HomeMy WebLinkAboutA012 - Draft of Preliminary Official Statement PRELIMINARY OFFICIAL STATEMENT DATED SEPTEiIMBEK ,2011
B&F DRAFT 08/10/11
NEW ISSUE
BOOK-ENTRY ONLY SEE"RATING"HEREIN
JIn the opinion of Bond Counsel,under existing law and assuming continuous compliance with the applicable provisions of the Internal Revenue Code of 1986,
r- as amended(the"Code'),interest on the Series 2011 Bonds is excluded from gross income for federal income tax purposes,and is not treated as an item of tax preference
G for purposes of determining the federal alternative minimum tax for individuals and corporations,but,in the case of corporations,is included in adjusted current earnings
y: for purposes of computing such alternative minimum tax. Interest on the Series 2011 Bonds is NOT excluded from income for State of Iowa income tax purposes. The
Series 2011 Bonds will not be designated as"qualified tax-exempt obligations"within the meaning of Section 265(b)(3)of the Code. See"TAX EXEMPTION"herein.
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vMARY GREELEY CITY OF AMES,IOWA
>. OMEDICAL CENTER HOSPITAL REVENUE BONDS
a (MARY GREELEY MEDICAL CENTER PROJECT)
SERIES 2011
Dated:Date of Issuance Due: 1,as shown on inside front cover
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° The Series 2011 Bonds will be registered in the name of Cede&Co.,as nominee for The Depository Trust Company,New York,New York("DTC").
' Purchases of beneficial interests in the Bonds will be made in book-entry form,in the denominations of$5,000 or integral multiples thereof DTC will act as
>,2 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
0 0 o physical delivery of certificated Bonds. Payments of principal of,premium,if any,and interest on the Bonds will be made directly to DTC or its nominee,Cede
.o, &Co.,by the Bond Trustee,Wells Fargo Bank,National Association,Des Moines,Iowa,so long as DTC is the registered owner of the Bonds. DTC will remit
-6� ° such payments to the applicable DTC Participants. The disbursement of such payments will be made by DTC Participants to the beneficial owners of the Bonds.
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For further details,see"THE BONDS-Book Entry Only System"herein.
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The Series 2011 Bonds will be issued pursuant to an Indenture of Trust, dated as of June 1, 2003 (the "Original Indenture"), as amended and
supplemented by a First Supplemental Indenture of Trust, dated as of October 1, 2011 (the "First Supplemental Indenture" and, together with the Original
�?45 ° Indenture,the"Indenture"),among the City of Ames,Iowa(the"City"),Mary Greeley Medical Center(the"Medical Center")and Wells Fargo Bank,National
Association,Des Moines,Iowa,as trustee(the"Trustee"). The proceeds of the Series 2011 Bonds,together with certain funds of the Medical Center,will be
y C; used 1(i)to finance the construction and equipping of certain improvements to the Medical Center's existing hospital space(the"Project")],(ii)to fund a
debt service reserve fund,and(iii)to pay certain costs of issuance of the Series 2011 Bonds.
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sThe Series 2011 Bonds will be secured equally and ratably with the Series 2003 Bonds(defined herein)by amounts on deposit in funds held by the
„ !, Trustee under the Indenture, including amounts in the Debt Service Reserve Fund. The Series 2003 Bonds are also secured by a financial guaranty insurance
policy issued by Ambac Assurance Corporation simultaneously with the delivery of the Series 2003 Bonds(the"Ambac Policy"). However,the Series 2011
y = Bonds are not secured by the Ambac Policy.
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S THE SERIES 2011 BONDS AND THE INTEREST AND PREMIUM,IF ANY,PAYABLE THEREON DO NOT REPRESENT OR CONSTITUTE
c E`t A GENERAL OBLIGATION OF THE CITY WITHIN THE MEANING OF THE CONSTITUTIONAL PROVISIONS OR STATUTORY LIMITATIONS OF
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"5 = THE STATE OF IOWA,AND DO NOT CONSTITUTE OR GIVE RISE TO A PECUNIARY LIABILITY OF THE CITY OR CHARGES AGAINST ITS
o $ GENERAL CREDIT OR TAXING POWERS. THE SERIES 2011 BONDS AND THE INTEREST AND PREMIUM,IF ANY,PAYABLE THEREON ARE
o Y NOT OBLIGATIONS OF THE STATE OF IOWA OR ANY POLITICAL SUBDIVISION THEREOF,OTHER THAN THE CITY,AND,WITH RESPECT
U C 4 TO THE CITY,ARE SPECIAL LIMITED OBLIGATIONS OF THE CITY PAYABLE SOLELY FROM NET REVENUES OF THE MEDICAL CENTER
y T� PLEDGED TO THEIR PAYMENT PURSUANT TO THE INDENTURE AND OTHER AMOUNTS PLEDGED THEREFOR IN ACCORDANCE WITH THE
y. INDENTURE,ALL AS FURTHER DESCRIBED HEREIN.
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a ° The Bonds are subject to redemption prior to maturity and to certain other risks as described under the captions"THE SERIES 2011 BONDS"and
Y "BONDHOLDERS'RISKS"herein.
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The Series 2011 Bonds are offered, when, as and if issued and accepted by the Underwriter, subject to the opinion of Dorsey& Whitney LLP, Des
Moines,Iowa,Bond Counsel,as to validity and tax exemption. Certain legal matters will be passed upon for the City and the Medical Center by the Ames City
cb Attorney,Ames,Iowa and for the Underwriter by Best&Flanagan LLP,Minneapolis, Minnesota. It is expected that the Series 2011 Bonds in definitive form
o will be available for delivery through the facilities of DTC to New York,New York,on or about October 2011.
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b Pipedaffray.
y The date of this Official Statement is October 2011.
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'Preliminary,subject to change.
MATURITY SCHEDULE
CITY OF AMES,IOWA
HOSPITAL REVENUE BONDS
(MARY GREELEY MEDICAL CENTER PROJECT)
SERIES 2011
Dated: Date of Issuance Due: 1, 20
[TO COME]
Preliminary,subject to change.
No dealer, broker,salesperson or other person has been authorized by the Medical Center, the City
or the Underwriter to give any information or make any representations other than those contained in this
Official Statement in connection with the Series 2011 Bonds and, if given or made, such 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 or solicitation in any jurisdiction in which such offer or solicitation is
not authorized or in which the person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such offer or solicitation. The information contained herein has been
obtained from the Corporation and other sources that are deemed reliable. This Official Statement is
submitted in connection with the initial public offering of the Series 2011 Bonds. The delivery of this Official
Statement at any time does not imply that information herein is correct as of any time subsequent to the date
of this Official Statement.
TABLE OF CONTENTS
INTRODUCTORY STATEMENT......................................................................................................................... 1
THE CITY AND THE MEDICAL CENTER..........................................................................................................3
PLANOF FINANCE.............................................................................................................................................3
ESTIMATED SOURCES AND USES OF FUNDS................................................................................................4
THESERIES 2011 BONDS...................................................................................................................................4
SECURITY FOR THE SERIES 2011 BONDS.......................................................................................................9
ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS............................................................................10
BONDHOLDERS' RISKS...................................................................................................................................I
LITIGATION......................................................................................................................................................37
LEGALMATTERS.............................................................................................................................................37
RATING..............................................................................................................................................................37
UNDERWRITING...............................................................................................................................................38
CONTINUINGDISCLOSURE............................................................................................................................38
TAX EXEMPTION AND RELATED CONSIDERATIONS................................................................................39
INDEPENDENTAUDITORS..............................................................................................................................40
MISCELLANEOUS ............................................................................................................................................40
APPENDIX A INFORMATION CONCERNING MARY GREELEY MEDICAL CENTER..............................A-1
APPENDIX B AUDITED FINANCIAL STATEMENTS...................................................................................B-1
APPENDIX C DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE
INDENTURE....................................................................................................................................................C-1
APPENDIX D FORM OF BOND COUNSEL OPINION....................................................................................D-1
APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT.........................................................E-1
IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVER
ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF
SUCH BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING,IF COMMENCED,MAY BE DISCONTINUED AT ANY TIME.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE CORPORATION AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THE BONDS HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY
FURTHERMORE,THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR
DETERMINED THE ADEQUACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The Underwriter has provided the following sentence for inclusion in this Official Statement. The
Underwriter has reviewed the information in this Official Statement in accordance with, and as part of its
responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this
transaction, but the Underwriter does not make any guarantee as to the accuracy or completeness of such
information.
CAUTIONARY STATEMENTS REGARDING FORWARD-
LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT
Certain statements included or incorporated by reference in this Official Statement constitute "forward-
looking statements" within the meaning of the United State Private Securities Litigation Reform Act of 1995,
Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United
States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such
as "plan", "expect", "estimate", "anticipate", "budget" or other similar words. Such forward looking statements
include, among others, certain statements under the caption "Debt Service Coverage" and "Management's
Discussion of Recent Financial Performance"in Appendix A to this Official Statement and certain statements under
the caption`BONDHOLDERS' RISKS"in the forepart of this Official Statement.
THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. NEITHER THE CORPORATION NOR ANY OTHER PARTY PLANS TO ISSUE ANY
UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN THEIR
EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES UPON WHICH SUCH STATEMENTS
ARE BASED OCCUR.
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OFFICIAL STATEMENT
related to
City of Ames,Iowa
Hospital Revenue Bonds
(Mary Greeley Medical Center Project)
Series 2011
INTRODUCTORY STATEMENT
This Official Statement, including the cover page and the Appendices, is furnished in
connection with the offering of $ * in aggregate principal amount of Hospital
Revenue Bonds (Mary Greeley Medical Center Project), Series 2011 (the "Series 2011 Bonds").
The Series 2011 Bonds will be issued by the City of Ames, Iowa (the "City"). All descriptions
and summaries of documents hereinafter set forth are qualified in their entirety by reference to
each document. All capitalized terms used herein and not otherwise defined have the meaning
set forth under "DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN
PROVISIONS OF THE INDENTURE" in Appendix C hereto.
The City owns and operates Mary Greeley Medical Center (the "Medical Center"), an
acute care hospital located in the City. Authority for the management, control and government
of the Medical Center is vested by statute and local ordinances in the Ames City Hospital Board
of Trustees (the "Board") whose five members are elected in regular City elections in staggered
terms. See "THE CITY AND THE MEDICAL CENTER"and Appendix A—"INFORMATION
CONCERNING MARY GREELEY MEDICAL CENTER" herein for more information
concerning the City and the Medical Center.
The Series 2011 Bonds will be issued pursuant to Division V of Chapter 384 of the Code
of Iowa, as amended (the "Act"), and an Indenture of Trust, dated as of June 1, 2003 (the
"Original Indenture"), as amended and supplemented by a First Supplemental Indenture of Trust,
dated as of October 1, 2011 (the "First Supplemental Indenture" and, together with the Original
Indenture, the "Indenture"), by and among the City, the Medical Center and Wells Fargo Bank,
National Association, Des Moines, Iowa, as trustee (the"Trustee").
Pursuant to the Indenture, the Medical Center agrees to make the principal and interest
payments due on the Series 2011 Bonds on behalf of the City from the Net Revenues, to
establish and revise, as necessary, a schedule of rates and charges sufficient to meet the prompt
payment of principal of and interest on the Series 2011 Bonds, to maintain adequate reserves
therefor, to pay currently all proper expenses of operation and maintenance of the Medical
Center and otherwise to comply with the provisions of the Series 2011 Bonds and the Indenture.
The Series 2011 Bonds are not secured by a lien on or security interest in any real or
personal property of the city, including the Medical Center.
Preliminary,subject to change.
The proceeds to be received by the City from the sale of the Series 2011 Bonds, exclusive
of accrued interest, will be used, together with other available moneys, [(i) to finance the
construction and equipping of certain improvements to the Medical Center's existing
hospital space (the "Project")], (ii) to fund a debt service reserve fund, and (iii) to pay certain
costs of issuance of the Series 2011 Bonds. A more detailed description of the uses of the
proceeds of the Series 2011 Bonds and other available funds of the Medical Center, including the
purposes and approximate amounts thereof, is included here under "PLAN OF FINANCE" and
"ESTIMATED SOURCES AND USES OF FUNDS".
The City previously issued its $29,285,000 Hospital Revenue Refunding Bonds (Mary
Greeley Medical Center Project), Series 2003. Proceeds of the Series 2003 Bonds were used (i)
to refund the City's then-outstanding Hospital Revenue Bonds (Mary Greeley Medical Center
Project) Series 1992 and the City's then-outstanding Hospital Revenue Bonds (Mary Greeley
Medical Center Project) Series 1993, (ii)to fund a debt service reserve fund for the benefit of the
Series 2003 Bonds and (iii) to pay expenses incurred in connection with the issuance of the
Series 2003 Bonds.
