borrowing from another Member of the Obligated Group; (xii) Indebtedness in the form of any other financial obligation to another Member of the Obligated Group; (xiii) Indebtedness incurred on an interim basis with respect to any construction project for which money is available therefor in the construction fund for such project; (xiv) Indebtedness incurred in the ordinary course of business; (xv) Indebtedness in the form of a guaranty or confirmation of liability of an Affiliate incurred directly or indirectly with respect to a self-insurance or captive insurance program benefiting any Member of the Obligated Group; and (xvi) Indebtedness incurred or deemed incurred by virtue of any recourse obligation associated with any sale or assignment of accounts receivable, but in no event in an amount in excess of the monetary consideration received from any such sale or assignment. Section 411. Permitted Dispositions. (a) The Members of the Obligated Group covenant that, except for Permitted Dispositions described in paragraph (b) of this Section 411, the Members of the Obligated Group shall not sell, lease, remove, release from the liens of the Mortgages or of this Master Indenture, transfer, assign, convey or otherwise dispose of any Property of the Members of the Obligated Group. (b) Permitted Dispositions shall include only the following: (i) the disposition of Property if the Book Value of such Property disposed of in any one Fiscal Year is not in excess of fifteen percent (15%) of the Book Value of the Property of the Obligated Group as of the end of the Historic Test Period; 39

252 (ii) the disposition of Property if the Book Value of such Property disposed of in any one Fiscal Year exceeds fifteen percent (15%) of the Book Value of the Property of the Obligated Group; provided, however, that an Officer s Certificate is delivered to the Master Trustee demonstrating that the Transaction Test shall have been met for, and giving effect to, such proposed Permitted Disposition; (iii) the disposition of real property that is unused or surplus upon which none of the Facilities are situated; (iv) the disposition of Property in the case of any proposed or potential condemnation or taking for public or quasi-public use of the Property or any portion thereof; (v) the disposition of Property to any Person if such Property has, or within the next succeeding twenty-four (24) calendar months is reasonably expected to, become inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the disposition thereof will not impair the structural soundness, efficiency or economic value of the remaining Property; (vi) the disposition of Property in the ordinary course of business; (vii) the disposition of Property (other than Current Assets or Gross Revenues) that does not constitute part of the health care Facilities of the Obligated Group; (viii) the disposition of Property if such Property is replaced promptly by other Property of comparable utility or worth; (ix) the disposition of Property if the Obligated Group, or any Member thereof, receives fair market value consideration therefor; (x) the disposition of Property constituting the sale, assignment or other disposition of accounts receivable, provided that the transaction is commercially reasonable and for consideration deemed fair and adequate in an Officer s Certificate delivered to the Master Trustee; (xi) Group; the disposition of Property to another Member of the Obligated (xii) the disposition of Property in connection with a Permitted Reorganization; (xiii) investments and securities sold in arms-length transactions; and (xiv) Indebtedness. transfers that involve only Property securing Non-Recourse 40

253 Section 412. Permitted Encumbrances. No Obligated Group Member shall create or incur or permit to be created or incurred or to exist any Lien on any Property of such Member, except for Permitted Encumbrances. Section 413. Right to Consent, Etc. Each Member, with the prior written consent of the Obligated Group Agent, 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 this 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, the credit enhancer of any Related Bonds, 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 hereunder may also be delivered or addressed to the Related Issuer, such Obligation holders, the credit enhancer of any Related Bonds, and the Related Bond Trustee, or any one thereof, unless waived thereby. Section 414. Indemnity. Each Member will pay, and will protect, indemnify and save the Master Trustee (and its directors, officers, employees and agents) harmless from and against any and all liabilities, losses, damages, costs and expenses (including reasonable attorneys fees and expenses of such Member and the Master Trustee), causes of action, suits, claims, demands and judgments of whatsoever kind and nature (including those arising or resulting from any injury to or death of any person or damage to Property) arising from or in any manner directly or indirectly growing out of or connected with the following: (a) the use, non-use, condition or occupancy of any of the Property of any Member, any repairs, construction, alterations, renovation, relocation, remodeling and equipping thereof or thereto or the condition of any of such Property including adjoining sidewalks, streets or alleys and any equipment or Facilities at any time located on such Property or used in connection therewith but which are not the result of the negligence of the Master Trustee; (b) violation of any agreement, warranty, covenant or condition of this Master Indenture, except by the Master Trustee; (c) violation of any contract, agreement or restriction by any Member relating to its Property, which shall have existed at the commencement of this Master Indenture; 41

254 (d) violation of any law, ordinance, regulation or court order affecting any Property of any Member or the ownership, occupancy or use thereof; (e) any statement or information concerning any Member or its officers and members or its Property, contained in any official statement or other offering document furnished to the Master Trustee or the purchaser of any Obligations or any Related Bonds, that is untrue or incorrect in any material respect, and any omission from such official statement or other offering document of any statement or information which should be contained therein for the purpose for which the same is to be used or which is necessary to make the statements therein concerning any Member, its officers and members and its Property not misleading in any material respect, provided that the official statement or other offering document has been approved by a Member of the Obligated Group and the indemnified party did not have knowledge of the omission or misstatement or did not use the official statement or other offering document with reckless disregard of or gross negligence in regard to the accuracy or completeness of the official statement or other offering document; and (f) the performance by the Master Trustee of its powers, duties and obligations under this Master Indenture except in the case of its gross negligence or willful misconduct. Such indemnity shall extend to each Person, if any, who controls the Master Trustee as that term is defined in Section 15 of the Securities Act of 1933, as amended. The respective obligations of the Members under this Section 414 to indemnify and hold harmless the Master Trustee shall survive satisfaction and discharge of this Master Indenture and the replacement or resignation of the Master Trustee. In the event of settlement of any litigation commenced or threatened, such indemnity shall be limited to the aggregate amount paid under a settlement effected with the written consent of the Obligated Group Agent. The Master Trustee shall promptly notify the Obligated Group Agent in writing of any claim or action brought against the Master Trustee, its directors, officers, employees and agents, or any controlling Person, as the case may be, in respect of which indemnity may be sought against any Member, setting forth the particulars of such claim or action, and the Obligated Group will assume the defense thereof, including the employment of counsel satisfactory in the reasonable discretion of the Master Trustee or such controlling Person, as the case may be, and the payment of all expenses. The Master Trustee or any such controlling Person, as the case may be, may employ separate counsel in any such action and participate in the defense thereof, and the reasonable fees and expenses of such counsel shall not be payable by the Obligated Group unless such employment has been specifically authorized by the Obligated Group Agent. Section 415. Debt Service on Balloon Indebtedness. For purposes of the computation of the Debt Service Requirement, whether historic or projected, Balloon Indebtedness shall, at the election of the Obligated Group Agent, be deemed to be Indebtedness which was payable over (a) thirty (30) years from the date of incurrence of 42

