WELLS FARGO SECURITIES. $191,830,000 Series 2015B Taxable

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1 NEW ISSUE BOOK ENTRY ONLY RATINGS: See RATINGS herein In the opinion of Bond Counsel, according to laws, regulations, rulings and decisions in effect on the date of delivery of the Bonds, interest on the Series 2015A Bonds is not includable in gross income for federal income tax purposes or in taxable net income of individuals, estates or trusts for State of Minnesota income tax purposes. Interest on the Series 2015A Bonds is not an item of tax preference for purposes of determining the federal alternative minimum tax imposed on individuals and corporations or for purposes of determining the Minnesota alternative minimum tax imposed on individuals, estates and trusts. Interest on the Series 2015A Bonds is subject to the Minnesota franchise tax imposed on corporations and financial institutions and is includable in adjusted current earnings for purposes of the federal and Minnesota alternative minimum taxes imposed on corporations. See TAX EXEMPTION AND RELATED CONSIDERATIONS SERIES 2015A BONDS herein. Interest on the Series 2015B Bonds is taxable for federal and State of Minnesota income tax purposes. See TAXABILITY OF INTEREST AND RELATED CONSIDERATIONS SERIES 2015B BONDS herein. $498,225,000 HOUSING AND REDEVELOPMENT AUTHORITY OF THE CITY OF SAINT PAUL, MINNESOTA Health Care Facilities Revenue Refunding Bonds (HealthPartners Obligated Group) $306,395,000 Series 2015A Tax-Exempt Dated: Date of Delivery $191,830,000 Series 2015B Taxable Due: July 1, as shown on inside front cover The Health Care Facilities Revenue Refunding Bonds, Series 2015A (HealthPartners Obligated Group), Series 2015A (the Series 2015A Bonds ), and the Taxable Health Care Facilities Revenue Refunding Bonds, Series 2015B (HealthPartners Obligated Group), Series 2015B (the Series 2015B Bonds, and together with the Series 2015A Bonds, the Bonds or the Series 2015 Bonds ) will be issued as fully registered bonds in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company, New York, New York ( DTC ). Purchases of beneficial interests in the Bonds will be made in book-entry only form in denominations of $5,000 and integral multiples thereof. DTC will act as securities depository for the Bonds. So long as the Bonds are registered in the name of Cede & Co. as nominee for DTC, references herein to the registered owners of the Bonds shall mean Cede & Co., and shall not mean beneficial owners of the Bonds. Purchasers of a beneficial interest in the Bonds will not receive physical delivery of certificated Bonds. Interest on the Bonds will be payable on each January 1 and July 1, commencing January 1, Payments of principal of, premium, if any, and interest on the Bonds will be made directly to Cede & Co. by Wells Fargo Bank, National Association, the bond trustee (the Bond Trustee ), so long as Cede & Co. is the registered owner of the Bonds. Disbursement of such payments to the DTC Participants (as defined herein) is the responsibility of DTC and disbursement of such payments to the purchasers of beneficial ownership interests in the Bonds is the responsibility of DTC Participants and Indirect Participants (as defined herein). See APPENDIX G BOOK-ENTRY ONLY SYSTEM hereto. THE BONDS ARE SPECIAL, LIMITED REVENUE OBLIGATIONS OF THE HOUSING AND REDEVELOPMENT AUTHORITY OF THE CITY OF SAINT PAUL, MINNESOTA (THE ISSUER ), AND ARE PAYABLE SOLELY FROM REVENUES RECEIVED BY OR ON BEHALF OF THE ISSUER FROM PAYMENTS TO BE MADE BY THE OBLIGATED GROUP MEMBERS (AS DEFINED HEREIN) UNDER THE MASTER TRUST INDENTURE (AS DEFINED HEREIN), AS AMENDED, AMONG WELLS FARGO BANK, NATIONAL ASSOCIATION, AS MASTER TRUSTEE, AND THE OBLIGATED GROUP MEMBERS, AND SECURED UNDER THE PROVISIONS OF THE BOND INDENTURE (AS DEFINED HEREIN) BETWEEN THE ISSUER AND THE BOND TRUSTEE. PURSUANT TO THE BOND INDENTURE, THE ISSUER HAS PLEDGED AND ASSIGNED TO THE BOND TRUSTEE CERTAIN RIGHTS OF THE ISSUER UNDER THE LOAN AGREEMENTS (AS DEFINED HEREIN), EACH BETWEEN THE ISSUER AND ONE OR MORE OBLIGATED GROUP MEMBERS, AS REPRESENTATIVES OF THE OBLIGATED GROUP (AS DEFINED HEREIN), AND THE SERIES 2015 MASTER NOTES (AS DEFINED HEREIN), EACH DELIVERED TO THE ISSUER UNDER THE MASTER TRUST INDENTURE. The Bonds do not constitute a debt, liability, general obligation or pledge of the full faith and credit of the Issuer, the State of Minnesota (the State ) the City of Saint Paul, Minnesota (the City ) or any political subdivision of the State. The issuance of the Bonds does not directly or indirectly or contingently obligate the Issuer, the State, the City or any political subdivision of the State to pay the Bonds from taxes or any other assets or revenues of the Issuer, or to appropriate therefor. No Holder (as defined herein) will have the right to demand payment of the principal of, premium, if any, or interest on the Bonds out of any funds or from any sources of revenue other than those expressly pledged to the payment of the Bonds pursuant to the Bond Indenture. The Bonds are subject to optional redemption, mandatory redemption and extraordinary optional redemption prior to maturity, all as set forth herein. See THE BONDS Redemption herein. The Bonds are subject to certain other risks as described under the captions THE BONDS and BONDHOLDERS RISKS herein. The Bonds are offered when, as and if issued and received by Piper Jaffray & Co. and Wells Fargo Securities (collectively, the Underwriters ), subject to prior sale, withdrawal or modification of the offer without any notice, and subject to the approving opinion of Kennedy & Graven, Chartered, Saint Paul, Minnesota, Bond Counsel to the Issuer. Certain legal matters will be passed upon for the Obligated Group by its counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota, and for the Underwriters by their counsel, Dorsey & Whitney LLP, Minneapolis, Minnesota. It is expected that the Bonds in definitive form will be available for delivery to DTC in New York, New York, on or about June 11, The date of this Official Statement is June 4, WELLS FARGO SECURITIES

2 MATURITY DATES, AMOUNTS, INTEREST RATES AND PRICES OR YIELDS $306,395,000 Housing and Redevelopment Authority of the City of Saint Paul, Minnesota Health Care Facilities Revenue Refunding Bonds, Series 2015A (HealthPartners Obligated Group) Maturity (July 1) Principal Amount Interest Rate Yield Price CUSIP 2016 $ 1,545, % 0.520% % CQ ,950, CR ,010, CS ,090, CT ,170, CU ,280, CV ,405, CW ,980, CX ,240, CY ,505, CZ ,790, DA ,970, DB ,975, * DC ,835, * DD ,615, * DE ,370, * DF ,205, * DG ,110, DX ,030, * DH1 $58,320, % Term Bond due July 1, 2035, priced at % to yield 4.120%, CUSIP DJ7 *Priced to first optional redemption date of July 1, 2025 $191,830,000 Housing and Redevelopment Authority of the City of Saint Paul, Minnesota Taxable Health Care Facilities Revenue Refunding Bonds, Series 2015B (HealthPartners Obligated Group) Maturity (July 1) Principal Amount Interest Rate Yield Price CUSIP 2016 $13,345, % 1.041% % DK ,245, DL ,445, DM ,710, DN ,055, DP ,460, DQ ,925, DR ,445, DS ,025, DT ,675, DU ,375, DV ,125, DW8 Registered Trademark 2015, American Bankers Association. CUSIP data herein is provided by Standard & Poor s, CUSIP Services Bureau, a division of the McGraw-Hill Companies, Inc. CUSIP numbers have been assigned by an independent company not affiliated with the Issuer and are included solely for the convenience of the holders of the Bonds. The Issuer is not responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the Bonds or as indicated above. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of the Bonds. -i-

3 ISSUER Housing and Redevelopment Authority of the City of Saint Paul, Minnesota OBLIGATED GROUP HealthPartners, Inc. Group Health Plan, Inc. HealthPartners Administrators, Inc. HealthPartners Insurance Company Regions Hospital Park Nicollet Health Services Park Nicollet Methodist Hospital Park Nicollet Clinic Park Nicollet Health Care Products PNMC Holdings UNDERWRITERS Piper Jaffray & Co. Minneapolis, Minnesota Wells Fargo Securities Minneapolis, Minnesota BOND COUNSEL Kennedy & Graven, Chartered Saint Paul, Minnesota OBLIGATED GROUP S COUNSEL Gray, Plant, Mooty, Mooty & Bennett, P.A. Minneapolis, Minnesota UNDERWRITERS COUNSEL Dorsey & Whitney LLP Minneapolis, Minnesota TRUSTEE Wells Fargo Bank, National Association Minneapolis, Minnesota AUDITOR KPMG LLP Minneapolis, Minnesota -ii-

4 REGARDING USE OF THIS OFFICIAL STATEMENT No dealer, broker, salesperson or other person has been authorized by the Issuer (as defined herein), the Obligated Group Members (as defined herein) or the Underwriters (as defined herein) to give information or to make any representations with respect to the Bonds (as defined herein), 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, and there shall not be any sale of the Bonds, in any jurisdiction in which it is unlawful to make such offer, solicitations or sale. Certain information contained herein has been obtained from the Obligated Group Members, The Depository Trust Company and other sources which are believed to be reliable, but such information is not guaranteed, as to accuracy or completeness, by, and is not to be construed to be a representation of, the Issuer or the Underwriters. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of any of the parties referred to above since the date hereof. The Underwriters have provided the following sentence for inclusion in the Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY EFFECT CERTAIN TRANSACTIONS THAT STABILIZE THE PRICE OF THE BONDS. SUCH TRANSACTIONS MAY CONSIST OF BIDS OR PURCHASES FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE BONDS. IN ADDITION, IF THE UNDERWRITERS OVERALLOT (THAT IS, SELL MORE THAN THE AGGREGATE PRINCIPAL AMOUNT OF ANY SERIES OF THE BONDS SET FORTH ON THE COVER PAGE OF THIS OFFICIAL STATEMENT) AND THEREBY CREATE A SHORT POSITION IN THE BONDS IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY REDUCE THAT SHORT POSITION BY PURCHASING BONDS IN THE OPEN MARKET. IN GENERAL, PURCHASES OF A SECURITY FOR THE PURPOSE OF STABILIZATION OR TO REDUCE A SHORT POSITION COULD CAUSE THE PRICE OF A SECURITY TO BE HIGHER THAN IT MIGHT OTHERWISE BE IN THE ABSENCE OF SUCH PURCHASES. THE UNDERWRITERS MAKE NO REPRESENTATION OR PREDICTION AS TO THE DIRECTION OR THE MAGNITUDE OF ANY EFFECT THAT THE TRANSACTIONS DESCRIBED ABOVE MAY HAVE ON THE PRICE OF THE BONDS. IN ADDITION, THE UNDERWRITERS MAKE NO REPRESENTATION THEY WILL ENGAGE IN SUCH TRANSACTIONS OR THAT SUCH TRANSACTIONS, IF COMMENCED, WILL NOT BE DISCONTINUED WITHOUT NOTICE. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THE BOND INDENTURE OR THE MASTER INDENTURE 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 BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAWS OF THE STATES IN WHICH THE BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. Neither the Issuer nor any of its members, agents, employees or representatives have reviewed this Official Statement or investigated the statements or representations contained herein, except for those statements relating to the Issuer set forth under the captions THE ISSUER and LITIGATION - Issuer. Except with respect to the information contained under such captions, neither the Issuer nor any of its members, agents, employees or representatives makes any representation as to the completeness, sufficiency and truthfulness of the statements set forth in this Official Statement. Members of the governing body of the Issuer and any other person executing the Series 2015 Bonds are not subject to personal liability by reason of the issuance of the Bonds. Other than as described in this paragraph, the Issuer assumes no responsibility for this Official Statement and has not reviewed or undertaken to verify any information contained herein. -iii-

5 CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute forwardlooking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or similar words. Such forward-looking statements include, among others, certain statements contained under the heading MANAGEMENT DISCUSSION AND ANALYSIS in Appendix A hereto. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVES KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE OBLIGATED GROUP MEMBERS DO NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN THEIR EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED, OCCUR. -iv-

6 TABLE OF CONTENTS Page Page INTRODUCTION... 1 THE ISSUER... 4 THE OBLIGATED GROUP... 5 PLAN OF FINANCE... 5 General... 5 The Prior Bonds... 5 The Escrow Agreement... 6 Verification Agent... 6 ESTIMATED SOURCES AND USES OF FUNDS... 6 DEBT SERVICE SCHEDULE... 7 THE BONDS... 8 Description of the Bonds... 8 Redemption Provisions... 8 Book-Entry Only System SECURITY FOR THE BONDS Limited Obligations of the Issuer The Loan Agreements Master Indenture Amendments to the Master Indenture The Bond Indenture BONDHOLDERS RISKS General The Obligated Group Significant Risk Areas Summarized Impact of Disruptions in the Credit Markets and General Economic Factors Nonprofit Health Care Environment Federal Laws Affecting Health Care Facilities Medicare and Medicaid Programs Disproportionate Share Payments Commercial Insurance and Other Third- Party Plans Health Plan Membership and Premiums Regulatory and Contractual Matters Licensing, Surveys, and Accreditation Competition Negative Rankings Based on Clinic Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures State Budgets Health Care Professionals and Other Employees Antitrust Physician Relationships Coding Update Environmental Laws and Regulations Pharmaceutical and Technological Changes Enforcement of Remedies; Risks of Bankruptcy Risks Related to Obligated Group Financings Market for Bonds Tax-Exempt Status; Continuing Legal Requirements Maintenance of Tax-Exempt Status of Interest on the Series 2015A Bonds Bond Ratings No Mortgage No Debt Service Reserve Additional Risk Factors RATINGS AUDITED FINANCIAL STATEMENTS UNAUDITED FINANCIAL STATEMENTS TAX EXEMPTION AND RELATED CONSIDERATIONS SERIES 2015A BONDS Other Tax Considerations Original Issue Discount Original Issue Premium TAXABILITY OF INTEREST SERIES 2015B BONDS CONTINUING DISCLOSURE UNDERTAKING LEGAL MATTERS RELATIONSHIPS AMONG THE PARTIES LITIGATION The Issuer The Obligated Group UNDERWRITING THE MASTER TRUSTEE AND BOND TRUSTEE MISCELLANEOUS APPENDIX A INFORMATION CONCERNING THE HEALTHPARTNERS OBLIGATED GROUP APPENDIX B AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHPARTNERS, INC., AND SUBSIDIARIES, AS OF AND FOR THE FISCAL YEARS ENDED DECEMBER 31, 2014 AND 2013 APPENDIX C UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHPARTNERS, INC., AND SUBSIDIARIES, AS OF AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2015 AND 2014 APPENDIX D DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF PRINCIPAL DOCUMENTS APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT APPENDIX F FORM OF OPINION OF BOND COUNSEL APPENDIX G BOOK-ENTRY ONLY PROVISIONS -v-

7 OFFICIAL STATEMENT $498,225,000 HOUSING AND REDEVELOPMENT AUTHORITY OF THE CITY OF SAINT PAUL, MINNESOTA Health Care Facilities Revenue Refunding Bonds (HealthPartners Obligated Group) $306,395,000 Series 2015A Tax-Exempt $191,830,000 Series 2015B Taxable INTRODUCTION This Official Statement, including the cover page and appendices hereto, is furnished in connection with the offering by the Housing and Redevelopment Authority of the City of Saint Paul, Minnesota (the Issuer ) of its (i) $306,395,000 Health Care Facilities Revenue Refunding Bonds, Series 2015A (HealthPartners Obligated Group) (the Series 2015A Bonds ), and (ii) $191,830,000 Taxable Health Care Facilities Revenue Refunding Bonds, Series 2015B (HealthPartners Obligated Group) (the Series 2015B Bonds, and together with the Series 2015A Bonds, the Bonds or the Series 2015 Bonds ). This Official Statement speaks only as of its date, and the information contained herein is subject to change. All capitalized terms used in this Official Statement and not otherwise defined herein are defined in Appendix D hereto. The Issuer is a public body corporate and politic under the laws of the State of Minnesota (the State ). The Bonds will be issued in accordance with the provisions of the Minnesota Municipal Industrial Development Act, Minnesota Statutes, Sections to , as amended (the Act ), pursuant to a Bond Trust Indenture, dated as of June 1, 2015 (the Bond Indenture ) between the Issuer and Wells Fargo Bank, National Association, as bond trustee (the Bond Trustee ) and a resolution of the Issuer dated May 13, The proceeds of the Bonds will be loaned to the Regions Hospital (as defined herein) and Park Nicollet (as defined herein), pursuant to (i) a Loan Agreement dated as of June 1, 2015 (the Regions Hospital Loan Agreement ), between the Issuer and Regions Hospital, relating to a portion of the proceeds of the Series 2015A Bonds in the amount of $145,185,000 (the Regions Hospital Bonds ); (ii) a Loan Agreement dated as of June 1, 2015 (the Park Nicollet Tax-Exempt Loan Agreement ), between the Issuer and Park Nicollet, relating to a portion of the proceeds of the Series 2015A Bonds in the amount of $161,210,000 (the Park Nicollet Tax-Exempt Bonds ); and (iii) a Loan Agreement dated as of June 1, 2015, between the Issuer and Park Nicollet, relating to the proceeds of the Series 2015B Bonds (the Park Nicollet Taxable Loan Agreement, and together with the Regions Hospital Loan Agreement and the Park Nicollet Tax-Exempt Loan Agreement, the Loan Agreements ). The Existing Obligated Group Members (as defined herein) have previously entered into a Master Trust Indenture, originally dated as of October 15, 2003, as supplemented and amended by and through that certain Supplemental Master Indenture No. 7, dated as of March 18, 2014, with Wells Fargo Bank, National Association, as master trustee (the Master Trustee ) (the Master Trust Indenture as heretofore supplemented and amended, the Original Master Indenture, and as further supplemented and amended by the Supplemental Indenture No. 8 (as defined herein), the Supplemental Indenture No. 9 (as defined herein), the Supplemental Indenture No. 10 (as defined herein), the Supplemental Indenture No. 11 (as defined herein) and any additional supplements executed hereafter, the Master Indenture ). The loan of Bond proceeds made pursuant to the Loan Agreements will be secured by the Series 2015 Master Notes (as defined herein) of the Obligated Group Members (as defined herein) issued under and entitled to the benefit of the Master Indenture. Proceeds of the Bonds will be used, together with other available funds, to: (i) advance refund the Issuer s Outstanding (as defined in Appendix D) Health Care Facility Revenue Bonds, Series 2006 (HealthPartners Obligated Group Project), issued on November 30, 2006, in the original principal amount of $176,365,000 (the Series 2006 Bonds ); (ii) advance refund the Outstanding Health Care Facilities Revenue Refunding Bonds, (Park Nicollet Health Services) Series 2008C, of the City of St. Louis Park, Minnesota, issued on August 14, 2008, in the original principal amount of $221,850,000 (the Series 2008C Bonds ); (iii) advance refund the Outstanding Health Care Facilities Revenue Refunding Bonds, (Park Nicollet Health Services) Series 2009, of the City of St. Louis Park, Minnesota, issued on December 31, 2009, in the original principal amount of $188,340,000 (the Series 2009

8 Bonds, and together with the Series 2006 Bonds and the Series 2008C Bonds, the Prior Bonds ); and (iv) pay certain costs of issuance of the Bonds. See PLAN OF FINANCE herein. HealthPartners, Inc. is a Minnesota nonprofit corporation exempt from federal income taxation pursuant to Section 501(c)(4) of the Internal Revenue Code of 1986, as amended (the Code ) ( HealthPartners ). HealthPartners is the parent organization in a family of health care financing and health care delivery nonprofit and for-profit organizations in Minnesota and Wisconsin (the HealthPartners System or the System ). The following members of the System are the existing members of the Obligated Group (as defined herein) (the Existing Obligated Group Members ): (i) HealthPartners; (ii) Group Health Plan, Inc., a Minnesota nonprofit corporation exempt under Section 501(c)(3) of the Code ( Group Health ); (iii) HealthPartners Insurance Company (formerly Midwest Assurance Company), a Minnesota insurance corporation ( HPIC ); (iv) HealthPartners Administrators, Inc., a Minnesota taxable nonprofit corporation ( HPAI ); and (v) Regions Hospital, a Minnesota nonprofit corporation exempt under Section 501(c)(3) of the Code ( Regions Hospital ). The Master Indenture provides for the creation of a group of entities (the Obligated Group ), the members of which are jointly and severally obligated for the payment of debt service on all Notes issued thereunder, including, but not limited to, the Series 2015 Master Notes. Only the Existing Obligated Group Members comprise the Obligated Group under the Original Master Indenture. However, the Master Indenture provides for the addition of members to the Obligated Group and the withdrawal of members from the Obligated Group. On January 1, 2013, HealthPartners became the sole corporate member of Park Nicollet Health System ( PNHS ), a Minnesota nonprofit corporation and an exempt organization under Section 501(c)(3) of the Code, making PNHS a part of the System. PNHS is the sole member of several entities, including, but not limited to, Park Nicollet Methodist Hospital ( Methodist Hospital ), Park Nicollet Clinic ( PNC ) and Park Nicollet Health Care Products ( PNHCP ), each a Minnesota nonprofit corporation and an exempt organization under Section 501(c)(3) of the Code. PNC is the sole member of PNMC Holdings, also a Minnesota nonprofit corporation and an exempt organization under Section 501(c)(3) of the Code ( PNMC, and together with PNHS, Methodist Hospital, PNC and PNHCP, Park Nicollet; and together with Regions Hospital, the Borrowers ). In connection with the issuance of the Bonds, Park Nicollet will become a part of the Obligated Group pursuant to that certain Supplemental Indenture No. 8 to the Original Master Indenture, dated as of June 1, 2015, among the Existing Obligated Group Members, Park Nicollet and the Master Trustee (the Supplemental Indenture No. 8 ), such that upon the issuance of the Bonds, the Obligated Group will consist of: (i) HealthPartners, (ii) Group Health, (iii) HPIC, (iv) HPAI, (v) Regions Hospital, (vi) PNHS, (vii) Methodist Hospital; (viii) PNC; (ix) PNHCP; and (x) PNMC (collectively, the Obligated Group Members and each an Obligated Group Member ). The obligations of the Obligated Group Members under the Master Indenture will be secured by a security interest in the Gross Revenues (as defined in Appendix D hereto) of the Obligated Group as further described in and limited by the Master Indenture. See SUMMARY OF MASTER INDENTURE in Appendix D to this Official Statement for a summary of the provisions of the Master Indenture. NOT ALL ENTITIES INCLUDED IN THE HEALTHPARTNERS SYSTEM ARE INCLUDED IN THE OBLIGATED GROUP AND NOT ALL SYSTEM REVENUES ARE GROSS REVENUES UNDER THE MASTER INDENTURE. THE HEALTHPARTNERS SYSTEM INCLUDES MANY REVENUE GENERATING AFFILIATES COMMONLY OWNED OR CONTROLLED BY ONE OR MORE OBLIGATED GROUP MEMBERS, INCLUDING HOSPITALS, BUT ONLY THE OBLIGATED GROUP MEMBERS ARE OBLIGATED FOR THE PAYMENT OF DEBT SERVICE ON THE BONDS PURSUANT TO THE LOAN AGREEMENTS AND THE SERIES 2015 MASTER NOTES AND ONLY THEIR GROSS REVENUES ARE PLEDGED FOR SUCH PURPOSE PURSUANT TO THE MASTER INDENTURE, THE SERIES 2015 MASTER NOTES AND THE BOND INDENTURE. THE CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHPARTNERS INCLUDED IN APPENDICES B AND C TO THIS OFFICIAL STATEMENT CONTAIN INFORMATION WITH RESPECT TO ALL SYSTEM ENTITIES WHOSE FINANCIAL INFORMATION IS REQUIRED TO BE CONSOLIDATED WITH HEALTHPARTNERS FOR FINANCIAL REPORTING PURPOSES UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. THIS INCLUDES SEVERAL NON-OBLIGATED AFFILIATES WHICH ARE NOT OBLIGATED GROUP MEMBERS. OBLIGATED GROUP MEMBERS COMPRISED APPROXIMATELY 95% OF ALL REVENUES OF THE HEALTHPARTNERS SYSTEM FOR THE QUARTER ENDED MARCH 31, FOR ADDITIONAL INFORMATION REGARDING THE HEALTHPARTNERS SYSTEM, THE OBLIGATED GROUP MEMBERS AND NON-OBLIGATED AFFILIATES (AS DEFINED HEREIN), SEE APPENDIX A HERETO. 2

9 As security for the payment of the Series 2015A Bonds, pursuant to that certain Supplemental Master Indenture No. 9 to the Original Master Indenture, dated as of June 1, 2015, among the Obligated Group Members and the Master Trustee (the Supplemental Indenture No. 9 ), Regions Hospital will issue to the Issuer, as representative of the Obligated Group, its Series 2015A-1 Master Note (the Series 2015A-1 Master Note ) in the principal amount of $145,185,000, representing the amount of the Series 2015A Bonds allocated to refunding the Series 2006 Bonds; and pursuant to that certain Supplemental Master Indenture No. 10 to the Original Master Indenture, dated as of June 1, 2015, among the Obligated Group Members and the Master Trustee (the Supplemental Indenture No. 10 ), Park Nicollet will issue to the Issuer, as representatives of the Obligated Group, its Series 2015A-2 Master Note (the Series 2015A-2 Master Note and together with the Series 2015A-1 Master Note, the Series 2015A Master Notes ) in the principal amount of $161,210,000, representing the amount of the Series 2015A Bonds allocated to refunding the Series 2008C Bonds and the Series 2009 Bonds on a tax-exempt basis. As security for the payment of the Series 2015B Bonds, pursuant to that certain Supplemental Master Indenture No. 11 to the Original Master Indenture, dated as of June 1, 2015, among the Obligated Group Members and the Master Trustee (the Supplemental Indenture No. 11 ), Park Nicollet will issue to the Issuer, as representatives of the Obligated Group, its Series 2015B Master Note (the Series 2015B Master Note and together with the Series 2015A Master Notes, the Series 2015 Master Notes ) in the principal amount of $191,830,000, representing the amount of the Series 2015B Bonds allocated to refunding the Series 2008C Bonds and the Series 2009 Bonds on a taxable basis. The Series 2015A Master Notes will be assigned by the Issuer to the Bond Trustee pursuant to the Bond Indenture. The Series 2015A Master Notes will be in the same aggregate principal amounts and will bear interest at the same rates as the Series 2015A Bonds, will have provisions as to redemption corresponding to the Series 2015A Bonds and will be payable in installments corresponding to the maturities and mandatory redemption amounts of the Series 2015A Bonds (subject to certain credits relating to investment income and other monies held by the Bond Trustee). The Series 2015A-1 Master Note will be issued in consideration of the Regions Hospital Loan Agreement whereby by the Issuer will loan certain proceeds of the Series 2015A Bonds to Regions Hospital, and the Series 2015A-2 Master Note will be issued in consideration of the Park Nicollet Tax-Exempt Loan Agreement whereby by the Issuer will loan certain proceeds of the Series 2015A Bonds to Park Nicollet. Under the terms of the Series 2015A Master Notes, the entire Obligated Group is obligated to make payments on the Series 2015A Master Notes to the Bond Trustee in amounts sufficient, if paid timely and in full, to provide for timely and full payment on the Series 2015A Bonds. The Series 2015B Master Note will also be assigned by the Issuer to the Bond Trustee pursuant to the Bond Indenture. The Series 2015B Note will be in the same aggregate principal amount and bear interest at the same rate as the Series 2015B Bonds, will have provisions as to redemption corresponding to the Series 2015B Bonds and will be payable in installments corresponding to the maturities and mandatory redemption amounts of the Series 2015B Bonds (subject to certain credits relating to investment income and other monies held by the Bond Trustee). The Series 2015B Master Note will be issued in consideration of the Park Nicollet Taxable Loan Agreement whereby the Issuer will loan the proceeds of the Series 2015B Bonds to Park Nicollet. Under the terms of the Series 2015B Master Note, the entire Obligated Group is obligated to make payments on the Series 2015B Master Note to the Bond Trustee in amounts sufficient, if paid timely and in full, to provide for timely and full payment on the Series 2015B Bonds. Upon the issuance of the Bonds there will be three other outstanding Notes under the Master Indenture: (1) the Senior Notes, Series 2013 (HealthPartners Obligated Group) (the Series 2013 Notes ) issued by HealthPartners in the original principal amount of $92,500,000, and outstanding as of May 15, 2015 in the amount of $86,425,000; (2) the Series 2014A Master Note (the Series 2014A Master Note ), which secures the Health Care Facility Revenue Bonds (HealthPartners Obligated Group Project), Series 2014A (the Series 2014A Bonds ), issued by the Issuer in the original principal amount of $30,860,000, and outstanding as of May 15, 2015 in the amount of $29,130,000; and (3) the Series 2014B Master Note (the Series 2014B Master Note ) which secures the Health Care Facility Revenue Refunding Bonds (HealthPartners Obligated Group Project), Series 2014B (the Series 2014B Bonds ), issued by the Issuer in the original principal amount of $37,365,000, and outstanding as of May 15, 2015 in the amount of $28,820,000. The Series 2013 Notes, the 2014A Master Note and the Series 2014B Master Note and the Series 2015 Master Notes are, and any additional Notes issued under the Master Indenture (collectively, the Master Notes ) will be, the joint and several obligations of the Obligated Group. Pursuant to the Master Indenture, Obligated Group Members covenant not to create or permit to exist any lien, charge or encumbrance on their property other than 3

10 those specifically permitted under the terms of the Master Indenture. See SUMMARY OF MASTER INDENTURE Restrictions as to Creation of Liens in Appendix D hereto. The Bonds are limited obligations of the Issuer payable, except to the extent payable from the proceeds of the Bonds and investment income thereon, or proceeds of insurance and condemnation awards, solely from revenues derived by the Issuer from payments to be made by the Borrowers under the Loan Agreements and payments to be made by the Obligated Group pursuant to the Series 2015 Master Notes. See the caption SECURITY FOR THE BONDS herein. The Bonds are subject to acceleration in whole or in part and prepayment prior to maturity and to redemption prior to maturity and to certain other risks as described under the headings THE BONDS Redemption Provisions and BONDHOLDERS RISKS herein. Information concerning the Obligated Group, including certain financial information, is set forth in Appendixes A, B and C to this Official Statement. For summaries of the Master Indenture, the Bond Indenture and the Loan Agreements, as well as definitions of terms used herein, see Appendix D to this Official Statement. This Official Statement contains descriptions of, among other matters, the Bonds, the Master Indenture, the Series 2015 Master Notes, the Loan Agreements, the Bond Indenture and the Obligated Group. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to the Master Indenture, the Series 2015 Master Notes, the Loan Agreements, the Supplemental Indenture No. 8, the Supplemental Indenture No. 9, the Supplemental Indenture No. 10, the Supplemental Indenture No. 11 and the Bond Indenture (as well as any other documents relating to the Bonds) are qualified in their entirety by reference to such documents, and references herein to the Bonds are qualified in their entirety by reference to the forms thereof included in the Bond Indenture. During the period of the offering, copies of such documents and other documents herein described will be available for inspection at the principal office of the Piper Jaffray & Co. or Wells Fargo Securities (collectively, the Underwriters ): Piper Jaffray & Co., 800 Nicollet Mall, Minneapolis, Minnesota 55402; or Wells Fargo Securities, 608 Second Avenue South, Minneapolis, Minnesota Copies of such documents related to the Bonds will be available for inspection at the principal corporate trust offices of the Master Trustee and the Bond Trustee after delivery of the Bonds. THE ISSUER The Issuer was organized in Its functions include the administration of programs for housing and redevelopment in the City of Saint Paul, Minnesota (the City ). Pursuant to State legislation enacted in 1976, the City Council of the City is the governing body of the Issuer. In 1978, the staff of the Issuer was incorporated into a separate City operating department designated as the Department of Planning and Economic Development. The Director of the Department of Planning and Economic Development is the Executive Director of the Issuer, which exists as an independent corporate entity and exercises the powers granted to housing and redevelopment authorities under State law. Pursuant to the Act, the Issuer is empowered to issue the Bonds. The Issuer is not pledging its credit to the Bonds. The Issuer does not and will not in the future monitor the financial condition of the Obligated Group Members, the operations of the System, or otherwise monitor payment of the Bonds or compliance with the documents relating thereto. The responsibility for the operation of the System will rest entirely with the Obligated Group Members. The Bonds are special, limited obligations of the Issuer. No recourse by an Holder (as defined in Appendix D) of the Bonds will be had for the payment of the principal of, premium, if any, or interest on any of the Bonds or for any claim based thereon or upon any obligation, covenant, or agreement in the Bond Indenture or the Loan Agreements, against any past, present, or future officer, member, counsel, advisor or agent of the Issuer or any successor thereto, as such, directly or through the Issuer or any successor thereto, 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 officer, member, counsel, advisor or agent as such has been expressly waived as a condition of and in consideration of the execution of the Bond Indenture, the Loan Agreements and the issuance of the Bonds. All payments made by the Borrowers on behalf of the Obligated Group pursuant to the Loan Agreements will be made directly to the Bond Trustee. None of the revenues to pay the Bonds will come from the Issuer, except to the extent payable from the proceeds of the Bonds and investment income thereon, or proceeds of insurance and condemnation awards, and therefore the Issuer s financial information and status is irrelevant to any investment decision with respect to the Bonds. As a result, no information regarding the Issuer will be provided in respect of any continuing disclosure requirement relating to the Bonds. The Issuer has not assumed responsibility for any 4