The Series 2011 Bonds will be secured equally and ratably with the Series 2003
Bonds by amounts on deposit in funds held by the Trustee under the Indenture, including
amounts in the Debt Service Reserve Fund. The Series 2003 Bonds are also secured by a
financial guaranty insurance policy issued by Ambac Assurance Corporation
simultaneously with the delivery of the Series 2003 Bonds (the "Ambac Policy"). However,
the Series 2011 Bonds are not secured by the Ambac Policy.
The Series 2011 Bonds and the interest and premium, if any, payable thereon, are not
obligations of the State of Iowa (the "State"), or of any political subdivision thereof, other than
the City, and are special, limited obligations of the City payable solely from the Net Revenues of
the Medical Center pledged to their payment pursuant to the Indenture and other amounts
pledged therefor in accordance with the Indenture. The issuance of the Series 2011 Bonds does
not, directly, indirectly or contingently, obligate the City, the State or any political subdivision
thereof to levy any form of taxation for the payment thereof or to make any appropriation for
their payment. The Series 2011 Bonds and the interest and premium, if any, payable thereon do
not now and shall never constitute or give rise to a pecuniary liability of the City or the State or a
charge against the general credit or taxing powers of the City, the State or any political
subdivision thereof. The State shall not in any event be liable for the payment of the principal of,
premium, if any, or interest on the Series 2011 Bonds or for the performance of any covenants,
pledge, obligation or agreement of any kind whatsoever which may be undertaken by the City in
connection with the issuance of the Series 2011 Bonds. No breach by the City of any such
covenant, pledge, obligation or agreement may impose any pecuniary liability upon the State or
any charge upon the general credit of the City or the State or against the taxing power of the City
or the State.
The Official Statement contains descriptions of, among other matters, the Series 2011
Bonds, the Indenture, the Medical Center and its facilities. All references herein to the Indenture
are qualified in their entirety by reference to such document; and references herein to the Series
2011 Bonds are qualified in their entirety by reference to the forms thereof included in the
Indenture. Until the issuance and delivery of the Series 2011 Bonds, copies of the Indenture and
other documents herein described may be obtained from the Underwriter. Copies of such
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documents will be available for inspection at the principal corporate trust office of the Trustee
after delivery of the Series 2011 Bonds.
THE CITY AND THE MEDICAL CENTER
The City is a municipal corporation duly organized and existing under the laws of the
State. The City is located in Story County, in central Iowa, approximately 30 miles north of Des
Moines. Pursuant to the Act, the City is authorized to issue the Series 2011 Bonds for the
purposes described herein.
The Medical Center is a 220-bed acute care hospital, located in the City. The City owns
and operates the Medical Center. For additional information regarding the Medical Center, see
Appendix A—"INFORMATION CONCERNING MARY GREELEY MEDICAL CENTER."
PLAN OF FINANCE
General
The proceeds of the Series 2011 Bonds will be used (i) to finance a portion of the costs of
the Project, (ii) to fund a debt service reserve fund, and (iii) to pay certain expenses incurred in
connection with the issuance of the Series 2011 Bonds.
The Project
The Project consists of 0 ons s At Closing, the Medical Center J g, will be
reimbursed for approximately$ of Project costs.
The cost of the Project is approximately $130,000,000, of which approximately
$60,000,000 is expected to be paid from proceeds of the Series 2011 Bonds.
Ground-breaking of the Project is scheduled for Winter 2012 and the Project is expected
to be completed by Summer 2015.
For a further description of the Project, see Appendix A — "INFORMATION
CONCERNING MARY GREELEY MEDICAL CENTER."
(Remainder of this page intentionally left blank.)
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ESTIMATED SOURCES AND USES OF FUNDS*
The following table sets forth the estimated sources and uses of funds in connection with
the issuance of the Series 2011 Bonds:
Sources of funds:
Principal amount of Series 2011 Bonds
TOTAL SOURCES
Uses of funds:
Project costs
Deposit to Debt Service Reserve Fund
Costs of issuance, including Underwriter's discount
TOTAL USES
*Preliminary;subject to change.
THE SERIES 2011 BONDS
The Series 2011 Bonds will be delivered in registered form only, will be transferable and
exchangeable as set forth in the Indenture and, when executed and delivered, will be registered in
the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York
("DTC"). DTC will act as securities depository for the Series 2011 Bonds. Registered
ownership interests in the Series 2011 Bonds may be purchased in book-entry form only, in the
denominations hereinafter set forth. See "Book-Entry Only System" herein. So long as the
Book-Entry System is in place, payment of the principal of, and premium, if any, and interest on
the Series 2011 Bonds will be made as described under "Book-Entry Only System." Pursuant to
the Indenture, the Trustee and the City are entitled to treat the registered owner of each
(including DTC as to Series 2011 Bonds registered in the name of DTC or its nominee) as the
Owner of such Series 2011 Bonds for all purposes. Neither the Trustee nor the City shall have
any duty or responsibility to recognize the beneficial ownership rights of a person who has
acquired a beneficial interest in Bonds registered in the name of DTC or its nominee.
Each Series 2011 Bond will be dated, as originally issued, as of the date of delivery, and
will be otherwise dated as provided in the Indenture. The Series 2011 Bonds will bear interest
from as of the date of delivery, at the rates and mature in the amounts and on the dates as set
forth on the cover page of this Official Statement. Interest on the Bonds is payable semiannually
on each June 15 and December 15, commencing June 15, 2012. So long as Cede & Co. is the
registered owner of all of the Series 2011 Bonds, principal of and premium, if any, and interest
on the Series 2011 Bonds shall be made by the Trustee by wire transfer to DTC in immediately
available funds.
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Registered ownership interests in the Series 2011 Bonds will be $5,000 denominations or
integral multiples thereof.
Redemption Prior to Maturity
Sinking Fund Redemption. The Series 2011 Bonds maturing on June 15, 20 and June
15, 20_, respectively (the "Term Bonds"), are subject to mandatory redemption prior to
maturity, by lot, from moneys required to be on deposit in the Bond Sinking Fund, on June 15 in
the years 20_ through 20 and 20_ through 20 , respectively, at the principal amounts
thereof to be redeemed, and accrued interest to the redemption date,but without premium.
Moneys are required to be deposited in the Bond Sinking Fund to provide for mandatory
redemption in amounts and at times as follows:
$ Term Bonds Due
Year Principal
June 151 Amount
`Maturity
$ Term Bonds Due
Year Principal
June 151 Amount
sMaturity
Provided that such amounts shall be reduced by the amount of Series 2011 Bonds
purchased in lieu of redemption in accordance with the Indenture.
Optional Redemption. Series 2011 Bonds maturing on or after June 15, 201_are subject
to optional redemption and prepayment, in whole or in part, by the City upon request by the
Medical Center, on June 15, 201_ and any date thereafter, in such amounts and maturities as
designated by the Medical Center and within any maturity by lot or other method deemed fair by
the Trustee, at par, plus accrued interest without a premium.
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Extraordinary Redemption. The Series 2011 Bonds are subject to redemption in whole or
in part, in such maturities as designated by the Medical Center and within a maturity by lot or
other method deemed fair by the Trustee, at a redemption price equal to the principal amount
thereof, together with interest accrued thereon to the date fixed for redemption, and without
premium, in the event that the Medical Center facilities, or any portion thereof, are destroyed by
fire or other casualty or condemned or taken by eminent domain, and such damage, destruction
or taking is estimated equal or exceed five percent (5%) of the Book Value of the Medical Center
facilities. In the event of such damage, destruction, condemnation or taking, the City has the
option (at the direction of the Medical Center)to apply the applicable insurance or condemnation
proceeds to the prepayment of this obligations thereunder, in whole or in part, which moneys
will be deposited in the Redemption Fund and applied to the redemption of Series 2011 Bonds.
If Additional Indebtedness is issued on a parity with the Series 2011 Bonds and the Series 2003
Bonds, such insurance or condemnation proceeds will be apportioned among the Series 2011
Bonds, the Series 2003 Bonds and the Additional Indebtedness in proportion to the respective
outstanding amounts thereon.
Notice of Redemption. Notice of redemption of Series 2011 Bonds will be given by
mailing a copy of the redemption notice by first class mail not more than 60 days and not less
than 45 days prior to the date fixed for redemption to the registered owner of each Series 2011
Bond to be redeemed, in whole or in part, at the address shown on the registration books of the
Trustee; provided that any defect in or failure to mail such notice shall not affect the validity of
the proceedings for the redemption of any Series 2011 Bond not affected by such defect or
failure.
Cessation of Interest. All Series 2011 Bonds or portions thereof called for redemption
for which sufficient funds have been deposited with the Trustee will cease to bear interest on the
specified redemption date, will no longer be secured by the Indenture and will not be deemed to
be Outstanding under the provisions thereof.
Partial Redemption. Series 2011 Bonds in denominations larger than $5,000 may be
redeemed in part in integral multiples of $5,000. Upon partial redemption, such Series 2011
Bonds shall be surrendered to the Trustee at its principal corporate trust office in exchange for
one or more new Series 2011 Bonds, in authorized form, for the unredeemed portion of principal.
Book-Entry Only System
The Depository Trust Company ("DTC"), New York, NY, will act as securities
depository for the Series 2011 Bonds. The Series 2011 Bonds will be issued as fully registered
securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other
name as may be requested by an authorized representative of DTC. One fully-registered Series
2011 Bond certificate will be issued for each series and each maturity of the Series 2011 Bonds,
in the aggregate principal amount of the Series 2011 Bonds, and will be deposited with DTC.
DTC, the world's largest securities depository, is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934.
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DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity
issues, corporate and municipal debt issues, and money market instruments (from over 100
countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also
facilitates the post-trade settlement among Direct Participants of sales and other securities
transactions in deposited securities, through electronic computerized book-entry transfers and
pledges between Direct Participants' accounts. This eliminates the need for physical movement
of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers
and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC
is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC").
DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed
Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by
the users of its regulated subsidiaries. Access to the DTC system is also available to others such
as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing
corporations that clear through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating:
AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange
Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.
Purchases of the Series 2011 Bonds under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Series 2011 Bonds on DTC's records. The
ownership interest of each actual purchaser of each Series 2011 Bond (`Beneficial Owner") is in
turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not
receive written confirmation from DTC of their purchase. Beneficial Owners are, however,
expected to receive written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through which the Beneficial
Owner entered into the transaction. Transfers of ownership interests in the Series 2011 Bonds
are to be accomplished by entries made on the books of Direct and Indirect Participants acting on
behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their
ownership interest in Series 2011 Bonds, except in the event that use of the book-entry system
for the Series 2011 Bonds is discontinued.
To facilitate subsequent transfers, all Series 2011 Bonds deposited by Direct Participants
with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other
name as may be requested by an authorized representative of DTC. The deposit of Series 2011
Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee
effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial
Owners of the Series 2011 Bonds; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Series 2011 Bonds are credited, which may or may not be
the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by
Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to
Beneficial Owners will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time. Beneficial Owners of Series 2011
Bonds may wish to take certain steps to augment the transmission to them of notices of
significant events with respect to the Series 2011 Bonds, such as redemptions, tenders, defaults,
and proposed amendments to the Series 2011 Bond documents. For example, Beneficial Owners
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of the Series 2011 Bonds may wish to ascertain that the nominee holding the Series 2011 Bond
for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the
alternative, Beneficial Owners may wish to provide their names and addresses to the registrar
and request that copies of the notices be provided directly to them.
Redemption notices shall be sent to DTC. If less than all of the Series 2011 Bonds within
an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of
each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with
respect to Series 2011 Bonds unless authorized by a Direct Participant in accordance with DTC's
MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts the Series 2011 Bonds are credited
on the record date (identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Series 2011 Bonds will be made to Cede & Co., or
such other nominee as may be requested by an authorized representative of DTC. DTC's
practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding
detail information from the City or the Trustee, on the payable date in accordance with their
respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Trustee, or the City, subject to any
statutory or regulatory requirements as may be in effect from time to time. Payment of principal
and interest to DTC (or such other nominee as may be requested by an authorized representative
of DTC) is the responsibility of the City or the Trustee, disbursement of such payments to Direct
Participants shall be the responsibility of DTC, and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Direct and Indirect Participants.
A Beneficial Owner will give notice to elect to have its Series 2011 Bond purchased or
tendered, through its Participant, to the Trustee, and will effect delivery of such Series 2011
Bond by causing the Direct Participant to transfer the Participant's interest in the Series 2011
Bonds, on DTC's records, to the Trustee. The requirement of physical delivery of Series 2011
Bonds in connection with an optional tender or a mandatory purchase will be deemed satisfied
when the ownership rights in the Series 2011 Bond are transferred by Direct Participants on
DTC's records and followed by a book-entry credit of tendered Series 2011 Bonds to the
Trustee's DTC account.