255 such Indebtedness, (b) the remaining term to maturity of such Indebtedness, or (c) the term of refinancing if such Indebtedness is subject to a binding commitment for the refinancing of such Indebtedness, in each case with level annual debt service, at a rate of interest equal to that derived from the Bond Index, as determined by an Officer s Certificate. Section 416. Debt Service on Variable Rate Indebtedness. For purposes of the computation of the projected (but not historic) Debt Service Requirement, Variable Rate Indebtedness shall be deemed Indebtedness maturing in accordance with its terms, and which bears interest at a rate derived from the Bond Index, all as determined by an Officer s Certificate. Section 417. Debt Service on Discount Indebtedness. For purposes of the computation of the Debt Service Requirement or Debt Amortization Requirement, whether historic or projected, the amount of principal represented by Discount Indebtedness shall, at the election of the Obligated Group Agent, be deemed to be the accreted value of such Indebtedness computed on the basis of a constant yield to maturity. Section 418. Security for Indebtedness. Indebtedness incurred pursuant to this Article IV may be secured only by such liens, security interests or other similar rights and interests (hereinafter collectively referred to as liens ) as are permitted below: (a) Long Term Indebtedness (including Obligations) may be secured by: (i) liens in the form of purchase money security interests in personal property financed with the proceeds of the Long Term Indebtedness secured thereby; (ii) liens (other than purchase money security interests) on property constituting all or any portion of the Property, Plant and Equipment of a Member and the revenues derived from the operation of such property, if the Current Value of the property to be so encumbered, together with the Current Value of all other property then encumbered pursuant to this clause (ii), does not exceed 3% of the current value of the Property, Plant and Equipment (exclusive of properties securing Non-Recourse Indebtedness) of the Obligated Group, such valuations to be made on the basis (consistently applied) of either the net book value of the property under consideration, as set forth in the financial statements of the Obligated Group, or the appraised value thereof, as set forth in writing by a qualified appraiser not unsatisfactory to the Master Trustee; and (iii) liens on restricted gifts, grants, bequests, donations, other similar contributions, pledges of the foregoing and income derived from the investment thereof, if restricted or designated by the donor or maker at the time of the making thereof for use to pay (or to repay loans incurred to pay) the costs of capital improvements to be financed with the proceeds of the Long Term Indebtedness secured thereby. At the time any such lien is granted, the Member issuing the Long Term Indebtedness secured thereby shall deliver to the Master Trustee an Officer s Certificate demonstrating and concluding that the lien is being granted in accordance with the foregoing. No lien which does not meet the foregoing requirements may be granted to secure any Long Term Indebtedness unless a lien of equal or superior rank and priority is granted in favor of the Master Trustee for the benefit of the 43

256 holders of all Obligations issued and Outstanding hereunder. The foregoing limitations shall not apply to any lease executed by a Member, as lessor, in favor of a governmental or quasigovernmental issuer of debt obligations, as lessee, in consideration of the use of the proceeds of such debt obligations for the benefit of the Member, provided that the term of the lease shall expire or terminate when the Member s payment obligations (described below) are satisfied, and that the leased premises are subleased back to the Member for rentals sufficient to pay or provide for the payment of the debt service requirements on the governmental or quasi-governmental issuer s debt obligations (plus related fees, expenses and deposit requirements) under a sublease which entitles the Member to exclusive possession of the leased premises for so long as it is not in default thereunder. (b) Short Term Indebtedness may be secured by liens on accounts receivable of the Obligated Group. (c) Non-Recourse Indebtedness may be secured by liens on: (i) any real property, fixtures and tangible personal property acquired with the proceeds of the Non-Recourse Indebtedness and any improvements to such property; (ii) revenues derived from the ownership or operation of the property described in clause (i) above; and (iii) restricted gifts, grants, bequests, donations, other similar contributions, pledges of the foregoing and income derived from the investment thereof, if and to the extent excluded from Gross Revenues. At the time any such lien is to be granted, the Member issuing the Non-Recourse Indebtedness shall deliver to the Master Trustee an Officer s Certificate demonstrating and concluding that the lien is being granted in accordance with the foregoing. (d) If a credit facility is issued in support of any Long Term Indebtedness secured as permitted by this Section 4.18, the Member may grant a lien in favor of the issuer of the credit facility which is equal in rank and priority with or subordinate to the lien granted to secure the Long Term Indebtedness. (e) The foregoing shall not be deemed to prohibit the establishment of Qualified Escrows, sinking funds as or other funds to be held as security for any indebtedness incurred by a Member or the exercise of any rights and remedies with respect thereto; provided that, if any moneys of a Member are to be deposited into any such fund, the following limitations shall be applicable to such funds and to deposits of the Member s moneys therein: (i) In the case of a Qualified Escrow, deposits of moneys of the Member shall be limited to the proceeds of any Refunding Indebtedness (as described in the definition of Qualified Escrow) and any moneys in funds of the types described in subparagraph (iv) below which were previously established as security for the Prior Indebtedness (as described in the definition of Qualified Escrow). Indebtedness; (ii) Sinking funds may be established for the payment of Balloon (iii) Other permitted funds consisting in whole or in part of moneys of a Member may include (A) construction funds or other similar funds established to pay the costs of 44

257 projects being financed by the indebtedness secured thereby, (B) debt service funds or other similar funds established to accumulate funds to pay the principal or redemption price of and interest on the indebtedness secured thereby, (C) depreciation reserve funds or other similar funds established to provide a proper matching between revenues available for debt service and debt service requirements, and (D) other reasonably required reserve funds. All such funds and the required deposits of moneys of any Member therein shall be consistent with prevailing market conditions at the time such funds are established. (iv) Notwithstanding any other provision hereof, the Member establishing any fund pursuant to the foregoing may grant a first lien security interest in any such fund in favor of the holder of the indebtedness secured thereby, provided that the obligation of the Member to make deposits into any such fund may be secured only if and to the extent permitted pursuant to the foregoing subsections. The limitations contained in this Section 418 shall no longer be applicable or of any effect upon the consent of the holders of not less than 75% of all Obligations then Outstanding. As of the date hereof, the holders of the following Obligations have consented to the removal of this Section 418: (i) Master Trust Indenture Promissory Note, Series 2007, (ii) Master Trust Indenture Promissory Note, Series 2010D, (iii) Master Trust Indenture Promissory Note, Series 2015B, (iv) Master Trust Indenture Promissory Note, Series 2015C and (v) Master Trust Indenture Promissory Note, Series 2016A. Section 419. Certain Covenants (a) The Hospital agrees to use its best efforts to cause the holder of Master Trust Indenture Promissory Note, Series 2015B and the holder of Master Trust Indenture Promissory Note, Series 2015C to notify the Master Trustee of any failure to receive a payment on either such Master Note. (b) Warren agrees to use its best efforts to cause the holder of the Master Trust Indenture Promissory Note, Series 2013B to notify the Master Trustee of any failure to receive a payment on such Master Note. Section 501. Events of Default. ARTICLE V DEFAULTS AND REMEDIES Each of the following events is hereby declared an event of default : (a) failure of the Obligated Group to pay any installment of interest or principal, or any premium, or any other amount due, 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 (giving effect to any grace period provided in the Supplemental Master Indenture pursuant to which such Obligation was issued); or 45

258 (b) failure of any Member to comply with, observe or perform any other covenants, conditions, agreements or provisions hereof 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 25% in aggregate principal amount of the outstanding Debt 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 hereunder if the Member shall immediately upon receipt of such notice commence with due diligence and 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 herein 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 hereto 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 25% in aggregate principal amount of the outstanding Debt Obligations; or (d) any default or event of default that has occurred and is continuing under or with respect to any Obligation, including but not limited to any default or event of default under any mortgage, loan agreement, reimbursement agreement, or other instrument that is evidenced or secured by any such Obligation; or (e) any 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 Bond Indenture or 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 Bond Indenture or Related Loan Document, a default in payment thereunder shall not constitute an event of default hereunder unless the unpaid principal amount of such Indebtedness, together with the unpaid principal amount of all other Indebtedness so in default, exceeds 10% of Current Assets of the Obligated Group as shown on or derived from the then latest available audited consolidated financial statements of the Obligated Group; or (f) any judgment, writ or warrant of attachment or of any 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; 46