11 information in this Official Statement, except for the information under this caption and the caption LITIGATION The Issuer in this Official Statement. THE OBLIGATED GROUP Upon the issuance of the Bonds, the Obligated Group will consist of (1) HealthPartners, (2) Group Health, (3) HPIC, (4) HPAI, (5) Regions Hospital, (6) PNHS, (7) Methodist Hospital; (8) PNC; (9) PNHCP; and (10) PNMC. All Obligated Group Members are part of the HealthPartners System. Obligated Group Members comprised 95% of all revenues of the HealthPartners System for the quarter ended March 31, For a more complete description of the Obligated Group Members and the System, see Appendix A hereto. General PLAN OF FINANCE The proceeds of the Bonds will be loaned to each Borrower on behalf of the Obligated Group Members pursuant to the Loan Agreements and applied, together with other available funds, to (i) advance refund the Issuer s Outstanding Health Care Facility Revenue Bonds, Series 2006 (HealthPartners Obligated Group Project), issued on November 30, 2006, in the original principal amount of $176,365,000 (the Series 2006 Bonds ); (ii) advance refund the Outstanding Health Care Facilities Revenue Refunding Bonds, (Park Nicollet Health Services) Series 2008C, of the City of St. Louis Park, Minnesota, issued on August 14, 2008, in the original principal amount of $221,850,000 (the Series 2008C Bonds ); (iii) advance refund the Outstanding Health Care Facilities Revenue Refunding Bonds, (Park Nicollet Health Services) Series 2009, of the City of St. Louis Park, Minnesota, issued on December 31, 2009, in the original principal amount of $188,340,000 (the Series 2009 Bonds, and together with the Series 2006 Bonds and the Series 2008C Bonds, the Prior Bonds ); and (iv) pay certain costs of issuance of the Bonds. The proceeds of the Prior Bonds financed or refinanced facilities owned and operated by various Obligated Group Members and located in the City, St. Louis Park, Burnsville, Maple Grove and Wayzata, Minnesota. The Prior Bonds will be defeased to their respective Redemption Date (as hereinafter defined). The Series 2006 Bonds will be called for redemption on November 15, 2016; the Series 2008C Bonds will be called for redemption on July 1, 2018, and the Series 2009 Bonds will be called for redemption on July 1, 2019 (each, a Redemption Date ). On each Redemption Date, the respective Series of Prior Bonds will be redeemed in full at a redemption price equal to 100% of the principal amount thereof. The Prior Bonds Proceeds of the Series 2006 Bonds were loaned to Regions Hospital to (i) finance the acquisition, construction, expansion, improvement, remodeling, equipping, and furnishing of the hospital facilities located at the intersection of Jackson Street and University Avenue in the City, including but not limited to capital improvements, up to an eleven-story tower for surgery, patient rooms, clinical facilities and support services, and underground parking; and (ii) current refund the Health Care Revenue Bonds (St. Paul-Ramsey Medical Center Project), Series 1993, issued by the Authority in the original aggregate principal amount of $36,340,000, the proceeds of which also financed improvements to the hospital facilities. Proceeds of the Series 2008C Bonds and the Series 2009 Bonds were loaned to Park Nicollet and Park Nicollet Institute to refund obligations issued by the City of St. Louis Park, Minnesota, which financed the (i) the acquisition, construction, and equipping of an approximately 82,000 square foot building to house the Cancer Center and related facilities with approximately 31,000 square feet of the building reserved for future expansion, located at 6490 Excelsior Boulevard in St. Louis Park; (ii) the acquisition, construction, and equipping of a new parking ramp including approximately 1,700 parking stalls adjacent to the Cancer Center; (iii) the redesign and renovation of the emergency center at Methodist Hospital, located at 6500 Excelsior Boulevard in St. Louis Park; (iv) the construction and equipping of a new common entrance to Park Nicollet Methodist Hospital, the new Cancer Center, and the Meadowbrook Building, located at 3931 Louisiana Avenue South in St. Louis Park; and (v) the acquisition, construction, and equipping of an approximately 69,000 square foot Eating Disorders Institute, including a parking ramp and surface lot with an estimated 220 parking stalls, located at 3525 Monterey Drive in St. Louis Park. Proceeds of the Series 2009 Bonds were also used to refund obligations issued by St. Louis Park, Minnesota, which financed a portion of the following: (i) the construction and equipping of the Heart and Vascular Center at Methodist Hospital, the construction of a parking ramp and other improvements at Methodist Hospital, the 5

12 construction of public infrastructure improvements with respect to the foregoing, and the acquisition and installation of equipment for Methodist Hospital; and (ii) the acquisition and installation of a computed tomography ( CT ) scanner at the facilities located at Fairview Drive in the City of Burnsville, Minnesota, a CT scanner at the facilities located at th Avenue North in the City of Maple Grove, Minnesota, and a CT scanner and a magnetic resonance imaging scanner at the facilities located at 250 North Central Avenue in the City of Wayzata, Minnesota. Proceeds of the Series 2008C Bonds also refinanced capital improvements to the facilities of Park Nicollet and Park Nicollet Institute originally financed with the proceeds of the following obligations issued by St. Louis Park, Minnesota: (i) the Hospital Facilities Refunding Revenue Bonds (Methodist Hospital Project), Series 1990-B; (ii) the Health Care Facilities Revenue Bonds (HealthSystem Minnesota Obligated Group), Series 1993A; (iii) the Health Care Facilities Revenue Bonds (HealthSystem Minnesota Obligated Group), Series 1993B; and (iv) the Health Care Facilities Revenue Bonds (HealthSystem Minnesota Obligated Group), Series 1993C. The Escrow Agreement The portion of the proceeds from the sale of the Bonds used to defease the Prior Bonds will be deposited pursuant to an Escrow Agreement (the Escrow Agreement ) between Regions Hospital, Park Nicollet, and Wells Fargo Bank, National Association, as escrow agent (the Escrow Agent ), to establish an escrow fund (the Escrow Fund ) to be used to purchase certain non-callable, direct obligations of the United States of America (the Government Obligations ). The Government Obligations, together with a certain beginning balance held in the Escrow Account, will be sufficient to pay principal and interest coming due on the defeased Prior Bonds, to and including the respective Redemption Dates and principal of the defeased Prior Bonds on the respective Redemption Dates. Verification Agent Robert Thomas CPA, LLC, Certified public accountants (the Verification Agent ), will deliver to the Obligated Group and the Escrow Agent their report verifying the accuracy of the mathematical computations of the adequacy of the maturing principal and interest on the Government Obligations or other permitted investments to pay, when due or called for redemption on the Redemption Dates, the principal of and interest on the defeased Prior Bonds. ESTIMATED SOURCES AND USES OF FUNDS The proceeds of the sale of the Bonds (other than accrued interest, if any) and the estimated uses of such proceeds and other funds are as follows: SOURCES OF FUNDS: Principal Amount of the Series 2015A Bonds $306,395,000 Principal Amount of the Series 2015B Bonds 191,830,000 Net Original Issue Premium on the Series 2015A Bonds 25,491,593 Prior Bond Funds held by Trustee 75,701,259 TOTAL SOURCES OF FUNDS $599,417,852 USES OF FUNDS: Series 2006 Bonds Refunding Escrow Deposit $177,322,269 Series 2008C Bonds Refunding Escrow Deposit 192,210,914 Series 2009 Bonds Refunding Escrow Deposit 226,002,214 Costs of Issuance 3,882,454 TOTAL USES OF FUNDS $599,417,852 6

13 DEBT SERVICE SCHEDULE The following table sets forth the amounts required in each fiscal year, ending December 31, for the payment of principal on the Bonds at maturity or by mandatory sinking fund redemption, and payment of interest on the Bonds, along with the payment of principal and interest on the Series 2013 Notes, Series 2014A Bonds, the Series 2014B Bonds, and the other long-term debt of the Obligated Group and non-obligated HealthPartners affiliates, which will remain outstanding upon the issuance of the Bonds. Fiscal Year Ending December 31 Series 2015A Bonds Series 2015B Bonds Principal and Interest on Other Obligated Group Longterm Indebtedness (1)(2) Principal and Interest on Other Non- Obligated Affiliates Long-Term Indebtedness (3) Principal Interest Principal Interest Total $32,901,929 $6,891,729 $39,793, $1,545,000 $15,101,635 $13,345,000 $6,143,979 16,964,426 6,891,729 59,991, ,950,000 14,260,463 14,245,000 5,681,690 16,929,611 6,891,729 59,958, ,010,000 14,201,963 14,445,000 5,482,260 16,930,034 6,891,729 59,960, ,090,000 14,121,563 14,710,000 5,216,761 16,932,382 6,891,729 59,962, ,170,000 14,037,963 15,055,000 4,870,635 16,964,133 6,718,057 59,815, ,280,000 13,929,463 15,460,000 4,468,215 14,676,669 4,867,770 55,682, ,405,000 13,815,463 15,925,000 4,005,497 14,656,919 4,867,770 55,675, ,980,000 13,695,213 16,445,000 3,481,087 13,204,429 4,867,770 56,673, ,240,000 13,446,213 17,025,000 2,899,098 13,127,769 4,719,125 56,457, ,505,000 13,184,213 17,675,000 2,254,021 12,737,964 3,975,953 55,332, ,790,000 12,908,963 18,375,000 1,552,500 12,724,816 3,975,953 55,327, ,970,000 12,735,263 19,125, ,146 12,507,192 3,975,953 55,114, ,975,000 12,548, ,502,224 3,975,953 54,001, ,835,000 11,249, ,555,368 3,706,586 55,346, ,615,000 9,708, ,443,946 2,359,758 48,126, ,370,000 7,977, ,255 2,359,758 46,735, ,205,000 6,158, ,359,758 46,723, ,140,000 4,248, ,359,758 46,748, ,080,000 2,332, ,359,758 46,772, ,240, , ,359,758 19,249, , ,167 (1) Includes Series 2014A & B Bonds, Series 2013 Notes, HealthPartners Sleep Note, January interest payments made on Series 2008C and 2009 in FY 2015, and existing Park Nicollet leases. See APPENDIX A - INFORMATION CONCERNING THE HEALTHPARTNERS OBLIGATED GROUP FINANCIAL AND OTHER INFORMATION - Capitalization in this Official Statement. (2) Park Nicollet Health Services and other Park Nicollet entities were previously obligated with respect to a guaranty obligation (the Guaranty ) relating to bonds issued for the benefit of St. Francis Regional Medical Center (the St. Francis Bonds ) under an existing Park Nicollet Master Trust Indenture. The Guaranty runs to Wells Fargo Bank, National Association (the St. Francis LOC Bank ), and guarantees one-third of any reimbursement obligation relating to draws on a letter of credit issued by the St. Francis LOC Bank securing the St. Francis Bonds currently outstanding in the approximate principal amount of $1,400,000, resulting in an obligation under the Guaranty of less than $500,000. The Guaranty has been restructured, and as a result, PNHS remains the guarantor on a stand-alone basis, and there are no further obligations outstanding pursuant to the existing Park Nicollet Master Trust Indenture, which will be terminated when the Bonds are issued. (3) Excludes Series 2005 Lakeview Health System Bonds which were redeemed on June 1, 2015 from Lakeview Health System funds. 7

14 THE BONDS Description of the Bonds The Bonds will be dated, as originally issued, as of the date of issuance thereof, and will be issued as fully registered bonds, in book-entry only form. Ownership interests in the Bonds may be purchased in denominations of $5,000 or any integral multiple thereof. Interest on the Bonds will be payable on January 1 and July 1, commencing January 1, 2016 (each such date an Interest Payment Date ). The Bonds will bear interest at the rates and mature, subject to prior redemption as described herein, at such times as are shown on the inside front cover page of this Official Statement. Principal of and the redemption premium, if any, on the Bonds are payable at the principal corporate trust office of the Bond Trustee in Minneapolis, Minnesota, and at such other office of the Bond Trustee, if any, as it may from time to time designate. Interest on the Bonds paid on any Interest Payment Date is payable by check or draft mailed to the persons who are the registered owners thereof as of the first day of the calendar month preceding such Interest Payment Date, whether or not such day is a business day. Upon notice to the Bond Trustee accompanied by proper wire instructions, any registered owners of the Series 2015A Bonds or Series 2015B Bonds, respectively, in an aggregate amount equal to or greater than $1,000,000, may elect to be paid the interest on such Bonds payable on any Interest Payment Date by Federal Reserve wire transfer in immediately available funds to any bank in the United States specified by such registered owner. Interest on the Bonds is computed on the basis of a 360-day year composed of twelve 30-day months. Redemption Provisions Optional Redemption, Series 2015A Bonds. The Series 2015A Bonds maturing on or after July 1, 2026, are each subject to redemption and prepayment, at the option of the Borrowers, on July 1, 2025, and any date thereafter, in principal increments of $5,000, at a redemption price equal to the principal amount of the Series 2015A Bonds to be redeemed, together with interest accrued on the principal amount to be redeemed to the date of redemption, without premium. Optional Redemption, Series 2015B Bonds. The Series 2015B Bonds are each subject to redemption and prepayment, at the option of Park Nicollet, in principal increments of $5,000, at the Make-Whole Redemption Price, together with interest accrued on the principal amount to be redeemed to the date of redemption. The Make-Whole Redemption Price means, with respect to the Series 2015B Bonds, the greater of: (1) 100% of the principal amount of the Series 2015B Bonds being redeemed; or (2) the sum of the present values of the remaining unpaid scheduled payments of principal and interest on any Series 2015B Bonds being redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 360 day year consisting of twelve 30-day months) at the Treasury Rate plus (a) for the Series 2015B Bonds maturing July 1, 2016 through July 1, 2019, 15 basis points; (b) for the Series 2015B Bonds maturing July 1, 2020 through July 1, 2024, 25 basis points; and (c) for the Series 2015B Bonds maturing July 1, 2025 through July 1, 2027, 35 basis points. Treasury Rate means, with respect to any redemption date related to the Park Nicollet Taxable Bonds, the rate per annum equal to the semiannual equivalent yield to maturity or an interpolation (on a day count basis) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. Comparable Treasury Issue means the United States Treasury security or securities selected by a Designated Investment Banker as having an actual or interpolated maturity comparable to the remaining term of the Park Nicollet Taxable Bonds to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of a comparable maturity to the remaining term of such Park Nicollet Taxable Bonds. Comparable Treasury Price means, with respect to any redemption date of the Park Nicollet Taxable Bonds, (a) the average of the Reference Treasury Dealer Quotations for such redemption date after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (b) if the Designated Investment Banker obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations. 8

15 Group. Designated Investment Banker means one of the Reference Treasury Dealers appointed by the Obligated Reference Treasury Dealer means each of four firms, as designated by the Obligated Group, and their respective successors; provided, however, that if any of such firms ceases to be a primary U.S. government securities dealer in the City of New York (a Primary Treasury Dealer ), the Obligated Group will substitute another Primary Treasury Dealer. Reference Treasury Dealer Quotations means, with respect to each Reference Treasury Dealer and any redemption date related to the Park Nicollet Taxable Bonds, the average, as determined by the Designated Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Designated Investment Banker by such Reference Treasury Dealer at 3:30 p.m., central standard time, on the third Business Day preceding such redemption date. Scheduled Mandatory Redemption. The Series 2015A Bonds maturing in the year 2035 shall be redeemed on July 1 of the years and in the amounts set forth below or, if less than such amount is then Outstanding, an amount equal to the aggregate principal amount of the Series 2015A Bonds then Outstanding: Series 2015A Bonds Maturing July 1, 2035 Payment Date (July 1) Principal Amount * Maturity $42,080, * 16,240,000 On or before the thirtieth (30th) day prior to any Sinking Fund Payment Date (as defined in Appendix D), the Bond Trustee shall proceed to select for redemption (in such random order as the Bond Trustee may determine), from Bonds Outstanding for each series of Bonds, an aggregate principal amount of such Bonds equal to the amount required to be on deposit in the Bond Fund (as defined in Appendix D) on such Sinking Fund Payment Date, and shall call the Bonds or portions thereof for redemption from the Bond Fund on such Sinking Fund Payment Date and give notice of such call. Extraordinary Redemption. The Bonds are also subject to redemption prior to maturity by the Issuer upon the Written Request of a Borrower in the event (i) the Bond-Financed Facilities (as defined in Appendix D) or any portion thereof are damaged, destroyed or condemned, (ii) the net proceeds of insurance or condemnation received in connection therewith exceed five percent (5%) of the full insurable value of the Bond-Financed Facilities, and (iii) a Borrower elects to have all or any part of such net proceeds applied to the prepayment of its respective Loan Agreement(s). If called for redemption in any such event, the Bonds shall be subject to redemption in whole, or in part, on any date, at a redemption price equal to the principal amount thereof being redeemed plus accrued interest thereon through the redemption date, without premium. Notice of Redemption. Bonds shall be called for optional redemption by the Bond Trustee as provided in the Bond Indenture, upon receipt by the Bond Trustee at least forty-five (45) days prior to the Redemption Date (as defined in Appendix D) of a Written Request of a Borrower specifying the principal amount of Bonds to be called for redemption, the applicable redemption price or prices and the provision or provisions of this Bond Indenture pursuant to which such Bonds are to be called for redemption. In the case of every redemption, the Bond Trustee shall cause notice of such redemption to be given by mailing a copy of the redemption notice by first class mail to the Holders of Bonds designated for redemption, at their addresses as the same shall last appear upon the registration books, in each case not less than thirty (30) days nor more than sixty (60) days prior to such Redemption Date; provided, however, that failure duly to give such notice by mailing, or any defect in the notice, to the Holder of any Bond designated for redemption shall not affect the validity of the proceedings for the redemption of any other Bond. A notice of the redemption of Bonds may state that such notice is conditional and that if the conditions for redemption of such Bonds on the scheduled redemption date are not satisfied (including the availability of funds sufficient to redeem such Bonds), such Bonds will not be redeemed on such date and any Bonds tendered for payment on such date will be returned to the Holders thereof. 9

16 Book-Entry Only System Payments of principal of, premium, if any, and interest on the Bonds will be made directly to Cede & Co. by the Bond Trustee, so long as Cede & Co. is the registered owner of the Bonds. Disbursement of such payments to the DTC Participants (as defined in Appendix G) is the responsibility of The Depository Trust Company, New York, New York ( DTC ) and disbursement of such payments to the purchasers of beneficial ownership interests in the Bonds is the responsibility of DTC Participants and Indirect Participants (as defined in Appendix G). For further information regarding Cede & Co., DTC and the book-entry only system, see APPENDIX G BOOK-ENTRY ONLY SYSTEM. Limited Obligations of the Issuer SECURITY FOR THE BONDS The Bonds are special and limited obligations of the Issuer payable solely out of revenues derived by the Issuer from the payments to be made under the Series 2015A Master Notes and Series 2015B Master Note pledged thereto, which shall be pledged and assigned to the Bond Trustee for the payment of the Series 2015A Bonds and Series 2015B Bonds in accordance with the Bond Indenture. In addition, under certain circumstances, the Bonds are payable out of funds on deposit with the Bond Trustee pursuant to the Bond Indenture. The Bonds do not constitute a debt or liability of the City, the Issuer, the State or any political subdivision of the State or a pledge of the faith and credit or taxing power of the City, the Issuer, the State or any political subdivision of the State and shall be payable solely from the funds pledged therefor in accordance with the Bond Indenture and the Master Indenture. The Loan Agreements The proceeds of the Bonds will be loaned to Regions Hospital and Park Nicollet, pursuant to three separate loan agreements. The proceeds of the Series 2015A Bonds constituting the Regions Hospital Bonds will be loaned to Regions Hospital pursuant to the Regions Hospital Loan Agreement. The proceeds of the Series 2015A Bonds constituting the Park Nicollet Tax-Exempt Bonds will be loaned to Park Nicollet pursuant to the Park Nicollet Tax- Exempt Loan Agreement. The proceeds of the Series 2015B Bonds will be loaned to Park Nicollet pursuant to the Park Nicollet Taxable Loan Agreement. Under the Loan Agreements, the respective Borrower will be required to pay amounts sufficient to pay, when due, the principal of, premium, if any, and interest on the Bonds. Concurrently with the issuance of the Bonds, the Issuer will assign all of its rights under the Loan Agreements (other than Unassigned Rights (as defined in Appendix D)) to the Bond Trustee, pursuant to the Bond Indenture. Master Indenture Joint and Several Obligations. The Series 2015 Master Notes are being issued by the Borrowers under and pursuant to the Master Indenture on a parity with the Series 2013 Notes, the 2014A Master Note and the Series 2014B Master Note, and all other Notes which may become outstanding under the Master Indenture. All Obligated Group Members are required to make payments on the Series 2015 Master Notes in an amount sufficient to pay when due the principal of and premium, if any, and interest on the Bonds. Under the Master Indenture, each of the Obligated Group Members is authorized to issue, pursuant to a supplement to the Master Indenture, subject to the approval of the other Obligated Group Members, Master Notes to evidence or secure indebtedness. All Obligated Group Members are jointly and severally liable with respect to the payment of each Master Note incurred under the Master Indenture. For a more detailed discussion of entry to or withdrawal from the Obligated Group, see DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF PRINCIPAL DOCUMENTS Summary of Master Indenture Entering the Obligated Group and Withdrawing from the Obligated Group in Appendix D hereto. Covenant Against Encumbrances and Restrictions as to Incurrence of Additional Indebtedness. Pursuant to the Master Indenture, each Obligated Group Member agrees that it will not create, assume or suffer to be created or permit the existence of any Lien (as defined in Appendix D) upon its Property (as defined in Appendix D) nor its Gross Revenues, other than Permitted Liens, unless all Master Notes will be secured prior to or equally and ratably with any such Indebtedness (as defined in Appendix D) or other obligation secured by such Lien. Each Obligated Group Member, respectively, also covenants that it will not incur Additional Indebtedness (as defined in Appendix D) unless it meets certain financial tests and other requirements set forth in the Master Indenture. Additional Indebtedness may be in the form of additional Notes issued under and secured by the Master Indenture or in the form of indebtedness not issued under or secured by the Master Indenture. Any additional Notes issued under the Master Indenture will not be pledged as security for the Bonds. See DEFINITIONS OF CERTAIN TERMS AND 10

17 SUMMARIES OF PRINCIPAL DOCUMENTS Summary of Master Indenture Restrictions as to Incurrence of Additional Indebtedness and Restrictions as to Creation of Liens in Appendix D hereto. Pledge of Gross Revenues. To secure the prompt payment of sums due on all outstanding Master Notes, and the performance by each Obligated Group Member of its other obligations under the Master Indenture, each Obligated Group Member, as an Obligor (as defined in Appendix D) under the Master Indenture, shall pledge and assign to the Master Trustee for the equal and ratable benefit of the Holders of the Master Notes, all of the Obligor s Gross Revenues. Concurrent with becoming an Obligor, each Obligor shall deliver to the Master Trustee a fully executed financing statement evidencing the security interests of the Master Trustee. The security interests granted to the Master Trustee pursuant to the foregoing pledge of Gross Revenues shall be subordinate to certain Permitted Liens and the Master Trustee shall, at the request and expense of any Obligor, execute such documents as such Obligor may reasonably request to evidence that subordination or release. The Master Trustee may not exercise any remedies available to it under the Minnesota Uniform Commercial Code with respect to the security interests granted to the Master Trustee until an event of default has occurred under the Master Indenture and has continued for a period of at least five business days. Lock Box upon Event of Default. If an event of default under the Master Indenture should occur as the result of a failure to make any payment of the principal of, the premium, if any, and interest on any Master Notes issued and Outstanding when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, in accordance with the terms thereof, of the Master Indenture and any supplemental Master Indenture, and should such failure continue for a period of at least five business days, each Obligor will, at the direction of the Master Trustee, deposit daily the proceeds of their Gross Revenues with the Master Trustee. Such daily deposits will continue until such event of default has been cured. During any period that the Gross Revenues are held by the Master Trustee, the Master Trustee shall use and withdraw Gross Revenues from time to time to make such delinquent installments as such installments become due (whether by maturity, redemption, acceleration or otherwise), and, if such amounts shall not be sufficient to pay in full all such installments due on any date, then to the payment of debt service on such Master Notes ratably, without any discrimination or preference, and to such other payments in the order which the Master Trustee, in its discretion, shall determine to be in the best interests of the Holders, without discrimination or preference. During any period that the Gross Revenues are held by the Master Trustee, the Obligated Group Members shall not be entitled to use or withdraw any of the Gross Revenues unless and to the extent that the Master Trustee at its sole discretion so directs for the payment of current or past due operating expenses of the Obligated Group Members; provided, however, that the Master Trustee shall release any amounts paid to the Master Trustee which do not constitute Gross Revenues of the Obligated Group and shall also release any Gross Revenues which are subject to any senior lien to the holder of such senior lien. See DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF PRINCIPAL DOCUMENTS Summary of Master Indenture Pledge of Gross Revenues in Appendix D hereto. The foregoing pledge of Gross Revenues will be perfected to the extent, and only to the extent, that such security interest may be perfected by filing or notice under the Minnesota Uniform Commercial Code. The foregoing pledge may be subordinated to the interest and claims of others in several instances. Some examples of cases of subordination of prior claims are (i) statutory liens, (ii) rights arising in favor of the United States of America or any agency thereof, (iii) present or future prohibitions against assignment in any federal statutes or regulations, (iv) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction, (v) federal or state bankruptcy laws that may affect the enforceability of the Master Indenture or pledge of Gross Revenues, and (vi) Liens created on accounts of the Obligated Group Members which pursuant to the Master Indenture, are entitled to priority over the Lien on the Obligor s Gross Revenues created by the Master Indenture. See DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF PRINCIPAL DOCUMENTS Summary of Master Indenture Restrictions as to Creation of Liens in Appendix D hereto. In addition, it may not be possible to perfect a security interest in any manner whatsoever in certain types of Gross Revenues (e.g., gifts, donations, certain insurance proceeds, Medicare and Medicaid payments, and amounts payable to any Obligor by the United States of America or any agency or instrumentality thereof). Amendments to the Master Indenture The Obligated Group has proposed certain amendments to the Master Indenture which require the consent of the holders of not less than a majority in aggregate principal amount of the Notes then outstanding. Such amendments consist generally of changes relating to: (i) the incurrence of Balloon Indebtedness (as defined in the Master Indenture), (ii) the characterization of certain leases, and (iii) limitations on the ability of the Obligated Group Members to enter into Guaranties (as defined in the Master Indenture). See APPENDIX D 11

18 DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF PRINCIPAL DOCUMENTS Summary of Master Indenture - Restrictions as to the Incurrence of Additional Indebtedness, Determination of Character or Amount of Asset, Liability, Item of Income or Expense; Treatment of Lease, and Limitations on Guaranties in this Official Statement. For purposes of such consents, the original purchaser of the Series 2015 Bonds and each subsequent holder by purchase of the Series 2015 Bonds shall be deemed to be the holders of a proportionate share of the Series 2015 Notes. Each purchaser of the Series 2015 Bonds will be deemed to have consented to such amendments by purchase of its Series 2015 Bonds, and thus, such amendments will go into effect upon the issuance of the Series 2015 Bonds. The Bond Indenture Pledge and Assignment. Under the Bond Indenture and as further described therein, the Issuer has pledged and assigned to the Bond Trustee (a) all rights and interests of the Issuer under and pursuant to the Loan Agreements (except Unassigned Rights); (b) the Series 2015 Master Notes and all sums payable in respect of the indebtedness evidenced thereby; (c) amounts on deposit from time to time in the funds and accounts established pursuant to the Bond Indenture, subject to the provisions of the Bond Indenture permitting the application of such funds and accounts for the purposes and on the terms and conditions set forth therein; and (d) any and all other property, or interests therein, of every kind or description that may from time to time hereafter, by delivery or by writing of any kind be sold, transferred, conveyed, assigned, hypothecated, endorsed, deposited, pledged, mortgaged, granted or delivered to or deposited with the Bond Trustee as additional security hereunder by the Issuer or by anyone on its behalf or with its written consent, or that pursuant to any of the provisions hereof or of the Loan Agreements may come into the possession of or control of the Bond Trustee or a receiver appointed pursuant to the Bond Indenture, as such additional security (collectively, the Trust Estate ). The Series 2015A Bonds and Series 2015B Bonds will be payable solely out of the payments to be made by the Borrowers under the Loan Agreements and payments to be made by the Obligated Group Members under the Series 2015A Master Notes and the Series 2015B Master Note, respectively, and from funds held by the Bond Trustee in any fund or account as security for the Bonds. Descriptions of certain provisions of the Bond Indenture and the funds and accounts established thereby are set forth in Appendix D, DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF PRINCIPAL DOCUMENTS Summary of Certain Provisions of the Bond Indenture. BONDHOLDERS RISKS The following is a discussion of certain risks that could affect payments to be made with respect to the Bonds. Such discussion is not exhaustive and should be read in conjunction with all other parts of this Official Statement and should not be considered as a complete description of all risks that could affect such payments. Prospective purchasers of the Bonds should analyze carefully the information contained in this Official Statement, including the appendices hereto and additional information in the form of the complete documents summarized in Appendix D hereto, copies of which are available as described in this Official Statement. General The Series 2015A Bonds and Series 2015B Bonds will be payable by the Issuer solely from the Trust Estate, including amounts payable under the Loan Agreements and the Series 2015 Master Notes issued to the Master Indenture. See SECURITY FOR THE BONDS above. The ability of the Obligated Group to realize revenues in amounts sufficient to make all payments on the Series 2015A Master Notes and Series 2015B Master Note, which payments are sufficient to pay debt service on the Bonds when due, is affected by and subject to conditions which may change in the future to an extent and with effects that cannot be determined at this time. No representation or assurance is given or can be made that revenues will be realized by the Obligated Group in amounts sufficient to pay debt service when due on the Bonds and their other obligations. None of the provisions of the Loan Agreement or the Master Indenture provide any assurance that the obligations of the Obligated Group will be paid as and when due if one or more Obligated Group Members become unable to pay their debts as they come due or if one or more Obligated Group Members otherwise become insolvent. The Obligated Group derives significant portions of its revenues from third party payer programs and from Medicare and Medicaid, both while acting as a health payer and acting as a care provider. The future financial condition of the Obligated Group and its ability to generate revenues in an amount sufficient to pay debt service on the Bonds could be affected adversely by, among other things, legislation, regulatory actions, increased competition, 12

19 reduced demand for health care financing products, health care services, demographic changes, inability to control expenses in a period of inflation, labor unrest, malpractice claims and other litigation and other conditions which are not easily predictable and may not be quantifiable or determinable at this time. This discussion of risk factors is not intended to be exhaustive and should be read in conjunction with all other parts of this Official Statement. Nature of Special, Limited Obligations The Series 2015 Bonds are special, limited obligations of the Issuer, payable solely from the Trust Estate, including amounts payable under the Loan Agreements and the Series 2015 Master Notes issued pursuant to the Master Indenture, and do not give rise to a general obligation or general liability of the Issuer or a charge against its general credit or taxing powers and shall never constitute nor give rise to a pecuniary liability of the Issuer. The Bonds do not constitute a debt, moral obligation, liability or loan of credit or a pledge of the full faith and credit or taxing power of the Issuer, the City, the State, or of any political subdivision thereof. The Obligated Group The Obligated Group Members are part of the HealthPartners System, a group of affiliated entities that integrate the health care cost funding, health improvement and health care delivery components of medical care in a unified organization. The HealthPartners System includes managed care organizations, an indemnity insurer, and a third party administrative services organization, which offer a variety of health care funding vehicles from traditional health maintenance products to consumer-driven health plans, as well as hospitals, medical and dental clinics staffed by numerous employed physicians and dentists, and other related health care service provider entities, including home health care and transitional care facility services. Each of the Obligated Group Members provides different types of health care services and engages in different types of health care activities. Some non-obligated affiliates of the HealthPartners System (i.e., System entities which are not Obligated Group Members) provide similar services and engage in similar activities, while other non-obligated affiliates of the System provide other services and engage in other activities. All of the entities in the System play an important role in the integrated model. None of the Obligated Group Members are obligated to subsidize the operations or satisfy the financial obligations of any non-obligated affiliates within the System, but it remains possible that the overall operation of the HealthPartners System, the Obligated Group Members or even one of the non-obligated System affiliates could impact the ability of the Obligated Group Members to make payments on the Series 2015A Master Notes and the Series 2015B Master Note due to the highly integrated nature of the HealthPartners System. For that reason, this discussion of investment considerations references factors that may impact the larger HealthPartners System in addition to the Obligated Group Members. For a full description of the HealthPartners System, the Obligated Group Members and non-obligated affiliates of the System, see Appendix A hereto. All health maintenance organizations, health insurers, health care providers, and integrated delivery systems carry with them the potential for legal or regulatory risks in varying degrees. As a consequence of the factors noted in the remainder of this discussion of investment considerations, there can be no assurance that such issues and risks will not lead to material adverse consequences in the future. Significant Risk Areas Summarized Certain of the primary risks associated with the operations of the Obligated Group are briefly summarized in general terms below and are explained in greater detail in subsequent sections or in Appendix A hereto. The occurrence of one or more of these risks could have a material adverse effect on the financial condition and results of operations of the Obligated Group and in turn, the ability of the Obligated Group Members to make payments on the Series 2015A Master Notes and the Series 2015B Master Note. Health Care Reform Law. The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the Health Care Reform Law ) became law in March See Nonprofit Health Care Environment Health Care Reform below. This law may result in, among other things, lower hospital and provider reimbursement, utilization changes, increased government enforcement, and a health insurance tax, which in turn could reduce the Obligated Group s revenues, increase the Obligated Group s expenses, alter the Obligated Group s business practices or otherwise adversely impact its financial performance in a material way. 13

20 Future Legislation. Legislation is periodically introduced in the U.S. Congress and in state legislatures that could result in limitations on hospital and/or health plan revenues or reimbursement, or increase costs or charges or require an increase in the quantity of indigent care required to maintain charitable status, or other requirements. The effects of such legislation on the Obligated Group, if enacted, cannot accurately be determined at this time. Reliance on Medicare and Medicaid. Health care providers, such as Obligated Group Members that engage in health care delivery, rely to a high degree on payment from the federal Medicare and Medicaid programs. Future changes in the underlying law and regulations, as well as in payment policy and timing, creates uncertainty and could have a material adverse impact on payment streams from Medicare and Medicaid. With health care and hospital spending reported to be increasing faster than the rate of general inflation, Congress and/or the Centers for Medicare & Medicaid Services ( CMS ) have taken and may take further action in the future to decrease or restrain Medicare and Medicaid outlays. In addition, state Medicaid and other state health care programs often pay for services at levels that may be below the actual cost of the care provided. Furthermore, as Medicaid is partially funded by states, significant deterioration in the financial condition of the state in which a Obligated Group Member is located or does business could result in lower funding levels and/or payment delays. Capital Needs versus Capital Capacity. Health care delivery operations are capital intensive. Regulation, technology and physician/patient expectations require constant and often significant capital investment. Additionally, health insurance and financing operations are capital intensive. Total capital needs may be greater than the availability of funds to provide capital investment. Government Enforcement. To ensure the integrity of the federal health care programs, CMS, the U.S. Department of Health and Human Services ( HHS ), the Office of Inspector General ( OIG ) and the U.S. Department of Justice ( DOJ ) have paid close attention to the business practices and conduct of health care providers and health plans. The federal and state governments, including Minnesota, impose a wide variety of extraordinarily complex and technical requirements on providers intended to prevent overutilization based on economic inducements, misallocation of expenses, overcharging and other forms of fraud in the Medicare and Medicaid programs, as well as other state and federally-funded health care programs. This body of laws and regulations impacts a broad spectrum of activity, including billing, accounting, recordkeeping, medical staff oversight, physician contracting and recruiting, cost allocation, clinical trials and discounts, among other activities. Enforcement actions may pertain to not only deliberate violations, but also frequently relate to violations resulting from actions of which management is unaware, from mistakes or from circumstances where the individual participants do not know that their conduct is in violation of law. Enforcement actions may extend to conduct that occurred in the past. The government may seek a wide array of penalties, including withholding essential payments under the Medicare or Medicaid programs or exclusion from those programs. Technical and Clinical Developments. New clinical techniques and technology, as well as new pharmaceutical and genetic developments and products, may alter the course of medical diagnosis and treatment in ways that are currently unanticipated and that may dramatically change medical and hospital care. These new technologies and developments have and could continue to result in higher costs, reductions in patient populations and/or new sources of competition. Costs and Restrictions from Governmental Regulation. Nearly every aspect of the operations of health care payers and providers is regulated, in some cases by multiple agencies of government. The level and complexity of regulation appears to be increasing, bringing with it operational limitations, increased enforcement and liability risks and significant and sometimes unanticipated cost impacts. Competition. Obligated Group Members operate in a highly competitive environment. Payers and providers compete with a variety of competitors in an ever-changing environment. Competition may, in the future, arise from new sources not currently anticipated or prevalent. While the effect of such actions is uncertain, it can be expected to increase competition in the health care field generally, and the revenues, as well as the expenses, of the Obligated Group Members could be adversely affected. Health Plan Membership and Premiums. In markets where managed care is prevalent, including the areas in which certain Obligated Group Members operate, health plans (including those plans of certain Obligated Group Members) must be capable of attracting and maintaining members. The effect of the managed care industry on the Obligated Group s financial condition is difficult to predict and may be different in the future than that reflected in the financial statements for the current period. 14