DTC may discontinue providing its services as securities depository with respect to the
Series 2011 Bonds at any time by giving reasonable notice to the Medical Center or the Trustee.
Under such circumstances, in the event that a successor securities depository is not obtained,
Bond certificates are required to be printed and delivered.
The City may direct the DTC Participants to request or discontinue use of the system of
book-entry transfers through DTC (or a successor securities depository). In that event, Bond
certificates will be printed and delivered.
-8-
The information above discussing the book-entry system have been furnished by DTC.
No representation is made by the City or the Underwriter as to the completeness or accuracy of
such information or as to the absence of material adverse changes in such information
subsequent to the date hereof. No attempt has been made by the City or the Underwriter to
determine whether DTC is or will be financially or otherwise capable of fulfilling its obligations.
The City has no responsibility or obligation to DTC Participants, Indirect Participants or
Beneficial Owners, or the persons for which they act as nominees with respect to the Series 2011
Bonds, or for any principal of,premium, if any, or interest payment thereon.
SECURITY FOR THE SERIES 2011 BONDS
General
The principal of the Series 2011 Bonds, redemption premium, if any, and interest thereon
are limited obligations of the City and are payable solely from the Net Revenues of the Medical
Center, except to the extent payable from proceeds of the Series 2011 Bonds and other amounts
held in any fund or account (other than the Rebate Fund) established by the Indenture, including
the Debt Service Reserve Fund. The Series 2011 Bonds are not secured by a lien on or
security interest in any real or personal property of the city, including the Medical Center.
Indenture
Pledge of Net Revenues. Pursuant to the Indenture, the City and the Medical Center
assign and grant to the Trustee for the benefit and security of the Bondholders a security interest
in the Net Revenues of the Medical Center and all amounts held in any fund or account
established by the Indenture, including investment income thereon.
Debt Service Reserve Fund. A Debt Service Reserve Fund has been established under
the Indenture and held by the Trustee. At the time of issuance of the Series 2011 Bonds, the
amount in the Debt Service Reserve Fund will be equal to S (the "Debt Service
Reserve Fund Requirement").
If at any time the amount on deposit in the Debt Service Reserve Fund is less than the
Debt Service Reserve Fund Requirement either because of a transfer therefrom or a valuation
thereof, the Indenture requires the Medical Center to restore the Debt Service Reserve Fund to an
amount equal to the Debt Service Reserve Fund Requirement from the Net Revenues in not more
than 12 substantially equal monthly payments commencing with the first day of the first month
following the month in which the deficiency occurs. Investment Securities in the Debt Service
Reserve Fund shall be valued by the Trustee at their fair market value determined as of each June
15, beginning June 15, 2012.
The Medical Center agrees to make payments due on the Series 2011 Bonds on behalf of
the City from the Net Revenues, to establish and revise, as necessary, a schedule of charges
sufficient to meet the prompt payment of all expenses and charges payable therefrom, including
the payment of principal of and interest on the Series 2011 Bonds, to maintain adequate reserves
therefor, to pay currently all proper expenses of operation and maintenance of the Medical
Center facilities and otherwise to comply with the provisions of the Series 2011 Bonds and the
Indenture.
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Additional Indebtedness
The Indenture provides that the City and the Medical Center may not incur Additional
Indebtedness payable from the Net Revenues of the Medical Center except for the purposes and
upon the conditions set forth therein. See APPENDIX C — "SUMMARY OF CERTAIN
PROVISIONS OF THE INDENTURE — Restrictions as to Incurrence of Additional
Indebtedness."
ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS*
The following table sets forth, for each calendar year, scheduled payments of principal of
the Series 2003 Bonds and the Series 2011 Bonds at maturity or by mandatory redemption
through the sinking fund, and the payment of interest on the Series 2003 Bonds and the Series
2011 Bonds.
Remainder of this page intentionally left blank.
� Pg Y )
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Calendar Year Series 2011 Bonds Series 2003 Bonds
Ending Total Debt
December 31. Principal Interest Principal Interest Service
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
BONDHOLDERS' RISKS
General
Except as noted herein, the Series 2011 Bonds are payable solely from the Net Revenues
of the Medical Center and from additional security provided by the Indenture. No
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representation or assurance can be made that revenues will be realized by the Medical
Center in the amounts necessary to make payments sufficient to pay maturing principal of,
premium, if any, and interest on the Series 2011 Bonds. The ability of the Medical Center to
generate sufficient revenue for such payments is subject to, among other things, the capabilities
of the management of the Medical Center, the confidence of physicians in management, the
availability of physicians and trained support staff, changes in the population or the economic
condition of the service areas of the Medical Center, the level of and restrictions on federal
funding of Medicare and federal and state funding of Medicaid, imposition of government
wage and price controls or other limits on expense or revenue, the implementation of federal or
state health reform measures, the demand for the services of the Medical Center, competition,
rates, government regulations and licensing requirements, inflation and future economic and
other conditions that are unpredictable and may not be quantifiable or determinable at this
time.
Some of the identifiable risks that should be considered when making an investment
decision regarding the Series 2011 Bonds are detailed below. Such listing is not, and is not
intended to be, exhaustive.
Matters Relating to Security for the Series 2011 Bonds; Enforceability of Remedies
The Medical Center facilities are not pledged as security for the Series 2011 Bonds. The
Act provides that the sole remedy for a breach or default with respect to the Series 2011 Bonds is
a proceeding in law or in equity to enforce performance of the City's duties under the Act and
the Indenture or to obtain the appointment of a receiver to take possession of the Medical Center
and to perform such duties.
The remedies available to the Trustee or the holders of the Series 2011 Bonds upon an
event of default under the Indenture are in many respects dependent upon judicial actions which
are often subject to discretion and delay. Under existing constitution and statutory law and
judicial decisions, including, specifically the Federal Bankruptcy Code, the remedies provided in
the Indenture and the Act may not be readily available or may be limited. The various legal
opinions to be delivered concurrently with the delivery of the Series 2011 Bonds will be
qualified as to the enforceability of the various legal instruments by limitations imposed by
general principles of equity and by bankruptcy, reorganization, insolvency or other similar laws
affecting the rights of creditors generally.
If the City were to file a petition for relief under the Federal Bankruptcy Code, the filing
would operate as an automatic stay of the commencement or continuation of any judicial or other
proceeding against the City and its property. If the bankruptcy court so ordered, the City's
property, including the Medical Center's accounts receivable and proceeds thereof, could be used
for the benefit of the City despite the claims of its creditors.
Global and National Economic Crisis
The recent economic crisis has had, and may continue to have, serious negative
consequences for the global and national economies. To date, the crisis has caused a restriction
on the availability of credit, extreme volatility in interest rates and the credit and securities
markets generally, failures and bankruptcies of businesses and financial institutions and reduced
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business activity, which in turn has reduced personal, corporate and governmental revenues.
These consequences may reduce the Medical Center's revenues from operations and
investments, affect the ability of the Medical Center to make payments on the Series 2003 Bonds
and the Series 2011 Bonds and reduce its ability to obtain liquidity and credit facilities or receive
funds thereunder.
There have been significant global governmental actions aimed at counteracting the
economic crisis. There can be no assurance that these actions will be effective in correcting the
global or national economies.
Health Care Industry Factors Affecting the Medical Center
A significant portion of the revenues of the Medical Center is derived from the Medicare
and Medicaid programs. See "Sources of Medical Center Revenue" in APPENDIX A hereto.
The Medical Center is adversely affected to the extent that reimbursement from these sources for
services rendered is less than actual expenses incurred.
Federal Health Care Reform. 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 Reform Act') were signed into law by President Obama in March of 2010. The Health
Reform Act reflects the federal government's attempt to reform the systems through which
health care services are delivered and financed in the United States. The Health Reform Act is
expected to have a significant impact on the entire health care industry. Numerous provisions of
the Health Reform Act have become effective since enactment of the law, including provisions
related to health insurance underwriting and requirements related to denials of insurance
coverage and claims, which took effect September 23, 2010. A significant portion of the reforms
required by the Health Reform Act will be phased in during a period of time ranging from one to
ten years. Because many of the reforms set out in the Health Reform Act are addressed only in
conceptual or policy terms, new guidelines and regulations related to the Health Reform Act will
likely need to be enacted.
Among other things, the Health Reform Act makes changes to the ways that individuals
pay for their own and their families' health care and how employers procure health insurance for
their employees. In addition, the Health Reform Act requires health insurers to change certain
underwriting practices and benefit structures to extend coverage to individuals who previously
could have been ineligible for private health insurance. As a result, there is expected to be a
significant increase in the number of individuals eligible for, and covered by, health insurance.
Broadly stated, the goals of the Health Reform Act are to reduce the number of uninsured
individuals, to increase the availability and affordability of insurance coverage, to enhance the
focus on quality of care and to contain health spending growth. The legislation intends to
accomplish these objective through various provisions, including (i) creating active markets
(referred to as "exchanges") in which individuals and small employers can purchase health
insurance for themselves and their families or their employees and dependents, (ii) providing
subsidies for premium costs to individuals and families based upon their income relative to
federal poverty levels, (iii) mandating that individuals obtain and certain employers provide a
minimum level of health insurance and providing for penalties and imposing taxes on those
individuals and employers that do not obtain coverage, (iv) establishing insurance reforms that
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expand coverage generally through such provisions as prohibitions on denials of coverage for
pre-existing conditions and elimination of lifetime or annual cost caps, (v) expanding eligibility
for existing public programs, including Medicaid, for individuals and families, (vi) increasing
cost containment provisions in Medicare and Medicaid, and (vii) creating and funding research
programs related to quality and cost of care. It is expected that there will be an increased demand
for health care services as a result of the increase in individuals eligible for health insurance
coverage.
The following are examples of provisions of the Health Reform Act may affect the operations
and financial condition of the Medical Center:
• The Health Care Act requires an expansion of Medicaid programs to a broader
population, with incomes up to 133% of federal poverty levels.
• Commencing in federal fiscal year 2011 (which began October 1, 2010), federal
payments to states for Medicaid services related to certain health care-acquired
conditions will be prohibited.
• With varying effective dates, the Health Reform Act mandates a reduction of
waste, fraud and abuse in public programs by allowing provider enrollment
screening, enhanced oversight periods for new providers and suppliers, and
enrollment moratoria in areas identified as being at elevated risk of fraud in all
public programs and by requiring Medicare and Medicaid program providers and
suppliers to establish compliance programs.
• The legislation provides for increased penalties for fraud and abuse violations and
for increased funding for antifraud activities.
• The Health Reform Act also provides for the implementation of various
demonstration programs 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.
At this time, given the number of variables involved in implementation of the Health
Reform Act, including the likely adoption of significant additional policies, rules and
regulations, the Medical Center's management is unable to predict the effect that the Health
Reform Act will have on the Medical Center's operations or financial performance.
American Recovery and Reinvestment Act of 2009. The Recovery Act was signed into
law in February, 2009. The Recovery Act includes certain provisions which are intended to
provide financial relief to healthcare 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
-14-
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, loans and grants to encourage practitioners and
providers to adopt and use qualified electronic health records. Eventually, Medicare payments
are reduced for providers and practitioners who do not use electronic health records. The
HITECH Act has also significantly increased fines, the scope of coverage, and the scope of
remedies for violations of the Health Insurance Portability and Accountability Act of 1996
("HIPAA") and breaches of the security of electronic health records. Criminal penalties will be
enforced against persons who obtain or disclose personal 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 future violations or obtain money damages on behalf
of the residents harmed. The U.S. Department of Health and Human Services ("DHHS") is also
beginning to perform periodic audits of healthcare providers to ensure that required policies
under the HITECH Act are in place. Finally, individuals harmed by violations will be able to
recover a percentage of monetary penalties or a monetary settlement based upon methods
established by DHHS for this private recovery in the next three years. The effect of the
Recovery Act, including the HITECH Act, on the Medical Center cannot be determined at this
time.
Reliance on Medicaid The Medical Center relies to a high degree on payment from the
federal and state Medicaid program. Future changes in the underlying law and regulations, as
well as in payment policy and timing create uncertainty and could have a material adverse
impact on hospitals' payment stream from Medicaid. With healthcare and hospital spending
reported to be increasing faster than the rate of general inflation, Congress and the Centers for
Medicare and Medicaid Services ("CMS") have taken and may take action in the future to
decrease or restrain Medicaid outlays for hospitals. Medicaid often pays the Medical Center at
levels that may be below the actual cost of the care provided. As Medicaid is partially funded by
state government, the financial condition of the State is relevant to the Medical Center's financial
well-being. See"Medicare and Medicaid Programs and Other Payors."