259 provided, however, that none of the foregoing shall constitute an event of default unless the amount of such judgment, writ, warrant of attachment or similar process, together with the amount of all other such judgments, writs, warrants or similar processes so unvacated, unpaid, unbonded, unstayed or uncontested, exceeds 10% of Current Assets of the Obligated Group as shown on or derived from the then latest available audited consolidated financial statements of the Obligated Group; or (g) any Material Obligated Group 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 (h) a trustee, custodian or receiver is appointed for any Material Obligated Group Member or for the major part of its Property and is not discharged within 60 days after such appointment; (i) 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 Material Obligated Group Member (other than bankruptcy proceedings instituted by any Material Obligated Group Member against third parties), and if instituted against any Material Obligated Group Member are allowed against such Member or are consented to or are not dismissed, stayed or otherwise nullified within 60 days after such institution; or Indenture. (j) any additional events of default specified in a Supplemental Master Section 502. Acceleration. If an event of default has occurred and is continuing, the Master Trustee may, and (a) if requested by the holders of not less than a majority in aggregate principal amount of Outstanding Debt Obligations, or (b) if an event of default has occurred with respect to a Debt Obligation or the Related Loan Documents related to that Debt Obligation, and the Debt Obligation or the Related Loan Documents related to that Debt Obligation permit the holder of such Debt Obligation to declare (or to request the Master Trustee to declare) such Debt Obligation to be immediately due and payable, if the Master Trustee is requested by the holder of such Debt Obligation, in the case of either (a) or (b), the Master Trustee shall, by notice in writing delivered to the Obligated Group Agent, declare the entire principal amount of or other amounts evidenced under all (but not less than all) Obligations then outstanding hereunder and the interest accrued thereon immediately due and payable, and the entire principal or other amounts and such interest shall thereupon become immediately due and payable, subject, however, to the provisions of Section 510 hereof with respect to waivers of events of default. The foregoing notwithstanding, if the Supplemental Master Indenture creating an Obligation or Obligations includes a requirement then in effect that the consent of any Credit Enhancer or any other Person be 47

260 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 Credit Enhancer or other Person. Section 503. Remedies; Rights of Obligation Holders. Upon the occurrence and during the continuance of any event of default hereunder, 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 hereunder and any other sums due under the Obligations or hereunder and may collect such sums in the manner provided by law out of the Property of any Member wherever situated. If an event of default shall have occurred and be continuing, and if it shall have been requested so to do by the holders of a majority or more in aggregate principal amount of Debt Obligations outstanding (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 this Section 503 as the Master Trustee shall deem most expedient in the interests of the holders of Debt 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 this 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 hereunder 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 hereunder, 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. Section 504. Direction of Proceedings by Holders. The holders of a majority in aggregate principal amount of the Debt Obligations then outstanding which have become due and payable in accordance with their terms or have been declared due and payable pursuant to Section 502 hereof 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 Debt Obligations then outstanding (whether or not due and payable) in 48

261 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 this Master Indenture, the Mortgages and any other documents issued in favor of the Master Trustee to secure all Debt Obligations, or for the appointment of a receiver, or any other proceedings hereunder or thereunder; provided, that such direction shall not be otherwise than in accordance with the provisions of law and of this Master Indenture, the Mortgages and any other documents issued in favor of the Master Trustee to secure all Debt Obligations, 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. The foregoing notwithstanding, the holders of a majority in aggregate principal amount of the Debt 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 order to realize on such exclusive security; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of this Master Indenture. Section 505. Appointment of Receivers. Upon the occurrence of an event of default, and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Master Trustee and the holders of Obligations under this Master Indenture, the Master Trustee shall be entitled, as a matter of right, to the appointment of a receiver or receivers of the rights and properties pledged hereunder and of the revenues, issues, payments and profits thereof, pending such proceedings, with such powers as the court making such appointment shall confer. Section 506. Application of Moneys. All moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of this Article V (except moneys held for the payment of Obligations called for prepayment or redemption which have become due and payable) 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 all 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 (and fees, if any) then due on the Obligations, in the order of the maturity of the installments of such 49

262 interest (including but not limited to the reimbursement of interest paid by a Credit Enhancer with respect to an issue or series of Related Bonds), 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 this 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; provided and notwithstanding the foregoing, concurrently with any such payments of principal, sufficient funds, based upon the total available amount to pay principal and interest under any irrevocable direct pay letter of credit securing any Related Bonds, shall be held in escrow by the Master Trustee as a source of payment or reimbursement of principal and interest with respect to any amounts available to pay principal and interest not yet due on any such Related Bonds, the payment of which principal and interest is irrevocably secured by any direct pay letter of credit securing any such Related Bonds; and Third: To the payment to the Persons entitled thereto of any other amounts which have become due under any and all Obligations. (b) If all 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 and all other amounts then due and unpaid upon the Obligations without preference or priority of principal, premium, interest or other amounts 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, interest and all other amounts to the Persons entitled thereto without any discrimination or privilege; and (c) If all Obligations shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of this Article V, then, subject to the provisions of paragraph (b) of this Section 506 in the event that all 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

263 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 upon which such application is to be made and upon such date interest on the amounts 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 506 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. Section 507. Remedies Vested in Master Trustee. All rights of action including the right to file proof of claims under this Master Indenture or under any of the Obligations may be enforced by the Master Trustee without the possession of any of the Obligations or the production thereof in any trial or other proceedings relating thereto and any such suit or proceeding instituted by the Master Trustee shall be brought in its name as Master Trustee without the necessity of joining as plaintiffs or defendants any holders of the Obligations, and any recovery of judgment shall be for the equal benefit of the holders of the Outstanding Obligations. Section 508. 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 this Master Indenture or for the execution of any trust hereof or for the appointment of a receiver or any other remedy hereunder, unless a default shall have become an event of default and (a) the holders of a majority or more in aggregate principal amount of the Debt Obligations which have become due and payable in accordance with their terms or have been declared due and payable pursuant to Section 502 hereof and have not been paid in full in the case of powers exercised to enforce such payment, (b) the holders of a majority or more in aggregate principal amount of the Debt Obligations then outstanding in the case of any other exercise of power, or (c) the holder of a Debt Obligation if the Debt Obligation or the Related Loan Documents related to that Debt Obligation permit the holder of such Debt Obligation to declare (or to request the Master Trustee to declare) such Debt Obligation to be immediately due and payable, shall have made written request to the Master Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers hereinbefore granted 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 Master Trustee in its sole discretion, and unless the Master Trustee shall thereafter fail or 51