21 Labor Costs and Disruption. Health care institutions are labor intensive. Labor costs, including salary, benefits and other liabilities associated with the workforce, have a significant impact on operations and financial condition. Employees are increasingly organized in collective bargaining units and may be involved in work actions of various kinds, including work stoppages and strikes. Federal laws have changed recently to allow for faster and more targeted organizing campaigns. Overall costs of the workforce are high and turnover can also be high. Pressure to recruit, train and retain qualified employees is expected to accelerate. These factors may materially increase costs of operation. Workforce disruption may negatively impact revenues and reputation. See OTHER INFORMATION REGARDING THE OBLIGATED GROUP Employees in Appendix A hereto for a discussion of the Obligated Group s labor and employee relations. Pension and Benefit Funds. Large employers, health care payers and providers may incur significant expenses to fund pension and benefit plans for employees and former employees and to fund required workers compensation benefits. Funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes. Medical Liability and Managed Care Litigation and Insurance. Medical liability and managed care litigation are subject to public policy determinations and legal and procedural rules that may be altered from time to time, with the result that the frequency and cost of such litigation and resultant liabilities, may increase in the future. A health care provider may also be adversely affected by negative financial and liability impacts on its medical staff. Costs of insurance, including self-insurance, may increase dramatically or the availability of commercial insurance may be jeopardized. Facility Damage. Health care providers are highly dependent on the condition and functionality of their physical facilities. Damage from natural causes, fire, water, deliberate acts of destruction or various facilities system failures may have a material adverse impact on operations, financial conditions and results of operations. Impact of Disruptions in the Credit Markets and General Economic Factors The economic recession that began in 2008 has had and may continue to have, negative repercussions upon the national and global economies, including a scarcity of credit, lack of confidence in the financial sector, extreme volatility in the financial markets, increases in interest rates, reduced business activity, increased consumer bankruptcies and increased business failures and bankruptcies. In response, President Barack Obama, on February 17, 2009, signed the American Recovery and Reinvestment Act of 2009 (the Recovery Act ), which provides approximately $787 billion in federal spending and tax initiatives, of which a portion is intended to provide financial relief to health care providers as further described herein. The recession has had a particularly acute impact upon the financial sector and has caused many banks and other financial institutions to seek additional capital, to merge and in some cases, to fail. The Obligated Group Members have significant holdings in a broad range of investments. Market fluctuations have affected and will continue to affect materially the value of those investments and those fluctuations may be and historically have been material. In the past, market disruption has had a negative impact on the investment performance of securities in the portfolios of certain Obligated Group Members and losses in investment income (including both realized and unrealized gains on investments) have had a material adverse effect on the Obligated Group s financial results. Future market volatility may have a similar effect, although investment policies of the Obligated Group Members are designed to take such market conditions into account. See FINANCIAL AND OTHER INFORMATION Investment Management in Appendix A hereto. No assurance can be given that the investments of the Obligated Group Members will produce positive returns or that losses on investments will not occur in the future. See Appendix A of this Official Statement for more specific information about the effects of market factors upon the Obligated Group s recent financial performance and its financial condition. In particular, reference is made to information in Appendix A under the caption heading, MANAGEMENT DISCUSSION AND ANALYSIS. Nonprofit Health Care Environment General. Most Obligated Group Members are nonprofit tax-exempt organizations, and, as such, are subject to federal, state and local laws, regulations, rulings and court decisions relating to their organization and operation, including, for entities that are exempt under Section 501(c)(3) of the Code, their operation for charitable purposes. At the same time, such Obligated Group Members conduct large-scale complex business transactions and are major 15

22 employers in their respective geographic areas. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of a complex health care organization. Recently, an increasing number of the operations or practices of health care organizations have been challenged or questioned to determine if they are in compliance with the regulatory requirements for nonprofit taxexempt organizations. These challenges, in some cases, are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead, in many cases, are examinations of core business practices of the health care organizations. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, executive compensation, exemption of property from real property taxation and others. These challenges and questions have come from a variety of sources, including state attorneys general, the Internal Revenue Service (the IRS ), labor unions, Congress, state legislatures, other federal and state agencies and patients and in a variety of forums, including hearings, audits and litigation. Budget Control Act. The Budget Control Act of 2011 (the Budget Control Act ) limits the federal government s discretionary spending caps at levels necessary to reduce expenditures by $917 billion from the current federal budget baseline between federal fiscal years 2012 and Social Security, Medicaid, and other entitlement programs are not affected by the limit on discretionary spending caps. The Budget Control Act also created a new Joint Select Committee on Deficit Reduction (the Supercommittee ) tasked with making recommendations to further reduce the federal deficit by $1.2 trillion. Due to the Supercommittee s failure to act within the time specified in the Budget Control Act, the debt ceiling was to be automatically raised and sequestration (the process of automatic across the board cuts) was to be triggered in an amount necessary to achieve $1.2 trillion in savings. A wide range of spending is exempted from sequestration, including: Social Security, Medicaid, Veteran s benefits and pensions, specified federal retirement funds, child nutrition, and other programs. Medicare is not exempted from sequestration, but Medicare payment reductions are limited to 2% of total program costs. The American Taxpayer Relief Act of 2012 ( ATRA ) postponed this scheduled reduction until March 1, The Office of Management and Budget issued a report to Congress detailing the effects of this reduction to be a 2% Medicare spending reduction and CMS confirmed that the 2.0% reduction to Medicare providers and insurers was for services provided on or after April 1, ATRA significantly affects hospital Medicare reimbursement in that it requires the Medicare program to recoup funds from hospitals based on changes in documentation and coding that have increased Medicare inpatient prospective payment system ( IPPS ) payments but that do not represent real increases in the intensity of services provided to patients. In the final IPPS regulations for federal fiscal year 2014, CMS stated that it intends to phase in this recoupment over time, starting with a 0.8% reduction in the Medicare standardized amount for fiscal years 2014 and Additional recoupment adjustments are planned for federal fiscal years 2016 and In addition, on December 26, 2013, President Obama signed into law a bipartisan and bicameral budget agreement known as the Bipartisan Budget Act of 2013 ( Bipartisan Budget Act ), which staved off further sequestration cuts, while keeping the current Medicare sequestration cuts in place. Therefore, the 2% reduction to Medicare providers and insurers has continued into Certain commercial Medicare Advantage plans are passing this reduction on to healthcare providers. The Bipartisan Budget Act also included Medicare cuts such as a restructuring of Medicaid disproportionate share payments reductions by delaying the fiscal year 2014 disproportionate share payment cuts until fiscal year 2016, but increasing the overall level of reductions and extending cuts through fiscal year See BONDHOLDERS RISKS Disproportionate Share Payments for information regarding the current status of disproportionate share payment reductions. The $85 billion agreement funds the federal government until fall 2015 and aims to eliminate some of the cuts imposed on the federal government by the sequestration. It is possible that Congress will take action to eliminate some or all of the reductions in the future and any Congressional action could be made retroactive in order to eliminate some or all of the cuts even to the extent they were imposed. However, there is no certainty that Congress will take any action. Absent further Congressional action, these automatic spending cuts will become permanent. Because Congress may make changes to the budget in the future, it is impossible to predict the impact any spending cuts may have upon the Obligated Group. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. If and to the extent Medicare and/or Medicaid spending is reduced under either scenario, this may have a material adverse effect upon the financial condition of the Obligated Group, including a disproportionate impact on hospital providers. 16

23 Health Care Reform. The Health Care Reform Law is designed to overhaul the United States health care system and regulate many aspects of and players in the health care arena including individuals, employers and health insurers. This legislation addresses almost all aspects of health care payment and delivery, and has and will continue to change how health care services are covered, delivered, and reimbursed. These changes will result in new payment models with the risk of lower reimbursement from Medicare, utilization changes, increased government enforcement and the necessity for health care providers to assess, and potentially alter, their business strategy and practices, among other consequences. Requirements for state health insurance exchanges could fundamentally alter the health insurance market and negatively impact health plans and providers by taking on a rate-setting role, thus potentially affecting Obligated Group Members. Federal deficit reduction efforts will likely curb federal Medicare and Medicaid spending further to the detriment of hospitals, physicians, and other health care providers. On June 28, 2012, the U.S. Supreme Court reviewed two provisions of the Health Care Reform Law; the requirement that individuals maintain health insurance coverage, and Medicaid expansion. The Supreme Court upheld the individual mandate to purchase insurance, but also ruled that the federal government could not compel states to comply with the Health Care Reform Law s requirement to expand Medicaid by eliminating all federal funds a state receives for its existing Medicaid program. Subsequently, there have been many cases challenging various parts of the Health Care Reform Law. The most significant case currently pending before the U.S. Supreme Court is King v. Burwell, which challenges the use of federal subsidies in federal insurance exchanges. The case will be decided by the Supreme Court this term, and, while the decision will not directly impact the Minnesota market at first, if the decision goes against the government, there could be significant long-term negative impacts in many insurance markets and on the reforms in the Health Care Reform Law in general. In addition, certain political leaders have announced their intention to proceed with legislation to repeal or amend provisions of the Health Care Reform Law. At this time, it is not possible to predict the outcome of the many pending cases challenging various provisions of the Health Care Reform Law, the legislative attempts to repeal or amend the Health Care Reform Law or other potential legislative efforts. A significant component of the Health Care Reform Law is the expansion of the base of health care consumers through the reformation of the sources and methods by which consumers pay for health care for themselves and their families and by which employers procure health insurance for their employees and dependents of their employees. One of the primary drivers of the Health Care Reform Law was to provide, make available, or subsidize the premium costs of health care insurance for some of the millions of uninsured (or underinsured) consumers who fall below certain income levels. The Congressional Budget Office estimates that 19 million consumers will become insured by federal fiscal year 2015, 25 million more by 2016, and 26 million more each year from 2017 through 2024 than would have been the case without the Health Care Reform Law. To the extent all or any of the Health Care Reform Law provisions produce the intended result, an increase in utilization of health care services by those who are currently avoiding or rationing their health care can be expected and bad debt expenses may be reduced. Associated with increased utilization will be increased variable and fixed costs of providing health care services, which may or may not be offset by increased revenues, and a risk of physician shortages, especially in specialties necessary to provide critical intervention or chronic disease management (e.g., primary care). The Health Care Reform Law also contains many sections related to health care fraud and abuse and program integrity as well as significant amendments to existing criminal, civil and administrative anti-fraud statutes. See Regulatory and Contractual Matters below. Increased compliance and regulatory requirements, disclosure and transparency obligations, quality of care expectations and extraordinary enforcement provisions that could greatly increase potential legal exposure are all aspects of the Health Care Reform Law that could increase operating expenses of certain Obligated Group Members. The Health Care Reform Law contains many features from previous tax exemption reform proposals, including a set of sweeping changes applicable to hospitals exempt under Section 501(c)(3) of the Code. The Health Care Reform Law: (a) imposes new eligibility requirements for 501(c)(3) hospitals, coupled with an excise tax for failures to meet certain of those requirements; (b) requires mandatory IRS review of the hospitals entitlement to exemption; (c) sets forth new reporting requirements, including information related to community health needs assessments and audited financial statements; and (d) imposes further reporting requirements on the Secretary of the U.S. Department of the Treasury ( Treasury ) regarding charity care levels, bad debt expenses, unreimbursed costs for services, and costs incurred for community benefit. The Health Care Reform Law does not, however, mandate 17

24 specific levels of charity care for nonprofit hospitals despite efforts to propose such a requirement. See Tax Exempt Status; Continuing Legal Requirements below. Some provisions of the Health Care Reform Law took effect immediately, while others will be phased in over time, ranging from a few months following final approval to ten years. Given the general complexity of the Health Care Reform Law, additional legislation is likely to be considered and enacted over time. The Health Care Reform Law will also require the promulgation of substantial regulations with significant effects on the health care industry, including payers and providers, which likely involve additional contractual obligations upon payers and providers. Thus, the health care industry will be subjected to significant new statutory and regulatory requirements as well as contractual terms and conditions, and consequently to structural and operational changes and challenges, for a substantial period of time. Obligated Group Members have and continue to analyze the Health Care Reform Law in order to assess the effects of the legislation and/or regulations on current and projected operations, financial performance and financial condition. However, management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation or promulgated regulations. Health Care Payment Reform. As a part of the Health Care Reform Law, the payment structure from governmental payers, including Medicare and Medicaid, as well as from private payers, may be altered from current methodologies. With varying effective dates, the annual Medicare market basket updates for many providers, including hospitals, will be reduced, and adjustments to payments for expected productivity gains will be implemented. For example, as of fiscal year 2012 (which began October 1, 2011), Medicare payments that would otherwise be made to hospitals were reduced by specified percentages to account for excess or preventable hospital readmissions. Since 2012, a value-based purchasing program established under the Medicare program pays hospitals based on performance tested against quality measures. The Health Care Reform Law also provides for the implementation of various demonstration and pilot projects to test, evaluate, encourage, and expand new payment structures and methodologies to reduce health care expenditures while maintaining or improving quality of care, including bundled payments under Medicare and Medicaid, and comparative effectiveness research programs that compare the clinical effectiveness of medical treatments and develop recommendations concerning practice guidelines and coverage determinations. Certain other provisions of the Health Care Reform Law encourage the creation of new health care delivery programs, such as accountable care organizations in which a group of providers is held jointly responsible for improving the quality and cost of health care of a certain population with the opportunity to share in the financial savings that result, or combinations of provider organizations that voluntarily meet quality thresholds being able to share in the cost savings they achieve for the Medicare program. The outcomes of these projects and programs, including their effect on payments to providers and financial performance, cannot be predicted. The effect, however, may result in reduction of net revenue of the Obligated Group. Similar to the discussion under the heading Nonprofit Health Care Environment Budget Control Act above, Medicare reimbursement levels could automatically be reduced. For example, as a result of physician reimbursement cuts mandated by the sustainable growth rate ( SGR ), a formula that ties physician reimbursement to the gross domestic product and which has called for cuts in pay every year since On April 16, 2015, President Obama signed into law the Medicare Access and CHIP Reauthorization Act of 2015 ( MACRA ) to permanently repeal the SGR and raise reimbursement rates.5% in the last half of 2015 and annually through 2019, and transition to a pay-for-performance system. Deficit Commission Report. The National Commission on Fiscal Responsibility and Reform, a bipartisan commission appointed by President Obama, released a report in December 2010 (the Deficit Commission Report ), which includes a number of proposals related to slowing the growth of health care costs to the federal government, including a proposal to establish a global budget for total federal health care costs and to limit, commencing in 2020, the growth of health care costs paid for by the federal government to the growth in the annual gross domestic product plus 1%. Litigation Relating to Billing and Collection Practices. Lawsuits have been filed in both federal and state courts alleging, among other things, that hospitals have failed to fulfill their obligations to provide charity care to uninsured patients and have overcharged uninsured patients. The cases are proceeding in various courts around the country with inconsistent results. While it is not possible to make general predictions, some hospitals and health systems have incurred substantial costs in defending such lawsuits and in some cases have entered into substantial 18

25 settlements. No Obligated Group Member is currently a defendant in litigation relating to billing and collection practices. Challenges to Real Property Tax Exemptions. Recently, a number of states have challenged the real property tax exemptions afforded to certain nonprofit hospitals by state and local taxing authorities on the grounds that the health care providers were not engaged in sufficient charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. Management of the Obligated Group is not aware of any challenges to the tax-exempt status of the real property of any Obligated Group Member. IRS Form 990. The IRS Form 990 is used by certain exempt organizations, including organizations recognized under Sections 501(c)(3) and 501(c)(4) of the Code, to submit information required by the federal government to maintain tax-exemption. The Form 990 requires detailed public disclosure of compensation practices, corporate governance, loans to management and others, joint ventures and other types of transactions, political campaign activities and other areas the IRS deems to be compliance risk areas. For hospitals, the Form 990 also requires detailed community benefit information on Schedule H and establishes uniform standards for the reporting of charity care. Furthermore, Schedule K of the Form 990 requires detailed reporting information relating to tax exempt bonds, including compliance with the arbitrage rules and rules limiting private use of bond-financed facilities (which includes compliance with the safe harbor guidance in connection with management contracts and research contracts). The Form 990 allows for enhanced transparency as to the operations of exempt organizations, which can result in enhanced enforcement from the IRS and other stakeholders, including state attorneys general, unions, plaintiff s class action attorneys, public watchdog groups and others. The Health Care Reform Law amended the Code to require tax-exempt hospitals to include in their Form 990 a report describing how they are addressing the needs identified in each community health needs assessment conducted (see Tax Exempt Status; Continuing Legal Requirements below) and their audited financial statements (or the consolidated financial statements in which they are included). Indigent Care. Tax-exempt hospitals often treat large numbers of indigent patients who are unable to pay in full for their medical care. General economic conditions that affect the number of employed individuals who have health coverage affects the ability of patients to pay for health care. Similarly, changes in government policy, which may result in coverage exclusions under local, county, state and federal health care programs may increase the frequency and severity of indigent treatment by such hospitals and other providers. It is also possible that future legislation could require that tax-exempt health care providers maintain minimum levels of indigent care as a condition of federal income tax exemption and exemption from certain state and local taxes. These factors could have a material adverse impact on the financial conditions and results of operations of certain Obligated Group Members. In addition, the Minnesota Attorney General has conducted a number of reviews of the policies and practices of Minnesota hospitals with regard to their provision of charity care and their collection practices. As a result of those audits, most hospitals in Minnesota, including hospitals within the Obligated Group, have agreed to follow certain policies and practices with regard to charity care, discounts for self-pay members, and collections. The agreements provide that the hospital must limit the amounts charged for medically necessary care to uninsured individuals to not more than the hospital would be reimbursed for that service by the insurance company providing the hospital with the most revenue in the previous calendar year and that the hospital must not engage in certain collection actions until a debt is authorized by an accountable employee of the hospital upon verification of certain information. Action by Purchasers of Health Care Services and Consumers. Major purchasers of health care services could take action to restrict hospital charges or charge increases. As a result of increased public scrutiny, it is also possible that the pricing strategies of health care providers may be perceived negatively by consumers, and health care providers may be forced to reduce fees for their services. Decreased utilization could result, and health care providers revenues may be negatively impacted. In addition, consumers and groups lobbying on behalf of consumers are increasing pressure for health plans, hospitals and other health care providers to be transparent and provide information about cost and quality of services that may affect future consumer choices about where to receive health care services. Facility Damage. Health care providers are highly dependent on the condition and functionality of their physical facilities. Damage from natural causes, fire, deliberate acts of destruction, or various facility system failures may have a material adverse impact on hospital operations, financial conditions and results of operations. 19

26 Federal Laws Affecting Health Care Facilities American Recovery and Reinvestment Act of The Recovery Act was signed into law on February 17, The Recovery Act includes certain provisions which are intended to provide financial relief to health care providers. Title XIII of the Recovery Act, otherwise known as the Health Information Technology for Economic and Clinical Health Act (the HITECH Act ), provides for an investment of almost $20 billion in public monies for the development of a nationwide health information technology ( HIT ) infrastructure. The HIT infrastructure is intended to improve health care quality, reduce health care costs and facilitate access to necessary information. Among other things, the HITECH Act provides financial incentives (through the Medicaid and Medicare programs), as well as loans and grants to encourage practitioners and providers to engage in meaningful use of electronic health record ( EHR ) technology. Health care providers demonstrate their meaningful use of EHR technology by meeting objectives specified by CMS for using HIT and by reporting on specified clinical quality measures. Medicare payments are significantly reduced for hospitals and physicians who have not satisfied the performance and reporting criteria for demonstrating meaningful use. Under a revised schedule, Stage 2 of the EHR incentive program was extended through 2016 and Stage 3 will begin in 2017 for providers having completed at least two years in Stage 2. CMS issued proposed rules for Stage 3 of the EHR incentive program on March 30, Final regulations have not yet been issued. Additionally, beginning in 2014, the federal government began auditing hospitals and providers records related to their attestation of being meaningful users in order to obtain the incentive payments. A hospital or provider that fails the audit will have an opportunity to appeal. Ultimately, hospitals or providers that fail on appeal will have to repay any incentive payments they received through these programs. Regions Hospital was audited for program year 2013 and passed. Methodist Hospital has not been audited to date, but audits are based on a random selection, meaning Methodist Hospital could be audited in the future, and Regions Hospital could be audited again. Individual providers in Group Health and PNC have been audited, and it is expected individual providers will continue to be audited. The HITECH Act has also significantly increased fines and the scope of remedies for violations of the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ) (described below) and breaches of the privacy and security of individuals protected health information. The HITECH Act requires notification to affected individuals, news media and HHS in the event certain breaches of unsecured protected health information. Criminal penalties are enforceable against persons who obtain or disclose protected health information without authorization. In addition, a state s attorney general can bring civil actions against a person on behalf of residents adversely affected by violations of either HIPAA or the HITECH Act. The Attorney General can either seek to enjoin further violations or obtain money damages on behalf of the residents harmed. HHS has begun to perform periodic audits of health care providers and business associates to ensure that required policies under the HITECH Act are in place. Individuals harmed by violations of HIPAA or the HITECH Act will be able to recover a percentage of monetary penalties or a monetary settlement based upon methods to be established by HHS for this private recovery in the next few years. The HITECH Act also increases penalties for violations of HIPAA. Any violation of the HITECH Act is subject to HIPAA civil and criminal penalties. The effect of the Recovery Act, including the HITECH Act, on the Obligated Group cannot be determined at this time. Certain Obligated Group Members have received substantial HITECH Act incentive payments to date and expect to receive certain additional incentive payments over the next few years. However, there is no guarantee that the financial incentives for adopting qualified EHR systems will be sufficient to offset the Obligated Group s costs for development and implementation of such a system. Federal Privacy Laws. HIPAA addresses the confidentiality of individuals health information and requires the establishment of distinct privacy and security protections for individually identifiable health information. HHS has promulgated privacy regulations under HIPAA that protect patient medical records and other personal health information maintained by health care providers, hospitals, health plans, health insurers and health care clearinghouses (the Privacy Regulations ). Management of the Obligated Group believes that its operations and information systems comply with the Privacy Regulations. Security regulations have also been promulgated under HIPAA (the Security Regulations ). Additionally, HHS has promulgated regulations to standardize the electronic transfer of information pursuant to certain enumerated transactions (the Code Set Transactions ). Management of the Obligated Group believes that all of their health care facilities are in substantial compliance with the Security Regulations and the Code Set Transactions. However, as national and worldwide security breaches show, no organization is immune from any number of intentional or unintentional attacks or breaches of information security. 20

27 Use and disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of HIPAA and related regulations or authorized by the patient. HIPAA s privacy and security provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These restrictions add costs and create potentially unanticipated sources of legal liability. On January 25, 2013, HHS issued comprehensive modifications to the existing HIPAA regulations to implement the requirements of the HITECH Act, commonly known as the HIPAA Omnibus Rule. The HIPAA Omnibus Rule became effective on March 26, 2013, and covered entities were required to be in compliance by September 23, 2013 (though certain requirements have a longer timeframe). Key aspects of the HIPAA Omnibus Rule include, but are not limited to: (i) a new standard for what constitutes a breach of protected health information, (ii) establishing four levels of culpability with respect to civil monetary penalties assessed for HIPAA violations, (iii) direct liability of business associates for certain violations of HIPAA, (iv) modifications to the rules governing research, (v) stricter requirements regarding non-exempt marketing practices, (vi) modification and re-distribution of notices of privacy practices, and (vii) stricter requirements regarding the protection of genetic information. While the effects of the HIPAA Omnibus Rule cannot be predicted at this time, the obligations imposed thereunder could have a material adverse effect on the financial condition of the Obligated Group. The HITECH Act revises the civil monetary penalties associated with violations of HIPAA as well as provides state attorneys general with authority to enforce the HIPAA privacy and security regulations. The revised civil monetary penalty provisions establish a tiered system, ranging from a minimum of $100 per violation for an unknowing violation to $1,000 per violation for a violation due to reasonable cause, but not willful neglect. For a violation due to willful neglect, the penalty is a minimum of $10,000 per violation if the violation was corrected within 30 days of the date the violator knew or should have known of the violation and a minimum of $50,000 if corrected after 30 days. Maximum penalties may reach $1,500,000 for identical violations. The new levels of civil monetary penalties apply immediately for unknowing violations or violations due to reasonable cause. Criminal penalties will be enforced against persons who obtain or disclose personal health information without authorization. Finally, while there is currently no private cause of action for violations of HIPAA or the HITECH Act, an individual may have a right to sue based on state law. The Office for Civil Rights ( OCR ) is the administrative office that is tasked with enforcing HIPAA. OCR has stated that it has now moved from education to enforcement in its implementation of the law. Recent settlements of HIPAA violations for breaches involving lost data have reached the millions of dollars. Any breach of HIPAA, regardless of intent or scope, may result in penalties or settlement amounts that are material to a covered health care provider or health plan. On September 30, 2014, HealthPartners and Group Health each received notice that OCR is investigating whether HealthPartners and Group Health are in compliance with the Privacy Regulations, Security Regulations, and HIPAA breach notification rules. This investigation was precipitated by a breach notification report that HealthPartners submitted to OCR on March 28, 2014, involving a HealthPartners employee who took individually identifiable health information to the employee s home for work purposes. HealthPartners and Group Health each provided information in response to OCR s request for documents. On March 31, 2015, Group Health received notice that OCR believes all matters raised in the breach report have been resolved through the voluntary compliance efforts of Group Health, and that OCR is closing its investigation of Group Health. OCR has not yet provided any further response to the investigation regarding HealthPartners. 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. Health care providers and payers have been and will continue to be significantly impacted by changes in the last several years to the federal health care laws and regulations, particularly those pertaining to Medicare and Medicaid. The purpose of much of the recent statutory and regulatory activity has been to reduce the rate of increase in health care costs, particularly costs paid under the Medicare and Medicaid programs. The Health Care Reform Law amended Medicaid funding and substantially increased the potential number of Medicaid beneficiaries. As referenced above, the Supreme Court has ruled that the federal government cannot compel states to comply with the Health Care Reform Law s requirement to expand Medicaid by eliminating all federal funds a state receives for its existing Medicaid program. Certain outcomes, such as a state refusing to expand Medicaid coverage, which brings more patients to most hospital providers, while 21

28 Medicaid payment cuts are implemented, could put providers at greater risk. With respect to Medicare, the Health Care Reform Law, among other things, mandates significant reimbursement modifications, such as moving from a fee-for-service model to a quality of care model for physician reimbursement where value-based payments are tied to certain clinical objectives, including, but not limited to, patient outcomes and patient satisfaction. Past federal budgets have contained cuts to the Medicare and Medicaid program budgets. While it is uncertain whether future federal budgets will propose cuts to these programs, any reduction in the level of Medicare and/or Medicaid spending or a reduction in the rate of increase of Medicare and/or Medicaid spending may have an adverse impact on the revenues of certain Obligated Group Members derived from the Medicare and Medicaid programs. Diverse and complex mechanisms to limit the amount of money paid to health care providers under both Medicare and Medicaid programs have been enacted and further initiatives continue to be debated. Continued efforts in the form of statutory and regulatory activity to reduce the rate of increase in reimbursement for health care costs, particularly costs paid under the Medicare and Medicaid programs, can be expected. The Obligated Group s profitability is impacted by payment rates set by CMS within the Medicare program and by the Minnesota Department of Human Services within the Minnesota Medicaid programs because a significant portion of Obligated Group s revenue is derived from Medicare and Medicaid programs. It is unlikely that the Obligated Group could attract sufficient numbers of private pay patients to become self-sufficient without reimbursement from these governmental programs. These programs may, from time to time, establish payment rates that may not be sufficient to cover the actual costs directly incurred and allocable to the services and items provided to the program enrollees. In addition, the Obligated Group s financial performance could be adversely affected by a delay in receipt of payments from these programs, whether due to the insolvency of such payers or delays resulting from other circumstances. The Health Care Reform Law requires that all providers enrolled in Medicare or Medicaid implement a compliance plan that contains core elements laid out by the Secretary of HHS. There is no guidance at this time related to what types of provisions must be included in the mandatory compliance plan. HealthPartners and the other Obligated Group Members already have a compliance program in place. The compliance program is referred to as the Integrity and Compliance Program, and includes a Code of Conduct that establishes standards of conduct and provides behavioral expectations for employees. The Integrity and Compliance Program provides education and training opportunities on the Code of Conduct and compliance issues for all employees. thereto. The following is a summary of the Medicare and Medicaid programs and certain risk factors related Medicare For the fiscal years ended December 31, 2013 and 2014, Obligated Group Members providing healthcare services received approximately 28.3% and 29.2%, respectively, of net patient service charges from Medicare programs. See OBLIGATED GROUP UTILIZATION AND FINANCIAL PERFORMANCE Payers in Appendix A hereto. The Obligated Group also receives other Medicare revenue through the operation of its health care delivery system. As a consequence, any adverse development or change in Medicare reimbursement could have a material adverse effect on the financial condition and results of operations of the Obligated Group. Overview. The federal Social Security Act Amendments of 1965 established the Medicare program, which is designed to provide health care services primarily to the aged and disabled. Medicare Part A provides health insurance benefits for covered inpatient hospital, skilled nursing, home health, and hospice services to covered persons. Medicare Part B provides supplemental medical benefits covering primarily outpatient and a variety of physician care costs for covered persons. Medicare Part A is funded through payroll taxes on employers, employees, and the self-employed. Medicare Part B is a voluntary program, and only those eligible beneficiaries who pay the Part B premiums may receive benefits. Medicare Part C established the program now called Medicare Advantage, under which managed care plans may contract with CMS to provide care to Medicare beneficiaries in exchange for a prepaid, capitated payment set by CMS. In so doing, the managed care plan assumes full financial risk on a prospective basis for the provision of all Medicare covered services. Medicare Part D provides prescription drug coverage for Medicare beneficiaries through either a Medicare prescription drug plan or through a Medicare Advantage Plan. Certain Obligated Group Members offer Part D coverage in conjunction with other medical coverage. 22

29 Conditions of Participation. Hospitals must comply with standards called Conditions of Participation in order to be eligible for Medicare and Medicaid reimbursement. CMS is responsible for ensuring that hospitals meet these regulatory Conditions of Participation. In Minnesota, the Minnesota Department of Health is the state agency responsible for surveying hospitals on behalf of CMS to determine whether they comply with the Conditions of Participation. Failure to comply with the Conditions of Participation could have a materially adverse effect on the continued participation in the Medicare and Medicaid programs, and ultimately, the revenues of the Obligated Group. Hospital Inpatient Reimbursement. Hospitals are generally paid for inpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as diagnosis related groups ( DRGs ). DRGs are a system of classifying inpatient hospital services based on a person s medical diagnosis, any secondary diagnoses, surgical procedures, age, sex and presence of any complications. Payments are made to hospitals based on the DRG assignment for each patient s diagnosis. Hospital reimbursement will be set at specific rates established by Medicare for that particular patient s DRG, regardless of the actual costs incurred by the hospital for such treatment. The actual cost of care, including capital costs, may be more or less than the DRG rate. DRG rates are subject to adjustment by CMS and are subject to federal budget considerations. There is no guarantee that DRG rates, as they change from time to time, will cover actual costs of providing services to Medicare patients. CMS established a DRG classification system in its 2008 Inpatient Prospective Payment System Final Rule (the 2008 IPPS Rule ), which categorizes base DRGs by severity and weight. The 2008 IPPS Rule replaced the prior DRG codes with Medicare Severity DRG codes. CMS continues to revise the inpatient prospective payment system and annually publishes an interim rule for notice and comment prior to a final rule. The 2014 Inpatient Prospective Payment System Final Rule (the 2014 IPPS Rule) included a payment rate update for general acute care hospitals that successfully participate in the Hospital Inpatient Quality Reporting Program and are meaningful users of EHR of 1.4% and for long-term care hospitals of 1.1% for fiscal year Under the Hospital Value- Based Purchasing Program, the 2014 IPPS Rule also increased the applicable percent reduction to 1.5% of the base operating DRG payment amounts to all participating hospitals. Additionally, in fiscal year 2015, the maximum reduction in payments under the Hospital Readmissions Reduction program increased from 2 to 3 percent. There can be no assurance that future changes in classifications of patient hospitalizations or revisions to annual documentation and coding adjustments or other payment update measures implemented in future prospective payment regulations will not result in fluctuations or declines in revenue. Outpatient Reimbursement. Hospitals are generally paid for outpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as ambulatory payment classifications ( APC ). The actual cost of care, including capital costs, may be more or less than the reimbursements. There is no guarantee that APC rates, as they change from time to time, will cover actual costs of providing services to Medicare patients. Hospice Reimbursement. Medicare pays hospices a daily rate for each day a patient is enrolled in the hospice benefit. Daily payments are made regardless of the amount of services furnished on a given day. Payments are made based on the level of care required to meet patient and family needs. The four levels of care are: routine home care; continuous home care; inpatient respite care; and general inpatient care. The daily hospice payment rates are adjusted to account for differences in wage rates among markets. There can be no assurance that the prospective payment amounts for hospice services provided by the HealthPartners System will be sufficient to cover the actual costs of providing such services. Other Medicare Service Payments. Medicare payment for skilled nursing services, psychiatric services, inpatient rehabilitation services, and certain other services are based on regulatory formulas or predetermined rates. There is no guarantee that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to Medicare patients. Hospital Capital Costs. Medicare payments for capital costs (e.g., depreciation, interest, taxes and similar expenses for plant and equipment) are paid by Medicare exclusively on the basis of a standard federal rate (based upon average national costs of capital), subject to limited adjustments specific to each hospital. There can be no assurance that future capital-related payments will be sufficient to cover the actual capital-related costs of the Obligated Group s facilities applicable to Medicare patient stays or will provide flexibility for hospitals to meet changing capital needs. 23