Managed Care Exposure. Managed care plans have penetrated most hospital markets.
Managed care companies have significant influence over hospital rates, utilization and
competition. Rate pressure imposed by managed care payors may have a future material adverse
impact on hospitals, particularly if major purchasers put increasing pressure on payors to restrain
rate increases. Business failures by managed care companies also could have a material adverse
impact on contracted hospitals in the form of payment shortfalls or delay, and/or continuing
obligations to care for managed care patients without receiving payment. See "Medicare and
Medicaid Programs and Other Payors."
Government "Fraud" Enforcement Fraud in government funded healthcare programs is
a significant concern of DHHS, CMS and many states, and is one of the federal government's
prime law enforcement priorities. The federal and state governments impose a wide variety of
extraordinarily complex and technical requirements intended to prevent over-utilization 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 healthcare
programs. This body of regulation impacts a broad spectrum of hospital commercial activity,
including billing, accounting, recordkeeping, medical staff oversight, physician contracting and
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recruiting, cost allocation, clinical trials, discounts and other functions and transactions. See
"Medicare and Medicaid Programs and Other Payors—Regulatory Environment."
Nursing and Healthcare Professionals Shortage. Currently there is a shortage of
qualified, available nurses. Various studies have predicted that this nursing shortage will become
more acute over time and grow to significant proportions. Likewise, some other types of
healthcare professionals, including family practice and other primary care physicians, are in short
supply. Hospital operations, patient and physician satisfaction, financial condition and future
growth could be negatively affected by nursing and other professional shortages, resulting in
future material adverse impact to hospitals.
Labor Costs and Disruption. Hospitals are labor intensive. Labor costs, including salary,
benefits and other liabilities associated with the workforce, have a significant impact on hospital
operations and financial condition. Hospital employees are increasingly organized in collective
bargaining units, and may be involved in work actions of various kinds, including work
stoppages and strikes. Overall costs of the hospital workforce are high and turnover is high.
Pressure to recruit, train and retain qualified employees is expected to increase. These factors
may materially increase hospital costs of operation. Future workforce disruption may negatively
impact hospital revenues and reputation.
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, some of which could result in substantial uninsured damages to a
hospital. In addition, failure of the hospital governing body to adequately oversee the conduct of
its medical staff may result in future hospital liability to third parties.
Physician Contracting. The Medical Center may contract with individual physicians,
physician groups or physician organizations (such as independent physician associations and
physician-hospital 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 the
physician organizations.
The success of the Medical Center will be partially dependent upon its ability to attract
physicians to join the physician organizations and to attract physician organizations to participate
in its 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 Medical Center will be able to attract and retain an adequate number
of physicians, or that such physicians will deliver high-quality health care services. Without
impaneling a sufficient number and type of providers, the Medical Center could fail to be
competitive or could fail to obtain and maintain attractive payor contracts. Such occurrences
could have a material adverse effect on the business or operations of the Medical Center.
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Similarly, any termination or alteration of existing agreements between the Medical
Center and individual physicians and physician groups who render services to the patients of the
Medical Center, could have a material adverse effect on the business or operations of the
Medical Center.
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 could result in higher hospital costs, reductions in
patient populations and/or new sources of competition for hospitals.
Costs and Restrictions from Governmental Reputation Nearly every aspect of hospital
operations 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,
enforcement and liability risks, and significant and sometimes unanticipated cost impacts. See
"Medicare and Medicaid Programs and Other Payors—Regulatory Environment."
General Economic Conditions; Bad Debt and Indigent Care. Hospitals are economically
influenced by the environment in which they are located. To the extent that state or county
governments are unable to provide a safety net of medical services, pressure is applied to local
hospitals to increase free care. Economic downturns and lower funding of the Medicaid program
may increase the number of patients treated by hospitals who are uninsured or otherwise unable
to pay for some or all of their care. These conditions may give rise to increased bad debt and
higher indigent care utilization. At the same time, nonoperating revenue from investments may
be reduced or eliminated. These factors may have a materially adverse effect on hospitals.
Pension and Benefit Funds. As large employers, hospitals may incur significant expenses
to fund pension and benefit plans for employees and former employees, and to fund required
workers' compensation benefits. Funding obligations in some cases may be erratic or
unanticipated and may require significant commitments of available cash needed for other
purposes.
Medical Liability Litigation and Insurance. Medical liability litigation is 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. Hospitals may be affected by negative financial and liability impacts on
physicians. Costs of insurance, including self-insurance, may increase dramatically.
Joint Ventures with Other Health Care Organizations. Currently, the Medical Center is
g ,
Y
involved in one joint venture with another entity and the Medical Center may, from time to time
in the future, explore other joint venture opportunities. See Appendix A — "AFFILIATIONS,
JOINT VENTURES AND OTHER RELATIONSHIPS"
The OIG has expressed its concern in various advisory bulletins that many types of joint
venture arrangements involving hospitals may implicate the Anti-Kickback Law, since the
parties to joint ventures are typically in a position to refer patients of federal health care
programs. In 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
-17-
up a stream of referrals from the physician investors and compensate these investors indirectly
for these 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 2006, the OIG issued a Special Advisory Bulletin indicating that "contractual
joint ventures" (where a provider expands into a new line of business by contracting with an
entity that already provides the items or services) may violate the Anti-Kickback Law and
expressing skepticism that existing statutory or regulatory safe-harbors would protect suspect
contractual joint ventures.
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.
Any evaluation of compliance with the Anti-Kickback Law or tax laws governing Section
501(c)(3) organizations depends on the totality of the facts and circumstances. While
management of the Medical Center believes that the joint venture arrangements to which the
Medical Center is a party are in material compliance with the Anti-Kickback Law, Stark Law
and OIG pronouncements, and the tax laws governing Section 501(c)(3) organizations, any
determination that the Medical Center is not in compliance with such laws and regulations could
have a material adverse effect on the future financial condition of the Medical Center.
The ownership and operation of certain of these joint ventures may not meet safe harbors
under the Anti-Kickback Law. Management of the Medical Center intend to proceed with such
transactions related to the joint ventures on the assumption, after consultation with its legal
counsel, that each of the transactions related to the joint ventures is in compliance with the Stark
Law and is otherwise generally in compliance with the Anti-Kickback Law. However, 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 the Stark Law and/or the Anti-Kickback Law.
Any such determination could have a material adverse effect on the financial condition of the
Medical Center.
Future Affiliations, Merger, Acquisition and Divestiture. In addition to relationships with
other hospitals and physicians, the Medical Center may consider investments, ventures,
affiliations, development and acquisition of other healthcare-related entities. These may include
home health care, long-term care entities or operations, infusion providers, pharmaceutical
providers, and other health care enterprises which support the overall operations of the Medical
Center. In addition, the Medical Center may pursue such transactions with health insurers,
-18-
HMOs, preferred provider organizations, third-party administrators and other health insurance-
related businesses. Because of the integration occurring throughout the health care field,
management of the Medical Center will consider such arrangements if there is a perceived
strategic or operational benefit for the Medical Center. Any such initiative may involve
significant capital commitments and/or capital or operating risk (including, potentially, insurance
risk) in a business in which the Medical Center may have less expertise than in hospital
operations. There can be no assurance that these projects, if pursued, will not lead to material
adverse consequences to the Medical Center.
Competition Among Healthcare Providers. Increased competition from a wide variety of
sources, including specialty hospitals, other hospitals and healthcare systems, inpatient and
outpatient healthcare facilities, clinics, physicians and others, may adversely affect the utilization
and/or revenues of hospitals. Existing and potential competitors may not be subject to various
restrictions applicable to hospitals, and competition, in the future, may arise from new sources
not currently anticipated or prevalent. See APPENDIX A under the caption "SERVICE AREA
AND COMPETITION" for a discussion of the facilities which the Medical Center considers to
be its major competition.
Antitrust. Antitrust liability may arise in a wide variety of circumstances including
medical staff privilege disputes, third party contracting, physician relations, and joint venture,
merger, affiliation and acquisition activities. In some respects, the application of the federal and
state antitrust laws to health care is still evolving. Health care providers 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.
Violation of the antitrust laws could subject the health care provider to criminal and civil
enforcement by federal and state agencies, as well as by private litigants.
Medicare and Medicaid Programs and Other Payors
Medicare and Medicaid
The Medical Center is subject to governmental regulation under the federal Medicare
program and the joint federal and state Medicaid program. Health care providers, including the
Medical Center, have been and will continue to be affected by changes that have occurred during
the last several years in the administration of the Medicare and Medicaid programs. In addition,
in recent years, an increasing number of federal and state legislative initiatives have been
introduced that would, if adopted, affect major reforms in the federal and state health care
systems. Management of the Medical Center cannot predict whether any such proposals will be
adopted and, if adopted, what effect such proposals would have on the Medical Center's business
and operations. The following is a summary of Medicare and Medicaid.
Medicare. The Medical Center receives a significant portion of net patient service
revenue from reimbursement under Medicare (approximately , the fiscal year ended June 30,
2011, see "SOURCES OF HOSPITAL REVENUE" in Appendix A). In 1966, the federal Social
Security Act established the Medicare program to provide health care services to the elderly and
the disabled. Medicare Part A provides health insurance benefits for covered hospital and related
health care services to persons aged 65 years and older who are entitled to monthly Social
Security retirement benefits, as well as to certain disabled persons. Medicare Part B provides
-19-
supplemental medical benefits covering primarily outpatient and physician care costs for covered
persons. Beneficiary participation in Medicare Part B is on a voluntary basis.
Legislative action and the promulgation of related regulations have resulted in significant
changes in the Medicare program. Formerly, Medicare provided reimbursement to hospitals for
the reasonable direct and indirect costs of inpatient hospital services furnished to beneficiaries.
Pursuant to the Social Security Amendments of 1983 and subsequent Budget Reconciliation Act
modifications, Congress adopted a prospective payment system to cover the routine and ancillary
operating costs of most Medicare inpatient hospital services.
Under Medicare's prospective payment system ("PPS"), hospital discharges are classified
into approximately 500 categories of specific diagnosis-related groups of services ("DRGs"),
which classify illnesses according to the estimated intensity of hospital resources necessary to
furnish care for each principal diagnosis. Hospitals generally receive a fixed amount based upon
the assigned DRG, on a per discharge basis for each Medicare patient. Such determination is
made regardless of how long the patient remains in the hospital or the volume of ancillary
services ordered by the attending physician. Additional payments may be made to hospitals for
cases involving unusually high costs in comparison with other discharges in the same DRG.
Under PPS, hospitals may retain payments in excess of costs but must absorb costs in excess of
payments.
CMS, which administers the Medicare Program, annually updates and recalibrates DRG
rates. Such updating and recalibrating have been affected by several federal enactments. The
Omnibus Budget Reconciliation Act of 1987 ("OBRA-87") provided for an increase in
prospective payment system update factors based upon the location of the hospital, i.e., whether
the hospital is located in a "rural," "large urban" or "other urban" area. The Medical Center is
considered to be located in an "other urban" area for purposes of these rules. As a result of the
Omnibus Budget Reconciliation Act of 1989 ("OBRA-89"), DRG recalibrations must be
undertaken on a "budget-neutral basis." (All references to fiscal years in this discussion are to
the fiscal years of the federal government unless otherwise noted.) "Budget-neutrality" requires,
with certain exceptions, that the estimated amount of aggregate adjusted payments made in a
given year be not greater or less than the payment amounts that would have been payable for the
same services or costs for a historical fiscal year, which has typically been fiscal year 1984 under
the Social Security Act as in effect on April 19, 1983, but which varies depending on the services
or costs in question and the date that the budget-neutrality becomes applicable thereto.
Increases in DRG payment rates are generally tied to the hospital "market basket" as a
measure of the inflation experienced by hospitals in purchasing the goods and services they need
to provide inpatient services. The standardized amounts are updated annually effective with
discharges occurring on or after October 1 of each year. Other factors in PPS payments,
including DRG classifications, the area wage index, outlier payment thresholds, and the
hospital's geographic classification are also revised at the start of each fiscal year.
In OBRA-90, Congress revised the Gramm-Rudman budget and sequestration process
and established a "pay-as-you-go" system for entitlement programs, including Medicare.
Legislation increasing entitlements, reducing revenues, or both, must be deficit-neutral—i.e., it
must pay for itself either by a reduction in entitlement spending elsewhere in the Medicare
budget or by additional revenues. Legislation violating the pay-as-you-go principle would
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trigger a sequestration of entitlement program funds in the same amount that such legislation
added to the deficit. Medicare program funds would be included among those sequestered, but
the sequestration of Medicare funds is limited to a maximum of 4%.