264 refuse to exercise the powers hereinbefore granted, or to institute such action, suit or proceeding in its own name; and such notification, request and offer of indemnity are hereby declared in every case at the option of the Master Trustee to be conditions precedent to the execution of the powers and trusts of this Master Indenture and to any action or cause of action for the enforcement of this Master Indenture, or for the appointment of a receiver or for any other remedy hereunder; 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 this Master Indenture by its, his or their action or to enforce any right hereunder except in the manner herein provided, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided and for the equal benefit of the holders of all Obligations outstanding. Nothing in this 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, or any other amounts due under, any Obligation at and after the maturity thereof, or the obligation of the Members to pay the principal, premium, if any, and interest on, or any other amounts due under, each of the Obligations issued hereunder to the respective holders thereof at the time and place, from the source and in the manner in said Obligations expressed. Section 509. Termination of Proceedings. In case the Master Trustee shall have proceeded to enforce any right under this 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 hereunder with respect to the Property pledged and assigned hereunder, and all rights, remedies and powers of the Master Trustee shall continue as if no such proceedings had been taken. Section 510. Waiver of Events of Default. If, at any time after 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 hereinafter provided and before the acceleration of any Related Bond, any Member shall pay or shall deposit with the Master Trustee (in connection with any event of default described in Section 501(a) hereof) a sum sufficient to pay all matured installments of interest upon all such Obligations and the principal and premium, if any, of, and any other amounts due under, 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 if any and all events of default under this Master Indenture, other than the nonpayment of any amounts due under such Obligations that shall have become due by acceleration, shall have been remedied, then and in every such case (a) the holders of a majority in aggregate principal amount of all Debt Obligations then outstanding, or (b) in the case acceleration occurred at the direction of the holders of a majority in aggregate principal amount of a particular Debt Obligation as permitted by clause (b) of Section 502 hereof, the holders of a majority in aggregate principal amount of such Debt Obligation, by written notice to the Obligated Group Agent and to the Master Trustee, may waive all events of 52

265 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. Section 511. Members Rights of Possession and Use of Property. So long as each Member is in compliance with the terms and provisions of this Master Indenture, each Member shall be suffered and permitted to possess, use and enjoy its Property and appurtenances thereto free of claims of the Master Trustee. Section 512. Related Bond Trustee or Bondholders Deemed To Be Obligation Holders. For the purposes of this Master Indenture, unless a Related Bond Trustee elects to the contrary or contrary provision is made in a Related Bond Indenture, each Related Bond Trustee shall be deemed the holder of the Obligation or Obligations pledged to secure the Related Bonds with respect to which such Related Bond Trustee is acting as trustee. If such a Related Bond Trustee so elects or the Related Bond Indenture so provides, the holders of each series of Related Bonds (or, in lieu thereof, the Credit Enhancer for such Related Bonds) shall be deemed the holders of the Obligations to the extent of the principal amount of the Obligations to which such Related Bonds relate. ARTICLE VI THE MASTER TRUSTEE Section 601. Acceptance of the Trusts. The Master Trustee accepts and agrees to execute the trusts imposed upon it by this Master Indenture, but only upon the terms and conditions set forth herein. The Master Trustee, prior to the occurrence of an event of default and after the curing of all events of default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Master Indenture and to perform such duties as an ordinarily prudent trustee under a corporate indenture, and no implied covenants or obligations should be read into this Master Indenture against the Master Trustee. If an event of default under this Master Indenture shall have occurred and be continuing, the Master Trustee shall exercise such of the rights and powers vested in it by this Master Indenture and shall use the same degree of care as a prudent man would exercise or use in the circumstances in the conduct of his own affairs. The Master Trustee agrees to perform such trusts only upon and subject to the following express terms and conditions: (a) The Master Trustee may execute any of the trusts or powers hereof and perform any of its duties by or through attorneys, agents, receivers, or employees but shall be answerable for the conduct of the same in accordance with the standard specified above, and shall be entitled to advice of counsel concerning all matters of trusts hereof and duties hereunder, and may in all cases pay such reasonable compensation to any attorney, agent, receiver or 53

266 employee retained or employed by it in connection herewith. The Master Trustee may act upon the opinion or advice of an attorney, surveyor, engineer or accountant selected by it in the exercise of reasonable care or, if selected or retained by any Member, approved by the Master Trustee in the exercise of such care. The Master Trustee shall not be responsible for any loss or damage resulting from any action or nonaction based on its good faith reliance upon such opinion or advice. (b) The Master Trustee shall not be responsible for any recital herein, or in the Obligations (except with respect to the certificate of the Master Trustee endorsed on the Obligations), or for the investment of moneys as herein provided (provided that no investment shall be made by the Master Trustee except in compliance with the provisions of this Master Indenture applicable to such investment), or for the recording or re-recording, filing or re-filing of this Master Indenture, or any supplement or amendment thereto, or the filing of financing statements, or for the validity of the execution by any Member of this Master Indenture, or by any Member of any Supplemental Master Indentures or instruments of further assurance, or for the sufficiency of the security for the Obligations issued hereunder or intended to be secured hereby, or for the value or title of the Property herein conveyed or otherwise as to the maintenance of the security hereof. The Master Trustee may (but shall be under no duty to) require of any Member full information and advice as to the performance of the covenants, conditions and agreements in this Master Indenture and shall use its best efforts, but without any obligation, to advise the Members of any impending default known to the Master Trustee. The Master Trustee shall have no obligation to perform any of the duties of the Obligated Group hereunder. (c) The Master Trustee shall not be accountable for the use or application by the Obligated Group of any of the Obligations or the proceeds thereof or for the use or application of any money paid over by the Master Trustee in accordance with the provisions of this Master Indenture. The Master Trustee may become the owner of Obligations secured hereby with the same rights it would have if it were not Master Trustee, and may enter into other business and financial transactions with any Member. (d) The Master Trustee shall be protected in acting upon any notice, order, requisition, request, consent, certificate, order, opinion (including an opinion of Counsel), affidavit, letter, telegram or other paper or document in good faith reasonably deemed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons. Any action taken by the Master Trustee pursuant to this Master Indenture upon the request or authority or consent of any Person who at the time of making such request or giving such authority or consent is the owner of any Obligation shall be conclusive and binding upon all future owners of the same Obligation and upon Obligations issued in exchange therefor or in place thereof. (e) As to the existence or non-existence of any fact or as to the sufficiency or validity of any instrument, paper or proceeding, the Master Trustee shall be entitled to rely upon an Officer s Certificate as sufficient evidence of the facts therein contained and, prior to the occurrence of a default of which the Master Trustee has been notified as provided in subsection (g) of this Section, or of which by said subsection it is deemed to have notice, shall also be at liberty to accept a similar certificate to the effect that any particular dealing, transaction or action 54

267 is necessary or expedient, but may at its discretion secure such further evidence deemed necessary or advisable, but shall in no case be bound to secure the same. The Master Trustee may accept an Officer s Certificate to the effect that a resolution in the form therein set forth has been adopted by such Member as conclusive evidence that such resolution has been duly adopted, and is in full force and effect. (f) The permissive right of the Master Trustee to do things enumerated in this Master Indenture shall not be construed as a duty and the Master Trustee shall not be answerable for other than its negligence or willful default. (g) The Master Trustee shall not be required to take notice or be deemed to have notice of any default hereunder except failure by the Obligated Group to cause to be made any of the payments to the Master Trustee required to be made by Section 202 or Section 401 unless the Master Trustee shall be specifically notified in writing of such default by a Member, by the written report of nationally recognized independent certified public accountants required by Section 409(a), by any Related Issuer, by any Related Bond Trustee, or by the holders of at least 25% in aggregate principal amount of all Debt Obligations then outstanding and all notices or other instruments required by this Master Indenture to be delivered to the Master Trustee must, in order to be effective, be delivered at the designated corporate trust office of the Master Trustee, and in the absence of such notice so delivered, the Master Trustee may conclusively assume there is no default except as aforesaid. (h) The Master Trustee shall not be required to give any bond or surety in respect of the execution of the said trusts and powers or otherwise in respect of the premises. (i) Notwithstanding anything contained elsewhere in this Master Indenture, the Master Trustee shall have the right, but shall not be required, to demand, in respect of the authentication of any Obligation, the withdrawal of any cash, the release of any property, or any action whatsoever within the purview of this Master Indenture, any showings, certificates, opinions, appraisals or other information, or corporate action or evidence thereof, in addition to that by the terms hereof required as a condition of such action by the Master Trustee deemed desirable for the purpose of establishing the right of any Member to the authentication of any Obligations, the withdrawal of any cash, the release of any property or the taking of any other action by the Master Trustee. (j) All moneys received by the Master Trustee shall, until used or applied or invested as herein provided, be held in trust for the purposes for which they were received but need not be segregated from other funds except to the extent required by law or by this Master Indenture. The Master Trustee shall not be under any liability for interest on any moneys received hereunder except such as may be agreed upon. (k) No provision of this Master Indenture shall require the Master Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 55