30 Medicare Payment for Preventable Medical Errors. The Deficit Reduction Act of 2005 (the DRA ) required the Secretary of HHS to identify complicating conditions present as a secondary diagnosis that are high cost and/or high volume and reasonably preventable through application of evidence-based guidelines (collectively referred to as hospital-acquired conditions ). The DRA further required hospitals to begin reporting on claims for discharges, beginning October 1, 2007, whether the selected hospital-acquired conditions were present on admission. In the 2008 IPPS Rule, CMS included several conditions identified by the National Quality Forum as never events (i.e., inexcusable outcomes in a health care setting). Each year, additional conditions classified as hospital-acquired or never events can be been added to the inpatient prospective payment system final rule. All such conditions have negative payment implications when acquired during an inpatient stay. Effective July 1, 2011, federal payments to states for Medicaid services related to hospital-acquired conditions were prohibited. As announced in the 2014 IPPS Rule, commencing in federal fiscal year 2015, Medicare payments to certain hospitals for hospital-acquired conditions such as infections were reduced by one percent. The incidence of adverse events and their payment implications continues to be an area of focus for regulators. Medical Education Payments. Medicare currently pays for a portion of the costs of medical education at hospitals that have teaching programs. Regions Hospital received $16,684,783 and Methodist Hospital received $5,676,710 for a total in 2014 of $22,361,493. These payments are vulnerable to reduction or elimination. The direct and indirect medical education reimbursement programs have repeatedly emerged as targets in the legislative efforts to reduce the federal budget deficit. There can be no assurance that payments to certain Obligated Group Members for providing medical education will be adequate to cover the costs associated with their medical education programs. Physician Payments. Physicians may elect to participate or enroll in the Medicare program as a provider. Medicare Part B provides reimbursement for physician services, including employed and provider-based physicians, based upon a national fee schedule called the Resource-Based Relative Value Scale ( RBRVS ). Under the RBRVS system, payments for services are determined by the resource costs necessary to provide such services. Payments also are adjusted for geographical differences. The costs have three components: physician work, practice expense and professional liability insurance. Payments are calculated by multiplying the combined costs of a service by a conversion factor. The RBRVS system encourages a shift towards greater reimbursement for the provision of primary care, and a reduction of technology-based diagnostic procedures and surgical procedures. This continued shift in payment emphasis may affect the relationship between certain of the Obligated Group Members and their related medical staff and may increase pressure on hospitals to enter into bundled or global payment models, riskbased delivery models, or increase demands by physicians for payment from hospitals. Currently, it is projected that RBRVS will have negative updates for the next few years. In that regard, there is no guarantee that reimbursement under RBRVS will cover the Obligated Group s actual costs of providing physician services to Medicare beneficiaries. Any failure to enact legislation preventing such reduction could have a material adverse effect on the financial condition of the Obligated Group. Physicians who opt not to participate in the Medicare program also may provide care to Medicare beneficiaries, but will be reimbursed at a lower fee schedule. Regardless of physician enrollment status, physicians who furnish health care services to Medicare beneficiaries must meet all applicable federal coding, documentation, and other compliance requirements. EHR. Components of the Recovery Act provide for Medicare incentive payments beginning in 2011 to hospital providers meeting designated deadlines for the installation and meaningful use of EHR systems. For those hospital providers failing to meet a 2016 deadline, Medicare payments will be significantly reduced. It is not clear what effect, if any, this legislation will have on revenues or profitability of the Obligated Group. Audits and Withholds. Hospitals participating in Medicare and Medicaid are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under those programs. Although management of the Obligated Group believes its reserves are adequate for the purpose, any such future adjustments could be material. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to any Obligated Group Member could have a material adverse effect on the financial condition and results of operations of the Obligated Group. In addition, contracts between hospitals and third-party payers often have contractual audit, setoff and withhold language that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of the Obligated Group. Management of the Obligated Group is not aware of any situation in which a Medicare or other payment is being or may in the future be, withheld that would materially and adversely affect the financial condition or results of operations of the Obligated Group. 24

31 Under both the Medicare and Medicaid programs, certain health care providers, including hospitals, are required to report certain financial information on a periodic basis and with respect to certain types of classifications of information. Penalties are imposed for inaccurate reports. As these requirements are numerous, technical and complex, there can be no assurance that the Obligated Group Members will avoid incurring such penalties in the future. These penalties may be material and adverse and could include administrative, criminal or civil liability for making false statements or claims and/or an administrative action for exclusion from participation in the federal health care programs. 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 ( FCA ) or other federal statutes, subjecting the provider to civil, administrative or criminal sanctions. The DOJ has initiated a number of national investigations involving proceedings under the FCA relating to alleged improper billing practices by hospitals. These actions have resulted in substantial settlement amounts being paid in certain cases. Management of the Obligated Group does not anticipate that Medicare audits or cost report settlements for the Medicare program will materially adversely affect the financial condition or results of operations of the Obligated Group, taken as a whole, nor is it aware of any claims that have been improperly submitted by any Obligated Group Member. However, in light of the complexity of the regulations relating to the Medicare program and the threat of ongoing investigations as described above, there can be no assurance that significant difficulties will not develop in the future. Recovery Audit Contractors. CMS has implemented a Recovery Audit Contractor program on a nationwide basis where CMS contracts with private contractors to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program. Beginning January 1, 2012, state Medicaid agencies were also required to implement a recovery audit program to identify underpayments and overpayments. CMS also employs Medicaid Integrity Contractors to perform post-payment audits of Medicaid claims and identify overpayments. These programs tend to result in retroactively reduced payment and higher administration costs to hospitals. Management of the Obligated Group is not aware of a situation in which a recovery audit, if conducted, and any resulting payments made by certain Obligated Group Members, would materially adversely affect the financial condition of the Obligated Group. However, in light of the complexity of the regulations relating to the Medicare program and the ongoing threat of audits, there can be no assurance that any audit would not materially adversely affect the financial condition of the Obligated Group. Managed Care Contracts with Medicare. Certain Obligated Group Members have managed care contracts with CMS. The prepaid capitation payments from CMS under the Medicare Advantage contracts involve greater risk than Medicare fee-for-service payments or cost-based Medicare managed care contracts with CMS. However, certain Obligated Group Members have significant experience and expertise in providing comprehensive medical care to non-medicare, commercial members in return for prepaid capitated payments. The major difference with the Medicare Advantage contract is that the capitation payment rates are set by CMS through a bidding process rather than the marketplace. These rates vary greatly by geographic area, and the variations do not necessarily correspond with variations in the Obligated Group Members costs to provide or arrange for care for Medicare Advantage members. Therefore, rate increases may not necessarily synchronize with increases in general medical inflation. It is difficult to forecast CMS capitation methodologies and rates and, thus, Medicare revenue with certainty. Nevertheless, lobbying efforts by the managed care industry, by beneficiary advocacy groups, and providers, to stabilize and ensure the viability of Medicare managed care plans and the desire of many in Congress to offer Medicare beneficiaries alternatives to the original Medicare fee-for-service program have tended to keep Congress and CMS from making extreme changes and have inclined both bodies to adopt legislative and regulatory mitigating efforts when prior legislation has resulted in unintended negative consequences to the Medicare managed care industry. On April 6, 2015 CMS announced a 1.25% increase in Medicare Advantage plan rates for Medicaid Certain of the Obligated Group Members participate as health care providers in the Medicaid programs of Minnesota and may, to a lesser extent, receive reimbursement from the Medicaid programs of other states. This discussion is not intended to be exhaustive of all of the reimbursement programs in which Obligated Group Members are now, or may in the future, be involved. HealthPartners also participates as a plan in Minnesota s Medicaid managed care plans. 25

32 Overview. Medicaid (Title XIX of the federal Social Security Act) is a health insurance program for certain low-income and otherwise qualifying individuals. Pursuant to federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration and scope of services; sets the payment rates for services; and administers its own programs. Medicaid is funded by federal and state appropriations. Federal funding is provided to each state for its Medicaid program in the form of matching payments in amounts equal to a percentage of such state s Medicaid expenditures, ranging from 50% to 100%, depending upon the use of the funds and the per capita income of the state s recipients. These federal medical assistance percentages ( FMAPs ) are recalculated for each federal fiscal year. Receipt of federal funding is contingent on a state Medicaid program s compliance with federal standards regarding beneficiary eligibility, coverage, benefits, and use of FMAP payments. A number of provisions of the Health Care Reform Law impact FMAPs (e.g., FMAPs of up to 100% for certain newly eligible individuals, increased FMAPs for disaster-affected states, primary care payment rate increases, specific preventative services and immunizations, smoking cessation for pregnant women, and health home services for patients with certain chronic conditions). Hospital benefits are available under each participating state s Medicaid program, within prescribed limits, to persons meeting certain minimum income or other eligibility requirements, including children, the aged, the blind and/or the disabled. Payments made to health care providers under the Medicaid program are subject to change as a result of federal or state legislative and administrative actions, including changes in the methods for calculating payments, the amount of payments that will be made for covered services and the types of services that will be covered under the program. Such changes have occurred in the past and may be expected to occur in the future, particularly in response to federal and state budgetary constraints. Any future reduction in the level of Medicaid spending by the federal government or as a result of cuts in state budgets is likely to have an adverse impact on the revenues of the Obligated Group derived from the Medicaid program. For the fiscal years ended December 31, 2013 and 2014, Obligated Group Members providing healthcare services received approximately 12.2% and 12.6%, respectively, of net patient service charges from Medicaid programs. See OBLIGATED GROUP UTILIZATION AND FINANCIAL PERFORMANCE Payers in Appendix A hereto. Minnesota Reimbursement Programs. The Minnesota Department of Human Services administers Minnesota s Medicaid program, known as Medical Assistance, which provides health care coverage for low-income children, families, people with disabilities, adults without children, and people age 65 or older. Medical Assistance is the state s largest publicly funded health care program. Under this program, enrollees do not have to pay premiums and Medical Assistance covers most medical services. Minnesota also operates several Medicaid waiver programs that increase coverage across various patient populations including the elderly, the disabled and the chronically ill. The amount of Medical Assistance reimbursement received by certain Obligated Group Members in the future will depend on, among other things, fiscal considerations of both the federal and state governments in establishing their budgets for funding the Medical Assistance program. The Minnesota Department of Human Services administers MinnesotaCare, the state s subsidized health insurance program for those low-income Minnesotans whose income is too high to qualify for Medicaid but who have no access to affordable health care coverage. While MinnesotaCare is partly funded by federal funding and enrollee premiums, which are determined by a sliding-fee scale based on family size and income, the majority of the program s funding is generated by a tax rate of two percent of certain revenues of health care providers, including hospitals, and one percent on premiums of nonprofit health plan companies. All persons enrolled in MinnesotaCare receive their care through managed care health plans, which pay a monthly capitation payment for each MinnesotaCare enrollee. Reimbursement under MinnesotaCare is based on Medicaid rates and there can be no guarantees that such rates adequately cover the cost of care for MinnesotaCare beneficiaries. The MinnesotaCare Act sets forth various requirements to restrain the rate of growth in health care costs in Minnesota, including various reporting requirements applicable to participating health care providers such as certain Obligated Group Members. Such matters, as well as more general governmental budgetary concerns, may in the future reduce payments made to providers under the MinnesotaCare program. HealthPartners currently has a Medicaid managed care contract with the Minnesota Department of Human Services to provide comprehensive health care service to Medicaid-eligible residents of Minnesota. The State of Minnesota currently is in the midst of an RFP process to re-procure both Medicaid managed care and MinnesotaCare contracts with managed care organizations ( MCOs ) for the entire state. This is for a period of up to five years beginning with the 2016 calendar year. Determinations of which MCOs are successful will be made on 26

33 an individual basis for each of Minnesota s 87 counties. HealthPartners is currently contracted with the State as a Medicaid MCO for eight counties in the Twin Cities. For MinnesotaCare, HealthPartners is contracted for those counties plus two additional adjoining counties. In response to the RFP, HealthPartners has submitted a proposal to participate as an MCO in both programs in 41 Minnesota counties. The Minnesota Department of Human Services used a similar RFP process in 2013 and prior years, and HealthPartners responded to those requests. At this point it is not possible to predict in which counties HealthPartners bids will be successful. HealthPartners could lose some or all of its existing membership in these programs or gain significant membership under this competitive RFP procurement process. A failure to retain current contracts in the bidding process or a significant reduction in participation could have a material adverse impact on the revenues of the System. Results of this competitive bidding process will be known sometime in July Group Health, through its HealthPartners Dental Group, receives enhanced critical access dental payments under the Medical Assistance program for services provided to Minnesota health care program recipients. Legislation was introduced in Minnesota s 2015 legislative session that could have eliminated the critical access dental payment program or resulted in HealthPartners Dental Group no longer being eligible to participate, which could have had an adverse impact on the revenues of the Obligated Group derived from the critical access dental payment program. The legislation did not pass in the 2015 legislative session, but similar legislation could be introduced again in future legislative sessions. In addition, legislation was introduced in Minnesota in 2015 that would have consolidated the dental Medical Assistance and MinnesotaCare programs under one single health plan administrator. HealthPartners could have been adversely impacted by this due to loss of revenue that HealthPartners currently receives under its contract with the Minnesota Department of Human Services for dental benefits. The legislation did not pass in the 2015 legislative session, but similar legislation could be introduced again in future legislative sessions. State Children s Health Insurance Program. The State Children s Health Insurance Program ( SCHIP ) is a federally funded insurance program for children whose families earn too much money to be eligible for Medicaid, but yet cannot afford commercial health insurance. CMS administers the SCHIP, but each state creates its own program based upon minimum federal guidelines. Minnesota provides SCHIP benefits to uninsured children. While generally considered to be beneficial for both patients and providers by reducing the number of uninsured children, it is difficult to assess the fiscal impact of SCHIP on the payments to the Obligated Group. Moreover, states must periodically submit their SCHIP plan to CMS for review to determine if it meets the federal requirements. If it does not meet the federal requirements, a state can lose federal funding for its program. Finally, the future of SCHIP funding and at what levels is uncertain. Therefore, a state s decision to elevate the eligibility requirements, thereby decreasing the number of children eligible for SCHIP, the loss of federal approval for a state s program, or the failure of the federal government to appropriate additional funds for SCHIP all could have an adverse impact on the financial condition of the Obligated Group. On May 26, 2015, CMS released a proposed rule to modernize and enhance the provision of quality care to Medicaid managed care and SCHIP beneficiaries. This proposed regulation is the first significant update to the Medicaid and SCHIP managed care regulations in over 10 years. Several of the most important provisions of the proposed rule relate to making beneficiary communications and access better and easier, encouraging state endeavors to deliver higher quality care in an economical way, setting forth quality improvement mechanisms, clarifying actuarial soundness requirements, and aligning standards with other sources of health insurance coverage. It is uncertain to what extent and in what form the provisions of this proposed regulation will be finalized and what impact such finalized rules will have on the Obligated Group. Disproportionate Share Payments The federal Medicare and state Medicaid laws permit states to include a disproportionate share adjustment in payments to hospitals in order to compensate those hospitals that serve a disproportionate share of indigent patients with a supplemental payment (collectively this program is referred to as DSH ). The Health Care Reform Law provided that beginning in federal fiscal year 2014, hospitals receiving supplemental DSH payments from Medicare (i.e., those hospitals that care for a disproportionate share of low-income Medicare beneficiaries) were slated to have their DSH payments reduced significantly. This reduction potentially will be adjusted to addback payments based on the volume of uninsured and uncompensated care provided by each such hospital, and is anticipated to be offset by a higher proportion of covered patients as other provisions of the Health Care Reform Law go into effect. On September 18, 2013, CMS issued a final rule confirming its methodology, which accounts for statewide reductions in uninsured and uncompensated care, and reduces Medicaid DSH allotments to each state. 27

34 Under this final rule, the federal share of Medicaid DSH payments is reduced by $500 million in fiscal year 2014 and $600 million in fiscal year However, the Bipartisan Budget Act also included Medicare cuts such as a restructuring of Medicaid disproportionate share payments ( DSH payments ) reductions by delaying the fiscal year 2014 DSH payment cuts until fiscal year 2016, but increasing the overall level of reductions and extending cuts through fiscal year MACRA further modified the planned reductions in DSH payments by delaying fiscal year 2017 cuts until fiscal year 2018, restructuring the overall level of reductions, and extending cuts through fiscal year In 2013, Regions Hospital received DSH payments of $19,417,497, and Methodist Hospital received DSH payments of $2,835,296, for a total of $22,252,296. In 2014, Regions Hospital received DSH payments of $16,155,643, and Methodist Hospital received DSH payments of $3,787,194, for a total of $19,942,837. Commercial Insurance and Other Third-Party Plans Traditional Health Insurance. Many commercial insurance plans, including group plans, reimburse their customers or make direct payments to health care providers for charges at established rates. Generally, these plans pay at negotiated rates which are subject to various limitations and deductibles, depending on the plan. Patients carrying such coverage may be responsible to the provider for any deficiency between the commercial insurance proceeds and total billed charges, depending on the terms of the agreement between the provider and the plan. While this is a favorable method of reimbursement available to health care providers, there can be no assurance that this method of reimbursement will not decrease further in the future. Managed Care Delivery Systems. Most private health insurance coverage is provided by various types of managed care plans, including HMOs and preferred provider organizations ( PPOs ), which generally use discounts and other economic incentives to reduce or limit the cost and utilization of health care services. Medicare and Medicaid also purchase hospital care using managed care options. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers. Under an exclusive provider plan, which includes some HMOs, private payers cover only those services provided by preferred hospitals and physicians. With this contracting authority, private payers direct patients away from non-preferred hospitals and physicians by denying coverage for services provided by them, or by requiring greater levels of coinsurance from their members in order for members to use non-preferred hospitals and physicians. Increased sensitivity to the cost of health care and the desire to reduce health care costs historically led to growth among HMOs, PPOs and other alternative delivery systems. HMO and PPO provider contracts generally obligate a health care provider to provide services to HMO and PPO participants at a discount from established charges. Currently, many HMOs and PPOs pay providers on a negotiated fee-for-service basis or, for institutional care, on a fixed rate per day of care, which, in each case, usually is discounted from the typical charges for that service or care. The discounts offered to HMOs and PPOs may result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a provider may vary significantly from projections and/or changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider s ability to manage this component of revenue and cost. Some HMOs employ a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned or otherwise directed to receive care at a particular hospital. The hospital may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet the hospital s actual costs of care or if utilization by such enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly. Often, HMO contracts are enforceable for a stated term, regardless of hospital losses and may require hospitals to care for enrollees for a certain time period, regardless of whether the HMO is able to pay the hospital. Hospitals also from time to time have disputes with managed care payers concerning payment and contract interpretation issues. Failure to maintain contracts could have the effect of reducing the market share and net patient services revenues of the Obligated Group Members. Conversely, participation may result in lower net income if the Obligated Group Members are unable to adequately contain their costs. Thus, managed care poses a significant business risk that health care providers face. Future contract negotiations between such third-party payers and certain Obligated Group Members, and other efforts of these third-party payers and of employers to limit health care costs could adversely affect the level of utilization of the Obligated Group s services, or reimbursement to the Obligated Group, or both. In addition, it is 28

35 possible that competitive pricing of plan premiums could cause an HMO or PPO, particularly one that is part of the Obligated Group, to operate at a loss and expose the Obligated Group to delays in payment or nonpayment of claims for services to plan participants. Changes in sources of revenue and case mix intensity may also adversely affect the Obligated Group s operating revenue. For example, if patients formerly covered by commercial insurance programs that pay full hospital and physician charges shift to HMOs or other third-party payers that pay lower negotiated rates, the discounts reflected in the Obligated Group s financial statements as contractual allowances will proportionately increase and income will proportionately decrease. In addition, if the average severity of illness or condition of patients of the Obligated Group Members that operate hospitals and physicians covered by a capitated plan were to increase after execution of the plan contract, operating expenses of the Obligated Group would proportionately increase without an offsetting increase in operating revenues. Because the Obligated Group is part of an integrated health system, the financial condition of the overall health system, including the Obligated Group Members, will be most adversely impacted by changes in the health care industry that adversely affect both the delivery and health care financing components of the overall health system, such as an increase in the average severity of illness or condition of patients or members. Effect of Health Care Reform Law on Insurers. The Health Care Reform Law could have a significant impact on health insurers. For example, expanded health insurance coverage could increase membership enrollment or change the composition of the enrolled population, potentially resulting in a capacity strain on provider networks or unanticipated service costs. New, subsidized coverage under the Health Care Reform Law may not generate margins similar to those health insurers have previously realized in the commercial markets. Additionally, the Health Care Reform Law also institutes new requirements and restrictions on health insurers, including, but not limited to, precluding them from imposing pre-existing condition exclusions, which can have a material adverse effect on the profitability of health insurers. Health Plan Membership and Premiums In markets where managed care is prevalent, including the areas in which certain Obligated Group Members operate, health plans (including those plans of certain Obligated Group Members) must be capable of attracting and maintaining members. Due to increasing pressure from employers and other purchasers of health coverage, aggressive pricing may be required to keep increases of the premium rate at a minimum. Large employer groups account for a substantial portion of most health plans membership base, and withdrawal by any single large employer group from a health plan could result in the loss of a material number of covered lives. There is no assurance that Obligated Group Members will maintain their membership or increase their membership in the future. Failure to maintain or increase membership could reduce the Obligated Group s market share and gross revenues. Conversely, certain Obligated Group Members could maintain or increase its membership yet produce lower income if it is unable to adequately contain its costs or if medical inflation or utilization increases. Furthermore, aggressive pricing by certain Obligated Group Members may decrease their ability to reimburse Obligated Group Members that engage in health care delivery to the extent necessary for such Members to meet increasing costs of providing such services. Similarly, reduced revenues by certain Obligated Group Members may also decrease its ability to reimburse other parties providing health services to enrollees. This aspect of the managed care industry poses a significant business risk and opportunity. In the prepaid and fully insured market, premiums paid by individual members and groups may not cover the actual cost of providing the contracted-for services. If premiums are insufficient to meet the costs of care, the Obligated Group s ability to pay debt service on the Bonds could erode rapidly and significantly. In addition, there is typically a delay, which can be significant, between unanticipated increases in health care costs and the ability to negotiate increased premiums. In addition, there is typically further delay between the negotiation of rate increases and the receipt of funds reflecting such increases. In the self-insured industry, third party administrators are paid for claims management, member services, and health management. This market segment is highly competitive and aggressive pricing may impact the net income of certain Obligated Group Members. As a consequence of the above factors, the effect of the managed care industry on the Obligated Group s financial condition is difficult to predict and may be different in the future than that reflected in the financial statements for the current period. 29

36 Regulatory and Contractual Matters State Regulations. States in which the Obligated Group Members are licensed or conduct business may have established statutory and regulatory requirements for health care payers and providers (including HMOs and hospitals). The regulations may include annual filings, certain risk-based capital requirements or solvency requirements, and investment restrictions for insurers and HMOs, and statutory or regulatory requirements for third-party administrators. The HMOs within the Obligated Group are licensed and selling only in Minnesota and monitor and comply with Minnesota s regulations on these matters. Failure to comply with laws and rules governing licensure and standards of care could result in the revocation of a Obligated Group Member s licensure and, for hospitals, operating privileges, including licensure of inpatient facilities and outpatient programs, home health agencies, skilled nursing facilities, hospice programs and basic care facilities. Additionally, if any Member of the Obligated Group expands its operations as a health care payer or provider to other states, such Member of the Obligated Group would be subject to additional laws and regulations of that state, which could present additional risks. Anti-Fraud and Abuse Laws. A federal law (known as the Anti-Kickback Statute ) makes it a felony to knowingly and willfully offer, pay, solicit or receive remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in order to induce referrals for business that is reimbursable under any federal health care program. The Anti-Kickback Statute applies to many common health care transactions between entities and persons with which a hospital does business, including hospital-physician joint ventures, medical director agreements, physician recruitment agreements, physician office leases, and other transactions. The Anti-Kickback Statute has been interpreted to cover any arrangement where one purpose of the remuneration was to obtain or pay money for the referral of services or to induce further referrals. Violation of the Anti-Kickback Statute may result in imprisonment for up to five years and/or fines of up to $25,000 per violation. In addition, the OIG has the authority to impose civil assessments and fines and to exclude hospitals engaged in prohibited activities from federal healthcare programs, including Medicare, Medicaid, and TRICARE (a health care program providing benefits to dependents of active duty and retired members of the United States military services). The Health Care Reform Law amended a number of provisions of the Anti-Kickback Statute. One such amendment provides that an Anti-Kickback Statute violation may be established without showing that an individual knew of the statute s proscriptions or acted with specific intent to violate the Anti-Kickback Statute. The new standard could significantly expand criminal and civil fraud exposure for transactions and arrangements where there is no intent to violate the Anti-Kickback Statute. The Health Care Reform Law further amended the Anti-Kickback Statute to explicitly provide that a violation of the statute constitutes a false or fraudulent claim under the federal FCA. In addition to certain statutory exceptions to the Anti-Kickback Statute, the OIG has promulgated regulatory safe harbors under the Anti-Kickback Statute designed to protect certain payment and business practices. However, these safe harbors are narrow and do not cover a wide range of common economic relationships involving hospitals. The regulations do not purport to comprehensively describe all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources. While the failure to comply with a statutory exception or regulatory safe harbor does not mean that an arrangement is unlawful, such failure may increase the likelihood of a regulatory challenge or the potential for investigation. To date, a limited number of final safe harbors have been established. HIPAA created a new program operated jointly by HHS and the United States Attorney General to coordinate federal, state and local law enforcement with respect to fraud and abuse, including the Anti-Kickback Statute. HIPAA also provides for minimum periods of exclusion from a federal health care program for fraud related to the federal health care programs, provides for intermediate sanctions and expands the scope of civil monetary penalties. As stated above, pursuant to amendments to the Anti-Kickback Statute in the Health Care Reform Law, an action that violates the Anti-Kickback Statute constitutes a false or fraudulent claim under the FCA, which prohibits the knowing presentation of a false, fictitious or fraudulent claim for payment to the United States government. Actions under the FCA may be brought by the United States Attorney General or as a qui tam action brought by a private individual in the name of the government. Pursuant to the mandates of HIPAA, the DRA and the HITECH Act, increased emphasis is being placed on federal investigations and prosecutions of Medicare and Medicaid fraud and abuse cases and increases in personnel investigating and prosecuting such cases have been reported, which will most likely result in a higher level of scrutiny of hospitals and health care providers, including the Obligated Group Members. 30

37 Chapter 62J of the Minnesota Statutes, regarding health care cost containment, contains a conflict of interest provision that, in essence, applies the Anti-Kickback Law to the provision of health care to all patients, not just those covered under federal health care programs. The Commissioner has the authority to adopt regulations implementing the conflict of interest provision, but has not yet done so. Until the Commissioner adopts such regulations, the Anti-Kickback Law is deemed to apply to all health care services and providers in Minnesota, regardless of the source of payment. The regulations, when adopted, could be broader and more encompassing than the Anti-Kickback Law and could prohibit certain arrangements permitted under the law and its enacting regulations. Fines may be assessed against providers for violations of these restrictions. Management of the Obligated Group believes that the Obligated Group Members have used their best efforts to comply with the Anti-Kickback Statute. However, because of the breadth of those laws and the narrowness of the safe harbor regulations, there can be no assurance that regulatory authorities will not take a contrary position or that the Obligated Group Members will not be found to have violated the Anti-Kickback Statute. At the present time, Management of the Obligated Group is not aware of any pending or threatened claim, investigation or enforcement action regarding the Anti-Kickback Statute, if determined adversely to the Obligated Group Members, taken as a whole, would have a material adverse effect on the Obligated Group s financial condition. See also BONDHOLDERS RISKS - Physician Recruitment and Service Agreements. Stark Law. Another federal law (known as the Stark Law ) prohibits, subject to limited exceptions, a physician who has a financial relationship, or whose immediate family member has a financial relationship, with entities (including hospitals) providing designated health services from referring Medicare patients to these entities for the furnishing of designated health services. The Stark Law defines designated health services as including: physical therapy services; occupational therapy services; outpatient speech-language pathology services; radiology and certain other imaging services; radiation therapy services and supplies; durable medical equipment; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; inpatient and outpatient hospital services; and clinical laboratory services. The Stark Law also prohibits the entity receiving the referral from filing a claim or billing for the services arising out of the prohibited referral. The prohibition applies regardless of the reasons for the financial relationship and the referral; no finding of intent to violate the Stark Law is required. Sanctions for violation of the Stark Law include denial of payment for the services provided in violation of the prohibition, refunds of amounts improperly collected, a civil penalty of up to $15,000 for each service arising out of the prohibited referral, exclusion from participation in the federal health care programs and a civil penalty of up to $100,000 against parties that enter into a scheme to circumvent the Stark Law s prohibition. Under an emerging legal theory, violations of the Stark Law may also serve as the basis for liability under the federal FCA. The types of financial arrangements between a physician (or a physician s immediate family member) and an entity that trigger the self-referral prohibitions of the Stark Law are broad and include ownership and investment interests and compensation arrangements as well as certain disclosure obligations. Regulations promulgated under the Stark Law are subject to frequent amendment. Such amendments are likely to require the Obligated Group to amend or terminate certain arrangements with physicians to comply with new regulatory requirements. Although the Stark Law only applies to Medicare, a number of states (including Minnesota) have passed similar statutes pursuant to which similar types of prohibitions are made applicable to all other health plans or thirdparty payers. Minnesota law provides that the Commissioner on Health may audit the referral patterns of providers that qualify for Stark Law exceptions and that the Commissioner shall report to the Minnesota Legislature any audit results that reveal a pattern of referrals by a provider for the furnishing of health services to any entity with which the provider has a direct or indirect financial relationship. This audit authority extends to all health care services rather than just Stark Law designated health services. In 2004, the Minnesota Legislature enacted Minnesota Statute Section , which requires patients be informed in writing prior to receiving a referral to a hospital, outpatient surgical center, diagnostic imaging facility or any affiliates thereof, if the referring provider has an economic interest or an employment or contractual arrangement with such facility. In addition, a written notice of the relationship must be posted in the patient reception area, waiting room, or other conspicuous public location within the provider s facility. 31

38 Although management of the Obligated Group believes that the arrangements of the Obligated Group Members with physicians do not violate the Stark Law, as currently interpreted, there can be no assurance that regulatory authorities will not take a contrary position or that the Obligated Group Members will not be found to have violated the Stark Law. Sanctions under the Stark Law, including exclusion from the Medicare and Medicaid programs, could have a material adverse effect on the financial condition and results of operations of the Obligated Group, as would any significant penalties, demands for refunds or denials of payment. See also BONDHOLDERS RISKS - Physician Recruitment and Service Agreements. False Claims Laws. There are principally three federal statutes addressing the issue of false claims. First, the federal FCA imposes civil liability (including substantial monetary penalties and damages) on any person or corporation that (1) knowingly presents or causes to be presented a false or fraudulent claim for payment to the United States government; (2) knowingly makes, uses or causes to be made or used a false record or statement to obtain payment; or (3) engages in a conspiracy to defraud the federal government by getting a false or fraudulent claim allowed or paid. A showing of specific intent to defraud the federal government is not required to establish the requisite knowledge. Knowingly is broadly defined to include not only actual knowledge but also deliberate ignorance or reckless disregard of the facts. This statute authorizes private persons to file qui tam actions on behalf of the United States. Because qui tam lawsuits are kept under seal while the federal government evaluates whether the United States will join the lawsuit, it is impossible to determine at this time whether any such actions are pending against the Obligated Group and no assurances can be made that such actions will not be filed in the future. The Fraud and Enforcement and Recovery Act of 2009 ( FERA ), signed into law on May 20, 2009, has the potential to expand exposure under the civil FCA for a wide range of business transactions involving federal government funds. Pursuant to FERA amendments, the civil FCA may impose liability for false claims with more remote connections to the federal government. FERA has the effect of expanding liability for the retention of money owed to the government, including overpayments by Medicare. The Health Care Reform Law requires a person who receives an overpayment to report and repay the overpayment within 60 days after the overpayment is identified or the date any corresponding cost report is due, whichever is later. The Health Care Reform Law defines overpayments as any funds that a person receives or retains under Medicare or Medicaid to which the person, after applicable reconciliation, is not entitled. Failure to repay any overpayment within the deadline could lead to liability under the FCA. In addition to the federal FCA, the Civil Monetary Penalties Law authorizes the imposition of substantial civil money penalties against an entity that engages in activities including, but not limited to, (1) knowingly presenting or causing to be presented, a claim for services not provided as claimed or which is otherwise false or fraudulent in any way; (2) knowingly giving or causing to be given false or misleading information reasonably expected to influence the decision to discharge a patient; (3) offering or giving remuneration to any beneficiary of a federal health care program likely to influence the receipt of reimbursable items or services; (4) arranging for reimbursable services with an entity which is excluded from participation from a federal health care program; (5) knowingly or willfully soliciting or receiving remuneration for a referral of a federal health care program beneficiary; or (6) using a payment intended for a federal health care program beneficiary for another use. The Secretary of HHS, acting through the OIG, also has both mandatory and permissive authority to exclude individuals and entities from participation in federal health care programs pursuant to this statute. On October 3, 2014, the OIG published a proposed rule and request for comments that would amend certain rules under the Civil Monetary Penalties Law, but final regulations have not yet been published. In addition, pursuant to HIPAA, the commission of either one of the prohibited practices listed below may lead to civil monetary penalties: (1) the practice or pattern of presenting a claim for an item or service on a reimbursement code that the person knows or should know will result in greater payment than appropriate, i.e., upcoding and (2) engaging in a practice of submitting claims for payment for medically unnecessary services. Violation of such prohibited practices could amount to civil monetary penalties of up to $10,000 for each item or service involved. Management of the Obligated Group does not expect that the prohibited practices provisions of HIPAA will affect the Obligated Group in a material respect. Finally, it is a criminal federal health care fraud offense to: (1) knowingly and willfully execute or attempt to execute any scheme to defraud any health care benefit program; or (2) to obtain, by means of false or fraudulent pretenses, representations or promises any money or property owned or controlled by any health care benefit 32