Until September 1991, capital-related payments for inpatient hospital services (which
include depreciation, interest, taxes, property-related insurance and similar costs) had been
reimbursed only on a cost basis under Medicare. By fiscal year 2001, all hospitals participating
in the Medicare PPS have been reimbursed for capital costs at a standard federal rate of average
capital costs per discharge, subject to certain adjustments to reflect, among other things,
geographic variations in construction costs.
Congress enacted the Omnibus Budget Reconciliation Act of 1993 on August 10, 1993
("OBRA-93"). The annual update factor for hospitals under OBRA-93 is equal to the percentage
increase in the hospital market basket. These annual update factors are subject to future
legislative changes.
The Balanced Budget Act of 1997 ("BBA") established a prospective payment system for
several services previously reimbursed on a cost basis (home health, inpatient rehabilitation,
skilled nursing) and institutes the following additional changes in reimbursement: the hospital
PPS update was skipped for fiscal year 1998, freezing the current rate through September 30,
1998. The PPS update was market basket minus 1.9% in 1999, market basket minus 1.8% in
2000 and market basket minus 1.1% in 2001 and 2002. The BBA reduces hospital payments for
inpatient capital 2.1% for fiscal years 1998-2002. PPS exempt hospitals (psychiatric and
rehabilitation) received a zero update for 1998, then a variable update in fiscal years 1999-2002.
Discharges for 10 DRGS to a skilled nursing facility, a PPS-exempt facility or to home health
care will be treated as hospital transfers whereby the transferring facility gets a per diem rate up
to a maximum payment of the full DRG.
The Act directed that hospital outpatient services (and certain Medicare Part B services
furnished to hospital inpatients who no longer have Medicare Part A coverage) be reimbursed on
a prospective payment basis. Implementation of the outpatient prospective payment system
("OPPS") occurred for claims with dates of service on or after August 1, 2000. Payment for
services under OPPS is calculated based on grouping outpatient services into 451 ambulatory
payment classification ("APC") groups. Services within an APC are similar clinically and
require similar hospital resources. A coinsurance amount will be calculated for each APC based
on 20% of the national mediation charge for services within the APC. Payments will be adjusted
to reflect wage differences in different regions. Originally, hospitals were facing an average cut
of almost 11% from the OPPS system, however, Congress has ordered some transitional
payments as a temporary relief from that cut. OPPS has required hospitals to implement
significant changes in their billing and coding systems, at substantial cost to the hospitals.
The Act also mandated prospective payment for home health care as of October 1, 2000.
Under the prospective payment system for home health, a home health agency must bill (under a
consolidated bill) for all home health services which includes nursing and therapy services,
routine and non-routine medical supplies, home health aide and medical social services, except
durable medical equipment ("DME"). DME was excluded from the BBA established
consolidated billing requirement. The law requires that all home health services paid on a cost
basis be included in the prospective payment rate. Therefore, the PPS rate will include all
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nursing and therapy services, routine and non-routine medical supplies, and home health aide
and medical social services. The impact of consolidated billing is that the costs of providing all
of these services are rolled into one payment to the home health agency, which payment may or
may not adequately represent the actual cost of providing such services and could have adverse
effects on Medical Center revenues. Under PPS, home health agency payments are based on a
60-day episode, and are case-mix and wage adjusted. The case mix is based on data elements
from a patient's medical assessment that incorporates the Outcomes and Assessment Information
Set ("OASIS"), and the projected number of therapy hours. Upon receiving a referral, the home
health agency performs an initial assessment using OASIS that converts the patient's condition
into a numeric score in three areas: clinical severity, functional status, and service utilization.
These scores are totaled and assigned a value, which correlates to a patient's home health
resource group ("HHRG"), which are used to determine payment rates. There are 80 HHRGs
representing the range of complexity of a patient's condition.
Effective for cost reporting periods beginning on or after July 1, 1998, skilled nursing
facilities ("SNFs") were no longer paid on a reasonable cost basis or through low volume
prospectively determined rates, but rather on the basis of a prospective payment system ("PPS").
The PPS payment rates will be adjusted for case mix and geographic variation in wages and will
cover all costs of furnishing covered SNF services (routine, ancillary, and capital-related costs).
SNFs are also subject to consolidated billing, which places the responsibility on the SNF for
billing Medicare for all Part A services provided to the SNF resident.
The most recently implemented prospective payment system applied to inpatient
rehabilitation services provided by either a free-standing rehabilitation hospital or a rehabilitation
unit of a general hospital effective January 1, 2002. Under rehab PPS, hospitals will be
reimbursed based on the characteristics of their patients, on a per-discharge basis, with payments
covering all inpatient services. Payment rates to individual facilities will be adjusted to reflect
geographic differences in wages and the care provided to a disproportionate share of low-income
patients.
The Benefits Improvement and Protection Act of 2000 ("BIPA") has reduced to some
extent the harsh financial impact that was anticipated under the Balanced Budget Act. Despite
this limited relief, the additional components of hospital services subject to PPS force hospitals
to continue to balance increased costs and demands for quality services with capped
reimbursement and consolidated billing.
On January 1, 1992, Medicare reimbursement to physicians changed to a resource-based
relative value scale ("RBRVS") from paying the lesser of the actual customary or prevailing
charge for the services rendered. Under the Balanced Budget Act, a single conversion factor for
all physician services will be established and updated by an adjusted Medicare Economic Index.
RBRVS has had a significant impact on the Medicare reimbursement received by some
physicians. This in turn has had an impact on the Medical Center by affecting physicians'
admission practices and utilization of hospitals and revenues derived from physician employees
who reassign their professional fees to the Medical Center.
Uncertainty surrounds the future determination of reimbursement levels related to DRG
classifications and outpatient services. In addition, the Medicare program is subject to judicial
interpretations, administrative rulings, governmental funding, restrictions and requirements for
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utilization review (such as second opinions for surgery and preadmission criteria). Such matters,
as well as more general governmental budgetary concerns, may reduce payments made to the
Medical Center, and future Medicare payment rates may not be sufficient to cover increases in
the cost of providing services to Medicare patients.
Medicaid. The Medical Center receives a significant portion of net patient service
revenue from reimbursement under Medicaid (approximately _ the fiscal year ended June 30,
2011, see"SOURCES OF HOSPITAL REVENUE" in Appendix A). Medicaid is the commonly
accepted name for the hospital reimbursement program created by certain provisions of the
federal Social Security Act, as amended, to benefit indigent persons who are aged, blind or
disabled, or members of certain families who are eligible for Aid to Families with Dependent
Children. Medicaid is a combined federal and state program, administered in Iowa by the
Department of Human Services. Reimbursement for hospital services is based on similar
methods used for reimbursement under the Medicare program. Inpatient hospital services are
reimbursed on the basis of all payor DRGs calculated similar to those used in the Medicare
prospective payment system. Outpatient hospital services are also prospectively reimbursed
based on ambulatory patient groups. The amount of Medicaid reimbursement received by the
Medical Center 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 Medicaid
program.
Significant changes have been and may be made in the Medicaid program that could have
a materially adverse impact on the financial condition of the Medical Center. The purpose of
much of this statutory and regulatory activity has been to contain the rate of increase in amounts
paid to health care providers under the Medicaid program.
Since a portion of the Medicaid program's costs are paid by the state, the absolute level
of Medicaid revenues paid to the Medical Center, as well as the timeliness of their receipt, may
be affected by the financial condition of and budgetary factors facing the State of Iowa. The
actions that the State of Iowa could take with regard to reducing Medicaid expenditures to
accommodate any budgetary shortfalls may include changing the method of payment to
hospitals, changing eligibility requirements for Medicaid recipients and delaying actual
payments due to hospitals. Any such action taken by the State of Iowa could materially affect
the financial condition of the Medical Center, thus affecting the ability of the Medical Center to
make payments under the Indenture.
Boren Amendment. Under the so-called Boren Amendment, states were required to pay
hospitals rates that are "reasonable and adequate" to cover the costs which must be incurred by
"efficiently and economically operated" facilities. Effective for services furnished on or after
October 1, 1997, the BBA repealed the Boren Amendment and established a public approval
process under which proposed rates, methodologies underlying the rates and the justification for
such rates are published and subject to public review and comment. The full impact of the repeal
of the Boren Amendment on the Medicaid program in Iowa cannot be determined at this time.
Medicaid funding may be affected further by health care reform legislation and general
governmental budgetary concerns. It is impossible to predict the effect such changes might have
on the Medical Center. Such changes may reduce payments made to the Medical Center under
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Medicaid and future Medicaid payment rates may not be sufficient to cover increases in
providing services to Medicaid patients.
Audits and Withholds. Medicare participating hospitals are subject to audits and
retroactive audit adjustments with respect to the Medicare program. Medicare regulations also
provide for withholding Medicare payment in certain circumstances, and such withholds could
have a material adverse effect on the financial condition of the Medical Center, thus affecting the
ability of the Medical Center to make payments under the Indenture.
Annual Cost Reporting. The Medical Center's annual cost reports, which are required
under the Medicare and Medicaid programs, are subject to audit which ultimately may result in
adjustments to the amounts determined to be due to or from the Medical Center under these
programs. These audits often require several years to reach the final determination of amounts
earned under the programs based on cost. Providers also have a right of appeal.
Medicare/Medicaid Compliance and Reimbursement. 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, and the Medical Center is surveyed by the Iowa Department of Inspections and
Appeals to determine whether it is in compliance with the Conditions of Participation.
Significant failure to comply with the Conditions of Participation could result in loss of provider
status which would materially affect the revenues of the Medical Center, thus affecting the
ability of the Medical Center to make payments under the Indenture.
Private Third Party Reimbursement
Apart from reimbursement by the federal government under Medicare and the federal and
state governments under Medicaid (Medical Assistance), a substantial portion of the Medical
Center's revenue is provided by private third-party payors, such as commercial insurers and
various types of"managed care" programs such as health maintenance organizations ("HMOs")
and preferred provider organizations ("PPOs"). Generally, reimbursement received from HMOs
and PPOs is lower than rates charged to patients covered by commercial insurance. Future
contract negotiations between such third-party payors and the Medical Center, and other efforts
of these third-party payors and of employers to limit hospitalization and health care costs, could
adversely affect the level of utilization of the Medical Center's services, or reimbursement to the
Medical Center, or both. In addition, it is possible that competitive pricing of plan premiums
could cause an HMO or PPO to operate at a loss and expose the Medical Center 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
Medical Center's operating revenue. For example, if patients formerly covered by commercial
insurance programs that pay full hospital and physician charges shift to HMOs or other third-
party payors that pay lower negotiated rates, the discounts reflected in the Medical Center'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 Medical Center covered by a "capitated" plan (i.e., a plan that pays the Medical Center a
fixed sum for each participant regardless of the services actually performed by the Medical
Center for the participant) were to increase after execution of the plan contract, operating
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expenses of the Medical Center would proportionately increase without an offsetting increase in
operating revenues. Currently, the Medical Center does not have any capitalized contracts.
In addition, private insurers or managed care programs might enter into contracts with
physicians, hospitals or other health care providers whereby the providers are the sole providers
of care for participants in the program. If significant numbers of persons living in the Medical
Center's market area participated in exclusive provider programs not involving the Medical
Center, the Medical Center's revenues and cash flow could be adversely impacted, thus affecting
the ability of the Medical Center to make payments under the Indenture.
Health Plan Financial Pressure and Insolvency
Over the last few years, a number of health plans have become insolvent or experienced
financial pressure or cash flow issues. Such plans range in size from smaller local provider-
based plans to some of the largest plans in the United States. These plans include traditional
indemnity insurers, as well as health maintenance organizations and preferred provider
organizations. Health plans that experience financial pressure may slow payment to providers,
withhold payment entirely, or utilize claims payment methodology that systematically reduces
compensation on a per claim basis. Health plans that become insolvent may seek either federal
bankruptcy or state insurance insolvency protection. Such bankruptcy or insurance insolvency
protection may require that providers repay certain claims to the health plan, or result in certain
claims becoming uncollectable.
Emergency Medical Treatment and Labor Act
In response to concerns regarding inappropriate hospital transfers of emergency room
patients based on the patient's ability to pay for the services provided, Congress has enacted the
Emergency Medical Treatment and Labor Act("EMTALA") or the "anti-dumping" statute. This
law imposes certain requirements on hospitals prior to discharging an emergency patient or
transferring such a patient to another facility. Failure to comply with the law can result in
exclusion from the Medicare and/or Medicaid programs as well as civil penalties. Failure of the
Medical Center to meet its responsibilities under EMTALA could adversely affect the financial
condition of the Medical Center. EMTALA and its implementing regulations are complex, and
the Medical Center's compliance is dependent, in part, upon the volition of independent Medical
Staff members. Accordingly, there can be no assurance that no violation of EMTALA will be
found or, if found, that any sanction imposed would not have a material adverse effect on the
operations or financial conditions of the Medical Center, thus affecting the ability of the Medical
Center to make payments under the Indenture.