268 (l) Whether or not therein expressly so provided, every provision of this Master Indenture relating to the conduct or affecting the liability of or affording protection to the Master Trustee shall be subject to the provisions of this Section 601. Section 602. Fees, Charges and Expenses of Master Trustee. The Master Trustee shall be entitled to payment and/or reimbursement by the Members for reasonable fees and for its services rendered hereunder and all advances, counsel fees and expenses and other expenses reasonably and necessarily made or incurred by the Master Trustee in connection with such services. The Master Trustee shall be entitled to payment and reimbursement for the reasonable fees and charges of the Master Trustee and Obligation registrar for the Obligations as hereinabove provided. Upon an event of default, but only upon an event of default, the Master Trustee shall have a right of payment prior to payment on account of principal of, or premium, if any, or interest on, or any other amounts due under, any Obligation for the foregoing advances, fees, costs and expenses incurred. The respective obligations of the Members under this Section 602 to compensate the Master Trustee to pay or reimburse the Master Trustee for expenses, disbursements or advances, shall survive satisfaction and discharge of this Master Indenture. Section 603. Notice to Obligation Holders if Default Occurs. If a default occurs of which the Master Trustee is by subsection (g) of Section 601 hereof required to take notice or if notice of default be given as in said subsection (g) provided, then the Master Trustee shall give written notice thereof by mail to the last known owners of all Obligations then outstanding shown by the list of Obligation holders required by the terms of this Master Indenture to be kept at the designated office of the Master Trustee or its agent. Section 604. Intervention by Master Trustee. In any judicial proceeding to which any Member is a party and which in the opinion of the Master Trustee and its counsel has a substantial bearing on the interests of owners of the Obligations, the Master Trustee may intervene on behalf of Obligation holders and shall do so if requested in writing by the owners of at least 25% in aggregate principal amount of all Debt Obligations then outstanding if indemnification satisfactory to the Master Trustee in its sole discretion is provided to the Master Trustee. The rights and obligations of the Master Trustee under this Section 604 are subject to the approval of a court of competent jurisdiction. Section 605. 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 hereunder 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 56

269 instrument or any further act, deed or conveyance on the part of and of the parties hereto, anything herein to the contrary notwithstanding. Section 606. Corporate Master Trustee Required; Eligibility. There shall at all times be a Master Trustee hereunder 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 this Master Indenture and its successors under Section 605) 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 in accordance with the provisions of this Section 606, it shall resign immediately in the manner provided in Section 607 hereof. 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 under Section 610 hereof. Section 607. Resignation by the Master Trustee. The Master Trustee and any successor Master Trustee may at any time resign from the trusts hereby created 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 this Master Indenture to be kept at the designated office of the Master Trustee or its agent. 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 hereby, 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. Section 608. 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 Debt 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 hereunder, 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. Section 609. Appointment of Successor Master Trustee by the Obligation Holders; Temporary Master Trustee. In case the Master Trustee hereunder shall resign or be removed, or be dissolved, or shall be in the process of dissolution or liquidation, or otherwise becomes incapable of acting hereunder, or in case it shall be taken under the control of any public officer or officers, or of a 57

270 receiver appointed by a court, a successor may be appointed by the owners of a majority in aggregate principal amount of Debt 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 hereunder, 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 Debt Obligations then Outstanding. Every such successor Master Trustee appointed pursuant to the provisions of this Section 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. Section 610. Concerning Any Successor Master Trustee. Every successor Master Trustee appointed hereunder shall execute, acknowledge and deliver to its predecessor and also to the Obligated Group Agent an instrument in writing accepting such appointment hereunder, and thereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, trusts, duties and obligations of its predecessor; but such predecessor shall, nevertheless, on the written request of the Obligated Group Agent, or of its successor, execute and deliver an instrument transferring to such successor Master Trustee all the estates, properties, rights, powers and trusts of such predecessor hereunder; and every predecessor Master Trustee shall deliver all securities and moneys held by it as Master Trustee hereunder to its successor. Should any instrument in writing from any Member be required by any successor Master Trustee for more fully and certainly vesting in such successor the estate, rights, powers and duties hereby vested or intended to be vested in the predecessor, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by such Member. The resignation of any Master Trustee and the instrument or instruments removing any Master Trustee and appointing a successor hereunder, together with all other instruments provided for in this Article VI shall be filed and/or recorded by the successor Master Trustee in each recording office, if any, where this Master Indenture shall have been filed and/or recorded. Section 611. Master Trustee Protected in Relying Upon Resolutions, Etc. The resolutions, opinions, certificates and other instruments provided for in this Master Indenture may be accepted by the Master Trustee as conclusive evidence of the facts and conclusions stated therein and shall be full warrant, protection and authority to the Master Trustee for the release of property and the withdrawal of cash hereunder. Section 612. Successor Master Trustee as Trustee of Funds and Obligation Registrar. In the event of a change in the office of Master Trustee, the predecessor Master Trustee which has resigned or been removed shall cease to be trustee of any funds provided hereunder and Obligation registrar, and the successor Master Trustee shall become such Master Trustee and Obligation registrar. 58

271 Section 613. Maintenance of Records. The Master Trustee agrees to maintain such records with respect to any and all moneys or investments held by the Master Trustee pursuant to the provisions hereof as are reasonably requested by the Obligated Group Agent. The Master Trustee shall be entitled to reasonable compensation for its maintenance of any such records. Section 614. List of Obligation Holders. The Master Trustee will keep on file at its office or at the designated office of its agent a list of the names and addresses of the last known holders of all Obligations and the serial numbers of such Obligations held by each of such holders. At reasonable times, upon prior written notice, and under reasonable regulations established by the Master Trustee, said list may be inspected and copied by any Member, any Obligation holder or the authorized representative thereof, provided that the ownership of such holder and the authority of any such designated representative shall be evidenced to the satisfaction of the Master Trustee. Section 615. Master Trustee as Registrar. The Master Trustee is hereby designated and agrees to act as Obligation registrar for and in respect to the Obligations. ARTICLE VII SUPPLEMENTAL MASTER INDENTURES Section 701. Supplemental Master Indentures Not Requiring Consent of Obligation Holders. Subject to the limitations set forth in Section 702 hereof with respect to this Section 701, the Members (or the Obligated Group Agent on their behalf) and the Master Trustee may, without the consent of, or notice to, any of the Obligation holders, amend or supplement this Master Indenture, for any one or more of the following purposes: (a) To cure any ambiguity or defective provision in or omission from this Master Indenture in such manner as is not inconsistent with and does not impair the security of this 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; (c) To add to the covenants of the Members for the benefit of the Obligation holders or to surrender any right or power conferred hereunder upon any Member, including, but not limited to, any amendments necessary to establish or maintain any credit ratings applicable to the Obligated Group; 59