39 program. Penalties for a violation of this federal law include fines and/or imprisonment and a forfeiture of any property derived from proceeds traceable to the offense. The DRA provides financial incentives to states that pass similar false claims statutes or amend existing false claims statutes that track the FCA more closely with regard to penalties and rewards to qui tam relators. A number of states, including Minnesota, have passed similar statutes. In 2011, HealthPartners became aware that there was a matter then pending in federal court in the state of Minnesota in which HealthPartners, along with other parties, were named as defendants. This matter was then under seal and, therefore, the Complaint, Amended Complaints, and other filings were not publicly available at that time. This matter was a qui tam (whistleblower) suit initially filed in 2011 wherein the plaintiff alleges that the defendants violated the federal and state False Claims Acts with regard to their participation in Minnesota s Medicaid program. Between 2011 and 2015, HealthPartners and the other defendants provided information to the Department of Justice (the DOJ ), and the DOJ reviewed the responses in order to determine whether to intervene in the case. The DOJ recently completed its review and decided not to intervene in the matter or expend further resources pursuing the matter. The DOJ has decided not to intervene in the matter, and the plaintiff has chosen not to proceed with the case on his own as of May 22, Also in 2011, and related to the above-described matter, Group Health received a letter from the Office of Inspector General (the OIG ) requesting information and documents regarding the rate setting process between the Minnesota Department of Human Services and Group Health for various Medical Assistance health plan products. Group Health cooperated with the OIG s initial and subsequent letter requests, and Group Health believes that process is now concluding. The Obligated Group is not aware of any claim or assessment that has been or could be served or asserted against Group Health or any member of the Obligated Group, as a result of the information provided to OIG. The Obligated Group also is not aware of any other pending or threatened claims, investigations or enforcement actions regarding the FCA which, if determined adversely to the Obligated Group Members, taken as a whole and taking into account current reserves, would have a material adverse effect on the financial condition of the Obligated Group. Physician Recruitment and Service Agreements. The IRS, CMS and OIG have issued various pronouncements that could limit physician service, recruiting and retention arrangements. In IRS Revenue Ruling 97-21, the IRS ruled that a tax-exempt hospital that provides recruiting and retention incentives to a physician in order to have the physician join the hospital s medical staff or provide services to members of the community but not necessarily for or on behalf of the hospital itself risks loss of tax-exempt status unless the incentives are reasonably necessary to address a community need and accordingly provide a community benefit; improvement of a charitable hospital s financial condition does not necessarily constitute such a purpose. With respect to physician service contracts, the IRS takes the position that the compensation paid must be consistent with the value of services actually provided by the physician. The OIG also has taken the position that any arrangement between a federal health care program-certified facility and a physician that is intended even in part to encourage the physician to refer patients may violate the federal Anti-Kickback Statute unless a regulatory exception applies. Physician service, recruitment and retention arrangements may also implicate the Stark Law. While the OIG has promulgated a practitioner recruitment safe harbor to the Anti-Kickback Statute, it is limited to recruitment in areas that are health professional shortage areas ( HPSAs ). OIG also requires consistency with fair market value for certain other exceptions that may apply to service contracts and may allege that any amount paid above fair market value implies an intent to induce referrals. The Stark Law exception for practitioner recruitment is not limited to HPSAs; rather it applies to the recruitment of physicians who are relocating their practices to the geographic area served by the hospital, if certain requirements are met. The Stark Law also contains an exception pertaining to retention arrangements that allows hospitals, in limited circumstances, to pay incentives to retain a physician in underserved areas. In addition, the Stark Law includes certain exceptions that may apply to service contracts with physicians or physician groups, many of which also require (among other things) that payments to the physician are consistent with fair market value for services actually performed. Arrangements with employed physicians are also covered by an Anti-Kickback Statute safe harbor, which protects any amount paid by an employer to a bona fide employee, and by an exception to the Stark Law, which generally requires that amounts paid to a physician employee be consistent with fair market value of the services provided. The sanctions which could be imposed by the IRS or the other regulatory authorities or the courts for violations of IRS regulations, the Stark Law and the Anti-Kickback Statute and for false claims under the federal FCA and other similar federal or state laws include, among other things, the loss of tax-exempt status of one or more Obligated Group entities, repayment of up to three times the amount of claim payments related to services provided or referred by affected physicians, exclusion of one or more Obligated Group entities from federal health care programs, including the Medicare and Medicaid programs and/or additional monetary penalties. 33

40 Management of the Obligated Group believes that its arrangements with employed and independent physicians are in material compliance with these laws and regulations, but no assurance can be given that regulatory authorities will not take a contrary position or that the Obligated Group Members will not be found to have violated applicable law or that future laws, regulations or policies will not have a material adverse impact on the ability of the Obligated Group Members to recruit and retain physicians. Physician recruitment may also be affected by a variety of other factors. For example, physician recruitment in rural areas can be difficult and practice areas such as family medicine are in critical demand. It is common to take up to three years to fill positions in rural areas and because in many cases these areas already utilize large numbers of advanced practice clinicians (e.g., nurse practitioners and physician assistants) it is difficult to meet health care needs through more utilization of such professionals. Urban areas also face a short supply of certain physician specialties, such as pediatric psychiatry. Physician recruitment in behavioral health and certain subspecialties (developmental pediatrics and neuro-ophthalmology) is also challenging. The System is affected by these national trends. Emergency Medical Treatment and Active Labor Act. The federal Emergency Medical Treatment and Active Labor Act ( EMTALA ) imposes certain requirements on hospitals and facilities with emergency departments. Generally, EMTALA requires that hospitals and other facilities with emergency departments provide appropriate medical screening to patients who come to the emergency department to determine if an emergency medical condition exists. If so, the hospital must stabilize the patient within the capabilities of the hospital and the patient cannot be transferred unless stabilization has occurred or the transfer is done pursuant to EMTALA requirements. In addition, a hospital which receives an inappropriate transfer must report that transfer to CMS. Failure to comply with EMTALA may result in a hospital s exclusion from the Medicare and/or Medicaid programs, lawsuits for damages, as well as imposition of civil monetary penalties. As such, failure of a Obligated Group Member to meet its responsibilities under EMTALA could adversely affect the financial condition of the Obligated Group Members. Management of the Obligated Group believes its policies and procedures have been and currently are in material compliance with EMTALA, but no assurance can be given that a violation of EMTALA will not be found. Any sanctions imposed as a result of an EMTALA violation could have a material adverse effect on the future operations or financial condition of certain Obligated Group Members. Enforcement Activity. Enforcement activity against health care payers and providers has increased. Enforcement authorities may aggressively pursue perceived violations of health care laws. In the current regulatory climate, it is anticipated that many hospitals and physician groups may be subject to an audit, investigation or other enforcement action regarding the health care fraud laws mentioned above. The cost of defending such an action, the time and management attention consumed and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a payer or provider could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could also be damaging to the reputation and business of a payer or provider, regardless of outcome. Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above and therefore penalties or settlement amounts often are compounded. Generally these risks are not covered by insurance. Joint Ventures. The OIG has expressed its concern in various advisory bulletins that many types of joint venture arrangements involving hospitals may implicate the Anti-Kickback Statute, since the parties to joint ventures are typically in a position to refer patients of federal health care programs. In its 1989 Special Fraud Alert, the OIG raised concern about certain physician joint ventures where the intent is not to raise investment capital to start a business but rather to lock up a stream of referrals from the physician investors and compensate the investors indirectly for the referrals. The OIG listed various features of suspect joint ventures, but noted that its list was not exhaustive. These features include: (i) whether investors are chosen because they are in a position to make referrals; (ii) whether physicians with more potential referrals are given larger investment interests; (iii) whether referrals are tracked and referral sources shared with investing physicians; (iv) whether the overall structure is a shell (i.e., one of the parties is an ongoing entity already engaged in a particular line of business); and (v) whether investors are required to invest a disproportionately small amount or are paid extraordinary returns in comparison with their risk. In April 2003, the OIG issued a Special Advisory Bulletin, which indicated that contractual joint ventures (where a provider expands into a new line of business by contracting with an entity that already provides the items 34

41 or services) may violate the Anti-Kickback Statute and that expressed skepticism that existing statutory or regulatory safe-harbors would protect suspect contractual joint ventures. In January 2005, the OIG published its Supplemental Compliance Program Guidance for Hospitals and reiterated its concerns regarding joint ventures entered into by hospitals. In addition, under the federal tax laws governing Section 501(c)(3) organizations, a tax-exempt hospital s participation in a joint venture with for-profit entities must further the hospital s exempt purposes and the joint venture arrangement must permit the hospital to act exclusively in the furtherance of its exempt purposes, with only incidental benefit to any for-profit partners. If the joint venture does not satisfy these criteria, the hospital s tax exemption may be revoked, the hospital s income from the joint venture may be subject to tax or the parties may be subject to some other sanction. Finally, many hospital joint ventures with physicians may also implicate the federal Stark Law. Any evaluation of compliance with the Anti-Kickback Statute or tax laws governing Section 501(c)(3) organizations depends on the totality of the facts and circumstances, while the Stark Law requires strict compliance with an exception if the prohibition is triggered. While management of the Obligated Group believes that the joint venture arrangements to which Obligated Group Members are a party are in material compliance with the Anti- Kickback Statute, OIG pronouncements, the tax laws governing Section 501(c)(3) organizations and the Stark Law, there can be no assurance that regulatory authorities will not take a contrary position or that such transactions will not be found to have violated these laws and related regulations. Any determination that a Obligated Group Member is not in compliance with these laws and related regulations could have a material adverse effect on the future financial condition of the Obligated Group. Review of Outlier Payments. CMS has announced that it intends to review health care providers that are receiving large proportions of their Medicare revenues from outlier payments. Outlier payments are additions or adjustments to standard payments due to unusual variations in the type of amount of care. Health care providers found to have obtained inappropriately high outlier payments will be subject to further investigation by CMS and potentially the OIG. Enforcement Affecting Clinical Research. In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also heightened enforcement of laws and regulations governing the conduct of clinical trials at hospitals. HHS elevated and strengthened its Office of Human Research Protections, one of the agencies with responsibilities for monitoring federally funded research. In addition, the National Institutes of Health significantly increased the number of facility inspections that these agencies perform. The Food and Drug Administration ( FDA ) also has authority over the conduct of clinical trials performed in hospitals when these trials are conducted on behalf of sponsors seeking FDA approval to market the drug or device that is the subject of the research. The FDA s inspection of facilities has increased significantly in recent years. These agencies enforcement powers range from substantial fines and penalties to exclusions of researchers and suspension or termination of entire research programs. Exclusive or Anti-Competitive Credentialing. Some hospitals have adopted admissions policies for their medical staffs that deny staff appointment or privileges to physicians that compete against the subject hospital ( exclusive credentialing ). If CMS were to determine that exclusive credentialing violates provisions of federal law, including the Stark Law, and develops regulations prohibiting or restricting exclusive credentialing, such regulations could adversely affect the policies of certain of the Obligated Group Members. Licensing, Surveys, and Accreditation On a regular basis, health care facilities, managed care organizations, third party administrators and insurance operations, including the Obligated Group Members, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements relating to Medicare and Medicaid participation and reimbursement, state licensing agencies, private payers, The Joint Commission, the National Committee for Quality Assurance and other accrediting bodies. Renewal and continuance of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require or include affirmative action or response by the Obligated Group Members. These activities generally are conducted in the normal course of business of health care facilities and managed care organizations. Nevertheless, an adverse result could result in a loss or 35

42 reduction in the System's scope of licensure, certification or accreditation, or could reduce the payment received by the Obligated Group or require repayment of amounts previously remitted. Management of the Obligated Group currently anticipates no difficulty renewing or continuing currently held licenses, certifications or accreditations. Nevertheless, actions in any of these areas could result in the loss of utilization or revenues, or the ability to operate all or a portion of its operations and, consequently, could adversely affect the members of the Obligated Group s ability to payments sufficient to pay principal, interest and premium, if any, due with respect to the Bonds. Competition All Obligated Group Members operate in a highly competitive environment. Obligated Group Members that engage in health care delivery are subject to competition from nontraditional competitors such as national specialty centers, disease management companies and outpatient service providers. Existing and potential competitors may not be subject to various regulations and restrictions applicable to the Obligated Group Members, and may be more flexible in their ability to adapt to competitive opportunities and risks. Further, affiliations or mergers of existing competitors may create larger, more viable entities which may be more formidable competitors than the original constituent entities. Additionally, scientific and technological advances, new procedures, drugs and appliances, preventive medicine and outpatient health care delivery may reduce utilization and revenues of health care providers in the future or otherwise lead the way to new avenues of competition. In some cases, investments in facilities and equipment for capital-intensive services may be lost as a result of rapid changes in diagnosis, treatment or clinical practice brought about by new technology or new pharmacology. See SERVICE AREAS AND COMPETITION Service Areas and Competition in Appendix A hereto for a description of the principal competitors of the Obligated Group in its service areas and certain information regarding service area economics. Obligated Group Members that engage in health care financing components also operate in a highly competitive environment that has undergone significant change in recent periods as a result of health care reform, business consolidations, new strategic alliances, aggressive marketing practices by competitors and other market pressures. The Minnesota health care financing marketplace, in particular, is highly consolidated and highly regulated. Currently, all health maintenance organizations in Minnesota must be nonprofit corporations. A change in law or change in the enforcement of an existing law regarding health maintenance organizations could adversely affect the revenues of the Obligated Group. Increased competition from a wide variety of potential sources, including, but not limited to, health savings accounts and consumer-driven health care vendors, other care systems, including hospitals, inpatient and outpatient health care facilities, clinics, physicians, large insurers, health maintenance organizations, preferred provider organizations, physician hospital organizations, physician services organizations, third party administrators and others, may adversely and increasingly affect the revenues of the Obligated Group. The managed care industry is highly competitive and is subject to continuing changes in how services are provided and how providers are selected and paid. Increased enrollment in prepaid health care plans due to health care reform or for other reasons, increased participation by physicians in group practices and other factors may attract new entrants into the managed care industry and result in increased competition for the System. Consumerdriven health plans present a new source of competition. Under these plans, the consumer maintains a health savings account and purchases a high deductible insurance policy. These types of plans may limit the employer dollars allocated to health insurance which may reduce profitability and/or utilization. If such consumer-driven plans become increasingly popular, the Obligated Group Members could be adversely affected if its consumerdriven plans and other plans are not selected by consumers, or if the impact of such plans reduces elective and/or needed care. Competition may, in the future, arise from new sources not currently anticipated or prevalent. While the effect of such actions is uncertain, it can be expected to increase competition in the health care field generally, and the revenues, as well as the expenses, of the Obligated Group could be adversely affected. Negative Rankings Based on Clinic Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures Payers, 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 providers and the efficiency and effectiveness of health plans. Published rankings such as score 36

43 cards, P4P and other financial and non-financial incentive programs are being introduced that may affect the reputation and revenue of hospitals, their medical staffs, physicians and insurers and to influence the behavior of consumers and providers, including certain Obligated Group Members. 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 health care provider or health plan negatively may adversely affect its reputation and financial condition of the Obligated Group. State Budgets Many states face severe financial challenges, including erosion of general fund tax revenues. These factors have resulted in a shortfall between revenue and spending demands. The financial challenges facing states may negatively affect payers and providers in a number of ways, including, but not limited to, a decrease in the percentage of patients who have private insurance, a greater number of indigent patients who are unable to pay for their care and a greater number of individuals who qualify for Medicaid and/or reductions in Medicaid reimbursement rates. These factors may materially increase costs of operations for the Obligated Group. Health Care Professionals and Other Employees Employee/Labor Relations and Collective Bargaining. The ability of the Obligated Group Members to employ and retain qualified employees, including any senior management, and their ability to maintain good relations with such employees and the unions they may be represented by may affect the quality of services to patients and the financial condition of the Obligated Group Members. Health care systems are large employers with a wide diversity of employees. Increasingly, employees of health care providers are becoming unionized and many providers have collective bargaining agreements with one or more labor organizations. In addition, recent rules have been issued with the intent of making it easier to form, join or assist labor organizations. These factors may materially increase costs of operation for the Obligated Group. Wage and Hour Class Actions and Litigation. Federal law and many states impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforces are susceptible to actual and alleged violations of these standards. In recent years, there has been a proliferation of lawsuits over these wage and hour issues, often in the form of large, sometimes multi-state, class actions. For large employers such as hospitals and health systems, such class actions can involve multi-million dollar claims, judgments and/or settlements. A major class action decided or settled adversely to any Obligated Group Member could have a material adverse impact on its financial condition and result of operations. Currently, no such class action lawsuits are pending against any of the Obligated Group Members. Staffing Shortages. In past years, the health care industry experienced a scarcity of nursing personnel, respiratory therapists, radiation technicians, pharmacists and other trained health care technicians. A significant factor underlying this trend included a decrease in the number of persons entering such professions. As a result of the recent growth in the unemployment rate, however, these shortages have lessened. It is possible such shortages will reappear if the national economic conditions improve and demand for professional and technical staff increases. Competition for employees, coupled with increased recruiting and retention costs, could increase hospital operating costs, possibly significantly. Growth, therefore, could be constrained. Such a trend could have a material adverse impact on the financial conditions and results of operations of certain Obligated Group Members. Physician Shortages. The health care industry has also recently experienced a shortage of physicians, especially in primary care. This physician shortage will be compounded by the expansion of coverage to the uninsured under the Health Care Reform Law. Such a trend could have a material adverse impact on the financial conditions and results of operations of certain Obligated Group Members. Professional Liability Claims and General Liability Insurance. Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against health care providers. Insurance may not provide coverage for judgments for punitive damages. Litigation also arises from the business activities of hospitals, other health care providers, and health plans, from an entity s status as an employer, as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, certain of these risks may not be 37

44 covered by insurance. For example, some antitrust claims or business disputes are not covered by insurance and may, in whole or in part, become a direct liability of a Obligated Group Member if determined or settled adversely. There is no assurance that health care providers will be able to maintain the coverage amounts currently in place in the future, that the coverage will be sufficient to cover malpractice judgments rendered against a provider, or that such coverage will be available at a reasonable cost in the future. Antitrust Enforcement of the antitrust laws against health care payers and providers is common, and antitrust liability may arise in a wide variety of circumstances, including third party contracting, physician relations, and joint venture, merger, affiliation and acquisition activities. In some respects, the application of federal and state antitrust laws to health care is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, health care providers and insurance and health care financing organizations may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants. At various times, the Obligated Group may be subject to an investigation by a governmental agency charged with the enforcement of the antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. The most common areas of potential liability are joint activities among providers with respect to payer contracting, medical staff credentialing, and use of a hospital s local market power for entry into related health care businesses. From time to time, the Obligated Group may be involved in joint contracting or joint venture activity with other hospitals, providers or plans. The precise degree to which this or similar joint contracting or joint venture activities may expose the Obligated Group to antitrust risk from governmental or private sources is dependent on a myriad of factual matters which may change from time to time. Physician Relationships Integrated Physician Groups. As integrated health care providers, certain Obligated Group Members employ large numbers of physicians and have relationships with certain other physician groups. Many hospitals and health systems are pursuing strategies with physicians in order to offer an integrated package of health care services, including physician and hospital services, to patients, health care insurers and managed care providers. These integration strategies may take many forms, including management service organizations that provide physicians or physician groups with a combination of financial and managed care contracting services, office and equipment, office personnel and management information systems. Integration objectives may also be achieved via physician-hospital organizations, or PHOs, organizations which are typically jointly owned or controlled by a hospital and physician group for the purpose of managed care contracting, implementation and monitoring. Other integration structures include hospital-based clinics or medical practice foundations, which may purchase and operate physician practices as well as provide all administrative services to physicians. Additionally, some hospitals and health systems are pursuing accountable care arrangements, which include varying degrees of clinical and financial integration with physician groups and other health care providers to improve efficiencies and quality outcomes for population-management in a risk-sharing model. Many of these integration strategies are capital intensive and may create certain business and legal liabilities for the related hospital or health system. Often the start-up capitalization for such structures, as well as operational deficits, is funded by the sponsoring hospital or health system. Depending on the size and organizational characteristics of a particular strategy, these capital requirements may be substantial. In some cases, the sponsoring hospital or health system may be asked to provide a financial guarantee for the debt of a related entity which is carrying out an integrated delivery strategy. In certain of these structures, the sponsoring hospital or health system may have an ongoing financial commitment to support operating deficits, which may be substantial on an annual or aggregate basis. In addition, participating physicians may seek their independence for a variety of reasons, thus putting the hospital or health system s investment at risk and potentially reducing its managed care leverage and/or overall utilization. These types of integrated delivery strategies are generally designed to conform to existing trends in the delivery of medicine, to implement anticipated aspects of health care reform, to increase physician availability to the community and/or enhance the managed care capability of the affiliated hospital and physicians. However, these 38

45 goals may not be achieved, and, if the structure is not functionally successful, it may produce materially adverse results that are counterproductive to some or all of the above-stated goals. All such integrated delivery strategies carry with them the potential for legal or regulatory risks in varying degrees. Such strategies may call into question compliance with the Medicare fraud and abuse laws, relevant antitrust laws and federal or state tax exemption. Such risks will turn on the facts specific to the implementation, operation or future modification of any integrated delivery system. In addition, depending on the type of structure, a wide range of governmental billing and other issues may arise, including questions of the authorization of the entity to bill for or on behalf of the physicians involved. Other related legal and regulatory risks may arise, including employment, pension and benefits, requirements for risk-bearing organizations, and corporate practice of medicine, particularly in the current atmosphere of frequent and often unpredictable changes in federal and state legal requirements regarding health care and medical practice. The ability of hospitals or health systems to conduct integrated physician operations may also be altered or eliminated in the future by legal or regulatory interpretation or changes or by health care fraud enforcement. Tax-exempt hospitals and health systems also face the risk in affiliating with for-profit entities that the IRS will determine that compensation practices or business arrangements result in private benefit or private use or generate unrelated business income for the hospitals and health systems. Health Care Pricing. Inflation in health care costs may evoke action by legislatures, payers or consumers. It is possible that legislative action at the state or national level may be taken with regard to the pricing of health care services. Physician Medical Staff. 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 or revoked often file legal actions against hospitals and medical staffs. Such actions may include a wide variety of claims, including antitrust claims, some of which could result in substantial uninsured damages to a hospital. Furthermore, from time to time, actions or decisions of hospital management may cause unrest among certain physician groups or members of the medical staff, which could result in legal or other actions, such as resignation from the medical staff. In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties. Physician Supply. Sufficient community-based physician supply is important to hospitals and health systems. A shortage of physicians, especially in primary care, could become a significant issue for health providers to face in the coming years. Any physician shortage will be compounded by the expansion of coverage to the uninsured under the Health Care Reform Law. In addition, CMS annually reviews overall physician reimbursement formulas. Changes to physician compensation formulas could lead to physicians locating their practices in communities with lower Medicare and Medicaid populations. The Obligated Group may be required to invest additional resources for recruiting and retaining physicians or may be required to increase the percentage of employed physicians in order to continue serving the growing population base and maintain market share. Physician Contracting. Certain Obligated Group Members may contract with physician organizations (such as independent physician associations, physician-hospital organizations, and accountable care organizations) to arrange for the provision of physician and ancillary services. Because physician organizations are separate legal entities with their own goals, obligations to shareholders, financial status, and personnel, there are risks involved in contracting with physician organizations. The success of the Obligated Group is partially dependent upon its Members ability to attract physicians to join the physician organizations at facilities operated by the Obligated Group and to participate in their networks, and upon the ability of the physicians, including the employed physicians, 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 physicians will deliver high quality health care services. Without contracting with a sufficient number and type of providers, the Obligated Group could fail to be competitive, could fail to keep or attract payer contracts, or could be prohibited from operating until its physician organizations provide adequate access to patients. Such occurrences could have a material adverse effect on the business or operations of the Obligated Group. 39

46 Health Care Worker Classification. Health care payers and providers, like all businesses, are required to withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the employer becomes liable for payment of the tax imposed on the employee. On the other hand, businesses are not required to withhold federal taxes from amounts paid to a worker classified as an independent contractor. The IRS has established criteria for determining whether a worker is an employee or an independent contractor for tax purposes. If the IRS were to reclassify a significant number of independent contractors of the Obligated Group Members (e.g., physician medical directors at hospitals) as employees, back taxes and penalties could be material. Coding Update The International Classification of Diseases ( ICD ) is the international standard diagnostic classification used for health management purposes, clinical use and billing. HHS mandated a change from the ICD-9 coding standards currently used to ICD-10 standards to be effective October 1, The coding update changes are costly to health care providers and continue to require significant planning, training and updates to the software and systems of certain Members of the Obligations at substantial cost. Environmental Laws and Regulations The Obligated Group Members are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. These include, but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the hospital; and requirements for training employees in the proper handling and management of hazardous materials and wastes. Each Obligated Group Member may be subject to requirements related to investigating and remedying hazardous substances located on their property, including such substances that may have migrated off of their property. Typical health care operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. As such, health care operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such environmental 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; and may result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance. There is no assurance that the Obligated Group Members will not encounter such problems in the future and such problems may result in material adverse consequences to the operations or financial condition of the Obligated Group. At the present time, management of the Obligated Group is not aware of any pending or threatened claim, investigation or enforcement action regarding such environmental issues which, if determined adversely to the Obligated Group Members, taken as a whole, would have a material adverse effect on the Obligated Group s financial condition. Pharmaceutical and Technological Changes Medical research and resulting discoveries have grown exponentially in the last decade. These new discoveries may add greatly to costs of paying for or providing health care services with no or little offsetting increase in federal reimbursement and may also render obsolete certain of the health services provided by health care providers. New drugs and devices may increase hospitals expenses because, for the most part, the costs of new drugs and devices are not typically accounted for in the DRG payment received by hospitals for inpatient care and are often not covered for outpatient services. Similarly, increased utilization of expensive pharmaceutical products or therapies would increase health plan expenses, all of which could negatively affect certain Obligated Group Members. Enforcement of Remedies; Risks of Bankruptcy The obligations of the Obligated Group Members under the Master Indenture and the Master Notes are general obligations of the Obligated Group Members and are not secured by any liens on real estate, equipment or other assets or any pledge of the revenues of the current Obligated Group Members or any future Obligated Group Members, other than the security interest granted to the Master Trustee in the Gross Revenues of the Obligated 40

47 Group Members. Enforcement of the remedies mentioned under the headings DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF PRINCIPAL DOCUMENTS SUMMARY OF MASTER INDENTURE Defaults and Remedies and Rights of Obligation Holders in APPENDIX D hereto may be limited or delayed in the event of application of federal bankruptcy laws or other laws affecting creditors rights and may be substantially delayed and subject to judicial discretion in the event of litigation or the required use of statutory remedial procedures. If a Obligated Group Member were to file a petition for relief under Title 11 of the United States Code (the Bankruptcy Code ), the filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against such Obligated Group Member and any interest it has in property. If the bankruptcy court so ordered, the member s property, including its accounts receivable and proceeds thereof, could be used, at least temporarily, for the benefit of such Obligated Group Member s bankruptcy estate despite the claims of its creditors. In a case under the current Bankruptcy Code, a Obligated Group Member could file a plan of reorganization. The plan is the vehicle for satisfying, and provides for the comprehensive treatment of, all claims against such a Obligated Group Member and could result in the modification of rights of any class of creditors, secured or unsecured. To confirm a plan of reorganization, with one exception discussed below, it must be approved by the vote of each class of impaired creditors. A class approves a plan if, of those who vote, those holding more than one-half in number and at least two-thirds in amount vote in favor of a plan. Approval by classes of interests requires a vote in favor of the plan by two-thirds in amount. If these levels of votes are attained, those voting against the plan or not voting at all are nonetheless bound by the terms thereof. Other than as provided in the confirmed plan, all claims and interests are discharged and extinguished. If fewer than all of the impaired classes accept the plan, the plan may nevertheless be confirmed by the bankruptcy court and the dissenting claims and interests would be bound thereby. For this to occur, at least one of the impaired classes must vote to accept the plan and the bankruptcy court must determine that the plan does not discriminate unfairly and is fair and equitable with respect to the nonconsenting class or classes. The Bankruptcy Code establishes different fair and equitable tests for secured claims and interest holders. To be confirmed, the bankruptcy court must also determine that a plan, among other requirements, provides creditors with not less than would be received in the event of liquidation, is proposed in good faith, and that the debtor s performance is feasible. Risks Related to Obligated Group Financings The obligations of the Obligated Group Members under the Obligations and the Master Indenture are limited to the same extent as the obligations of debtors typically affected by bankruptcy, insolvency and the application of general principles of creditors rights and as additionally described below. The Master Indenture permits the addition of other Obligated Group Members if certain conditions are met. See DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF PRINCIPAL DOCUMENTS SUMMARY OF MASTER INDENTURE Entering the Obligated Group in Appendix D hereto. The joint and several obligations described herein of the Obligated Group Members to make payments of debt service on the Series 2015A Master Notes and Series 2015B Master Note issued pursuant to and under the Master Indenture may not be enforceable to the extent (1) enforceability may be limited by applicable bankruptcy, moratorium, reorganization, fraudulent conveyance or similar laws affecting the enforcement of creditors rights and by general equitable principles or (2) such payments (a) are requested to be made with respect to payments on any Note (other than the Series 2015A Master Notes and Series 2015B Master Note) that is issued for a purpose that is not consistent with the charitable purposes of the Obligated Group Member from which such payment is requested or that is issued for the benefit of any entity other than a tax-exempt organization; (b) are requested to be made from any money or assets that are donor restricted or which are subject to a direct or express trust which does not permit the use of such money or assets for such payment; (c) would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by the Obligated Group Member from which such payment is requested; or (d) are requested to be made pursuant to any loan violating applicable usury laws. The extent to which the money or assets of any present or future Obligated Group Member falls within the categories referred to above cannot be determined and could be substantial. The foregoing notwithstanding, the accounts of the Obligated Group Members are and will continue to be combined for financial reporting purposes and will be used in determining whether various covenants and tests contained in the Master Indenture (including tests relating to the issuance of Additional Indebtedness) are satisfied. 41

48 A Obligated Group Member may not be required to make any payment of any Note or portion thereof or the recipient of such payment may be compelled to return such payment, the proceeds of which were not lent or otherwise disbursed to such Obligated Group Member to the extent that such payment would conflict with or would be prohibited or avoidable under applicable laws. The application of the law relating to the enforceability of guaranties or obligations of a Obligated Group Member to make debt service payments on behalf of another Obligated Group Member is not amenable to an unqualified declaration of whether a transfer would be prohibited or subject to avoidance. As a general matter, in addition to a transfer of property made with the actual intent to hinder, defraud or delay creditors, a transfer of an interest in property by an entity may be avoided if the transfer is made for less than reasonably equivalent value or fair consideration and the transferor (i) is insolvent (e.g., is unable to pay its debts as they become due), (ii) rendered insolvent by the transaction, (iii) is undercapitalized (i.e., operating or about to operate without property constituting reasonably sufficient capital given its business operations) or (iv) intended or expected to incur debts that it could not pay as they became due. The lack of certainty in the treatment of transfers is attributable to several factors. First, there is no true uniform law governing fraudulent transfers. Such transfers may be avoided under the Bankruptcy Code, state law variants of the Uniform Fraudulent Transfer Act and its predecessor, the Uniform Fraudulent Conveyance Act or other non-uniform statutes or common law principles. Second and more importantly, the standards for determining the reasonable equivalence of value or the fairness of consideration and the measure for determining insolvency are subjective standards resolved in the exercise of judicial discretion after engaging in a fact intensive analysis. This subjectivity has resulted in a conflicting body of case law and a lack of certainty as to whether a given transfer would be subject to avoidance. In addition, the Bankruptcy Code provides a means to avoid transfers of a debtor s interests in property made on account of an antecedent debt within 90 days of the debtor filing for relief or one year if the transferee is an insider, if, as a result of that transfer, the transferee receives more than it would have received in a liquidation of the debtor under Chapter 7 of the Bankruptcy Code. Whether the creation of a lien or a payment, made by a Obligated Group Member, would be determined to be avoidable would be dependent on the particular circumstances surrounding the transfer. There exists, in addition to the foregoing, common law authority and authority under various state statutes pursuant to which courts may terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that a corporation has insufficient assets to carry out its stated charitable purposes or has taken some action that renders it unable to carry out its purposes. Such court action may arise on the court s own motion or pursuant to a petition of the attorney general of a particular state or 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. In at least one instance an attorney general of a state other than Minnesota brought suit pursuant to his statutory and common law authority to represent the public interest in the protection of gifts, bequests and devises intended for charitable purposes and obtained a temporary injunction enjoining a convalescent home, constructed and maintained in large part with private contributions, from transferring any of its revenues or assets or making any payments to an out-of-state not for profit corporation with which it was affiliated pursuant to the provisions of a proposed master trust indenture and the master note obligation to be entered into in connection with a bond financing. The convalescent home was not going to receive any of the proceeds of the proposed bond issue. Market for Bonds Subject to prevailing market conditions, the Underwriters intend, but are not obligated, to make a market in the Bonds. There is presently no secondary market for the Bonds and no assurance can be given that a secondary market will develop. Consequently, investors may not be able to resell the Bonds purchased should they need or wish to do so. Tax-Exempt Status; Continuing Legal Requirements The tax-exempt status of interest on the Series 2015A Bonds depends, among other things, upon maintenance by the Borrowers who operate facilities financed or refinanced with the proceeds of the Series 2015A 42