Other Legislative, Regulatory and Accreditation Requirements
The Medical Center and its operations are subject to regulation and certification by
various federal, state and local government agencies and by certain nongovernmental agencies
such as the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). No
assurance can be given as to the effect on the Medical Center's future operations of existing
laws, regulations and standards for certification or accreditation or of any future changes in such
laws, regulations and standards.
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Other regulatory programs which may have a significant effect on the Medical Center are
changes in the governmental requirements concerning how patients are treated. These
regulations are embodied in patients' bills of rights and similar programs being promulgated with
greater frequency, and changes in licensure requirements. All of these could increase the cost of
doing business and consequently adversely affect the financial condition of the Medical Center,
thus affecting the ability of the Medical Center to make payments under the Indenture.
Regulatory Environment
"Fraud" and "False Claims. " Healthcare "fraud and abuse" laws have been enacted at
the federal and state levels to broadly regulate the provision of services to government program
beneficiaries and the methods and requirements for submitting claims for services rendered to
the beneficiaries. Under these laws, hospitals and others can be penalized for a wide variety of
conduct, including submitting claims for services that are not provided, billing in a manner that
does not comply with government requirements or including inaccurate billing information,
billing for services deemed to be medically unnecessary, or billings accompanied by an illegal
inducement to utilize or refrain from utilizing a service or product.
Federal and state governments have a broad range of criminal, civil and administrative
sanctions available to penalize and remediate healthcare fraud, including the exclusion of a
hospital from participation in the Medicare/Medicaid programs, civil monetary penalties, and
suspension of Medicare/Medicaid payments. Fraud and abuse cases may be prosecuted by one or
more government entities and/or private individuals, and more than one of the available
sanctions may be, and often are, imposed for each violation.
Laws governing fraud and abuse may apply to a hospital and to nearly all individuals and
entities with which a hospital does business. Fraud investigations, settlements, prosecutions and
related publicity can have a catastrophic effect on hospitals. See "Regulatory Environment -
Enforcement Activity" below. Major elements of these often highly technical laws and
regulations are generally summarized below.
Billing and Reimbursement Practices. 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. Moreover, health care providers,
including hospitals and physician clinics, may be subject to criminal, civil and administrative
penalties for violating billing and reimbursement requirements under state and federal law.
These penalties can be substantial and may result in financial penalties and/or result in exclusion
from participation in federal health care programs, including Medicare and Medicaid.
As these requirements are numerous, technical and complex, there can be no assurance
that the Medical Center will avoid incurring such penalties in the future. These penalties may be
material and adverse and could include criminal or civil liability for making false claims and/or
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 or other federal statutes, subjecting the provider to civil
or criminal sanctions. The United States Department of Justice has initiated a number of national
investigations involving proceedings under the federal False Claims Act relating to alleged
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improper billing practices by hospitals. These actions have resulted in substantial settlement
amounts being paid in certain cases.
Management of the Medical Center does not believe that the Medical Center has
improperly submitted claim or cost reports; however, in light of the complexity of the regulations
relating to both the Medicare and Medicaid programs, and the'threat of ongoing compliance
initiatives described above, there can be no assurance that significant difficulties will not develop
in the future.
False Claims Laws. There are principally three federal statutes that address the issue of
"false claims." First, the Civil False Claims Act imposes civil liability (including substantial
monetary penalties and damages) on any person or corporation which (1) knowingly presents or
causes to be presented a false or fraudulent claim for payment to the United States government;
(2) knowingly makes, uses, or causes to be made or used a false record or statement to obtain
payment; or (3) engages in a conspiracy to defraud the federal government by getting a false or
fraudulent claim allowed or paid. Specific intent to defraud the federal government is not
required to act with knowledge; all that is required is that the person knew or should have known
of the falseness of the claim. This statute authorizes private persons to file qui tam actions on
behalf of the United States. The False Claims Act has become one of the government's primary
weapons against healthcare fraud.
The Fraud and Enforcement and Recovery Act ("FERA"), signed into law on May 20,
2009, has the potential to expand exposure under the Civil False Claims Act for a wide range of
business transactions involving federal government funds. Pursuant to FERA amendments, the
Civil False Claims Act may impose liability for false claims with more remote connections to the
federal government. FERA may also have the effect of expanding liability for the retention of
money owed to the government. FERA makes four other significant amendments to the Civil
False Claims Act. First, it expands protection for"whistleblowers" who lawfully attempt to stop
a violation of the Act. Second, it permits whistleblower plaintiffs to access information gained
from government subpoenas. Third, it authorizes the government to share information provided
by whistleblowers with law enforcement authorities from state or local governments. And lastly,
it effectively expands the statute of limitations for actions, specifying that government
complaints relate back to earlier whistleblower complaints for purposes of the statute of
limitations. The Health Reform Act also extends liability when an overpayment from the
government is identified and not returned by a specific deadline.
In addition to the Civil False Claims Act, the Civil Monetary Penalties Law authorizes
the imposition of substantial civil money penalties against an entity which 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
Health and Human Services, acting through the Office of Inspector General ("OIG"), also has
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both mandatory and permissive authority to exclude individuals and entities from participation in
federal health care programs pursuant to this statute.
Finally, it is a criminal federal 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 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 Health Reform Act also greatly expands potential liability under the Civil False
Claims Act by limiting several longstanding defenses intended to protect against speculative
lawsuits. In particular, the Health Reform Act makes the "public disclosure" and "original
source" bars easier for plaintiffs to defeat, meaning that it will be easier for plaintiffs to assert
claims under the False Claims Act.
Hospital providers in many states also are subject to a variety of state laws, related to
false claims (similar to the Civil False Claims Act or that are generally applicable false claims
laws) and anti-kickback (similar to the federal Anti-Kickback Statute or that are generally
applicable anti-kickback or fraud laws). These prohibitions are similar in public policy and
scope to the federal laws, and could pose the possibility of material adverse impact for the same
reasons as the federal statutes.
At the present time, management of the Medical Center is not aware of any pending or
threatened claims, investigations, or enforcement actions regarding the False Claims Act which,
if determined adversely to the Medical Center, taken as a whole and taking into account current
reserves, would have a material adverse effect on the financial condition of the Medical Center.
Anti-Kickback Law. The federal Medicare, Medicaid Anti-Fraud and Abuse
Amendments to the Social Security Act (the "Anti-Kickback Law") makes it a felony to
knowingly and willfully offer, pay, solicit or receive remuneration, directly or indirectly, in order
to induce business that is reimbursable under any federal health care program or in return for the
purchasing, leasing, ordering or arranging for, or recommending the purchasing, leasing or
ordering of, any good, facility, service or item for which payment is made in whole or in part
under a federal health care program. Violation of these provisions may result in imprisonment
for up to five years and criminal fines of up to $25,000 for each act. The OIG of DHHS also has
the authority to impose civil monetary penalties of up to $50,000 per violation and must exclude
hospitals who are convicted of violating the Anti-Kickback Law from federal health care
programs for a period of not less than five years. In addition, the OIG may exclude any
individual or entity that it determines has violated the Anti-Kickback Law even if the individual
or entity has not been convicted. A person who violates the Anti-Kickback Law also is subject
to damages of up to three times the total amount of remuneration offered, paid, solicited or
received. Finally, the United States Government may exclude from a federal health care
program any individual who has a direct or indirect ownership or control interest in a sanctioned
entity and has acted in deliberate ignorance of the information or is an officer or managing
employee of the sanctioned entity, irrespective of whether the individual participated in the
wrongdoing.
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The arrangements prohibited under the Anti-Kickback Law can involve hospitals and
persons or entities with which hospitals do business, including, in particular, physicians and
other health care providers and suppliers. Prohibited arrangements may include joint ventures
between providers, space and equipment rentals, purchases of physician practices, physician
recruiting programs and management and personal services contracts. In addition to certain
statutory exceptions to the Anti-Kickback Law, the OIG has promulgated regulatory "safe
harbors" under the Anti-Kickback Law designed to protect certain payment and business
practices. A party may seek an advisory opinion to determine whether an actual or proposed
arrangement meets a particular safe harbor. Failure to comply with a statutory exception or
regulatory safe harbor does not mean that an arrangement is unlawful but may increase the
likelihood of challenge. The safe harbors are, however, narrow and do not cover a wide range of
business relationships that many hospitals, physicians and other health care providers have
historically considered to be legitimate business arrangements not prohibited by the Anti-
Kickback Law. Because the safe harbor regulations do not purport to describe comprehensively
all lawful or unlawful business arrangements or other relationships between health care providers
and referral sources, it is uncertain whether hospitals and other health care providers that have
these arrangements or relationships may need to alter them in order to ensure compliance with
the Anti-Kickback Law.
Management of the Medical Center believes that the Medical Center's arrangements with
referral sources are in compliance with the Anti-Kickback Law. However, because of the
breadth of the Anti-Kickback Law and the narrowness of the safe harbor regulations, there can
be no assurances that in the future the Medical Center will not be found to have violated the
Anti-Kickback Law and, if so, whether any sanction imposed would have a material adverse
effect upon the operations and financial condition of the Medical Center.
Stark Physician Self-Referral Prohibition. Another federal law (known as the "Stark
Law" or "Stark II" for other than clinical laboratory services), with limited exceptions, prohibits
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 or Medicaid patients to such entities for the furnishing of such designated
health services. Stark Law designated health services include physical therapy services,
occupational therapy services, radiology or other diagnostic services (including MRIs, CT scans
and ultrasound procedures), durable medical equipment, radiation therapy services, parenteral
and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices, home
health services, outpatient prescription drugs, inpatient and outpatient hospital services 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; that is unlike the
PP g P ,
federal Anti-Kickback Law, 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 collected in violation, a civil penalty of up to $15,000 for
each service arising out of the prohibited referral, exclusion from 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. Knowing violations of the Stark Law have also served
as the basis for lawsuits against health care organizations under the False Claims Act. The types
of financial relationships between a physician and an entity that trigger the self-referral
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prohibitions of the Stark Law are broad, and include ownership and investment interests and
compensation arrangements.
In 2001, CMS issued Phase I final regulations implementing the Stark Law's application
to designated health services other than clinical laboratory services. The rules delineated in the
Phase I regulations became effective in 2002. CMS issued Phase II final regulations which
became effective in 2004. The rules delineated in the Phase II regulations address the remaining
exceptions relating to ownership and investment and compensation arrangements, reporting
requirements and sanctions, additional regulatory definitions, and additional new regulatory
exceptions. However, the Phase 11 regulations did not address Stark II's application to Medicaid
covered services, other than Medicaid managed care plans, but reserved that issue for a later
date.
CMS issued final regulations implementing Phase III of Stark II, effective December 4,
2007. Phase III made a number of changes to the existing exceptions relating to ownership and
compensation, including changes to the content and interpretation of such exceptions. Certain of
the changes set forth in the Phase III regulations could require modifying existing arrangements
between the Medical Center and physicians. Such modifications could have a material effect on
the nature of such arrangements.
In addition to the Phase III final rules, in November 2008 CMS issued final rules
governing Medicare physician payments effective January 1, 2009 that included changes to
certain anti-markup regulations relating to diagnostic tests. The Medical Center does not believe
that any of the changes will have a significant or material effect on existing arrangements
between the Medical Center and physicians.
The 2009 Inpatient Prospective Payment System Final Rule ("IPPS Final Rule")
published on August 18, 2008 further revised the Stark Law regulations, certain provisions of
which became effective on October 1, 2009 and others on October 1, 2009. Although many of
the provisions of the Stark Law regulations were revised, the provisions of the IPPS Final Rule
that could have a significant impact on the Medical Center include: (a) the definition of"entity"
and the affect on services provided "under arrangements," (b) the "stand in the shoes" provisions
under which certain physicians are treated as "standing in the shoes" of their "physician
organizations," (c) limitations placed on revenue-based or percentage payments for space and
equipment, and (d) limitations on "per-click" arrangements. The definition of an "entity" for
Stark purposes now includes the person or entity that performs DHS services, as well as the
person or entity that bills for DHS services. This change significantly affects the manner in
which an "under arrangements"relationship may be structured. In addition, many revenue-based
and percentage payments for space or equipment may no longer comply with space rental,
equipment rental, fair market value, or indirect compensation exceptions. Further, many per-unit
or per-click compensation methodologies for space and equipment rental charges will no longer
comply with space rental, equipment rental, fair market value, or indirect compensation
exceptions. The changes to percentage based and per-click compensation arrangements became
effective October 1, 2009.