272 (d) To assign and pledge under this Master Indenture any additional revenues, properties or collateral; (e) To evidence the succession of another entity to the agreements of a Member or the Master Trustee, or the successor to any thereof hereunder; (f) To permit the qualification of this 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; (g) (h) To provide for the refunding or advance refunding of any Obligation; To provide for the issuance of Obligations; (i) To reflect the addition to or withdrawal of a Member from the Obligated Group, including the necessary changes to Exhibit A, or to reflect any release of Property to be released from the Lien on Gross Revenues or the Lien of the Mortgages or any other Lien created under this Master Indenture or any Supplemental Master Indenture to the extent such release constitutes a Permitted Disposition; (j) To permit an Obligation to be secured by security which is not extended to all Obligation holders, to the extent otherwise consistent with the provisions hereof; (k) promissory note; To permit the issuance of Obligations which are not in the form of a (l) To modify or eliminate any of the terms of this 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; and (m) 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 this 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, and any other amounts due under, 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: 60

273 (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 herein 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. Section 702. Supplemental Master Indentures Requiring Consent of Obligation Holders. In addition to Supplemental Master Indentures covered by Section 701 hereof and subject to the terms and provisions contained in this Section 702, and not otherwise, the holders of not less than a majority in aggregate principal amount of the Debt Obligations which are Outstanding hereunder at the time of the execution of such Supplemental Master Indenture or, in case less than all of the several series of Debt Obligations are affected thereby, the holders of not less than a majority in aggregate principal amount of the Debt Obligations of each series affected thereby which are Outstanding hereunder at the time of the execution of such Supplemental Master Indenture, shall have the right, from time to time, anything contained in this 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 instance, any of the terms or provisions contained in this Master Indenture or in any Supplemental Master Indenture; provided, however, that nothing contained in this Section 702 or in Section 701 hereof shall permit, or be construed as permitting, the granting of any liens to secure Indebtedness in any manner other than as expressly permitted under Section 418 hereof, without the consent of the holders of not less than 75% in aggregate principal amount of the Debt Obligations Outstanding at the time of the execution of such Supplemental Master Indenture, as long as such Section is applicable, and provided further, however, that nothing contained in this Section 702 or in Section 701 hereof shall permit, or be construed as permitting, (a) an extension of the stated maturity or reduction in the principal or other 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 or other 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 this Master Indenture with respect to the trust estate, if any, subject hereto or terminate the lien of this Master Indenture on any Property at any time subject hereto or deprive the holder of any Obligation of the security afforded by the lien of this Master Indenture except as otherwise provided herein, without the consent of the affected holders, or (d) modification of the rights, duties or immunities of the Master Trustee, without the written consent of the Master Trustee. 61

274 If at any time the Obligated Group Agent shall request the Master Trustee to enter into any such Supplemental Master Indenture for any of the purposes of this Section 702, 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 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 this Section 702. If the holders of not less than the requisite percentage in aggregate principal amount of the Debt Obligations or the Debt Obligations of each series affected thereby, as the case may be, which are outstanding hereunder at the time of the execution of any such Supplemental Master Indenture shall have consented to and approved the execution thereof as herein provided, 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 in this Section 702 permitted and provided, this Master Indenture shall be and be deemed to be modified and amended in accordance therewith. For the purpose of obtaining the foregoing consents, the determination of who is deemed the holder of an Obligation held by a Related Bond Trustee shall be made in the manner provided in Section 512. Section 703. Execution of Supplemental Master Indentures. The Master Trustee shall not be required to execute any proposed Supplemental Master Indenture pursuant to this Article VII unless it is provided with (a) an opinion of Counsel satisfactory to the Master Trustee to the effect that such proposed Supplemental Master Indenture and its execution by the Master Trustee are permitted or authorized under this Article VII; and (b) an opinion of nationally recognized municipal bond counsel to the effect that such Supplemental Master Indenture will not adversely affect the exemption of interest on any Related Bonds from income tax under the Code. Section 704. Substitution of Obligations with Replacement Notes. Notwithstanding anything herein to the contrary, any Obligation issued hereunder may, upon the request of the Obligated Group Agent and the satisfaction of all terms and conditions described below, be substituted with an original replacement note or notes or similar obligations (collectively, the Replacement Note ) issued by an obligated issuer or group of obligated issuers or other obligated entities (collectively, the New Obligated Group ) under and pursuant to and secured by a master trust indenture or another agreement or agreements pursuant to which 62

275 entities may become jointly and severally liable on specified obligations and which provide that financial and operational covenants be measured on the basis of the results of the entities that are party to such agreement or agreements (the New Master Indenture ) executed by the New Obligated Group and an independent corporate trustee (the New Master Trustee ), upon receipt by the Master Trustee of the following: (a) (i) if the Master Trustee receives written confirmation from each Rating Service then rating the most recent issuance of Related Bonds that, upon consummation of the proposed transaction, the ratings on such Related Bonds (without regard to any credit enhancement of such Related Bonds) by each Rating Service then rating the Related Bonds will be no less than A2 or A or its equivalent as a result of the entry into the New Master Indenture and the substitution of the Obligation securing the Related Bonds with the Replacement Note (a Rating Upgrade ), then an Officer s Certificate certifying that (A) after giving effect to such Replacement Note and assuming that the New Obligated Group constituted the Obligated Group under the Master Indenture and that the Replacement Note was issued under the Master Indenture, the New Obligated Group could demonstrate compliance with the Transaction Test, assuming the incurrence of $1.00 of additional Indebtedness, and (B) the New Master Indenture contains a pledge of Gross Revenues substantially similar to the pledge of Gross Revenues in the Master Indenture as of the date thereof; or (b) (ii) if the Master Trustee does not receive written confirmation from each Rating Service then rating the most recent issuance of Related Bonds of a Rating Upgrade, then (A) written confirmation from each Rating Service then rating the most recent issuance of Related Bonds that, upon consummation of the proposed transaction, the ratings on such Related Bonds (without regard to any credit enhancement of such Related Bonds) will not be decreased or withdrawn (including instances in which the rating category level remains unchanged but the rating modifier (such as + or - ) is decreased as a result of the entry into the New Master Indenture and the substitution of the Obligation securing the Related Bonds with the Replacement Note, but not including instances in which the outlook alone is decreased), (B) an Officer s Certificate certifying that after giving effect to such Replacement Note and assuming that the New Obligated Group constituted the Obligated Group under the Master Indenture and that the Replacement Note was issued under the Master Indenture, the New Obligated Group could demonstrate compliance with the Transaction Test, assuming the incurrence of $1.00 of additional Indebtedness, and (C) an Officer s Certificate confirming that (1) the New Master Indenture contains (x) a pledge of Gross Revenues substantially similar to the pledge of Gross Revenues in the Master Indenture as of the date thereof, and (y) affirmative and negative covenants that are materially consistent with the covenants contained in Section 407 Long-Term Debt Service Coverage Ratio, Section 410 Permitted Indebtedness and Section 411 Permitted Dispositions of the Master Indenture as of the date thereof (except for modifications to such covenants in a manner within the scope of Section 701 Supplemental Master Indentures Not Requiring Consent of Obligation Holders of the Master Indenture ), and (2) the Mortgages, or mortgages substantially similar thereto in all material respects, will secure obligations issued under the New Master Indenture; 63