49 Bonds of their status as organizations described in Section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules based on the Code, regulations and judicial decisions regarding the organization and operation of tax-exempt hospitals and health systems. The tax-exempt Obligated Group Members are exempt under two provisions of the Internal Revenue Code; one under Section 501(c)(4) of the Code and others under Section 501(c)(3) of the Code. Other Obligated Group Members are taxable entities. The maintenance by an entity of its tax-exempt status depends, in part, upon its maintenance of its status as an organization described in Sections 501(c)(3) and 501(c)(4) of the Code, which is contingent upon compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of taxexempt entities, including operation for allowable purposes and the avoidance of transactions that may cause net earnings from tax-exempt operations to inure impermissibly to the benefit of private individuals. In addition to violations of the Code, the IRS has asserted that tax-exempt hospitals that are in violation of Medicare and Medicaid regulations regarding inducement for referrals may also be subject to revocation of their taxexempt status. Because a wide variety of hospital-physician transactions potentially violate these broadly stated prohibitions on inducement for referrals, the IRS has broadened the range of activities that may directly affect tax exemption, without defining specifically how those rules will be applied. As a result, tax-exempt hospitals, particularly those that have extensive transactions with physicians, are currently subject to an increased degree of scrutiny and perhaps enforcement by the IRS. The IRS s policy position is not necessarily indicative of a judicial determination of the applicable issues. The IRS closely scrutinizes transactions between tax-exempt entities and for-profit entities. Although specific activities of tax-exempt entities 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. Because the Obligated Group Members conduct significant and diverse activities involving private parties, there can be no assurance that certain of its transactions will not be challenged by the IRS. Additionally, the IRS reserves the right to and in fact occasionally does, alter or reverse its positions concerning tax-exemption issues, even concerning long-held positions upon which tax-exempt health care organizations have relied. This could adversely affect the tax-exempt status of certain Obligated Group Members. Section 4958 of the Code imposes excise taxes on excess benefit transactions between disqualified persons and tax-exempt organizations such as the Obligated Group Members. According to the legislative history and regulations associated with Section 4958, these excise taxes may be imposed by the IRS either in lieu of or in addition to revocation of exemption. These intermediate sanctions may be imposed in situations in which a disqualified person (such as an insider ) engages in excess benefit transactions such as (i) a transaction with a tax-exempt organization on other than a fair market value basis, (ii) receipt of unreasonable compensation from a tax-exempt organization or (iii) receipt of payment in an arrangement that violates the prohibition against private inurement. 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 $20,000 per transaction. A second penalty, in the amount of 200% of the excess benefit, may be imposed on the disqualified person (but not upon the organizational manager) if the excess benefit is not corrected within a specified period of time. Fair market value and reasonable compensation for tax purposes typically reflect a range rather than a specific dollar amount, and the IRS does not rule in advance on whether a transaction results in more than fair market value payment or more than reasonable compensation to a disqualified person. Although it is not possible to predict what enforcement action, if any, the IRS might take related to potential excess benefit transactions, consistent with the legislative history of Section 4958, regulations issued by the IRS in March 2008 indicate that not all excess benefit transactions jeopardize exempt status. Rather, the IRS will consider all relevant facts and circumstances including: the size and scope of the organization s activities that further exempt purposes; the size, scope and frequency of any excess benefit transactions; whether the organization has implemented appropriate safeguards reasonably designed to prevent future excess benefit; and whether the organization has made good faith efforts to correct any excess benefit such as by obtaining repayment of the amount of any excess benefit. Moreover, Section 4958 is potentially favorable to taxpayers because it provides the IRS with a punitive option short of revocation of exempt status to deal with incidents of private inurement. However, the standards for tax exemption have not been changed, including the requirement that no part of the net earnings of an exempt entity inure to the benefit of any private individual. Consequently, although the IRS has only infrequently revoked the tax 43

50 exemption of nonprofit health care corporations in the past, the risk of revocation remains and there can be no assurance that the IRS will not direct enforcement activities against any of the Obligated Group Members. In certain cases, the IRS has imposed substantial monetary penalties and future charity care or public benefit obligations on tax-exempt hospitals in lieu of revoking their tax-exempt status, as well as requiring that certain transactions be altered, terminated or avoided in the future and/or requiring governance or management changes. These penalties and obligations are typically imposed on the tax-exempt hospital pursuant to a closing agreement with respect to the hospital s alleged violation of Section 501(c)(3) exemption requirements. Given the uncertainty regarding how tax-exemption requirements may be applied by the IRS, Obligated Group Members could be at risk for incurring monetary and other liabilities imposed by the IRS in the event of a private inurement finding through this closing agreement or similar process. Like certain of the other business and legal risks described herein which apply to large multi-hospital systems, these liabilities are probable from time to time and could be substantial, in some cases involving millions of dollars, and in extreme cases could be materially adverse. The Health Care Reform Law places additional requirements on tax-exempt hospitals in order to receive and maintain their Section 501(c)(3) federal tax exempt status. One significant new requirement is that tax-exempt hospitals must perform a community health needs assessment every three years and develop an implementation strategy to meet the identified needs. Requirements relating to community health needs assessments became effective for taxable years beginning after March 23, 2012, while other requirements were effective for taxable years beginning after March 23, Any tax-exempt hospital that fails to satisfy the community health needs assessment requirement for any taxable year will be subject to an excise tax penalty of $50,000. Furthermore, the United States Secretary of the Treasury or that individual s delegate is to review the community benefit activities of each tax-exempt hospital at least every three years. Another major element of the Health Care Reform Law relating to tax-exempt status of hospitals involves charges. A hospital must limit the amounts charged for emergency room or other medically necessary care provided to patients eligible for assistance under the hospital s financial assistance policy to no more than the amounts generally billed to patients who have insurance covering such care. In other words, hospitals cannot charge persons eligible for financial assistance higher rates than the amounts generally billed to patients who have insurance covering such care. The Health Care Reform Law also requires that taxexempt hospitals have a written financial assistance policy in place. Finally, the Health Care Reform Law prohibits a hospital from engaging in extraordinary collection actions (which may include, among other things, a restriction on filing suit) before it has made reasonable efforts to determine whether the subject individual is eligible for financial assistance. Final regulations interpreting various portions of these new requirements were issued on December 29, 2014, to be effective for taxable years beginning after December 29, The Treasury is required to review information about each tax-exempt hospital s community benefit activities at least once every three years, as well as to submit an annual report to Congress with information regarding the levels of charity care, bad debt expenses, unreimbursed costs of government programs, and costs incurred by tax-exempt hospitals for community benefit activities. The periodic reviews and reports to Congress regarding the community benefits provided by 501(c)(3) hospitals may increase the likelihood that Congress will require such hospitals to provide a minimum level of charity care in order to retain tax-exempt status and may increase IRS scrutiny of particular 501(c)(3) hospital organizations. Legislative bodies have considered legislation concerning the charity care standards that nonprofit, charitable health care providers must meet to maintain their federal income tax-exempt status under the Code and legislation mandating nonprofit, charitable hospitals to have an open-door policy toward Medicare and Medicaid patients as well as offer, in a non-discriminatory manner, qualified charity care and community benefits. The scope and effect of legislation, if any, which may be adopted at the federal or state levels with respect to charity care of nonprofit hospitals cannot be predicted. Any such legislation or similar legislation, if enacted, may have the effect of subjecting a portion of the income of a Obligated Group Member to federal or state income taxes or to other tax penalties and adversely affect the ability of the Obligated Group Members individually and of the Obligated Group, taken as a whole, to generate net revenues sufficient to meet its obligations and to pay the debt service on the Series 2015A Master Notes and Series 2015B Master Note and its other obligations. The Tax Exempt and Governmental Entities Division of the IRS is responsible for the Team Examination Program (referred to as TEP ) of the IRS which conducts audits of exempt organizations using teams of revenue agents. The TEP audit teams consider a wide range of possible issues, including tax-exempt bond financing. In addition, the IRS conducts compliance checks and correspondence audits that focus initially on limited issues, such as executive compensation, unrelated business income or community benefit. Such limited scope reviews can be expanded in certain circumstances to include a variety of other issues as in a TEP audit. 44

51 Any Obligated Group Member could be audited by the IRS. Management of the Obligated Group believes that it has properly complied with the tax laws. Nevertheless, because of the complexity of the tax laws and the presence of issues about which reasonable persons can differ, a future TEP or other audit could result in additional taxes, interest and penalties. A future TEP or other audit also could ultimately affect the tax-exempt status of any of the Obligated Group Members. In addition, as a result of the increased scrutiny of community benefit activity by the IRS, tax-exempt hospitals may be required to increase resources spent on qualifying activities. On February 12, 2009, the IRS released its Final Report containing the results of a two-year study focusing on community benefit reporting practices and executive compensation practices of tax-exempt hospitals. The results are based on a compliance check survey the IRS sent to 500 hospitals in May 2006 and builds on the analysis of results first released by the IRS in its Interim Report in July 2007, and the results of a 2004 compliance check on executive compensation arrangements of 501(c)(3) tax-exempt organizations generally, a final report on which was issued in March The Final Report, however, does not reach specific conclusions concerning whether the existing community benefit standard is appropriate and whether tax-exempt hospital executives are being compensated appropriately. In recent years, with high turnover in the leadership of the IRS exempt organizations division, and some unexpected decisions and interpretations of the requirements of the community benefit test in relation to 501(c)(4) network model HMOs, it is possible there may be modifications to exemption criteria that could cause uncertainty about the continuing tax-exemption of these types of entities. Loss of tax-exempt status by any of the Obligated Group Members could result in loss of the exclusion from gross income of the interest on the Series 2015A Bonds that, in turn, could result in a default under the Bond Indenture, potentially triggering an acceleration of the Series 2015A Bonds. Any such event would have material adverse consequences on the future financial condition and results of operations of the affected Obligated Group Members and, potentially, the Obligated Group as a whole. Additionally, the loss of federal tax-exempt status by a Obligated Group Member could adversely affect its access to future tax-exempt financing. Maintenance of Tax-Exempt Status of Interest on the Series 2015A Bonds The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Series 2015A Bonds, to be excludable from gross income for federal income tax purposes. Future failure by the Borrowers to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Series 2015A Bonds as taxable, retroactively to the date of issuance. The Borrowers have covenanted in the Loan Agreements and the Tax Exemption Agreements that they will not take any action or refrain from taking any action that would cause interest on the Series 2015A Bonds to be included in gross income for federal income tax purposes. IRS officials have indicated that more resources will be invested in compliance projects and audits of taxexempt bonds, including the use of bond proceeds, in the charitable organization sector, with specific reviews of private use. The IRS sent post-issuance compliance questionnaires to several hundred nonprofit corporations that had borrowed on a tax-exempt basis. After analyzing responses, IRS representatives indicated that it had commenced a number of examinations of hospital tax-exempt bond issuances with wide-ranging areas of inquiry. In the final report, issued July 1, 2011, summarizing the findings and conclusions of the questionnaires, the IRS stressed the importance of formal post-issuance compliance and record-keeping procedures which, once implemented, the Borrowers should continuously review. The IRS suggested that it may issue future questionnaires as part of its goal to promote post-issuance compliance. There can be no assurance that responses by the Borrowers or the Obligated Group to an IRS examination or questionnaire, or Form 990, will not lead to an IRS review that could adversely affect the tax-exempt status or the market value of the Series 2015A Bonds or of other outstanding tax-exempt indebtedness of the Borrowers or the Obligated Group. Additionally, the 2015A Bonds, or other tax-exempt obligations issued for the benefit of the Borrowers or the Obligated Group may be, from time to time, subject to examination by the IRS. Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Series 2015A Bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest. For example, in 2014, Representative Dave Camp, Chair of the House Ways and Means Committee released draft legislation that would subject interest on the 45

52 Series 2015A Bonds to a federal income tax at an effective rate of 10% or more for individuals, trusts, and estates in the highest tax bracket, and the Obama Administration proposed legislation that would limit the exclusion from gross income of interest on the Series 2015A Bonds to some extent for high-income individuals. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Series 2015A Bonds and Series 2015B Bonds, by association. Prospective purchasers of the Series 2015A Bonds should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion. There can be no assurance that an examination of the Series 2015A Bonds will not adversely affect the market value of the Series 2015A Bonds, nor that future legislative action might limit or remove the tax-exempt status of interest on the Series 2015A Bonds. Bond Ratings There can be no assurance that the ratings assigned to the Bonds at the time of issuance will not be lowered or withdrawn at any time, the effect of which could adversely affect the market price for and marketability of the Bonds. See the information under the heading RATINGS. No Mortgage The Bonds are not secured by a mortgage on the property of the Obligated Group. Security for the Bonds is limited to the security expressly pledged to the payment of the Bonds pursuant to the Bond Indenture. No Debt Service Reserve The Bond Indenture does not establish a debt service reserve fund and no such fund is otherwise available for payment of debt service on the Bonds. Additional Risk Factors The following factors, among others, may also adversely affect the operation of health care payers and providers, including the Obligated Group Members, to an extent that cannot be determined at this time: 1. Increasing deficits and other financial pressure experienced by both state and federal governments could result in significant reductions or delays in payments from governmental payers, especially Medicare and Medicaid, or in the reduction or elimination of coverage for some of the plans and services provided by the Obligated Group. 2. An inflationary economy without corresponding increases in revenue could result from, among other factors: increases in the salaries, wages and fringe benefits of employees; increases in costs associated with advances in medical technology or with inflation; or future legislation which would prevent or limit the ability of the Obligated Group to increase revenues. 3. Changes in sources of revenue and case mix intensity may adversely affect the Obligated Group s operating revenues. 4. Competition from other health care providers or systems now or hereafter located in the service area of the Obligated Group could adversely affect its operations. The Obligated Group could also be adversely affected by economic trends and changes in the demographics of its service area. 5. Future contract negotiations between providers and the Obligated Group or other payers and Obligated Group could adversely affect membership and revenues of the Obligated Group s health plans and/or the level of utilization and compensation of the Obligated Group s health care providers. In addition, it is possible that competitive pricing of plan premiums could cause a payer to operate at a loss and expose the Obligated Group to delays in payment or nonpayment of claims for services to plan participants. 6. Any termination or alteration of referral patterns by individual physicians and physician groups who render services to the patients of the Member with whom such Member does not have contractual arrangements could adversely affect the Obligated Group s operations. 46

53 7. The State of Minnesota currently does not have a program for the limitation or setting of the rates charged for services furnished to private paying patients. If any such program limiting or setting rates were established, it may have an adverse effect on the revenues of the Obligated Group Members. 8. The possible inability to obtain future governmental approvals, to undertake projects necessary to remain competitive both as to rates and charges as well as quality and scope of care could adversely affect the operations of the Obligated Group Members. 9. Imposition of wage and price controls for the health care industry, such as those that were imposed and adversely affected health care facilities in the early 1970s, could adversely affect the Obligated Group s operations. 10. A shortage of qualified professional personnel, including registered nurses, or minimum staffing ratios could significantly increase payroll costs of the Obligated Group. 11. Increased unemployment or other adverse economic conditions which could increase the proportion of patients who are unable to pay fully for the cost of their care, which could adversely affect the Obligated Group s revenues. In addition, increased unemployment caused by a general downturn in the economy of the Obligated Group s service areas or by the closing of operations of one or more major employers in such service areas may result in a significant change in the demographics of such service areas, such as a reduction in the population. 12. Efforts by taxing authorities to impose or increase taxes related to the property and operations of nonprofit organizations or to cause nonprofit organizations to increase the amount of services provided to indigents to avoid the imposition or increase of such taxes could adversely affect the Obligated Group s revenues. 13. Proposals to eliminate the tax-exempt status of interest on bonds issued to finance health facilities or to limit the use of such tax-exempt bonds, have been made in the past and may be made again in the future. The adoption of such proposals would increase the cost to the Obligated Group Members of financing future capital needs. 14. The possible inability to obtain future governmental approvals to undertake projects which the Obligated Group deems necessary to remain competitive as to rates and charges and to maintain the quality and scope of care could adversely affect the Obligated Group s operations. 15. A flu pandemic or other public health incident, a terrorist attack, a natural disaster or political crisis may adversely affect the Obligated Group Members. 16. HealthPartners is currently evaluating purchasing electricity from a solar garden in accordance with Minnesota public utility commission guidelines. The purchase entails purchasing energy from the solar garden operator and receiving larger energy credits from HealthPartners current electricity utility, for a term up to 25 years. The transaction is expected to be structured so that there is no material impact on HealthPartners balance sheet. 17. In the future, other events may adversely affect the operation of the Obligated Group Members, as well as other health care facilities, in a manner and to an extent that cannot be determined at this time. RATINGS Moody s Investors Service has assigned a long-term rating of A2 with a Stable outlook to the Bonds. Standard & Poor s has assigned a long-term rating of A with a Stable outlook to the Bonds. Any explanation of the significance of such ratings may only be obtained from the respective rating agency. Any such credit rating will reflect only the views of such credit rating agency. There is no assurance that any such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by the rating agency if in its judgment circumstances so warrant. Any revision or withdrawal of a rating may have an adverse effect on the market price of the Bonds. Neither rating is a recommendation to buy, sell or hold the Bonds and each such rating should be evaluated independently. 47

54 AUDITED FINANCIAL STATEMENTS The consolidated financial statements of HealthPartners and subsidiaries as of and for the years ended December 31, 2014 and 2013, included in Appendix B of this Official Statement have been audited by KPMG LLP, Minneapolis, Minnesota (the Auditors ), independent auditors, as stated in their report appearing in Appendix B. UNAUDITED FINANCIAL STATEMENTS Appendix C to this Official Statement contains the unaudited financial statements of HealthPartners and its subsidiaries as of and for the three-month period ended March 31, 2015, with comparison to the three-month period ended March 31, Operating results for the three month-period ended March 31, 2015, are not necessarily indicative of the results that may be expected for the entire fiscal year of HealthPartners and its subsidiaries ending December 31, See APPENDIX C UNAUDITED FINANCIAL STATEMENTS hereto. TAX EXEMPTION AND RELATED CONSIDERATIONS SERIES 2015A BONDS In the opinion of Bond Counsel, Kennedy & Graven, Chartered, Saint Paul, Minnesota, under present laws, regulations, rulings and judicial decisions, assuming continuing compliance with the applicable covenants set forth in the Tax Exemption Agreements, the Loan Agreements and the Bond Trust Indenture, interest on the Series 2015A Bonds (a) is not includable in the net taxable income of individuals, trusts, or estates for State of Minnesota income tax purposes; (b) is not an item of tax preference for purposes of computing the federal alternative minimum tax imposed on individuals and corporations and the Minnesota alternative minimum tax applicable to individuals, estates and trusts; and (c) is taken into account in determining adjusted current earnings for the purpose of computing the federal alternative minimum tax imposed on certain corporations and is subject to the State of Minnesota franchise tax imposed on corporations and financial institutions. Other Tax Considerations Interest on the Series 2015A Bonds is includable in the calculation of modified adjusted gross income in determining whether Social Security or railroad retirement payments are to be included in taxable income of individuals. Under the Code, certain financial institutions, such as banks and savings and loan associations, are not allowed to deduct any portion of the interest expense allocable to the acquisition or carrying of the Series 2015A Bonds. Under the Code, the deduction available to property and casualty insurance companies for losses incurred would be reduced by a percentage of such insurance company's tax-exempt interest from the Series 2015A Bonds. The Code contains an alternative minimum tax provision applicable to corporations. For purposes of computing the amount of the alternative minimum taxable income for any taxable year to which this tax would be applied in the case of corporations (other than any regulated investment company, real estate investment trust, S corporation or REMIC), the "earnings and profits" of such corporation are required to be included in such computation. The term "earnings and profits" includes all tax-exempt interest, including interest on the Series 2015A Bonds. Interest on the Series 2015A Bonds may also be subjected to federal taxation in connection with the branch profits tax applicable to foreign corporations. Passive investment income, including interest on the Series 2015A Bonds, may be subject to federal taxation under Section 1375 of the Internal Revenue Code for S corporations that have Subchapter C earnings and profits at the close of the taxable year if a certain percentage of the gross receipts of such S Corporation consists of passive investment income. Original Issue Discount The Series 2015A Bonds with stated maturities in 2026, 2027, and 2035 (the Discount Bonds ) are being sold at a discount from the principal amount payable on such Series 2015A Bonds at maturity. The difference between the price at which a substantial amount of the Discount Bonds of a given maturity is first sold to the public (the Issue Price ) and the principal amount payable at maturity constitutes original issue discount under the Code. The amount of original issue discount that accrues to a holder of a Discount Bond under Section 1288 of the 48

55 Code is excluded from gross income for federal income tax purposes and from taxable net income of individuals, estates and trusts for Minnesota income tax purposes to the same extent that stated interest on such Discount Bonds would be so excluded. The amount of the original issue discount that accrues with respect to a Discount Bond under Section 1288 is added to the owner s tax basis in determining gain or loss upon disposition of such Discount Bond (whether by sale, exchange, redemption or payment at maturity.) Interest in the form of original issue discount accrues under Section 1288 pursuant to a constant yield method that reflects semiannual compounding on days that are determined by reference to the maturity date of the Discount Bond. The amount of original issue discount that accrues for any particular semiannual accrual period generally is equal to the excess of (1) the product of (a) one-half of the yield on such Series 2015A Bonds (adjusted as necessary for an initial short period) and (b) the adjusted issue price of such Series 2015A Bonds, over (2) the amount of stated interest actually payable. For purposes of the preceding sentence, the adjusted issue price is determined by adding to the Issue Price for such Series 2015A Bonds the original issue discount that is treated as having accrued during all prior semiannual accrual periods. If a Discount Bond is sold or otherwise disposed of between semiannual compounding dates, then the original issue discount that would have accrued for that semiannual accrual period for federal income tax purposes is to be apportioned in equal amounts among the days in such accrual period. If a Discount Bond is purchased for a cost that exceeds the sum of (1) the Issue Price, plus (2) accrued interest and accrued original issue discount, the amount of original issue discount that is deemed to accrue thereafter to the purchaser is reduced by an amount that reflects amortization of such excess over the remaining term of such Bond. Except for the Minnesota rules described above, no opinion is expressed as to state and local income tax treatment of original issue discount. It is possible under certain state and local income tax laws that original issue discount on a Discount Bond may be taxable in the year of accrual, and may be deemed to accrue differently than under federal law. Holders of Discount Bonds should consult their tax advisors for advice with respect to the state and local tax consequences of owning Discount Bonds. Original Issue Premium The initial public offering price of the Series 2015A Bonds with stated maturities in 2016 through 2025 and 2028 through 2032, and the Series 2015A Bonds with a 5.000% interest rate and a stated maturity in 2033 (the Premium Bonds ) is greater than the amount payable at maturity. To the extent that a purchaser of a Premium Bond acquires a Premium Bond in the initial public offering at a price greater than the principal amount payable at maturity, such excess may be considered amortizable bond premium under Section 171 of the Code. In general, (i) any amortizable bond premium with respect to a Premium Bond must be amortized under the Code, (ii) the amount of premium so amortized will reduce the owner s tax basis in such Premium Bond for federal income tax purposes, and (iii) such amortized premium is not deductible from the gross income of the owner for federal income tax purposes. In the case of tax-exempt debt instruments (such as the Premium Bonds) subject to early redemption, including for example, mandatory sinking fund redemption, the bond premium rules include special rules that impact the period over which the premium is to be amortized. The rate of the amortization of the bond premium and the corresponding reduction in tax basis may result in an owner realizing a taxable gain when a Premium Bond owned by such owner is sold or disposed of for an amount equal to or less than such Premium Bond s original cost. Purchasers of Premium Bonds should consult their own tax advisors as to the computation and treatment of such amortizable bond premium, including, but not limited to, the calculations of gain or loss upon the sale, redemption, maturity, receipt of principal or other dispositions of a Premium Bond. Owners of Premium Bonds should consult their own tax advisors with respect to the state and local tax consequences of owning the Premium Bonds. TAXABILITY OF INTEREST SERIES 2015B BONDS Interest on the Series 2015B Bonds is included in (a) gross income for federal income tax purposes, (b) net investment income for purposes of the new 3.8% unearned income Medicare contribution tax imposed by Section 1411 of the Code on certain individuals, estates and trusts with income exceeding specified amounts, (c) taxable net income of individuals, estates, and trusts for Minnesota income tax purposes, and (d) taxable income for purposes of the Minnesota franchise tax on corporations and financial institutions. 49

56 No other opinion has been obtained or is given regarding the federal, state or local tax consequences of the purchase, ownership, retirement or disposition of the Series 2015B Bonds. Prospective purchasers or bondholders should consult with their own tax advisors concerning such tax issues, including, without limitation, anticipated and potential changes in tax rates on interest income, the treatment of interest in jurisdictions other than Minnesota, the calculation and timing of the inclusion of interest in income, the tax consequences of dispositions of Series 2015B Bonds at a gain or loss and the determination of the amount thereof, rules applicable if Series 2015B Bonds are issued or acquired at a premium or discount from their face amount (including without limitation the possible treatment of accrued market discount as ordinary income, deferral of certain interest deductions attributable to indebtedness incurred or continued to purchase or hold Series 2015B Bonds, and the amortization of market premium). Interest payments and proceeds of the sale, exchange, redemption or retirement of Series 2015B Bonds are expected to be reported to the Internal Revenue Service to the extent required by law. A backup withholding tax might apply to payments to bondholders under circumstances described in section 3406 of the Code, including without limitation failure of the bondholder to provide the bondholder s tax identification number or certain other information. Payments to bondholders who are not U.S. residents or which are foreign entities might also be subject to tax withholding in certain circumstances. CONTINUING DISCLOSURE UNDERTAKING HealthPartners, on behalf of itself and the other Obligated Group Members, will enter into a Continuing Disclosure Agreement dated as of the date of issuance of the Bonds (the Continuing Disclosure Agreement ) for the benefit of the bondholders in accordance with the requirements of Section (b)(5) of Rule 15c2-12 (the Rule ) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934 to provide certain information annually and quarterly and to provide notice of certain events to information repositories designated in the Continuing Disclosure Agreement pursuant to the requirements of Section (b)(5) of the Rule. The information to be provided on an annual and quarterly basis, the events which will be noticed on an occurrence basis and the other terms of the Continuing Disclosure Agreement, including termination, amendment and remedies, are set forth in the form of the Continuing Disclosure Agreement set forth in Appendix E hereto. Failure by HealthPartners to comply with the Continuing Disclosure Agreement will not constitute an event of default under the Master Indenture, the Bond Indenture or the Loan Agreement and bondholders are limited to the remedies described in the Continuing Disclosure Agreement. See the information in Appendix E hereto. Failure by HealthPartners to comply with the Continuing Disclosure Agreement must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Bonds in the secondary market. Consequently, any such failure may adversely affect the transferability and liquidity of the Bonds and their market price. Group Health was a party to a continuing disclosure undertaking with respect to bonds that were issued in 2003 and were fully redeemed on March 19, In the four years preceding the redemption date, Group Health fully complied with its continuing disclosure undertaking. Regions Hospital is a party to a continuing disclosure undertaking with respect to the Series 2006 Bonds to be refunded. During the last five years, Regions has fully complied with its continuing disclosure undertaking. Park Nicollet is a party to continuing disclosure undertakings with respect to the Series 2008C Bonds and Series 2009 Bonds to be refunded. Park Nicollet has recently determined that during the last five years preceding the date of this Official Statement, it failed to comply with its continuing disclosure undertakings as follows: (i) for fiscal year 2009, it did not provide second quarter utilization statistics; (ii) for fiscal years 2009 through 2011, it did not provide its historical pro forma ratio analysis; and (iii) for fiscal years 2009 through 2011 and 2013, it did not provide an Officer s Certificate Regarding Debt Service Coverage. Park Nicollet has corrected the missed filings. The Issuer does not have any obligation with respect to the Continuing Disclosure Agreement because the Issuer is not an obligated party under the terms of the Rule. The Issuer will not monitor the compliance by HealthPartners with the terms of the Continuing Disclosure Agreement. 50

57 LEGAL MATTERS Legal matters incident to the authorization and issuance of the Bonds are subject to the approval of Kennedy & Graven, Chartered, Saint Paul, Minnesota, Bond Counsel to the Issuer, whose approving opinions with respect to the Bonds will be delivered with the Bonds. The proposed form of the approving opinion with respect to the Bonds is contained in Appendix F hereto. Certain legal matters will be passed upon for the Obligated Group by its counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota, and for the Underwriters by their counsel, Dorsey & Whitney LLP, Minneapolis, Minnesota. RELATIONSHIPS AMONG THE PARTIES In other transactions not related to the Bonds, Kennedy & Graven, Chartered, Dorsey & Whitney LLP, and Gray, Plant, Mooty, Mooty & Bennett, P.A., may have acted as Bond Counsel or represented the Issuer, the Obligated Group or one or more Obligated Group Members, the Underwriters, the Trustee, or their affiliates, in capacities different from those described under LEGAL MATTERS herein, and there will be no limitations imposed as a result of the issuance of the Bonds on the ability of these law firms or attorneys therewith to act as Bond Counsel or represent any of these parties in any future transaction. Potential purchasers of the Bonds should assume that the Issuer, the Obligated Group, the Trustee and the Underwriters or their respective counsel have previously engaged in or will, after the issuance of the Bonds, engage in, other transactions with each other or with any affiliates of any of them, and no assurances can be given that there are or will be no past or future relationship or transaction between or among any of these parties or these law firms. Wells Fargo Bank, National Association, one of the underwriters of the Series 2015 Bonds, is also serving as Trustee, Escrow Agent, and Dissemination Agent. A member of the Board of Directors of HealthPartners is also employed by Wells Fargo. She did not participate in the selection of the Underwriters and has no financial interest in any compensation that may be received by the Underwriters in connection with the Series 2015 Bonds. See APPENDIX A INFORMATION CONCERNING THE HEALTHPARTNERS OBLIGATED GROUP GOVERNANCE AND MANAGEMENT OF THE OBLIGATED GROUP Conflicts of Interest in this Official Statement. The Issuer LITIGATION To the actual knowledge of the Issuer, there is no litigation pending against the Issuer seeking to restrain or enjoin the issuance or delivery of the Bonds, questioning or affecting the legality of the Bonds or the proceedings and authority under which the Bonds are to be issued or questioning the validity or enforceability of the Bond Indenture, the Bond Purchase Agreement or the Loan Agreements. The Obligated Group At the time of the delivery of and payment for the Bonds, the Obligated Group will certify that there is no controversy or litigation of any nature at such time pending, or to the best knowledge of the officers thereof, threatened to restrain or enjoin the issuance, sale, execution or delivery of the Bonds, or the execution and delivery of the Loan Agreements, the Series 2015 Master Notes, the Master Indenture, or any related agreement, or questioning the corporate status of any of the Obligated Group Members. For a discussion of pending litigation concerning the Obligated Group, see the caption INSURANCE AND LITIGATION Litigation in Appendix A to this Official Statement. See also RISK FACTORS Regulatory and Contractual Matters in this Official Statement. UNDERWRITING The Bonds are being purchased by the Underwriters pursuant to a Bond Purchase Agreement (the Bond Purchase Agreement ) by and among the Underwriters, the Issuer and HealthPartners on behalf of itself and the Obligated Group. The Underwriters have agreed to purchase the Series 2015A Bonds at an aggregate purchase price of $330,431, (representing the original principal amount of the Series 2015A Bonds ($306,395,000), plus a net reoffering premium of $25,491,592.60, less Underwriters compensation of $1,455,376.25). The Underwriters have agreed to purchase the Series 2015B Bonds at an aggregate purchase price of $190,918, (representing the original principal amount of the Series 2015B Bonds ($191,830,000) less Underwriters compensation of $911,192.50). The Bond Purchase Agreement provides that the Underwriters will purchase all of the Bonds if any are purchased. 51

58 The Underwriters intend to offer the Bonds to the public initially at the offering price set forth on the inside front cover page of this Official Statement, which may subsequently change without any requirement of prior notice. The Underwriters reserve the right to join with dealers and other underwriters in offering the Bonds to the public. The Underwriters may offer and sell the Bonds to certain dealers (including dealers depositing the Bonds into investment trusts) at prices lower than the public offering prices. In connection with this offering, the Underwriters may over allot or effect transactions which stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. HealthPartners has agreed to indemnify the Underwriters against certain civil liabilities, including certain liabilities under the federal securities laws. Piper Jaffray & Co. has entered into a distribution agreement (for purposes of this paragraph only, the Pershing Distribution Agreement ) with Pershing LLC, a subsidiary of the Bank of New York Mellon Corporation ( Pershing ) for the retail distribution of certain securities offerings. Pursuant to the Pershing Distribution Agreement, Pershing will purchase Bonds from Piper Jaffray & Co. at the original issue price less a negotiated portion of the selling concession applicable to any Bonds that Pershing sells. Wells Fargo Bank, National Association ( WFBNA ), one of the underwriters of the Bonds, has entered into an agreement (for purposes of this paragraph only, the WFA Distribution Agreement ) with its affiliate, Wells Fargo Advisors, LLC ( WFA ), for the distribution of certain municipal securities offerings, including the Bonds. Pursuant to the WFA Distribution Agreement, WFBNA will share a portion of its underwriting or remarketing agent compensation, as applicable, with respect to the Bonds with WFA. WFBNA also utilizes the distribution capabilities of its affiliate Wells Fargo Securities, LLC ( WFSLLC ), for the distribution of municipal securities offerings, including the Bonds. In connection with utilizing the distribution capabilities of WFSLLC, WFBNA pays a portion of WFSLLC s expenses based on its municipal securities transactions. WFBNA, WFSLLC, and WFA are each wholly-owned subsidiaries of Wells Fargo & Company. Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association. THE MASTER TRUSTEE AND BOND TRUSTEE Wells Fargo Bank, National Association, a national banking association organized and operating under the laws of the United States, will serve as Bond Trustee, Master Trustee, Bond Registrar, Paying Agent, and Tender Agent (the Trustee ). The Trustee is to carry out those duties assignable to it under the Bond Indenture and the Master Indenture. Except for the contents of this section, the Trustee has not reviewed or participated in the preparation of this Official Statement and assumes no responsibility for the nature, contents, accuracy, fairness or completeness of the information set forth in this Official Statement or for the recitals contained in the Bond Indenture or the Master Indenture or the Bonds, or for the validity, sufficiency, or legal effect of any such documents. The mailing address of the Trustee is Wells Fargo Bank, National Association, 625 Marquette Avenue, 11 th Floor, N , Minneapolis, Minnesota MISCELLANEOUS The references herein to the Act, the Bond Indenture, the Master Indenture, the Supplemental Indenture No. 8, the Supplemental Indenture No. 9, the Supplemental Indenture No. 10, the Supplemental Indenture No. 11, the Series 2015A Master Notes, the Series 2015B Master Note, the Loan Agreements, the Continuing Disclosure Agreement, the Series 2015A Bonds and the Series 2015B Bonds are brief outlines of certain provisions thereof. Such outlines do not purport to be complete, and, for full and complete statements of the provisions thereof, reference is made to the Act, the Bond Indenture, the Master Indenture, the Supplemental Indenture No. 8, the Supplemental Indenture No. 9, the Supplemental Indenture No. 10, the Supplemental Indenture No. 11, the Series 2015A Master Notes, the Series 2015B Master Note, the Loan Agreements, the Continuing Disclosure Agreement, the Series 2015A Bonds and the Series 2015B Bonds. Copies of such documents are on file at the offices of the Issuer and the Underwriters and following delivery of the Bonds will be on file at the office of the Bond Trustee. The agreement of the Issuer with the Holders of the Bonds is fully set forth in the Bond Indenture, and neither any advertisement of the Bonds nor this Official Statement is to be construed as constituting an agreement with the purchasers of the Bonds. The Obligated Group and the Issuer have approved the use and distribution of this 52

59 Official Statement, although the Issuer has not reviewed or approved any matters herein and assumes no responsibility for the accuracy or completeness of the information herein except for the information under the captions THE ISSUER and LITIGATION The Issuer in this Official Statement. Statements made in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, are intended merely as such and not as representations of facts. The attached Appendices A, B, C, D, E, F, and G are integral parts of this Official Statement and must be read together with all of the foregoing statements. The Obligated Group reviewed the information contained herein which relates to the Obligated Group, its property and other assets and its operations and has approved all such information for use within this Official Statement. HEALTHPARTNERS, INC. By: /s/ David Dziuk Its: Chief Financial Officer 53