In the 2009 IPPS Final Rule, CMS also finalized its proposal to implement an
information collection instrument referred to as the Disclosure of Financial Relationships Report
("DFRR"). The DFRR is designed to collect information concerning the ownership and
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investment interests and compensation arrangements between hospitals and physicians. CMS
has stated it will send the DFRR to 500 hospitals, but that it may decide to decrease the number.
Those hospitals that receive a DFRR will have 60 days in which to complete and send the
information to CMS, and failure to do so could result in substantial civil monetary penalties.
CMS also indicated that it envisions the DFRR as a one-time information collection instrument;
however, depending on the information it receives sand other factors, CMS may propose future
rulemaking to use the DFRR or some other instrument as a periodic or regular collection
instrument.
At a minimum, the new Stark Law regulations may require the Medical Center to amend
or terminate certain arrangements with physicians or other referral sources to comply with the
regulations' new requirements. The new Stark Law regulations will also limit the types of
arrangements the Medical Center may enter into, and will increase the complexity of ensuring
regulatory compliance in the Medical Center's contractual relationships. Given the relatively
recent effective dates of many of these new regulations, it is currently uncertain whether, how or
to what extent these regulations will affect the financial condition and results of operations of the
Medical Center.
A number of states have passed statutes similar to the Stark Law, pursuant to which
similar types of prohibitions are made applicable to all other health plans or third-party payors
beyond Medicare and Medicaid. [IOWA?]
Although management of the Medical Center believes that the Medical Center is
presently in material compliance with the Stark Law, as currently interpreted, there can be no
assurance that regulatory authorities will not take a contrary position and that the Medical Center
will not be found to have violated the Stark Law. Exclusion from the Medicare program may
have a material adverse effect on the future operations and financial condition of the Medical
Center, as would any significant penalties, demands for refund or denials of payment.
Physician Recruitment. The Internal Revenue Service ("IRS") and DHHS have rendered
decisions that could limit physician recruitment and retention arrangements. This is also a
potential issue under the Anti-Kickback Law and Stark II. The Medical Center currently has no
such arrangements [PLEASE CONFIRM]. If the Medical Center were to enter into such
arrangements, it would need to comply with these regulatory requirements.
Enforcement Activity. Enforcement activity against healthcare providers has increased
and enforcement authorities have adopted aggressive approaches. In the current regulatory
climate, it is anticipated that many hospitals and physician groups will be subject to an audit,
investigation or other enforcement action regarding the health care fraud laws mentioned above.
Enforcement authorities are often in a position to compel settlements by providers
charged with or being investigated for false claims violations by withholding or threatening to
withhold Medicare, Medicaid and/or similar payments and/or by instituting criminal action. In
addition, the cost of defending such an action, the time and management attention consumed, and
the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case,
a hospital could experience materially adverse settlement costs, as well as materially adverse
costs associated with implementation of any settlement agreement. Prolonged and publicized
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investigations could be damaging to the reputation and business of a hospital, regardless of
outcome.
Certain acts or transactions may result in violation or alleged violation of a number of the
federal healthcare fraud laws described above and therefore, penalties or settlement amounts
often are compounded. Generally these risks are not covered by insurance. Enforcement actions
may involve multiple hospitals in a health system, as the government often extends enforcement
actions regarding healthcare fraud to other hospitals in the same organization.
In the event of a successful prosecution by the federal government of a violation of
these billing and reimbursement standards, it is possible that sanctions imposed would
have a material adverse effect on the operations or financial condition of the Medical
Center, thus affecting the ability of the Medical Center to make payments under the
Indenture.
Health Insurance Portability and Accountability Act
Specific state and federal laws govern the use and disclosure of confidential patient
health information, as well as patients' rights to access and amend their own health information.
Health care providers, health care clearinghouses and operators of health plans have been
significantly affected by certain health information requirements contained in the Administrative
Simplification Requirements of the Health Insurance Portability and Accountability Act of 1996
("HIPAA"), which established national standards to facilitate the electronic exchange of
Protected Health Information ("PHI") and to maintain the privacy and security of PHI. These
standards have a major effect on health care providers that transmit PHI in electronic form in
connection with HIPAA standard transactions (e.g. health care claims). In particular, HIPAA
establishes standards governing (1) Electronic Transactions and Code Sets; (2) Privacy; (3)
Security; and (4) National Identifiers. The Medical Center has developed policies, procedures
and practices that it believes comply with the HIPAA standards and requirements, but if it was
determined that the Medical Center was not in compliance, there could be criminal and civil
penalties imposed.
The HITECH Act has significantly increased fines and the scope of remedies for
violations of HIPAA. There are new requirements and potential exposure for breaches of the
security of electronic health records. HITECH has also expanded rights of subjects of PHI.
Increased federal enforcement is expected and increased civil and criminal penalties may be
enforced against persons who obtain or disclose personal health information without
authorization. In addition, State Attorneys 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 future violations or obtain money damages on behalf
of the residents harmed. DHHS is also beginning to perform periodic audits of healthcare
providers to ensure that required policies under the HITECH Act are in place. Finally,
individuals harmed by violations will be able to recover a percentage of monetary penalties or a
monetary settlement based upon methods to be established by DHHS for this private recovery.
The effects of the HITECH Act on the financial condition of the Medical Center cannot be
predicted at this time.
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The Medical Center has taken reasonable steps to be in substantial compliance with the
HIPAA regulations, but if it were found to be in violation, the fines could be substantial and
could have an adverse financial impact, thus affecting the ability of the Medical Center to make
payments under the Indenture.
Compliance and Government Enforcement Initiatives
Pursuant to the mandates of HIPAA and the Balanced Budget Act of 1997 passed by
Congress, increased emphasis is being placed on federal investigations and prosecutions of
Medicare and Medicaid "fraud and abuse" cases. Both Acts substantially increase enforcement
resources within the Department of Justice, FBI and Office of Inspector General ("OIG") and
mandate and provide resources for better coordination of enforcement and prosecution among
federal agencies and with local authorities. The federal emphasis on and commitment to
investigating, prosecuting and eradicating health care fraud has become a dominant national
public policy theme. There are new and revised "whistleblower" incentives for private citizens
to report or bring prosecutions against health care providers. The sanctions for violations of
laws, particularly those related to Medicare and Medicaid billing,have increased substantially.
Environmental Laws Affecting the Health Care Industry
Health care facilities are subject to a wide variety of federal, state and local
environmental and occupational and safety laws and regulations that address, among other
things, health care operations or facilities and properties owned or operated by health care
providers. Among the types of regulatory requirements faced by health care providers are: air
and water quality control requirements; waste management requirements; specific regulatory
requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances;
requirements for providing notice to employees and members of the public about hazardous
materials handled by or located at the hospitals, clinics and nursing homes; and requirements for
training employees in the proper handling and management of hazardous materials and wastes.
In their role as owners and operators of properties or facilities, health care providers may be
subject to liability for investigating and remedying any hazardous substances that have come to
be located on the property, including any such substances that may have migrated off of the
property. Typical health care operations include, in various combinations, the handling, use,
storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive,
flammable and other hazardous materials, wastes, pollutants or contaminants. For this reason,
health care operations are particularly susceptible to the practical, financial and legal risks
associated with compliance with such laws and regulations. Such risks may result in damage to
individuals, property or the environment; may interrupt operations or increase their cost, or both;
may result in legal liability, damages, injunctions or fines; or may trigger investigations,
administrative proceedings, penalties or other government agency actions. There can be no
assurance that the Medical Center will not encounter such risks in the future, and such risks may
result in material adverse consequences to the operations or financial condition of the Medical
Center, thus affecting the ability of the Medical Center to make payments under the Indenture.
Continued Utilization of Medical Center's Facilities
A significant portion of the Medical Center's revenues are derived from the treatment of
patients admitted to or provided services on an outpatient basis at the Medical Center's facilities
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by members of its medical staff. Physicians on the medical staff have the option of admitting a
particular patient, with the patient's consent, to the Medical Center's facilities or to other acute
care hospitals or to similar facilities that are not controlled by the Medical Center, with which the
physician may be affiliated. The revenues of the Medical Center could decrease if medical staff
members admit patients to such other similar facilities or hospitals instead of admitting such
patients to the Medical Center's facilities.
The Medical Center faces competition from other hospitals and health care facilities and
could face additional competition in the future as a result of the construction of new, or the
renovation of existing, hospitals in the areas served by it. No assurance can be given that
occupancy and utilization of the Medical Center's facilities will not be adversely affected by the
availability of other hospital facilities in the service areas of the Medical Center and elsewhere,
thus affecting the ability of the Medical Center to make payments under the Indenture.
The Medical Center also faces potential competition from other forms of health care
delivery, such as health maintenance organizations, preferred provider organizations, ambulatory
surgical centers, home health agencies, expanded preventive medicine and outpatient treatment,
drug and alcohol abuse programs, increasingly sophisticated physician group practices, private
pathology laboratories and radiological services. Certain of such forms of health care delivery
are designed to offer comparable services at lower prices and the federal government and private
third-party payors, such as the Blue Cross programs, may increase their efforts to encourage the
development and use of such programs. In addition, future changes in state and federal law may
have the effect of increasing competition in the health care industry. Finally, managed care
companies and insurers are becoming increasingly selective in contracting with health care
providers. The revenues of the Medical Center could decrease significantly with the loss of such
third party payor contracts, thus affecting the ability of the Medical Center to make payments
under the Indenture.
Possible Future State Legislation
Some states have adopted, and many more considered, health care reform legislation that
would change the payment for health care services, including specifically patients covered by the
Medicaid or similar programs, and the way it is delivered. Though these legislative efforts are
different in scope and form, most include one or more of the following: (i) cost reduction
measures, using budget or cost increase approval as enforcement mechanisms; (ii) creation of
health purchasing alliances; (iii) modification of payment provisions under the Medicaid or
similar programs; (iv) taxes or assessments on hospitals to fund the costs of such programs and
the cost of providing care to uninsured persons; (v) bans on certain self-referrals by physicians;
(vi) penalties for offering, paying, soliciting or receiving consideration for referring patients
covered by Medicaid or other payor contracts; (vii) "any willing provider" laws that require a
managed care network to accept as part of the network any provider that makes application and
is located within the applicable geographic area; and (viii) regulation of direct managed care
agreements between providers and self-insured employees. There can be no assurance that
future legislation will not adversely affect the future financial condition of the Medical Center.
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Other Factors Generally Affectiny,Health Care Facilities
Investments. The Medical Center has significant holdings in a broad range of
investments. Market fluctuations may affect the value of those investments and those
fluctuations may be and historically have been at times material.
Construction Risks. Construction projects are subject to a variety of risks, including but
not limited to delays in issuance of required building permits or other necessary approvals or
permits, strikes, shortages of materials and adverse weather conditions. Such events could delay
occupancy.
Cost overruns may occur due to change orders, delays in the construction schedule,
scarcity of building materials and other factors. Cost overruns could cause the costs to exceed
available funds.
Other Factors. The health care industry is highly dependent on a number of factors
which may limit the ability of the Medical Center to meet its obligations with respect to the
Series 2011 Bonds, a number of which are beyond the control of the Medical Center. Among
other things, participants in the health care industry are subject to significant regulatory
requirements of federal, state and local governmental agencies and independent professional
organizations and accrediting bodies, technological advances and changes in treatment modes,
various competitive factors and changes in third party reimbursement programs. Discussed
below are certain of these factors which could have a significant impact on the future operations
and financial condition of the Medical Center, thus affecting the ability of the Medical Center to
make payments under the Indenture. It is difficult to predict the effect of these factors on the
operations of the Medical Center; however, the factors described below could have a negative
impact on such operations and such effect could be material:
1. Future medical and scientific advances, the development and requirement of the
option for health maintenance organizations in labor contracts, state health plans, and other
health plans, preventive medicine, improved occupational health and safety, and improved
outpatient care could result in decreased usage of inpatient hospital facilities.
2. Changes in the economy and difficulties in increasing room charges and other
fees, while at the same time maintaining scope and quality of health services, may affect the
ability of the Medical Center to maintain sufficient operating margins. Iowa currently does not
have a program for the regulation or review of rates charged for hospital services furnished to
privately paying patients. If any such program was established, it could have an adverse effect
on the Medical Center's revenues.