276 (c) an original executed counterpart of the New Master Indenture; (d) original Replacement Notes for all Obligations Outstanding under the Master Indenture, issued by or on behalf of the New Obligated Group under and pursuant to and secured by the New Master Indenture, which Replacement Notes have been duly authenticated by the New Master Trustee under the terms of the New Master Indenture; (e) an opinion of nationally recognized municipal bond counsel addressed to the Master Trustee to the effect that the New Master Indenture has been duly authorized, executed and delivered by each member of the New Obligated Group, the Replacement Notes have been duly authorized, executed and delivered by or on behalf of the New Obligated Group and the New Master Indenture and the Replacement Notes are each legal, valid and binding obligations of each member of the New Obligated Group, subject in each case to customary exceptions for bankruptcy, insolvency and other laws generally affecting enforcement of creditors' rights and application of general principles of equity and to any other exceptions set forth in of the Master Indenture; all requirements and conditions to the issuance of the Replacement Note set forth in the New Master Indenture have been complied with and satisfied; and registration of the Replacement Notes under the Securities Act of 1933, as amended, is not required; and (f) an opinion of nationally recognized municipal bond counsel to the effect that the surrender of the Obligations and the acceptance of the Replacement Notes will not adversely affect the validity of any Related Bonds or any exemption for the purposes of federal income taxation to which interest on any Related Bonds would otherwise be entitled. Upon receipt of the items described above, the Master Trustee will mail to the holders of the Obligations Outstanding under the Master Indenture notice that the requirements described above have been satisfied and that the Obligations have been replaced with Replacement Notes, and direct such holders to surrender their Obligations to the Master Trustee for cancellation in exchange for the Replacement Notes. Upon receipt of such notice from the Master Trustee, the holders of the Obligations are required to surrender their Obligations to the Master Trustee for cancellation in exchange for the Replacement Notes. ARTICLE VIII SATISFACTION OF THE MASTER INDENTURE Section 801. Defeasance. If the Members shall pay or provide for the payment of the entire indebtedness on all Obligations (including, for the purposes of this Section 801, 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, and any other amounts due under, all Obligations outstanding, as and when the same become due and payable; 64

277 (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, and any other amounts due under, 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 Securities, 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 Securities may be used at the direction of the Obligated Group Agent for any other purpose permitted by law; (c) outstanding; or by delivering to the Master Trustee, for cancellation by it, all Obligations (d) by depositing with the Master Trustee, in trust, before maturity, Escrow Securities in such amount as the Master Trustee shall determine, based upon an Officer's Certificate provided by the Obligated Group Agent, 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 amounts due on all Obligations outstanding at or before their respective maturity or due dates; and if the Obligated Group shall also pay or cause to be paid all other sums payable hereunder 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 this 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 Section 803 hereof) this Master Indenture and the estate and rights granted hereunder 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 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 this Master Indenture have been complied with, forthwith execute proper instruments acknowledging satisfaction of and discharging this Master Indenture and the lien hereof. The satisfaction and discharge of this 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 herewith. The foregoing notwithstanding, the liability of the Obligated Group in respect of the Obligations shall continue, but the holders thereof shall thereafter be entitled to payment only out of the moneys or Escrow Obligations deposited with the Master Trustee as aforesaid. Any moneys, funds, securities, or other property remaining on deposit under this Master Indenture (other than said Escrow Securities or other moneys deposited in trust as above provided) shall, upon the full satisfaction of this Master Indenture, forthwith be transferred, paid over and distributed to the Obligated Group Agent. 65

278 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. Section 802. 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, for the purpose of this Section 802, 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, and any other amounts due under, 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, and any other amounts due under, 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 Securities 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 of such series or portion thereof outstanding at or before their respective maturity dates; it being understood that the investment income on such Escrow Securities 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 Securities in such amount as the Master Trustee shall determine, based upon an Officer's Certificate provided by the Obligated Group Agent, 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 hereunder 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 thereof, notice of such redemption shall have been given in accordance with the requirements of this 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 Section 803 hereof) such Obligations shall cease to be entitled to any lien, benefit or security under this Master Indenture. 66

279 Section 803. Satisfaction of Related Bonds. The provisions of Section 801 and Section 802 of this Master Indenture notwithstanding, any Obligation which secures a Related Bond (a) shall be deemed paid and shall cease to be entitled to the lien, benefit and security under this Master Indenture in the circumstances described in subsection (b)(ii) of the definition of Outstanding Obligations contained in Article I; and (b) shall not be deemed paid and shall continue to be entitled to the lien, benefit and security under this Master Indenture unless and until such Related Bond shall cease to be entitled to any lien, benefit or security under the Related Bond Indenture pursuant to the provisions thereof. ARTICLE IX MANNER OF EVIDENCING OWNERSHIP OF OBLIGATIONS Section 901. Proof of Ownership. Any request, direction, consent or other instrument provided by this Master Indenture to be signed and executed by the Obligation holders may be in any number of concurrent writings of similar tenor and may be signed or executed by such Obligation holders in person or by an agent appointed in writing. Proof of the execution of any such request, direction or other instrument or of the writing appointing any such agent and of the ownership of Obligations, if made in the following manner, shall be sufficient for any of the purposes of this Master Indenture and shall be conclusive in favor of the Master Trustee and the Obligated Group, with regard to any action taken by them, or either of them, under such request or other instrument, namely: (a) The fact and date of the execution by any Person of any such writing may be proved by the certificate of any officer in any jurisdiction who by law has power to take acknowledgements in such jurisdiction, that the Person signing such writing acknowledged before such Person the execution thereof, or by the affidavit of a witness of such execution; and Obligations. (b) The ownership of Obligations shall be proved by the registration of such Any action taken or suffered by the Master Trustee pursuant to any provision of this Master Indenture, upon the request or with the assent of any Person who at the time is the holder of any Obligation or Obligations, shall be conclusive and binding upon all future holders of the same Obligation or Obligations or any Obligation or Obligations issued in exchange therefor. 67

280 Section Limitation of Rights. ARTICLE X MISCELLANEOUS With the exception of rights herein expressly conferred, nothing expressed or mentioned in or to be implied from this Master Indenture or the Obligations is intended or shall be construed to give to any Person other than the parties hereto, and the holders of the Obligations, any legal or equitable right, remedy or claim under or in respect to this Master Indenture or any covenants, conditions and provisions herein contained; this Master Indenture and all of the covenants, conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and the holders of the Obligations as herein provided. Section Unclaimed Moneys. Unless otherwise required by applicable law, any moneys deposited with the Master Trustee by the Obligated Group in accordance with the terms and covenants of this Master Indenture, in order to redeem or pay any Obligation in accordance with the provisions of this Master Indenture, and remaining unclaimed by the owners of the Obligation for six years after the date fixed for redemption or of maturity, as the case may be, shall, if the Obligated Group is not at the time to the knowledge of the Master Trustee in default with respect to any of the terms and conditions of this Master Indenture, or in the Obligations, be repaid by the Master Trustee to the Obligated Group Agent upon its written request therefor on behalf of the Members; and thereafter the registered owners of the Obligation shall be entitled to look only to the Obligated Group for payment thereof. The Obligated Group hereby covenants and agrees to indemnify and save the Master Trustee harmless from any and all losses, costs, liability and expense suffered or incurred by the Master Trustee by reason of having returned any such moneys to the Members as herein provided. If any Obligation or evidence of beneficial ownership of such Obligation shall not be presented for payment when the principal thereof becomes due (whether at maturity, by acceleration, upon call for redemption, upon purchase or otherwise), all liability of the Obligated Group to the registered Owner thereof for the payment of such Obligation shall forthwith cease, terminate and be completely discharged if funds sufficient to pay such Obligation and interest due thereon, if any, are held by the Master Trustee uninvested for the benefit of the registered Owner thereof. The registered Owner shall thereafter be restricted exclusively to such funds for any claim of whatever nature on his or her part under this Master Indenture or on, or with respect to, such Obligation. Section Severability. If any provision of this Master Indenture shall be held or deemed to be or shall, in fact, be inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions or in all jurisdictions, or in all cases because it conflicts with any other provision or provisions or any constitution or statute or rule of public policy, or for any other reason, such circumstances shall not have the effect of rendering the provision in question inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions herein contained invalid, inoperative, or unenforceable to any extent whatever. 68