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61 APPENDIX A INFORMATION CONCERNING THE HEALTHPARTNERS OBLIGATED GROUP

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63 TABLE OF CONTENTS INTRODUCTION... A-1 THE HEALTHPARTNERS SYSTEM... A-1 Overview Integrated Health Care... A-1 OBLIGATED GROUP MEMBERS... A-5 NON-OBLIGATED AFFILIATES... A-6 Non-Obligated Care Delivery Affiliates; Foundations... A-6 Research and Education... A-7 Real Estate, Support Personnel... A-7 Other Non-Obligated Affiliates... A-7 GOVERNANCE AND MANAGEMENT OF THE OBLIGATED GROUP... A-8 Overview... A-8 HealthPartners, Inc. Board of Directors... A-8 Conflicts of Interest... A-8 HealthPartners Management... A-9 THE HEALTH PLAN... A-12 Obligated Group Members Providing Health Plan Products... A-12 Health Plan Market Area... A-12 Membership/Enrollment by Product Segment... A-14 Membership/Enrollment by Market Segment... A-14 Membership/Enrollment Trends... A-15 Health Plan Competition... A-16 Awards and Recognition... A-16 HEALTH CARE DELIVERY... A-17 Overview... A-17 Clinic Operations... A-17 Hospital Operations... A-18 Non-Obligated Group Hospitals... A-22 Recent and Current Capital Improvement Projects... A-22 CARE DELIVERY SERVICE AREA AND UTILIZATION... A-23 The Twin Cities Market Environment... A-23 Key Payers... A-24 Service Areas Patient Origin... A-25 Utilization... A-26 Net Patient Service Revenue by Source of Payment... A-27 Collective Bargaining Contracts... A-27 FINANCIAL AND OTHER INFORMATION... A-28 Summary Financial Highlights... A-28 Management s Discussion and Analysis of Financial Position of HealthPartners System for the Years Ended December 31, 2014 and A-29 Management s Discussion and Analysis of Financial Position of HealthPartners System for the Quarters Ended March 31, 2015 and A-31 Historical Financial Information... A-33 Pro Forma Debt Service Coverage... A-34 Capitalization... A-35 Investment Management... A-36 Historic Disclosure Available on EMMA... A-36 Insurance and Litigation... A-36 A-i

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65 INTRODUCTION HealthPartners, Inc. is a Minnesota nonprofit corporation exempt from federal income taxation pursuant to Section 501(c)(4) of the Internal Revenue Code of 1986, as amended (the Code ) ( HealthPartners ). HealthPartners is the parent organization in a family of health care related entities (the HealthPartners System or the System ). As more fully described in the forepart of this Official Statement, the $306,395,000 Health Care Facility Revenue Refunding Bonds, Series 2015A (HealthPartners Obligated Group) (the Series 2015A Bonds ), and the $191,830,000 Taxable Health Care Facility Revenue Refunding Bonds, Series 2015B (HealthPartners Obligated Group) (the Series 2015B Bonds, and together with the Series 2015A Bonds, the Bonds ) of the Housing and Redevelopment Authority of the City of St. Paul, Minnesota, are secured by the joint and several obligations of certain members of the HealthPartners System. The other members of the HealthPartners System are not obligated with respect to the Bonds (collectively, the Non-Obligated Affiliates ). Upon issuance of the Bonds, the following ten members of the HealthPartners System (each an Obligated Group Member ) will be obligated with respect to the payment of the Bonds pursuant to the Master Indenture (as defined in this Official Statement): (i) HealthPartners; (ii) Group Health Plan, Inc., a Minnesota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code ( Group Health ); (iii) HealthPartners Insurance Company (formerly Midwest Assurance Company), a Minnesota insurance corporation ( HPIC ); (iv) HealthPartners Administrators, Inc., a taxable Minnesota nonprofit corporation ( HPAI ); (v) Regions Hospital, a Minnesota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code ( Regions Hospital ); (vi) Park Nicollet Health System ( PNHS ), a Minnesota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code; (vii) Park Nicollet Methodist Hospital, a Minnesota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code ( Methodist Hospital ); (viii) Park Nicollet Clinic, a Minnesota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code ( PNC ); (ix) Park Nicollet Health Care Products, a Minnesota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code ( PNHCP ); and (x) PNMC Holdings, a Minnesota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code ( PNMC, and together with PNHS, Methodist Hospital, PNC and PNHCP, Park Nicollet; and Park Nicollet, together with HealthPartners, Group Health, HPIC, HPAI and Regions Hospital, the Obligated Group ). The Obligated Group and the Non-Obligated Affiliates comprise the HealthPartners System. The Obligated Group accounted for approximately 95% of the total revenue of the HealthPartners System and approximately 90% of its total assets as of March 31, This Appendix A provides information regarding the Obligated Group and the Non-Obligated Affiliates of the HealthPartners System, but all information regarding the HealthPartners System and Non-Obligated Affiliates included in this Appendix A is provided solely for the purpose of providing context and background related to the Obligated Group Members. The Obligated Group Members are the only HealthPartners System entities obligated with respect to the Bonds. See SECURITY FOR THE BONDS in this Official Statement. Overview Integrated Health Care THE HEALTHPARTNERS SYSTEM The HealthPartners System is a nationally recognized integrated health care system with strong care delivery, care financing and administration capabilities. The System is the largest consumer-governed, non-profit health care organization in the nation and among the largest health care systems in Minnesota, with more than 22,500 employees, 1.5 million medical and dental health plan members, and more than one million patients. With an increased focus nationally on pay-for-performance and provider risk-sharing, the HealthPartners System is committed to transforming the delivery of health care and has aligned its mission with the Triple Aim of the health care industry: simultaneously (i) improving the health of the population, (ii) enhancing the experience of each individual patient, and (iii) making health care affordable, as measured by total cost of care. The overall mission of the System is to improve health and well-being in partnership with its members, patients, and the community. A-1

66 HealthPartners began in 1992 as a result of a merger of a subsidiary of Group Health and MedCenters Health Plan. MedCenters Health Plan was a network model Health Maintenance Organization ( HMO ) founded in Group Health was incorporated as a Minnesota nonprofit corporation in 1955 and commenced operations in 1957, utilizing principles from the cooperative movement, including member governance and representation. Group Health introduced the concept of comprehensive, prepaid health care to the Minneapolis and St. Paul, Minnesota area (the Twin Cities ). HealthPartners has since grown and expanded not only its health care financing products, offerings and services, but also its care delivery presence in the east-metropolitan area of the Twin Cities and western Wisconsin. Effective January 1, 2013, HealthPartners combined with PNHS, a Minnesota nonprofit healthcare delivery system that owns and operates a hospital licensed for 426 beds and medical clinics with over 730 employed physicians primarily serving the west-metropolitan area of the Twin Cities. This strategic addition to the System complemented the existing hospital, clinic, and physician network assets of the System in the east-metropolitan areas and has resulted in an integrated system which combines health insurance products and care management with health care delivery assets across the Twin Cities metropolitan area. Management believes HealthPartners care redesign and care management approach position them for success in the new marketplace. The HealthPartners System Today 22,500 employees 1,600 employed physicians 1.5 million health and dental plan members 1 million patients 55 clinics 6 hospitals As the only health system in Minnesota that combines a wholly-owned health insurance business, hospital and clinic healthcare delivery sites, plus over 1,600 employed physicians, management believes the System is uniquely positioned to succeed in the post-healthcare reform era. Through its unique health programs, engagement efforts and innovative payment approaches that incent and reward quality, the HealthPartners System strives to provide better value for its customers. By partnering with providers, members, purchasers, and the community, HealthPartners delivers lower total plan costs than the Minnesota average, according to an independent study by OptumInsight. The System s total cost of care ( TCOC ) framework is a method for measuring health care affordability and provides a robust, scalable measurement system for both cost and resource use, as well as patient-level predictions to identify high-risk individuals. The System s TCOC methodology was the first full-population TCOC measurement approach endorsed by the National Quality Forum. The TCOC model considers the cost of care provided to a patient (or total cost index ) and it also incorporates an innovative approach to measuring resources used in providing that care (or total resource use index ). Using this system, HealthPartners has outperformed Minnesota, regional, and national risk-adjusted cost of care benchmarks for a number of years. The System has also been successful at coordinating care delivery and at eliminating barriers and engaging members in preventive care, which can help identify and address risk to keep people healthier. In conjunction with the System s TCOC efforts, PNHS participates in the Pioneer Accountable Care Organization ( ACO ) program. The Pioneer ACO program is a CMS Innovation Center initiative designed to support organizations with a new payment model, allowing them to provide more coordinated care to beneficiaries at a lower cost to Medicare. The Pioneer ACO program tests the impact of several innovative payment arrangements to support these organizations in achieving the goals of better care and outcomes at a lower cost. PNHS is one of 19 organizations in the nation participating in the Pioneer ACO program. The Pioneer ACO program was designed specifically for organizations with experience offering coordinated, patient-centered care across care settings, and operating in ACO-like arrangements. PNHS has seen favorable results as a participant in this program. A-2

67 Health Plans The System provides a full range of care financing services and products on a pre-paid, fully-insured and self-insured basis in an effort to meet the health and dental insurance needs of large employers, small employers, individuals and seniors. These services are provided by two Minnesota licensed HMOs (HealthPartners and Group Health), a licensed insurance company (HPIC) and a third party administrator company (HPAI). System plan networks extend to more than 270 counties in Minnesota, Wisconsin, North Dakota, South Dakota and Iowa. The System plans offer a wide array of health promotion and well-being services to employers and their employees. HealthPartners System plans are consistently recognized as among the nation s best. The National Committee for Quality Assurance ( NCQA ) ranked HealthPartners the number one health plan in Minnesota for the 10th consecutive year, according to the NCQA Private Health Insurance Plan Rankings Private. Nationally, HealthPartners ranked 26th out of 507 plans that were evaluated. NCQA also recognized HealthPartners Freedom (Cost) plan as the top-ranked Medicare plan in Minnesota for and 11th nationally, which places it in the top 2% of 408 plans that were evaluated. The System serves more than 1.5 million medical and dental plan members in Minnesota and surrounding states with a regional network of more than 148,000 health care providers in Minnesota, western Wisconsin, South Dakota and North Dakota. Through strategic alliances, the System also offers a national network of 950,000 health care providers, plus 6,000 hospitals across the United States to health insurance clients outside the upper Midwest region. Care Delivery The System has a robust care delivery system and is among the largest healthcare systems in Minnesota. The System employs more than 1,600 physicians that provide health care services to patients throughout the Twin Cities metropolitan area, and in western Wisconsin, in approximately 55 clinics and over 20 urgent care centers. As such, it is the second largest physician organization in Minnesota, behind only the Mayo Clinic, which operates in southern Minnesota. The System also employs approximately 70 dentists that provide care at 22 dental clinics across the metropolitan area. The System also includes six hospitals: (i) Regions Hospital, a 454-licensed-bed level one adult and level one pediatric trauma center located in St. Paul, Minnesota; (ii) Methodist Hospital, a 426-licensed-bed hospital located in St. Louis Park, Minnesota; (iii) Lakeview Hospital, a 97-licensed-bed hospital located in Stillwater, Minnesota; (iv) Hudson Hospital, a 25-licensed-bed critical access hospital located in Hudson, Wisconsin; (v) Westfields Hospital, a 25-licensed-bed critical access hospital located in New Richmond, Wisconsin; and (vi) Amery Regional Medical Center, a 25-licensed-bed critical access hospital located in Amery, Wisconsin. The System also has a partial ownership interest in St. Francis Regional Medical Center, an 93-bed hospital located in Shakopee, Minnesota. Regions Hospital and Methodist Hospital are part of the Obligated Group. For a more detailed description of the number of beds available at Regions Hospital and Methodist Hospital, see HEALTH CARE DELIVERY Beds Available for Service. In addition, the System conducts cutting edge healthcare research, provides medical education and training, and operates, among other things, pharmacies, an online clinic, home health and hospice agencies, ambulance and other medical transport services, and a transitional care facility. Organizational Chart The organizational chart on the following page shows certain key System entities, including both Obligated Group Members and Non-Obligated Affiliates, and how they relate to each other within the corporate structure. A-3

68 A-4

69 OBLIGATED GROUP MEMBERS Upon issuance of the Bonds, the Obligated Group will include the following ten System entities listed below. The ten Obligated Group Members accounted for approximately 90% of the total assets of the HealthPartners System and approximately 95% of its total revenue as of March 31, Of the over 22,500 employees of the HealthPartners System, over 20,000 are employed by Obligated Group Members. These Obligated Group Members are the only members of the HealthPartners System obligated to repay the Bonds. No other members of the HealthPartners System are obligated to repay the Bonds. HealthPartners, Inc. HealthPartners is a Minnesota nonprofit corporation and a 501(c)(4) organization under the Code. HealthPartners is the parent organization of the HealthPartners System and a Minnesota-licensed network model HMO. Group Health Plan, Inc. Group Health is a Minnesota nonprofit corporation and a 501(c)(3) organization under the Code. Group Health is a Minnesota licensed staff model HMO which combines financing and health care services for the purpose of improving the health and wellness of its members and patients. Group Health provides comprehensive medical care through its approximately 810 employed physicians practicing at 27 primary care and numerous specialty care locations throughout its service area. Group Health s sole corporate member is HealthPartners. HealthPartners Insurance Company. HPIC is a Minnesota insurance company licensed to do business in Minnesota, Iowa, Nebraska, and Wisconsin. HPIC also provides indemnity-type health insurance to both groups and individuals and stop loss coverage to self-insured plans. Its sole shareholder is HPAI. HealthPartners Administrators, Inc. HPAI is a Minnesota nonprofit corporation. HPAI is a third party administrator for enrollees of employer-sponsored self-insured plans. Its sole corporate member is HealthPartners. HPAI holds third party administrator licenses in the following states: Arizona, Iowa, Kentucky, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, New York, North Dakota, Pennsylvania, South Dakota, Texas, and Wisconsin. Regions Hospital. Regions Hospital is a Minnesota nonprofit corporation and a 501(c)(3) organization under the Code. Regions Hospital operates a general acute care hospital facility licensed for 454 beds, located in St. Paul, Minnesota. Regions Hospital is one of only three hospitals in Minnesota, and the only hospital in the east metropolitan area of the Twin Cities certified as both a level one adult and a level one pediatric trauma center. Park Nicollet Health Services. PNHS is a Minnesota nonprofit corporation and a 501(c)(3) organization under the Code. PNHS is the parent corporation of Methodist Hospital, PNC, PNHCP, and certain other Non- Obligated Affiliates. The sole corporate member of PNHS is HealthPartners. Park Nicollet Methodist Hospital. Methodist Hospital is a Minnesota nonprofit corporation and a 501(c)(3) organization under the Code. Methodist Hospital is located in St. Louis Park, Minnesota, approximately eight miles west of Minneapolis. Methodist Hospital is licensed for 426-beds and provides a broad range of inpatient and outpatient care services. The sole corporate member of Methodist Hospital is PNHS. Park Nicollet Clinic. PNC is a Minnesota nonprofit corporation and a 501(c)(3) organization under the Code. PNC provides comprehensive medical care through its approximately 730 physicians practicing at 20 clinic locations throughout the service area in more than 55 specialties and subspecialties. The sole corporate member of PNC is PNHS. Park Nicollet Health Care Products. PNHCP is a Minnesota nonprofit corporation and a 501(c)(3) organization under the Code. PNHCP is a supporting organization within Methodist Hospital and PNC, providing patients with durable medical equipment that supports ongoing patient care, onsite pharmacies, and eye and hearing centers. PNMC Holdings. PNMC is a Minnesota nonprofit corporation and a 501(c)(3) organization under the Code. PNMC owns and maintains land and buildings for PNC to provide services to patients. Its sole member is PNC. A-5

70 NON-OBLIGATED AFFILIATES The HealthPartners System includes various Non-Obligated Affiliates whose revenues are not pledged to the payment of the Bonds. None of the Non-Obligated Affiliates described below is a member of the Obligated Group under the Master Indenture and none are obligated in any manner to pay the principal of or interest on the Series 2015 Master Notes (as defined in the Official Statement). Non-Obligated Affiliates account for approximately five percent (5%) of System revenues. Non-Obligated Care Delivery Affiliates; Foundations Amery Regional Medical Center, Inc. ( Amery ) is a Wisconsin nonprofit, tax-exempt corporation that owns and operates a critical access hospital with 25 licensed beds in Amery, Wisconsin. Amery Regional Medical Center Foundation, Inc. is a Wisconsin nonprofit, tax-exempt corporation that raises funds and provides grants to Amery and other organizations in support of Amery s mission. Hudson Hospital, Inc. d/b/a Hudson Hospital & Clinic ( Hudson ) is a Wisconsin nonprofit, tax-exempt corporation that owns and operates a critical access hospital with 25 licensed beds in Hudson, Wisconsin. Hudson Hospital Foundation, Inc. is a Wisconsin nonprofit, tax-exempt corporation that raises funds and provides grants to Hudson and other organizations in support of Hudson s mission. Lakeview Memorial Hospital Association, Inc. d/b/a Lakeview Hospital ( Lakeview Hospital ) is a Minnesota nonprofit, tax-exempt corporation that owns and operates a licensed Minnesota hospital with 97 licensed beds in Stillwater, Minnesota. Lakeview Memorial Hospital Foundation is a Minnesota nonprofit, tax-exempt corporation that focuses on fundraising activities in support of Lakeview Hospital. Westfields Hospital Inc. ( Westfields ) is a Wisconsin nonprofit, tax-exempt corporation that owns and operates a critical access hospital with 25 licensed beds in New Richmond, Wisconsin. The Westfields campus is also home to the Cancer Center of Western Wisconsin, a joint venture among six critical access hospitals that provides comprehensive cancer treatment. Westfields Hospital Foundation, Inc. is a Wisconsin nonprofit, taxexempt corporation that raises funds and provides grants to Westfields and other organizations in support of Westfields mission. HPI-Ramsey is a Minnesota nonprofit, tax-exempt corporation that coordinates and oversees the activities of Regions Hospital, Lakeview Health System, and other Non-Obligated Affiliates. RH-Wisconsin, Inc. is a Wisconsin nonprofit, tax-exempt corporation that coordinates and oversees the operations of Hudson, Westfields, Amery, and WWEMS (as defined herein). Stillwater Health System, d/b/a Lakeview Health System ( Lakeview Health System ) is a Minnesota nonprofit, tax-exempt corporation that coordinates and oversees the activities of Lakeview Hospital, Stillwater Medical Group (as defined herein), and Lakeview Memorial Hospital Foundation. Stillwater Medical Group ( Stillwater Medical Group ) is a Minnesota nonprofit, tax-exempt corporation that employs physicians and other professional and non-professional staff and operates clinics in the Stillwater, Minnesota area and various locations in western Wisconsin. Physicians Neck & Back Clinics is a Minnesota nonprofit, tax-exempt corporation that employs physicians, physical therapists, and certified athletic trainers that provide physician-directed rehabilitation services at clinics in the metropolitan area. TRIA Orthopaedic Center, LLC is a Minnesota limited liability company and a Medicare certified ambulatory surgery center providing comprehensive care including diagnosis, treatment, rehabilitation and surgery at its location in Bloomington, Minnesota. Capitol View Transitional Care Center is a Minnesota nonprofit, tax-exempt corporation that owns and operates a 32-bed transitional care facility located on the Regions Hospital campus providing short-term care for the sub-acute and rehabilitation needs of its patients. A-6

71 Ramsey Integrated Health Services d/b/a Integrated Home Care is a Minnesota nonprofit, tax-exempt corporation that provides home health and palliative care services. Park Nicollet Foundation is a Minnesota nonprofit, tax-exempt corporation that raises funds and provides grants to Park Nicollet entities and unrelated organizations in support of PNHS s mission. Regions Hospital Foundation is a Minnesota nonprofit, tax-exempt corporation whose mission is to advance the mission of Regions Hospital and its related organizations through fundraising. Research and Education HealthPartners Research & Education d/b/a HealthPartners Institute for Education and Research ( HPIER ) is a Minnesota nonprofit, tax-exempt corporation that conducts public-domain health research proposed and led by multidisciplinary teams of independent PhD- and MD-level investigators. HPIER oversees undergraduate medical education in clinical and nonclinical areas through its health professional educators, sponsors residency programs at Regions Hospital and ambulatory clinics throughout the HealthPartners System and the community, and oversees continuing professional education programs for physicians, nurses and other medical personnel. Park Nicollet Institute is a Minnesota nonprofit, tax-exempt corporation that is principally involved with medical research and education. TRIA Orthopaedic Research Institute is a Minnesota nonprofit, tax-exempt corporation that is focused on advances in orthopaedic medicine through education and research programs. Real Estate, Support Personnel The following Non-Obligated Affiliates own, manage, or lease real estate used by other entities within the HealthPartners System and/or employ support personnel and mid-level providers for certain clinics and hospitals within the HealthPartners System: (i) Dental Specialties, Inc., a taxable Minnesota nonprofit corporation; (ii) HealthPartners Associates, Inc., a Minnesota business corporation; (iii) HealthPartners Central Minnesota Clinics, Inc., a taxable Minnesota nonprofit corporation; (iv) HealthPartners East Side Holding, LLC, a Delaware limited liability company qualified to do business in Minnesota; (v) HealthPartners Property Development Company, LLC, a Minnesota limited liability company; (vi) HealthPartners Services, Inc., a Minnesota business corporation; (vii) Park Nicollet Enterprises, a taxable Minnesota nonprofit corporation; and (viii) RHSC, Inc., a Minnesota nonprofit, tax-exempt corporation. Other Non-Obligated Affiliates HealthPartners Uganda ( HPU ) is a Ugandan corporation registered as a nongovernmental organization in Uganda. HPU provides the infrastructure support for various US AID cooperative development and health grants. Western Wisconsin Emergency Medical Services Company ( WWEMS ) is a Wisconsin nonprofit, taxexempt corporation that previously provided ambulance transport and emergency medical services to residents of western Wisconsin. In 2014, WWEMS transferred all of its assets to Regions Hospital, and the entity is in the process of being dissolved. In addition, certain System entities, including Obligated Group Members, have taken an interest in related health care entities or entered into partnerships, joint ventures, cooperatives, group purchasing organizations, affiliations or other agreements with similar or related health care entities to assist in the operation of bond financed property or other health care facilities, or to assist in the efficient delivery of health care products and services. The general goal of these relationships is to enhance the quality, experience and affordability of health care products and services in the communities served by the System. A-7

72 GOVERNANCE AND MANAGEMENT OF THE OBLIGATED GROUP Overview The HealthPartners Board of Directors serves as the governing body for HealthPartners, Methodist Hospital, PNHS, PNC, PNHCP, and PNMC. A subset of the HealthPartners Board of Directors serves as the governing body for Group Health. Regions Hospital, HPAI and HPIC each have their own governing boards. HealthPartners or, the corporate member or shareholder of Regions Hospital, HPAI, and HPIC, exercise certain powers, such as final approval regarding incurrence of indebtedness, merger or consolidation, or sale of all or substantially all of the entity s assets, and/or determines the composition of the entity s Board of Directors. HealthPartners, Inc. Board of Directors HealthPartners Board of Directors (the HealthPartners Board ) has 17 members comprised of (i) nine persons who are HealthPartners plan members (i.e., consumers) elected by HealthPartners plan members; (ii) three persons who are Group Health plan members (i.e., consumers) elected by Group Health plan members; and (iii) five persons who are health care providers appointed by the HealthPartners Board. In 2016, two directors terms will end resulting in a 15-member HealthPartners Board in From 2017 forward, the terms of directors shall be staggered such that approximately one-third of directors shall be elected in each annual election for a three year term. Present members of the HealthPartners Board are as follows: Name Principal Occupation Years Served on the Board Ann Wynia Retired, former Minnesota State Legislator and Speaker of the House; former President of Hennepin Community College 12 Donald Lewis, Chair Attorney and Partner, Nilan Johnson Lewis, P.A. 2 James Malecha, Treasurer President and CEO, Egan Company 9 Ruth Mickelsen, Vice Chair Senior Lecturer, School of Public Health University of Minnesota 2 Thomas Brinsko Resource Specialist, YMCA of USA (former President and CEO of YMCA of Greater Twin Cities) 12 Judith Corson Retired (former business owner) 2 Luz Maria Frias Vice President of Community Philanthropy, Minneapolis Foundation 7 Susan Hoyt Business Owner 4 Thomas Jones, M.D. General and Bariatric Surgeon, Park Nicollet Clinic 2 Jeffrey Mendeloff, M.D. Department Chair of Vascular Surgery, Park Nicollet Methodist Hospital 2 Laura Oberst Executive Vice President and Division Manager, Wells Fargo Commercial Banking Central Division 8 Brian Rank, M.D. Executive Medical Director for Park Nicollet/HealthPartners Care Group 19 Eric Schned, M.D. Rheumatologist, Park Nicollet Clinic 2 Gregory Strong Retired (formerly Vice President, Chief Financial Officer and Chief Actuary and Treasurer of Securian Financial Group ) 6 Richard Struthers Clearwater Capital Management, LLC 2 Christopher Tashjian, M.D., Partner, Vibrant Health Family Clinics FAAFP 15 Kenneth Thome, Secretary Retired (formerly Deputy Chief Financial Officer, General Mills) 2 Conflicts of Interest The Obligated Group Members, to the extent they have their own governing board, have each adopted a code of conduct which governs transactions between members of their respective governing boards and any related entity. HealthPartners System entities, including Obligated Group Members, from time to time enter into contracts and transactions for purchase of supplies, equipment or services from organizations with which members of the A-8

73 governing board may have an interest. Members of the governing boards are required to identify and abstain from voting on matters involving conflicts of interest and to deliver a conflict of interest statement annually, and any such transactions with related parties are reviewed annually. Laura Oberst, Executive Vice President and Central Division Manager of Commercial Banking at Wells Fargo Bank, N.A. ("WFBNA") is a member of the HealthPartners Board. WFBNA conducts its municipal securities sales, trading, and underwriting operations through the WFBNA Municipal Products Group and is one of the underwriters for the sale of the Bonds. WFBNA Commercial Banking, as a line of business of WFBNA, is unrelated to the WFBNA Municipal Products Group. Ms. Oberst participated in general discussions regarding HealthPartners capital needs, financing options, and vote to delegate to the Finance Committee of the Board of Directors the authority to decide which specific financing strategy to undertake. Ms. Oberst is not a member of the Finance Committee of the Board of Directors. Ms. Oberst was not involved in the selection of the underwriters of the Bonds, did not participate in the Board of Directors' authorization of the Bonds, will recuse herself from any future discussion or vote regarding the Bonds, and has no financial interest in any compensation that may be received by the WFBNA Municipal Products Group in connection with this bond transaction. HealthPartners Management The governing boards of the Obligated Group Members have delegated responsibility for day-to-day operations to management personnel. As a large, integrated system, the HealthPartners System utilizes a matrixed leadership approach, which means senior leaders usually have accountabilities across the System. The principal members of HealthPartners System management are set forth below with select biographical information: Mary K. Brainerd is President, Chief Executive Officer for HealthPartners. She has been with the organization since Prior to being appointed as President and Chief Executive Officer in 2002, Ms. Brainerd served as Executive Vice President and Chief Operating Officer of HealthPartners and Group Health. Ms. Brainerd is often cited for her strong business acumen and unwavering commitment to the community. Honors include: being named one of the Top 75 Most Influential People in the Twin Cities (2013) by Minnesota Monthly; the Caux Roundtable Award for outstanding citizenship (2012), induction into the Twin Cities Business Hall of Fame (2011), induction into the Junior Achievement of the Upper Midwest s Business Hall of Fame (2010) by the Minneapolis/St. Paul Business Journal; Executive of the Year from the Minneapolis/St. Paul Business Journal; and the University of St. Thomas Award for Ethical Leadership. Prior to joining HealthPartners, Brainerd held senior level positions with Blue Cross and Blue Shield of Minnesota, including senior vice president and chief marketing officer. She was also senior vice president and chief executive officer of Blue Plus. She is a frequent speaker on a variety of health care topics and is very involved and supportive of initiatives focusing on patient safety and patient-centered health care systems and programs. Ms. Brainerd holds a master s degree in business administration from the University of St. Thomas, and a bachelor-of-arts degree from the University of Minnesota. Ms. Brainerd is one of the founding CEOs of the Itasca Project, a group of 40 government, civic and business leaders addressing the issues that impact the long-term economic growth of Minnesota, including jobs, education, transportation, and economic disparities. She serves on the boards of Minnesota Life/Securian, Minnesota Council of Health Plans and Minnesota Philanthropy Partners. She is also the former chair of the Minneapolis Federal Reserve Bank. Kathy Cooney is Executive Vice President, Chief Administrative Officer for HealthPartners. She is responsible for areas related to information services & technology, human resources, dental administration, finance, actuarial/underwriting, health plan operations, and government programs. Ms. Cooney came to HealthPartners in 1986 from Ernst and Whinney (now Ernst and Young), where she served as a management consultant specializing in health care strategies. Ms. Cooney has held many positions at HealthPartners, including Vice President of Clinic Operations, Vice President of Administration and Continuous Quality Improvement Support, and Senior Director of Corporate Staff. Ms. Cooney received her nursing degree from Northern Illinois University. She received a master s degree in business administration from Northwestern University. A-9

74 Andrea Walsh is Executive Vice President, Chief Marketing Officer at HealthPartners. She has a broad range of responsibilities that include health plan and care delivery innovation and operations ranging from marketing and sales, health plan quality and network relations, well-being and disease management programs, worksite health solutions and customer service. She is responsible for communications across HealthPartners as well as public affairs and regulatory relations. She balances her time between externally working with customers and partners, and internally focusing on culture, customer service and strategy. She has been with HealthPartners since 1994 in a variety of roles. Prior to that, she practiced law at Rider Bennett, LLP and Popham, Haik, Schnobrich, Kaufman & Doty, Ltd., and was an assistant commissioner at the Minnesota Department of Health from She graduated from the University of Minnesota Law School in 1988, and from the University of Kansas with a double degree in Business and English. Ms. Walsh has a passion for youth development and community service. She serves on the Twin Cities YMCA and is Chair of the Science Museum of Minnesota board. She was the Chair of the American Heart Association s Twin Cities Go Red for Women Campaign, and a past chair of the Minnesota Chamber of Commerce. David Dziuk is Senior Vice President, Chief Financial Officer for HealthPartners. Mr. Dziuk joined the company in 1984 and was named Sr. Vice President and Chief Financial Officer in April of 2009, after serving as Sr. Vice President of Finance and Controller since April Mr. Dziuk has served on the Minnesota Comprehensive Health Association (MCHA) Board of Directors since 2002 and is currently board chair. He is the Treasurer for the Minnesota Council of Health Plans and he serves on the Board of Directors for United Way of Washington County-East. Mr. Dziuk holds a Bachelor of Science degree in Business from the University of Minnesota with emphasis in Finance and Management and has completed several graduate courses. He has also been a member of the Institute of Management Accountants (IMA) since Barbara Tretheway, J.D., is the Senior Vice President, Chief Legal Officer for HealthPartners. In this role, Ms. Tretheway is responsible for providing comprehensive legal advice and direction to the management and governance of HealthPartners and its affiliated entities. She also is responsible for managing the legal and risk management functions of the organization. Prior to joining HealthPartners, Ms. Tretheway practiced law at Gray, Plant, Mooty, Mooty & Bennett, P.A. in Minneapolis. She was the chair of the Health, Human Services and Nonprofit Organizations Practice Group, as well as a principal in its Employee Benefits department. Ms. Tretheway graduated with a Doctor of Law (J.D.) degree from the University of Wisconsin Law School (Order of the Coif). She is a Certified Employee Benefits Specialist. Ms. Tretheway is a member of the American Bar Association, Minnesota State Bar Association, Wisconsin State Bar Association, American Health Lawyers Association and the International Society of Certified Benefits Specialists. Ms. Tretheway is on the Board of the American Red Cross, Minnesota Region, and the Overseas Cooperative Development Council, and is a member of the Finance Committee of People, Inc. Charlie Fazio, MD currently serves as the Senior Vice President and Medical Director of the System health plans. In that role he is responsible for programs to improve the health of plan members as well as for initiatives that oversee and improve the quality, service and affordability of the health care plan members receive. He has extensive experience in quality improvement, cross-community collaboration, health care finance and public policy. Dr. Fazio received his Bachelor of Science in Biology and Computer Science and his MD from Georgetown University. He has an Masters of Science in administrative medicine from the University of Wisconsin, Madison. He has thirty-five years of clinical and administrative experience. Megan Remark is the President and Chief Executive Officer of Regions Hospital. Prior to becoming President and Chief Executive Officer in January 2015, she spent 10 years leading the HealthPartners Specialty Care Division, which includes 350 clinicians practicing in 25 medical and surgical specialties throughout the Twin Cities and western Wisconsin. Ms. Remark has more than 20 years of experience working with integrated health care systems. A-10

75 Ms. Remark s focus in the community includes education, economic development and mentoring the next generation of health care leaders. She was appointed by the Governor in 2009 and reconfirmed in 2012 to serve as a board member and an executive committee member for the Commission for National and Community Service, the organization charged to deploy AmeriCorps volunteers in Minnesota. She currently serves as a board member of the Jeremiah Program, which is committed to transforming the lives of Twin Cities families, two generations at a time. Ms. Remark received her undergraduate degree in Political Science and Public Administration at the University of Utah. She has an MHA from the University of Minnesota s School of Public Health and an MBA from the Carlson School of Management. Steven M. Connelly, MD is the President of PNHS. Dr. Connelly was previously Chief Medical Officer, System Alignment and Integration as well as Chief of Surgery for Park Nicollet Otolaryngology. He continues to practice and perform head and neck surgery. Dr. Connelly has practiced at Park Nicollet since He received his medical degree from the University of Wisconsin Medical School, performed his residency at the University of Iowa Hospitals and Clinic, did his fellowship in Birmingham, Alabama and received his Bachelor of Arts from the University of Iowa. Nancy Arneson McClure, Chief Operating Officer, Park Nicollet/HealthPartners Care Group. As Chief Operating Officer, Nancy McClure works in partnership with the medical director and is responsible for administrative leadership of Park Nicollet/HealthPartners Care Group, which is a multispecialty group with more than 1,540 physicians and 45 primary clinic sites throughout the Twin Cities metropolitan area. Ms. McClure has a unique perspective of health care having been in purchasing, health plan and care delivery roles. She joined the System in 1994 as vice president for specialty and hospital contracting. She was responsible for the negotiation and administration of contracts with specialty providers, hospitals and other institutions. Prior to that Ms. McClure served the State of Minnesota (the State ) as deputy commissioner for labor relations and compensation. While with the State, she was a health care purchaser, and was very involved in designing the first tiered health insurance product developed by the State. Ms. McClure holds a Juris Doctor and a Bachelor of Science degree from the University of Minnesota. Heidi Conrad is Vice President and Chief Financial Officer of Regions Hospital with accountability for Finance and Decision Support, Risk Management, Patient Financial Services, Plant Operations and Government & Community Relations, along with oversight for the Finance functions at Westfields, Hudson, and Amery Hospitals. Ms. Conrad has been in her current position since June 2007 and has been with the System since Her prior experience includes positions with HealthPartners as Vice President, Finance, Planning and Improvement and also as Senior Director, Special Projects. She received a BBA in Accounting from the University of Wisconsin- Madison and an MBA from Hamline University. Catherine Lenagh, CPA (inactive) is Vice President, Chief Financial Officer for PNHS. Ms. Lenagh joined PNHS in 1991 and had various management roles in finance. She served as Vice President, Controller from 2004 to 2013 and was named CFO in She has also been serving as interim Vice President, Human Resources, since January Prior to joining PNHS, Ms. Lenagh was an auditor with Coopers & Lybrand (now PWC). She received both her bachelors and masters degrees in Accounting from the University of Iowa. A-11