3. A shortage of qualified professional personnel, including registered nurses, could
significantly increase payroll costs. The Medical Center cannot control the prevailing wage rates
in its service area, and any increase in such rates will directly affect its costs of operations. The
Medical Center may also be facing new accreditation standards which require increased staffing
levels. The Medical Center is accredited by the Joint Commission on Accreditation of Health
Care Organizations ("Joint Commission"). The Joint Commission has approved new standards
for a hospital's monitoring of its staffing effectiveness. Under the standards, the Medical Center
is required to conduct such monitoring through the use of human resource screening indicators
-35-
and clinical/service indicators to conduct an analysis of staffing effectiveness. On survey, the
Joint Commission will review the organization's staffing plan, its review process, and the
analysis and actions taken based on the results of the monitoring. If the effect of such
monitoring and analysis is to require increased staffing, this could have an unpredictable impact
on the cost of staff. A shortage of qualified personnel could compound these costs.
4. The possible inability to obtain future governmental approvals to undertake
projects which the Medical Center deems necessary to remain competitive as to rates and charges
and to maintain the quality and scope of care may adversely affect the Medical Center. The
Medical Center is subject to health care planning programs administered by the State of Iowa
which requires that a hospital obtain a certificate of need from the State Health Facilities Council
before making certain capital expenditures or acquiring certain kinds of equipment, offering
certain types of new services or discontinuing certain types of existing services. This
requirement may prevent the Medical Center from adapting in a timely manner, or at all, to
changes in the mix of services needed to meet the needs of its service area and/or to remain
competitive with other health care providers. In 1997, the certificate of need statute was
amended to eliminate the requirement from a certificate of need for replacement of previously
existing buildings or equipment and for many other types of capital expenditures or new
services. This amendment, or further change or elimination of the certificate of need statute in
the future, could subject the Medical Center to unexpected competition from other health care
providers which might then be able to enter the Medical Center's service area and offer some or
all of the services provided by the Medical Center.
5. In recent years the dollar amounts of patient damage recoveries in malpractice
suits have been increasing nationwide. The ability of, and the cost to, the Medical Center to
insure or otherwise protect itself against malpractice claims may adversely affect the Medical
Center. Changes in the cost of paying claims in excess of insurance coverage could directly
adversely affect operating results. Prohibitive cost and unavailability of other types of insurance
that the Medical Center desires to obtain may also adversely affect the Medical Center. In
addition, the bankruptcy or insolvency of an insurance company which provides insurance
coverage to the Medical Center would cause the Medical Center to be at risk for claims which
would have been covered by such insurance without adequate liabilities having been recorded on
the balance sheets. "Tort reform" legislation may limit the exposure of the Medical Center to
such claims, but the likelihood of passage of such legislation and the effect it may have, if any,
on the Medical Center or the cost of insurance coverage cannot be determined at this time.
6. Work stoppages, slowdowns or lockouts could reduce, interrupt or otherwise
adversely affect operations of the Medical Center.
Tax-Exempt Status of the Series 2011 Bonds
As described hereinafter under the caption "TAX EXEMPTION AND RELATED
CONSIDERATIONS," failure to comply with certain continuing legal requirements may cause
interest on the Series 2011 Bonds to become subject to federal income taxation retroactive to the
date of issuance of the Series 2011 Bonds. The Indenture does not provide for the payment of
any additional interest or penalty in the event of taxability of interest on the Series 2011 Bonds.
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LITIGATION
The City has advised that there is not now pending, or to the knowledge of the City,
threatened any litigation restraining or enjoining the issuance or delivery of the Series 2011
Bonds or questioning or affecting the validity of the Series 2011 Bonds, or the proceedings or the
authority urider which they are to be issued. Neither the creation, organization or existence, nor
the title of any of the present members of the City Council or the Board or of any officers of the
City to their respective offices is being contested. There is no litigation pending, or, to the
knowledge of the City, threatened which in any manner questions the right of the City or the
Medical Center to enter into the Indenture or to secure the Series 2011 Bonds in the manner
provided in the Indenture and the Act.
The City has advised that no litigation or proceedings are pending or, to its knowledge,
threatened against the City with respect to the Medical Center except (i) litigation, proceedings
or investigations in which the probable ultimate recoveries and the estimated costs and expenses
of defense, in the opinion of counsel to the City, will be entirely within applicable insurance
policy limits (subject to applicable deductibles) or are not in excess of the total of available
assets held under the Medical Center's applicable self-insurance, pooled risk insurance and
shared risk insurance programs or(ii) litigation,proceedings or investigations which, if adversely
determined, will not, in the opinion of counsel to the City, have a material adverse effect on the
operations or condition, financial or otherwise,of the Medical Center.
LEGAL MATTERS
The validity of the Bonds and the tax-exempt status of the interest on the Bonds will be
passed upon by Dorsey & Whitney LLP, Des Moines, Iowa, Bond Counsel. Certain legal
matters will be passed upon for the City and the Medical Center by the Ames City Attorney,
Ames Iowa. Certain legal matters will be passed upon for the Underwriter by its counsel, Best &
Flanagan LLP, Minneapolis, Minnesota. The opinions of counsel will contain customary
exceptions regarding bankruptcy, insolvency and similar laws affecting the enforcement of
creditors' rights. The proposed form of opinion of Dorsey & Whitney LLP is set forth in
Appendix D to this Official Statement.
RATING
Moody's Investor Services, Inc. ("Moody's"), has currently assigned its long-term bond
rating of [" "] to the Bonds. The rating and an explanation of its significance may be
obtained from Moody's, and such rating reflects only the view of Moody's.
The Medical Center has furnished S&P with certain information and materials related to
the Series 2011 Bonds and the Medical Center that has not been included in this Official
Statement. There is no assurance that a particular rating will be maintained for any given period
of time or that it will not be lowered or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. None of the City, the Underwriter,
or the Medical Center has undertaken any responsibility to bring to the attention of the holders of
the Series 2011 Bonds any proposed revision or withdrawal of the rating of the Series 2011
-3 7-
Bonds or to oppose any such proposed revision or withdrawal. Any such change in or
withdrawal of such rating could have an adverse effect on the market price and marketability of
the Series 2011 Bonds.
UNDERWRITING
Under a bond purchase agreement ("Bond Purchase Agreement') entered into between
the City, the Medical Center and Piper Jaffray & Co. (the "Underwriter"), the Series 2011 Bonds
are being purchased by the Underwriter at an aggregate purchase price of$ (net of
net original issue discount/premium of $ and underwriting discount of
$ ). The Bond Purchase Agreement provides that the Underwriter will purchase all of
the Series 2011 Bonds if any are purchased. The obligation of the Underwriter to accept delivery
of the Series 2011 Bonds is subject to various conditions contained in the Bond Purchase
Agreement.
The Underwriter intends to offer the Series 2011 Bonds to the public initially at the
offering prices set forth on the inside front cover of this Official Statement, which may
subsequently change without any requirement of prior notice. The Underwriter has entered into
an agreement (the "Distribution Agreement") with Advisors Asset Management, Inc. ("AAM")
for the distribution of certain municipal securities allocated to the Underwriter at the original
offering prices. Under the Distribution Agreement, if applicable to the Bonds, the Underwriter
will share with AAM a portion of the fee or commission, exclusive of management fees, paid to
the Underwriter. The Underwriter also reserves the right to join with dealers and other
underwriters in offering the Series 2011 Bonds to the public. The Underwriter may offer and sell
Series 2011 Bonds to certain dealers (including dealers depositing Series 2011 Bonds into
investment trusts) at prices lower than the public offering prices. In connection with this
offering, the Underwriter may over allot or effect transactions which stabilize or maintain the
market price of the Series 2011 Bonds at a level above that which might otherwise prevail in the
open market. Such stabilizing, if commenced, may be discontinued at any time.
The City and the Medical Center have agreed in the Bond Purchase Agreement to
indemnify the Underwriter against certain civil liabilities, including certain potential liabilities
under federal securities laws.
CONTINUING DISCLOSURE
In order to permit the Underwriter and other participating underwriters of the Series 2011
Bonds to comply with paragraph (b)(5) of Rule 15c2-12 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Rule"), the
City and the Medical Center will covenant and agree, for the benefit of the registered holders or
beneficial owners from time to time of the outstanding Bonds, in a Continuing Disclosure
Agreement, dated as of October 1, 2011, among the City, the Medical Center and the Trustee, as
agent (the "Continuing Disclosure Agreement"), to provide annual and quarterly reports of
specified information and notice of the occurrence of certain material events. A form of the
Continuing Disclosure Agreement is attached as Appendix E hereto.
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Breach of the Continuing Disclosure Agreement will not constitute a default or an "Event
of Default" under the Indenture. A broker or dealer is to consider a known breach of the
Continuing Disclosure Agreement before recommending the purchase or sale of the Series 2011
Bonds in the secondary market. Thus, a failure on the part of the City and the Medical Center to
observe the covenants under the Continuing Disclosure Agreement may adversely affect the
transferability'and liquidity of the Series 2011 Bonds and their market price. Neither the City
nor the Medical Center has been in default under any prior disclosure agreement.
TAX EXEMPTION AND RELATED CONSIDERATIONS
Interest on In the opinion of Bond Counsel, based upon federal laws, regulations, rulings
and decisions in effect on the date of delivery of the Series 2011 Bonds, the interest on the Series
2011 Bonds is, including any original issue discount, excluded from gross income of the owners
thereof for federal income tax purposes, and is not treated as an item of tax preference for
purposes of determining the federal alternative minimum tax for individuals and corporations,
but, in the case of corporations (as defined for federal income tax purposes), such interest is
included in adjusted current earnings for purposed of the federal alternative minimum tax.
The Series 2011 Bonds are not exempt from present State income taxes imposed on
corporations.
The Code establishes certain requirements (the "Federal Tax Requirements")that must be
met subsequent to the issuance of the Series 2011 Bonds in order that, for federal income tax
purposes, interest on the Series 2011 Bonds not be included in gross income pursuant to Section
103 of the Code. The Federal Tax Requirements include, but are not limited to, requirements
relating to the expenditure of proceeds of the Series 2011 Bonds, requirements relating to the
operation of the facilities financed by the 2010A Bonds, restrictions on the investment of
proceeds of the Series 2011 Bonds prior to expenditure and the requirement that certain earnings
on the "gross proceeds" of the Series 2011 Bonds be paid to the federal government.
Noncompliance with the Federal Tax Requirements may cause interest on the Series 2011 Bonds
to become subject to federal income taxation retroactive to their date of issue irrespective of the
date on which such noncompliance occurs or is ascertained. In expressing its opinion, Bond
Counsel will assume compliance by the City, the Medical Center and the Trustee with the tax
covenants contained in the Indenture.
No provision has been made for an increase in the interest rate on the Series 2011 Bonds
in the event that interest on the Series 2011 Bonds becomes subject to federal income taxation.
Prospective purchasers of the Series 2011 Bonds should be aware that the ownership of
the Series 2011 Bonds may result in collateral federal income tax consequences to individual
recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed
to have incurred or continued indebtedness to purchase or carry tax-exempt obligations. Certain
corporations may have a tax imposed on passive income, including tax-exempt interest, such as
interest on the Series 2011 Bonds. Bond Counsel expresses no opinion with respect to such
other potential collateral tax consequences and prospective purchasers of the Series 2011 Bonds
should consult their tax advisors as to the applicability and impact of these and other potential
collateral tax consequences of owning and disposing of the Series 2011 Bonds.
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INDEPENDENT AUDITORS
The consolidated financial statements of the Medical Center for the years ended June 30,
2009, 2010 and 2011, included in APPENDIX B of this Official Statement, have been audited by
McGladrey &Pullen, LLP, independent auditors, as stated in their report, appearing in Appendix
B.
MISCELLANEOUS
The references herein to the Indenture and the Series 2011 Bonds are brief outlines of
certain provisions thereof. Such outlines do not purport to be complete and for full and complete
statements of such provisions reference is made to such documents, copies of which will be on
file at the principal offices of the Underwriter during the period of the offering of the Bonds and
thereafter at the principal corporate trust office of the Trustee.
Any statements made in this Official Statement involving matters of opinion or estimates,
whether or not so expressly stated, are set forth as such and not as representations of fact, and no
representations are made that any of the estimates will be realized.
The Medical Center and the City have authorized the use and distribution of this Official
Statement.
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APPENDIX A
INFORMATION CONCERNING
MARY GREELEY MEDICAL CENTER
A-1
APPENDIX B
AUDITED FINANCIAL STATEMENTS
B-1
APPENDIX C
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS
OF THE INDENTURE
The following is a summary of certain provisions of the Indenture. This summary does
not purport to be complete and is qualified in its entirety by reference to the Indenture for a
complete statement of the provisions of such documents.
C-1
APPENDIX D
FORM OF BOND COUNSEL OPINION
D-1
APPENDIX E
FORM OF CONTINUING DISCLOSURE AGREEMENT
1357987_1
E-1