281 The invalidity of any one or more phrases, sentences, clauses or Sections in this Master Indenture contained, shall not affect the remaining portions of this Master Indenture, or any part thereof. Section Notices. (a) Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for under this Master Indenture shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or, subject to Section 1004(c) below, by unsecured , facsimile transmission or other similar unsecured electronic methods as follows, and all notices and other communications expressly permitted under this Master Indenture to be given by telephone shall be made to the applicable telephone number, as follows: (i) if to the Master Trustee, at: The Bank of New York Mellon Trust Company, N.A., 1735 Market Street, 9th Floor, Philadelphia, PA 19103; Attn: V Esther F. Brown; (ii) if to the Hospital, at: St. Luke s Hospital of Bethlehem, Pennsylvania, 801 Ostrum Street, Bethlehem, PA 18015; Attention: Thomas P. Lichtenwalner, Senior Vice President, Finance; Telephone:; Fax: ; (iii) if to Monroe, at: Saint Luke s Hospital - Monroe Campus, 801 Ostrum Street, Bethlehem, PA 18015; Attention: Thomas P. Lichtenwalner, Senior Vice President, Finance; Telephone:; Fax: ; (iv) if to Warren, at: St. Luke s Warren Hospital, 185 Roseberry Street, Phillipsburg, NJ 08865; Attention: Thomas P. Lichtenwalner, Senior Vice President, Finance; Finance; Telephone:; Fax: ; (v) if to Anderson, at: St. Luke s Hospital - Anderson Campus, 1600 Riverside Drive, Easton, PA 18045; Attention: Thomas P. Lichtenwalner, Senior Vice President, Finance; Telephone:; Fax: ; (b) Notices and other communications sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices and other communications sent by unsecured , facsimile transmission or other similar unsecured electronic methods shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices and other communications delivered through electronic communications to the extent provided in subsection (c) below shall be effective as provided in such subsection (c). (c) The Master Trustee shall have the right to accept and act upon instructions, including funds transfer instructions ( Instructions ) given pursuant to this Master 69

282 Indenture and delivered using Electronic Means (as defined below); provided, however, that the Obligated Group Agent shall provide to the Master Trustee an incumbency certificate listing Persons with the authority to provide such Instructions ( Authorized Persons ) and containing specimen signatures of such Authorized Persons, which incumbency certificate shall be amended by the Obligated Group Agent whenever a Person is to be added or deleted from the listing. If any Member of the Obligated Group elects to give the Master Trustee Instructions using Electronic Means and the Master Trustee in its discretion elects to act upon such Instructions, the Master Trustee s understanding of such Instructions shall be deemed controlling. The Obligated Group understands and agrees that the Master Trustee cannot determine the identity of the actual sender of such Instructions and that the Master Trustee shall conclusively presume that directions that purport to have been sent by an Authorized Person listed on the incumbency certificate provided to the Master Trustee have been sent by such Authorized Persons. The Obligated Group shall be responsible for ensuring that only Authorized Persons transmit such Instructions to the Master Trustee and that the Members of the Obligated Group and all Authorized Persons are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication keys. The Master Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Master Trustee s reliance upon and compliance with such Instructions notwithstanding such directions conflict or are inconsistent with a subsequent written instruction. The Members of the Obligated Group agree: (i) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Master Trustee, including without limitation the risk of the Master Trustee acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (ii) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Master Trustee and that there may be more secure methods of transmitting Instructions than the method(s) selected by the Members of the Obligated Group; (iii) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (iv) to notify the Master Trustee immediately upon learning of any compromise or unauthorized use of the security procedures. For purposes hereof, the term Electronic Means shall mean any , facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Master Trustee or another method or system specified by the Master Trustee as available for use in connection with the services of the Master Trustee under this Master Indenture. (d) Each party hereto may change its address, fax number or telephone number or address for notices and other communications hereunder by notice to the other parties hereto in accordance with the above notice requirements. Section Counterparts. This Master Indenture may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 70

283 Section Applicable Law. This Master Indenture shall be governed exclusively by the applicable laws of the Commonwealth of Pennsylvania. Section Immunity of Officers, Employees and Members of Members. No recourse shall be had for the payment of any amounts due under any of the Obligations or for any claim based thereon or upon any obligation, covenant or agreement in this Master Indenture contained against any past, present or future officer, director, trustee, employee, member or agent of any Member, or of any successor corporation or other legal entity, as such, either directly or through any Member or any successor corporation or other legal entity, 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 officers, directors, trustees, employees, members or agents as such is hereby expressly waived and released as a condition of and consideration for the execution of this Master Indenture and the issuance of such Obligations. Section Holidays. If the date for making any payment or the date for performance of any act or the exercising of any right, as provided in this Master Indenture, is not a Business Day, such payment may be made or act performed or right exercised on the next succeeding Business Day with the same force and effect as if done on the nominal date provided in this Master Indenture. 71

284 IN WITNESS WHEREOF, the Members of the Obligated Group have caused these presents to be signed in their name and on their behalf and attested by their duly authorized officers, and to evidence its acceptance of the trusts hereby created the Master Trustee has caused these presents to be signed in its name and on its behalf by its duly authorized officer, all as of the day and year first above written. ATTEST: SAINT LUKE S HOSPITAL OF BETHLEHEM, PENNSYLVANIA, on behalf of itself and as Obligated Group Agent By: Name: Title: By: Name: Title: ATTEST: ST. LUKE S WARREN HOSPITAL, INC. D/B/A ST. LUKE S WARREN HOSPITAL By: Name: Title: By: Name: Title: ATTEST: ST. LUKE S HOSPITAL ANDERSON CAMPUS, By: Name: Title: By: Name: Title: ATTEST: ST. LUKE S HOSPITAL MONROE CAMPUS, By: Name: Title: By: Name: Title:

285 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Master Trustee By: Name: Title:

286 EXHIBIT A LIST OF MEMBERS OF THE OBLIGATED GROUP AS OF JULY 1, SAINT LUKE S HOSPITAL OF BETHLEHEM, PENNSYLVANIA, 2. ST. LUKE S WARREN HOSPITAL, INC. D/B/A ST. LUKE S WARREN HOSPITAL 3. ST. LUKE S HOSPITAL ANDERSON CAMPUS 4. ST. LUKE S HOSPITAL MONROE CAMPUS A-1

287 EXHIBIT B OBLIGATIONS OUTSTANDING [To be provided] C-1

288 [This Page Intentionally Left Blank]

289 [This Page Intentionally Left Blank]

290 [This Page Intentionally Left Blank]

291

292 NORTHAMPTON COUNTY GENERAL PURPOSE AUTHORITY HOSPITAL REVENUE BONDS, SERIES 2016A (ST. LUKE S UNIVERSITY HEALTH NETWORK PROJECT)