76 THE HEALTH PLAN The HealthPartners System offers a broad portfolio of health plan products to meet the needs of employers and individuals in the commercial, individual, group and government markets. The health plans within the System currently provides medical and dental insurance coverage to 1.5 million members. The System also participates in public and government programs (Medicare and Medicaid) and is also a participant in MNsure, the new Minnesota individual and small employer health insurance exchange marketplace created under the Affordable Care Act ( MNsure ). In addition, the HealthPartners System operates the second largest managed dental plan in Minnesota and provides comprehensive dental benefits to approximately 438,000 members. More than 7,300 organizations across a variety of market segments offer HealthPartners System medical insurance plans and 3,067 organizations offer HealthPartners System dental insurance plans to their employees, members or associates. Obligated Group Members Providing Health Plan Products In commercial health insurance products, large and small employers have the choice of purchasing fullyinsured or self-insured (self-funded) products. Individuals may only purchase fully-insured products. A fully-insured product passes the medical or dental claim risk from the purchaser to the health plan. Under a self-insured product, the employer bears the medical or dental claim risk and only pays the health plan for plan administration, including member services (enrollment, claims payment, network management, and medical management). The Obligated Group Members that provide health plan products are (i) HealthPartners, which is a Minnesota licensed network model HMO; (ii) Group Health, which is a Minnesota licensed staff model HMO that combines financing and health care services; (iii) HPAI, which acts as a third party administrator for enrollees of employer-sponsored self-insured plans and holds third party administrator licenses in the following states: Arizona, Iowa, Kentucky, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, New York, North Dakota, Pennsylvania, South Dakota, Texas, and Wisconsin and also operates in other states where a license is not required; and (iv) HPIC, which is a Minnesota insurance company licensed to do business in Minnesota, Iowa, Nebraska, and Wisconsin. HPIC also provides indemnity-type health insurance to both groups and individuals and stop loss coverage to self-insured plans. The System offers a comprehensive set of plans to the commercial individual, small group and large group markets as well as to the Medicare and public program markets. The System offers a breadth of service lines to meet purchaser benefit needs, including medical, dental, worksite programs, onsite clinics, short term disability, employee assistance, occupational medicine and health and well-being. The depth of service lines offered includes a wide variety of plan offerings, benefits from copay to high-deductible plans, funding and provider network options. Health Plan Market Area HealthPartners System plans serve a wide geographic area that is growing. The 2013 population of Minnesota is estimated at approximately 5.4 million people. There are 2,132,670 total households in the state, with nearly 3 million people living in the 7-county Twin Cities metropolitan area, which is the 16th largest metropolitan area according to 2013 U.S. Census estimates. 1 The HealthPartners System has a strong regional medical provider network area ( Proprietary Medical Network Area ) serving more than 270 counties in Minnesota, Wisconsin, North Dakota, South Dakota and Iowa. The System s Proprietary Medical Network Area is comprised of the geographic locations where the System s plans maintain a directly-contracted medical provider network. The System s HMO service area, as defined by filings with Minnesota, includes 15 counties clustered around the Twin Cities metropolitan area. In addition to the Proprietary Medical Network Area, the alliance between HealthPartners and Connecticut General Life Insurance Company ( CIGNA ) offers health plan members access to a medical provider network across the United States. The alliance with Cigna was formed in 2006 to provide the System s health plan members access to CIGNA s national network of physicians and hospitals, and to provide CIGNA s members access to the System s Proprietary Medical Network in a seamless administrative structure. This approach has afforded the System an opportunity to 1 Minnesota State Demographic Center A-12

77 grow membership through regional and national offerings and also create a new revenue stream from network access fees paid by CIGNA for its membership served by the HealthPartners System. This combined network provides individuals with access to more than 950,000 health care providers and 6,000 hospitals across the country. maps: The HealthPartners System proprietary and national medical network areas are shown in the following two A-13

78 Membership/Enrollment by Product Segment The table below sets forth the breakdown of the HealthPartners System plan membership by major product segment from December 31, 2010 through March 31, 2015: Year End Year End Year End Year End Year End Month End Actual Actual Actual Actual Actual Actual Dec. 31, 2010 Dec. 31, 2011 Dec. 31, 2012 Dec. 31, 2013 Dec. 31, 2014 Mar. 31, 2015 Medical Commercial 395, , , , , ,033 Medicare 42,443 45,353 47,449 47,950 49,485 50,233 Medicaid 60,353 66,850 80,907 83, , ,755 Self-Insured 324, , , , , ,282 Sub Total 823, , , , , ,303 Cigna/Network Access 118, , , , , ,473 Grand Total 941, , , ,159 1,065,207 1,126,776 Dental Comprehensive 322, , , , , ,481 Preventive* 73,942 71,946 69,308 66,822 66,379 67,727 Embedded (New in 2014) ** 133, ,824 Grand Total 396, , , , , ,032 * Preventative dental coverage is sold as part of the medical plan. Recently, employer groups have wanted to see their dental coverage separate from medical coverage costs and have terminated preventive coverage in favor of comprehensive coverage. ** Embedded pediatric dental coverage is sold as part of the medical plan. ACA legislation requires that small group and individual plans include pediatric dental coverage. Source: HealthPartners Membership/Enrollment by Market Segment The HealthPartners System utilizes a segmented approach in its plan marketing efforts (called Market Segments ). A Market Segment is defined around a certain set of purchasing characteristics. The following definitions are guidelines used for segmentation: Major & National Accounts Large groups, typically more than 3,000 employees, who purchase their benefit plans directly from the System or utilize consultants to assist in the purchasing process. Consultants get paid on a per project basis by the employer group. Government Employers Employer groups, of any size that are state, federal, municipalities or school districts. They may use a broker or consultant or purchase directly. Management believes this market segment has been relatively stable due to the price stability the System has demonstrated, as compared to its competitors. Middle Market Large groups, typically with 51 to 3,000 employees, who purchase benefits through a broker or directly from the System. Since brokers often serve as an extension of the sales and implementation teams, they are paid by HealthPartners from the premium revenue collected. The System believes this is a growth opportunity due to new product/network offerings and marketing focus. A-14

79 Small Group Market This market is currently defined as employer groups with 2 to 50 employees who typically purchase benefits through a broker. Effective January 2016, changes in federal law will define small groups as those having between 2 and 100 employees. This market segment has specific additional regulatory guidance around it. This market has grown in size. The System has recognized the growth in this market segment by focusing on flexible product design, stable rating approaches and working to build strong broker relationships. Public Programs Individuals who are eligible for state and federal programs and participate in a program through which the System contracts with the government to provide health care services. Public program growth has resulted primarily from Minnesota s requirement that all persons enrolled in certain statesubsidized health insurance programs receive their care through managed care health plans. Medicare Individuals or groups who are Medicare-eligible participate in programs through which the System contracts with a state or the federal government to provide health care services. Individual Non-Medicare eligible individuals with or without families who purchase coverage directly or through MNsure rather than through an employer. This is a growing market for the System where price competitiveness aligned with product design flexibility is key. MNsure - MNsure is the online health insurance marketplace or exchange used in Minnesota. MNsure allows individual and small group purchasers to shop for and enroll in a variety of health plan and product options. In particular, those individuals that are eligible for subsidies under the Affordable Care Act must sign up for health insurance via MNsure to access those subsidies. MNsure has been in place since October 2013 and has enrolled 62,000 individuals overall. HealthPartners has enrolled nearly 12,000 individual members via MNsure or about 19% of the total enrolled via MNsure. The table below outlines System plan enrollment by market segment as an approximate percentage of total enrollment for the fiscal years ended December 31, 2010 through 2014 and for the three-month period ended March 31, 2015: December 31, March 31, Major & National Accounts 27 % 26 % 26 % 21 % 24 % 24 % Government Employers Middle Market Small Group Market Public Programs Medicare Individual Total Enrollment 100 % 100 % 100 % 100 % 100 % 100 % Source: HealthPartners Membership/Enrollment Trends Since 2006, HealthPartners has experienced a 60% growth in medical insurance plan membership with over 330,000 new members and an 86% increase in dental insurance plan membership over the same period. This growth has been due to a combination of factors, including a continually improving product portfolio, an emphasis on new business acquisition, and strong retention in all segments. A-15

80 In response to evolving customer needs, the System continues to develop new products and variations on products. One of the most notable trends over the past few years has been a move by larger employer groups nationally, as well as locally, away from commercial prepaid and fully-insured to self-insured medical products as a perceived way to control or reduce the amount of money spent for employee health care services. Today 53% of the HealthPartners System commercial business is self-insured. Despite this trend, HealthPartners has continually increased premium revenue through increased business gains in other segments and recent selection by large employers who have moved to a single insurer offering upon expansion of the System s network service area. The System s product offerings span from the more traditional HMO plans to open access, tiered network and consumer directed health plans with many choices in plan design and benefit levels. Approximately 75% of the System s commercial business accesses care via an open access model where the member can use any provider available in-network without a referral. The majority of plan designs offered also contain an option for members to go outside the contracted provider network (out-of-network benefits) for a lesser benefit, however, only about 2% of the claims filed are outside the System s contracted network. One-third of commercial membership is enrolled in health savings account or health reimbursement account qualified high deductible plans. There is growing interest in narrow or tighter network plans and HealthPartners is a leader in bringing those products to market. Additionally, the System s product offerings expand beyond medical and dental plans to health and well-being offerings and other worksite products including onsite clinics, onsite health coaching and consultation around building cultures of health. These products allow HealthPartners to serve an employer customer s entire employee population, not just those taking medical coverage. Health Plan Competition The System s health plans compete with other HMOs, preferred provider organizations ( PPOs ), insurance companies, and third party administrators ( TPAs ). The System s Minnesota market is dominated by the local health plans due to the state s regulatory structure which requires state-based plans to be non-profit. The System seeks to differentiate its plans from competing plans by offering innovative products, competitive pricing and stable renewal ratings. The System s market share of fully-insured enrollees in HMOs in Minnesota is 27.6% based on 2013 premium data as reported via the Minnesota Department of Health. Major HMO competitors are primarily Medica and Blue Plus (Blue Cross/Blue Shield). PreferredOne currently has less market share given the nature of their organization as predominantly a Preferred Provider Organization. Total Fully-Insured Private Market 2013* Major Health Plans Market Share Blue Cross Blue Shield 31.2% HealthPartners System 27.6% Medica 26.7% PreferredOne 3.6% Source: Minnesota Department of Health Economics Program *Fully-insured enrollees in Minnesota HMOs is only one of the market categories the System operates in. Because this is the only market category measured by the State it does not capture the full market share of System plans, which System management believes is approximately one-third. Awards and Recognition HealthPartners health plans (i) are ranked among the top 30 highest-performing plans in the nation according to NCQA, with its commercial and Medicare plans recognized as the top-ranked plans in Minnesota; (ii) created total cost of care measures to improve affordability and delivery of health care, which were the first of their kind to be endorsed by the National Quality Forum; and (iii) scored in the nation s top 10 percent in more Healthcare Effectiveness Data and Information Set ( HEDIS ) categories than local competitors; HEDIS categories measure effectiveness of health plans in providing care and service to members. HealthPartners was (i) one of 50 organizations recognized as a J.D. Power Customer Champion in 2014, which reflects excellence in customer A-16

81 service; and (ii) recognized as the No. 1 Best Place to Work among large employers in Minnesota by Minneapolis/St. Paul Business Journal in Overview HEALTH CARE DELIVERY The HealthPartners System is made up of over 22,500 employees, providing health and dental insurance to over 1.5 million members, and delivering health care to over one million patients, making it among the largest health care systems in Minnesota and the second largest physician organization in the state. The System s care delivery locations (referred to as the HealthPartners Care Group for purposes of the map below) expand across the Twin Cities metropolitan area and western Wisconsin and include hospitals, primary and specialty medical clinics, dental and orthodontic clinics, and other health care facilities. The map below shows all of the HealthPartners System care delivery locations. Clinic Operations Included in the Obligated Group are the clinic operations of Group Health and PNC. Group Health s employed physicians and dentists are known as HealthPartners Medical Group ( HPMG ) and HealthPartners Dental Group ( HPDG ) respectively. Collectively, for purposes of this Appendix A only, the operations of PNC, HPMG and HPDG are referred to as the Clinic Group. A-17

82 Overview and History Group Health started as a nonprofit, member-governed, staff model multi-specialty group practice and managed health care delivery system. Group Health opened its first health center in 1957 in St. Paul, Minnesota, on a site between the University of Minnesota s Minneapolis and St. Paul campuses. Initially serving primarily University faculty and staff, Group Health expanded its membership to include school districts, State, county and federal employer groups, union members in private industry, and other employer groups. In 1992, a subsidiary of Group Health merged with MedCenters Health Plan to form HealthPartners. PNC, originally known as Nicollet Clinic, began in 1921 as the afternoon practice of a number of the department heads at the University of Minnesota Medical School, and was the first multi-specialty practice in the Twin Cities. In early 1983, PNC merged with another multi-specialty practice and become Park Nicollet Medical Center, one of the largest medical practices in the Twin Cities. In 1993, Methodist Hospital integrated with PNC under the parent company of Park Nicollet Health Services. Medical and Dental Care The Clinic Group is one of Minnesota s largest medical groups. In 2014, the Clinic Group employed approximately 1,540 physicians. The Clinic Group s physicians practice in more than 55 medical and surgical specialties. Clinic operations are provided through 55 locations and are spread across the Twin Cities and St. Cloud, Minnesota (approximately 60 miles west of the Twin Cities) markets. The Clinic Group offers a wide range of services such as primary, urgent, specialty and eye care, laboratory, radiology, pharmacy, consulting phone nurse services, mental/chemical health services, special health improvement programs, home care services, hospice services and an after-hours consulting phone nurse service. As shown on the prior page, with the addition of PNHS to the HealthPartners System, there is now greater coverage of the Twin Cities metropolitan area with clinics and physicians. HPDG employs approximately 70 dentists to provide dental care. HPDG dentists represent five dental specialties as well as general dentistry. HPDG operates 22 dental clinics. HPDG is also a critical access provider of dental services which means that a significant number of its patients are enrolled in a Minnesota state public program. Hospital Operations The Obligated Group includes two hospitals, Regions Hospital and Methodist Hospital (together, the Hospitals ). The System includes four other hospitals which are not obligated with respect to the Bonds. For a brief description of those hospitals, see Non-Obligated Affiliates in this Appendix A. Regions Hospital Regions Hospital is a general acute care hospital facility licensed for 454 beds, located on the east side of the Twin Cities in St. Paul, Minnesota. Regions Hospital is one of only three hospitals in Minnesota certified as both a level one adult and a level one pediatric trauma center, and the only trauma center in the eastern half of the metropolitan area. Regions Hospital offers special programs in cardiology, women s care, surgery, seniors services, digestive care, cancer, behavioral health, emergency medicine, stroke and burn care. Regions Hospital is accredited by the Joint Commission, the Commission on Accreditation of Rehabilitation Facilities, the American Burn Association, and the American College of Surgeons Committee on Trauma and Regions Hospital s hospital laboratory is accredited by the American College of Pathologists. Regions Hospital has been repeatedly recognized by the Minnesota Hospital Association for its commitment to patient safety. Regions has also been recognized by the Leapfrog Group for quality in four of the last five years. Nearly 900 physicians from throughout the community hold privileges at Regions Hospital in more than 40 specialties and subspecialties. Established in 1872, Regions Hospital has served the region for more than 140 years. Regions Hospital, then known as St. Paul-Ramsey Medical Center joined HealthPartners in The hospital changed its name to Regions Hospital in 1997 to better reflect the broad geographic area it serves and its commitment to becoming the region s hospital of choice. The sole corporate member of Regions Hospital is HPI-Ramsey (see description of Non- Obligated Group Affiliates). A-18

83 The main Regions Hospital campus is owned by Ramsey County. Ramsey County has leased the property to Regions Hospital since 1986 under a lease which expires on December 31, Under the lease, in lieu of rent, Regions Hospital has agreed to maintain certain services for the benefit of the community. Gillette Children s Specialty Healthcare ( Gillette ) occupies approximately 133,000 square feet within Regions Hospital. Gillette is an independent Minnesota nonprofit hospital that specializes in the diagnosis and treatment of children, adolescents and young adults with disabilities and complex medical needs. Gillette s presence within Regions Hospital provides access to Gillette s specialty, educational and patient support services for Regions Hospital s own patients, permits Regions Hospital and its medical staff to provide specialty patient care services to Gillette s patients, and provides operational efficiencies for both hospitals. Gillette is not part of the HealthPartners System or the Obligated Group, and is not obligated for payment of the Bonds. Methodist Hospital Methodist Hospital is a general acute care hospital facility licensed for 426 beds, located on the west side of the Twin Cities in St. Louis Park, Minnesota. Methodist Hospital is certified as a level three trauma center and offers special programs in bariatrics, cardiology, digestive care, eating disorders, maternity, oncology, orthopedics, stroke, surgery and Parkinson s disease. Methodist Hospital is accredited by the Joint Commission, the Commission on Accreditation of Rehabilitation Facilities, the American College of Pathologists, and triple-accredited by the Intersocietal Commission for the Accreditation of Echocardiography Laboratories. Methodist Hospital has been designated a Primary Stroke Center by the Joint Commission and a Center of Excellence by the American Society for Metabolic and Bariatric Surgery. Methodist Hospital has received an Outstanding Achievement award from the Commission on Cancer. Approximately 1,000 physicians from throughout the community hold privileges at Methodist Hospital in more than 70 specialties and subspecialties. Methodist Hospital s direct predecessor, Asbury Methodist Hospital, opened as a community hospital in downtown Minneapolis, Minnesota, in The hospital was among the first to establish a facility to serve the post-world War II population boom in the Twin Cities suburbs when it opened as Methodist Hospital in St. Louis Park in In 1993, Methodist Hospital integrated with PNC under the parent company of Park Nicollet Health Services. In 2013, PNHS and its subsidiaries combined with the HealthPartners System. Beds Available for Service As of December 31, 2014, Regions Hospital and Methodist Hospital were licensed for a total of 880 beds, excluding nursery (454 at Regions Hospital and 426 at Methodist Hospital), 812 of which are currently available for services and are utilized as follows: Available Beds Bed Category Type Regions Hospital Methodist Hospital Behavioral Health Medical/Surgical Intensive Care Coronary Care Intensive Medical Rehabilitation 21 - Obstetrics/Gynecology Total Excluding Nursery In addition, Methodist Hospital operates the Park Nicollet Melrose Center, which is licensed for 39 persons in its residential intensive eating disorders treatment center. Centers of Excellence The Hospitals offer a wide range of specialty care services to patients, many of which have received awards from state and national organizations. Below is a description of several centers of excellence. A-19

84 Regions Heart Center and Methodist Heart and Vascular Center These Centers offer a full range of inpatient and outpatient cardiology and cardiovascular services. They feature state of the art diagnostic equipment and focus on preventing heart disease, decreasing risks for heart events, both acute and chronic, through intervention, heart surgery, critical care and cardiac rehabilitation. Regions Women s Care Center and Methodist Family Birth Center These Centers provide a full-range of services for each mother and her family from childbirth education and pre-pregnancy through delivery. For newborns requiring specialized medical attention, the Level 2 special care nursery at each hospital is staffed with perinatologists, neonatal nurse practitioners, neonatologists and specially trained nurses who provide the latest in medical care. Surgical Services The surgery departments at both Regions Hospital and Methodist Hospital offer a broad range of services including laser and microsurgery, same-day surgery, plastic and reconstructive surgery, heart surgery, neurosurgery, orthopedic surgery, eye surgery including laser and radial keratotomy, burn surgery and trauma surgery. Emergency and Trauma Care The Emergency Center at each Hospital provides emergency and trauma care service to adults and children in Minnesota and the Upper Midwest. Regions Hospital is the only level one trauma center in the east metropolitan area of the Twin Cities. With almost 80,000 patient visits annually, the Regions Hospital Emergency Center is equipped to care for a broad range of illnesses and injuries. Methodist Hospital is a Level III trauma center in the west metropolitan area of the Twin Cities with over 48,000 visits in The Regions Burn Center The Burn Center was one of the first in the nation and today is one of only two burn centers in Minnesota verified by the American Burn Association and the American College of Surgeons. It offers comprehensive burn services, from intensive care to outpatient services in a single location. Specialized features of the Burn Center include on-site burn rehabilitation services, sleeping rooms for family members and visitors and separate waiting rooms for inpatients and outpatients. The Burn Center draws patients from across Minnesota, Wisconsin, and the Midwest. Cancer Care Programs Accredited by the American College of Surgeons, the cancer care program at each of the Hospitals provides a wide-range of oncology services. These services include early cancer diagnosis, prevention and screening programs, surgical oncology, medical oncology, chemotherapy, pain management, radiation oncology, palliative care and hospice services, spiritual care, patient education and support groups. Behavioral Health Services Regions Hospital offers a full range of treatment programs for mental health and substance abuse issues, including the HeroCare for Veterans program which is designed to meet the unique needs and demand for mental health care for veterans, and the DayBridge program for adults who need intensive therapy but have support of family and friends to continue to live in the community. For patients requiring inpatient treatment, Regions Hospital and HealthPartners opened a $36 million behavioral health center on the Regions Hospital campus in The facility has 100 private rooms, secure outdoor space, and allows patients to be grouped by clinical needs, all of which provide a better environment for patients receiving care. Melrose Center Methodist Hospital operates three Twin Cities locations of the Melrose Center, to provide support, encouragement and healing for people struggling with all types of eating disorders. The original 69,000 square foot Melrose Center facility is located in St. Louis Park, Minnesota, and is licensed to provide residential treatment services. The Melrose Center also provides outpatient treatment at locations in Maple Grove and St. Paul, Minnesota. Patients are welcomed into a peaceful, safe and trusting environment that encourages a return to a rich quality of life. The Melrose Center team of highly experienced, compassionate professionals is dedicated to caring for the patient s body, mind and spirit. Bariatric Center Park Nicollet Bariatric Surgery Center provides weight-loss surgery and follow-up care for those struggling with severe obesity. The Center has been nationally recognized by the Metabolic and Bariatric Surgery Accreditation and Quality Improvement Program ( MBSAQIP ). Pioneer Accountable Care Organization As noted earlier, PNHS (Methodist Hospital and PNC) is one of 19 organizations in the nation participating in the Pioneer ACO program. The Pioneer ACO program is a CMS Innovation Center initiative designed specifically for organizations with experience offering coordinated, patient- A-20

85 centered care across care settings, and operating in ACO-like arrangements. PNHS has seen favorable results as a participant in this program. Medical Education and Residency Programs The Hospitals train nearly 200 resident physicians annually. Approximately 33% of these residents are in the following programs sponsored by the HealthPartners Institute for Education and Research. The remaining residents are in affiliated programs sponsored by the University of Minnesota and Hennepin County Medical Center: Emergency Medicine Residency Emergency Medical Services Fellowship Pediatric Emergency Medicine Fellowship Hand Surgery Fellowship Managed Care Pharmacy Residency Program Foot and Ankle Surgery Medical Toxicology Fellowship Program Occupational Medicine Residency Pharmacy Residency Emergency Medicine PA Residency Program Psychiatry NP/PA Fellowship Program Awards and Recognition Regions Hospital Regions Hospital received an A rating on hospital safety from the Leapfrog Group and has also been recognized by Leapfrog as one of the 13 highest value hospitals in the nation. Leapfrog assigns A, B, C, D and F grades to hospitals based on a hospital s ability to prevent errors, injuries and infections. Regions Hospital has also received the highest quality ratings from the Joint Commission (the nation s primary hospital accreditation body) in the areas of heart attack, heart failure, pneumonia, and surgical care. The Minnesota Hospital Association has also recognized Regions Hospital s accomplishments in the area of patient safety, awarding Regions Hospital its Patient Safety Awards for Safe Account, Safe from Falls, Safe Skin, Safe Site, and Safe Count. In addition to these honors, Regions Hospital has also received the following national recognition: Received the Distinguished Hospital Award for Clinical Excellence from Healthgrades. Named one of 150 Great Places to Work in Healthcare by Becker Healthcare. Regions Hospital was the first in Minnesota to be certified as a Comprehensive Stroke Center by The Joint Commission and the American Heart Association/American Stroke Association. Methodist Hospital Methodist Hospital received an A rating on hospital safety from the Leapfrog Group. More than 2,500 hospitals were assigned scores with about 31 percent (31%) receiving an A grade in the spring of Methodist Hospital is one of 13 Minnesota hospitals to earn an A grade. In addition to these honors, Methodist Hospital has also received the following recognition: Methodist Hospital received the Distinguished Hospital Award for Clinical Excellence from Healthgrades, which placed it among the top 5 percent (5%) of hospitals in the nation with the lowest riskadjusted mortality and complication rates across 27 common conditions and procedures. Methodist Hospital received a gold-level Beacon Award for Excellence by the American Association of Critical-Care Nurses, which recognized the top critical care units in the nation that meet evidence-based standards of excellence in patient safety. WomenCertified, Inc., designated Methodist Hospital as one of the Best Hospitals for Patient Experience in Heart Care in the country. Methodist Hospital was selected based on its treatment record of heart attacks and heart failure, as well as patient satisfaction scores. A-21

86 The Human Rights Campaign Foundation named Methodist Hospital a Leader in LGBT Healthcare Equality for the sixth consecutive year for their commitment to providing equitable, inclusive care for lesbian, gay, bisexual and transgender patients and employees. Non-Obligated Group Hospitals Hospitals in Stillwater, Minnesota, and Amery, Hudson, and New Richmond, Wisconsin are also part of the HealthPartners System, although they are not part of the Obligated Group. Each of these facilities are located in the far east Twin Cities metropolitan and western Wisconsin areas. These hospitals are licensed for a total of 172 beds. See Non-Obligated Affiliates herein. Recent and Current Capital Improvement Projects HealthPartners has made significant investments in its care delivery assets. In 2006, a $179 million major renovation and expansion project was undertaken at Regions Hospital. The 385,000 square foot expansion included a new emergency center, new private rooms and onsite radiology and lab services. In the mid-2000 s, HealthPartners constructed two specialty centers in St. Paul. The total combined size is approximately 224,000 square feet. These sites are located adjacent to a major freeway and include numerous specialties. The specialties include a Same Day Surgery Center, Allergy & Asthma and Dermatology. Other recent clinic expansions include seven new clinic sites throughout the metro area for primary care, as well as employer-based clinics. In 2014, the System opened a new Women s Center on the Methodist Hospital site, a Well@Work clinic on the United Health campus, another Melrose Clinic site, and a west suburban medical and dental clinic. HealthPartners has several major projects currently in process or nearing inception: Methodist Hospital Expansion and Renovation Project. With an approximate budget of $140 million this expansion and renovation will add 60,000 square feet, renovate 135,000 square feet and add two new inpatient floors, modernize the surgery center and convert nearly all patient rooms to private rooms. The project is expected to be completed in This project will be funded over the period of construction with a combination of annual internally generated cash flows and cash reserves. In the event the entire project comes out of cash reserves, days cash on hand would be reduced by approximately ten days over the five year period. New Neuroscience Center Project. With an approximate budget of $75 million this project will be a state of the art facility in St. Paul, Minnesota, that will specialize in dementia, stroke, spine care, Parkinson s disease and other neurological disorders. The four story, 128,000 square foot building, along with a 630-stall parking ramp, is expected to be completed by the spring of This project will be funded over the period of construction with funds raised through a private placement of debt in 2013 and the balance from annual internally generated cash flows. Maple Grove Regional Center. This project includes an expansion in the growing northwest suburban area of the Twin Cities where PNHS currently has a presence. The expansion will be a 93,000 square foot building connected to the current 29,000 square foot clinic bringing a wide variety of primary care, specialty care and ambulatory surgical services together under one roof. Anticipated completion of the clinical space is late 2015 with the ambulatory surgery completed Spring The total cost of approximately $48 million will be funded over the period of construction primarily through a private placement of debt in A-22

87 The Twin Cities Market Environment CARE DELIVERY SERVICE AREA AND UTILIZATION Minnesota and the Twin Cities (Minneapolis and St. Paul) have a long history with managed care delivery systems. The most common forms of managed care delivery systems are through payers that offer health maintenance organization ( HMOs ) and preferred provider organizations ( PPOs ). Both the HMO and PPO markets are very concentrated, with only four key payer organizations offering both products. Blue Cross Blue Shield, HealthPartners, Medica, and PreferredOne are the four key payer organizations in Minnesota. HMOs also offer government programs and commercial products. UCare is another large HMO that only offers government products. The concentration of HMOs has occurred in part because Minnesota requires its HMOs to be not-forprofit. As a result, national for-profit HMOs such as United HealthCare and Aetna Health do not have HMO offerings in Minnesota. There are only a few traditional indemnity insurers in the market. Minnesota also has a history of innovation in health care delivery that includes the development of multispecialty group practices dating back to the creation of the Mayo Clinic. As a result, the Twin Cities market has a significant number of multi-specialty group practices, including the Clinic Group. Economy and Demographics Health care organizations in Minnesota benefit from the State s stable economy, low unemployment, a welleducated labor force and a diverse corporate and industrial base. The State s metropolitan centers are home to significant employers, including headquarters for 18 Fortune 500 companies. The Minneapolis-St. Paul metro area serves as a regional economic hub and is home to approximately 62% of the State s estimated 5.4 million residents. Minnesota Based Companies Included in the Fortune 500 Company Revenues $000 Industry Category UnitedHealth Group $ 122,489,000 Health Care: Insurance & Managed Care Target $ 72,596,000 General Merchandisers Best Buy $ 45,225,000 Specialty Retailers: Other Cenex Harvest States (CHS) $ 44,480,000 Wholesalers: Food & Grocery Supervalu $ 34,327,000 Food & Drug Stores Minnesota Mining & Mfg. (3M) $ 30,871,000 Miscellaneous U.S. Bancorp $ 21,059,000 Commercial Banks General Mills $ 17,774,000 Food Consumer Products Medtronic $ 16,590,000 Medical Products & Equipment Land O Lakes $ 14,681,000 Food Consumer Products Ecolab $ 13,263,000 Chemicals C.H. Robinson Worldwide $ 12,762,000 Transportation & Logistics Ameriprise Financial $ 11,230,000 Diversified Financials Xcel Energy $ 10,915,000 Utilities: Gas & Electric Mosaic $ 9,974,000 Chemicals Hormel Foods $ 8,752,000 Food Consumer Products Thrivent Financial for Lutherans $ 8,101,000 Insurance: Life, Health (Mutual) St. Jude Medical $ 5,501,000 Medical Products & Equipment Source: Fortune Magazine, dated June 2, 2014 Minnesota compares favorably to the national average in a number of economic and demographic categories relevant to health care organizations. The economy performed reasonably well through the recession, with fewer job losses than the U.S. average and a lower unemployment rate. Per capita personal income is 6% above the U.S. average. Minnesota recently ranked among the top 5 states with the lowest unemployment rate and the lowest estimated percentage of uninsured adult residents: A-23

88 Unemployment Rate Monthly, Seasonally Adjusted March 2014 March 2015 United States 6.70% 5.50% Minnesota 4.40% 3.70% Source: U.S. Bureau of Labor Statistics Estimated Uninsured Population % of Uninsured Adult Residents United States 17.3% 13.8% Minnesota 9.5% 7.4% Source: Gallup-Healthways Well-Being Index Key Payers There are five large HMOs in Minnesota that compete for business and have approximately 95% of the enrolled HMO population in the state. As a result, Minnesota leads other states in the concentration of its HMO market. The five large HMO s are Blue Cross Blue Shield of Minnesota, Medica, HealthPartners, UCare and PreferredOne. Blue Cross Blue Shield, Medica and HealthPartners offer both commercial HMO products and government HMO products. UCare offers only government products and PreferredOne offers only commercial products. Blue Cross Blue Shield of Minnesota, Medica, HealthPartners, PreferredOne and SelectCare comprise the key payers in the Twin Cities PPO market. The System has contracts and significant volume with all of these HMO and PPO payers. In addition to the HMO and PPO payer market, the Clinic Group and Hospitals provide care under various government programs to Medicare, Medicaid, MinnesotaCare and workers compensation beneficiaries. Payment methodologies under these payer and government program arrangements include DRG, APC, and ASC payments, discounts from charges, fee schedules, per diem payments and case rates. Additionally, there are a variety of risk sharing and pay for performance arrangements. A-24

89 Service Areas Patient Origin Hospitals The care delivery services of the Obligated Group primarily serve the Minneapolis and St. Paul metropolitan area, located in the Minnesota counties of Anoka, Hennepin, Carver, Scott, Ramsey, Dakota and Washington. In addition, Regions Hospital draws patients from western Wisconsin counties, particularly Pierce, Polk and St. Croix. The following map shows the primary and secondary service areas for Regions Hospital Inpatient Market Share The east metropolitan area of the Twin Cities is served principally by five acute care hospitals, including Regions Hospital. While these hospitals offer a comparable range of services, there is some variation in specialization. The following table displays the percent of admissions calculated based on patients residing within Regions Hospital s primary service area (48 zip codes), excluding newborns Months 2014 Regions Hospital 22.1% 21.9% 22.9% United St. John s St. Joseph s Woodwinds Source: Minnesota Hospital Association United Hospital is owned by Allina Health System ( Allina Health ), a system of hospitals, clinics and other health care providers. St. John s, St. Joseph s and Woodwinds hospitals are all owned by HealthEast Care System. HealthEast Care System also includes rehabilitation hospitals, clinics, long-term and senior care centers. A-25